organized crime the unvarnished truth about government

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Organized Crime

The Unvarnished Truth About Government


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Copyright © 2012 by the Ludwig von Mises Institute. Permission to reprint inwhole or in part is gladly granted, provided ull credit is given.

Ludwig von Mises Institute518 West Magnolia AvenueAuburn, Alabama 36832

mises.org

ISBN: 978-1-61016-255-5 (paperback edition)

ISBN: 978-1-61016-256-2 (hardback edition)


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o Laura

and all o those like her

who have enriched their lives

by discovering the literature o liberty.


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Contents

Introduction: Austrian Political Economy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix

Section One: Coercion and Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1. Four Tousand Years o Price Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. Te Other War . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

3. Who Will Regulate the Regulators?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

4. Regulation and the Stock Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

5. Our otalitarian Regulatory Bureaucracy . . . . . . . . . . . . . . . . . . . . . . . . 18

6. Antitrust, Anti-ruth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

7. Antitrust Luddites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

8. Socialized Healthcare vs. the Laws o Economics . . . . . . . . . . . . . . . . . . 26

Section wo: Politics and Tieves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

9. Pay to Play: Why the Fuss? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3310. Fed-ACORN Criminality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

11. Price Gouging: Te Real Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

12. Farmed Robbery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

13. Te Founding Father o Crony Capitalism. . . . . . . . . . . . . . . . . . . . . . . . 42

14. Te Curse o Instigationism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

15. Te State’s Media Lapdogs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Section Tree: Centralization versus Liberty . . . . . . . . . . . . . . . . . . . . . . 53

16. Freedom and Federalism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

17. Te Origins o Nullication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

18. Te Real Meaning o the Fourth o July . . . . . . . . . . . . . . . . . . . . . . . . . . 63

19. Electing U.S. Senators was a Bad Idea . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

20. False Virtue: Te Politics o Lying About History . . . . . . . . . . . . . . . . . . 68

21. How (and Why) the Lincoln Myth was Invented . . . . . . . . . . . . . . . . . . 72

22. Centralization Lets the Worst Rise to the op . . . . . . . . . . . . . . . . . . . . . 75

23. Death by Government: Te Missing Chapter . . . . . . . . . . . . . . . . . . . . . 78

24. Te Birth o American Imperialism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

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25. Paul Krugman’s Politically-Correct “Civil War” Delusions . . . . . . . . . . 86

26. Grand Old yrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

27. Facialism: Te New American System . . . . . . . . . . . . . . . . . . . . . . . . . . . 9628. In Deense o Sedition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

29. Distorting History in the Service o the State. . . . . . . . . . . . . . . . . . . . .104

Section Four: Money and the State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .111

30. Central Banking as an Engine o Corruption. . . . . . . . . . . . . . . . . . . . .113

31. States’ Rights vs. Monetary Monopoly . . . . . . . . . . . . . . . . . . . . . . . . . .117

32. How Central Banking Hides the Cost o War . . . . . . . . . . . . . . . . . . . .120

33. How the Fed Creates Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . 12534. Te Myth o a “Libertarian” Fed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

35. Te Myth o the “Independent” Fed . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

36. Why the Government is Responsible or the Sub-Prime Mortgage Meltdown. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .136

Section Five: Workers and Unions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .141

37. Te Political Economy o Government Employee Unions. . . . . . . . . . 143

38. Te Inherent Violence o Unions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14739. Te False Ideological Foundation o Unionism . . . . . . . . . . . . . . . . . . . 150

40. Markets, Not Unions, Give us Leisure and Saety on the Job . . . . . . . . 153

41. Te Union Conspiracy Against Walmart Employees . . . . . . . . . . . . . .156

42. How “Sweatshops” Help the Poor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

Section Six: ruth and Lies about Markets . . . . . . . . . . . . . . . . . . . . . . .161

43. Te ruth about the “Robber Barons”. . . . . . . . . . . . . . . . . . . . . . . . . . . 163

44. Te ruth about the Sherman Antitrust Act . . . . . . . . . . . . . . . . . . . . . 16845. Te Myth o “Natural” Monopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172

46. Te Virtues o ax “Loopholes” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176

47. Macroeconomists Discover Economics and Debunk

the New Deal (Again) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180

48. Will Socialism Make You Happier? Te rojan Horse o

“Happiness Research” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

49. Te Canard o “Asymmetric Inormation” as a Source o

Market Failure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .192

50. Te Real Ethics Problem in America. . . . . . . . . . . . . . . . . . . . . . . . . . . .19851. Te Myth o Government Job Creation . . . . . . . . . . . . . . . . . . . . . . . . . 201

52. Te Myth o the Male/Female Wage Gap . . . . . . . . . . . . . . . . . . . . . . . .204

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .207


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The late Milton Friedman once said that i the average tariff rate inAmerica was a ew percentage points lower than it would other-

wise be thanks to inuence o academic economists, that wouldmore than justiy all o their salaries and then some because o the

wealth-enhancing effects o reer trade. Friedman was correct as ar as the

story goes, but at the time that he made the comment the “mainstream” o

the economics proession was mostly involved in supporting the wealth-

destroying efforts o the parasitic welare/regulatory state by spinning

myriad tales o “market ailure” and recommending endless government

intervention.

Market ailure theorists, whose epicenter was or many years the Har- vard and M.I.. economics departments, had three main characteristics:

First, they concocted mathematical models that were usually ar removed

i not totally detached rom economic reality. Indeed, a realistic theory that

could explain real-world phenomena was (and is) ofen viewed as pedestri-

an and unscholarly. Only impossible-to-understand and seemingly trivial

mathematical manipulations were said to be worthy o “economic science.”

Te mainstream o the economics proession has long suffered rom phys-

ics envy and has sought to model the unmodelable—human action—to

make their “science” appear to be physics-like and scientic.

I N T R O D U C T I O N

Austrian Political Economy

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x Organized Crime·

Te second characteristic o the market ailure theorists is a con-sistent application o what UCLA economist Harold Demsetz labeled “the

nirvana allacy.” Te game is played as ollows: First, construct a totally un-realistic theory o “perect” competition that assumes away all real-worldcompetition with assumptions o perect inormation, homogenous prod-ucts and prices, ree or costless entry and exit rom industry, and “many”rms. Second, compare real-world markets to this utopian Nirvana stateand condemn the markets as “imperect” or “ailed.”

Te third characteristic o market ailure theories is to recommendintervention by presumably perect government that is assumed to suffer

rom no ailures and which will correct the ailures o the market.Tere are two schools o thought in the eld o economics that never

accepted this statist charade as being legitimate: the Austrian School andthe Public Choice School. Te Public Choice School—at least the “VirginiaSchool” variant o it—uses the economist’s understanding o incentives tostudy the behavior o government and all o its appendages (voters, bu-reaucrats, politicians, interest groups, etc.). Understanding how govern-ment actually works in this way will cure anyone o the stupidity o simply

assuming that government is capable o correcting perceived shortcomingso the market.

Te Austrian School never accepted the oolish Nirvana allacy ap-proach to “economic modeling” or obvious reasons, namely, it is intel-lectually dishonest. Rather than condemning markets as being “imper-ect” because market participants possess less than “perect” inormation(as though anyone does), or example, Austrian economists will explorethe ways in which market participants make use o the inormation that

is available to them and acquire new inormation. Te object is always tounderstand how the economic world works, not to provide what appears tobe a “scholarly” deense o government interventionism, as is the case withthe market ailure theorists.

Austrian economists also study how government works and do notsimply assume that it is some kind o benevolent and omniscient mecha-nism that serves as a corrector o market ailure. Examples would be Lud-wig von Mises’ book, Bureaucracy, or the numerous writings o Murray N.

Rothbard on the machinations o governments throughout history. Tereare many more examples in the Austrian literature.

Your author considers this book to be a collection o essays in the tra-dition o Austrian political economy —a combination o applied economicsand the study o governmental reality. Unlike “mainstream” economists


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Introduction xi·

who are content to spin mathematical model afer mathematical modelwhich explain little or nothing about the real world, your author’s ocus has

always been just the opposite—to use economic understanding to gain abetter understanding o how the political-economic world works. Austrianeconomics is indispensable to succeed at this task.

Te book is divided into six sections: “Coercion and Regulation” ana-lyzes various aspects o government regulation o business; “Politics andTieves” is o course about the inherent nature o government; “Centraliza-tion versus Liberty” discusses the never-ending quest by statists to monop-olize and centralize political power so as to isolate themselves as much as

possible rom public inuence; “Money and the State” describes the myriadevils o central banking, which was always thought o by its original pro-ponents in America as an engine o corruption; “Workers and Unions” dis-cusses various labor union myths and superstitions that too ofen cloud thepublic’s thinking about the reality o labor markets; and “ruth and Liesabout Markets” is a taxonomy o some o the main market-ailure mythsthat have long been used to illegitimately advance the cause o economicinterventionism, as well as some newer ones.

Tomas J. DiLorenzo May 2012


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S E C T I O N 1

Coercion and Regulation


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Supply and demand have generally been allowed to work in energymarkets, resulting in ups and downs in gasoline prices. Whenever

gasoline prices go up to any signicant degree, the industry is inevi-tably threatened by Congress with price controls, euphemistically

reerred to as “anti-price gouging legislation” or some other synonym.

Te case against price controls—no matter how they are labeled by

politicians—has been well known or hundreds o years. By articially

stimulating demand while taking some or all o the protability out o sup-

ply, price controls inevitably create shortages. Tey also induce suppliers

to skimp on quality, to the extent that they can, and ofen lead to bizarre

government-imposed rationing schemes that only make things worse.Te case against price controls is not merely an academic exercise,

however, restricted to economics textbooks. Tere is a our-thousand year

historical record o economic catastrophe afer catastrophe caused by price

controls. Te record is nicely documented in the book, Forty Centuries o

Wage and Price Controls by Robert Schuettinger and Eamon Butler, rst

published in 1979.

Te authors begin by quoting Jean-Philippe Levy, author o Te Eco-nomic Lie o the Ancient World , as noting that in Egypt during the third

century B.C. “there was a real omnipresence o the state” in regulating grain

C H A P T E R 1

Four Thousand Yearsof Price Control

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4 Organized Crime·

production and distribution. “[A]ll prices were xed by at at all levels.”Tis “control took on rightening proportions as there was a whole army o

inspectors.” Egyptian armers became so inuriated with the price controlpolice that many o them simply lef their arms. By the end o the century“the Egyptian economy collapsed as did her political stability.”

In Babylon some our thousand years ago the Code o Hammurabiwas in reality a maze o price control regulations. “I a man hire a eld-labourer, he shall give him eight gur o corn per annum,” the state dictated.“I a man hire a herdsman, he shall give him six gur o corn per annum”;

and “I a man hire a sixty-ton boat, he shall give a sixth part o a shekel o

silver per diem or her hire.” And on and on. Such laws “smothered eco-nomic progress in the empire or many centuries,” as the historical recorddescribes. Once these laws were abolished, “there was a remarkable changein the ortunes o the people” or the better.

Ancient Greece also imposed price controls on grain and established“an army o grain inspectors appointed or the purpose o setting the priceo grain at a level the Athenian government thought to be just.” Greek pricecontrols inevitably led to grain shortages, but ancient entrepreneurs saved

thousands rom starvation by evading these unjust laws with black mar-kets. Despite the imposition o the death penalty or evading the Greek pricecontrol laws, the laws “were almost impossible to enorce.” Te shortages

created by the Greek price control laws created black market opportunitiesto the great benet o the public.

In 284 A.D. the Roman emperor Diocletian created ination by plac-ing too much money in circulation, and then “xed the maximum pricesat which bee, grain, eggs, clothing and other articles could be sold, and

prescribed the penalty o death or anyone who disposed o his wares ata higher gure.” Te results, as Schuettinger and Butler explain, quotingan ancient historian, were that “the people brought provisions no moreto markets, since they could not get a reasonable price or them and thisincreased the dearth so much, that at last afer many had died by it, the lawitsel was set aside.”

Moving closer to modern times, George Washington’s revolutionary

army nearly starved to death thanks to price controls on ood that were im-

posed by Pennsylvania and other colonial governments. Pennsylvania spe-cically imposed price controls on “those commodities needed or the useby the army,” creating disastrous shortages o almost everything needed bythe army. Te Continental Congress wisely adopted an anti-price controlresolution on June 4, 1778 that read:


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6 Organized Crime·

the “German economic miracle” which o course was no miracle but onlya return to common sense by allowing markets and not politicians to set

prices.Price controls were the cause o the energy crisis in the U.S. in the

1970s and o the Caliornia energy crisis o the 1990s. For more than ourthousand years, dictators, kings, despots, and politicians o every varietyhave viewed price controls as the ultimate “something or nothing “prom-ise to the public. And or more than our thousand years the results havebeen the same: shortages, deterioration o product quality, the proliera-tion o black markets operated by criminals, bribery, destruction o a na-

tion’s productive capacity, economic chaos, the creation o massive pricecontrol bureaucracies and police states, and a dangerous concentration opower in the hands o the price controllers.


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A ormer MBA student o the author’s who was the director oemergency medicine at a large urban hospital once said that heand his colleagues spent about 90 percent o their time treat-

ing the knie and gunshot wounds o drug gang members. Hismedical preparation or such a job included serving as a surgeon during

wartime, which he said came in very handy. Such injuries dominate all

such hospitals at tremendous expense. Te incredible violence in America’s

cities is a direct result o the government’s war on drugs and would end i

the “war” was to end.

None o this should be surprising to anyone. In a ree and legal mar-

ket, any dispute between businesses, or buyers and sellers, can be settled

through negotiation or, i need be, the courts. I a businessman believes

he has been cheated or derauded, then he can seek to have his property

protected by the courts. He o course can also quit doing business with the

suspect businessman, and urge everyone else he knows to do the same.

No such relatively civilized solution is available when government

makes products or services illegal. A drug dealer cannot go to a judge and

say, “Your Honor, I delivered one ton o cocaine to Mr. Smith here, and

he reuses to pay me in ull. I would like you to orce him to live up to his

end o our contract.” Instead, drug dealers—like booze peddlers during

Prohibition—resort to the only effective means available to enorce their

business agreements: violence.

C H A P T E R 2

The Other War

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Tere is an even more ominous dynamic at work here, however. Once violence becomes the means by which one succeeds in illegal markets, the

enormous prots earned in those markets will attract competition romthose elements o society who have a comparative advantage in violenceand brutality. Te most violent will rise to the top.

Drug gangs are simply business partnerships, but unlike normal businesspartnerships in legal markets, they have great latitude in destroying their com-petitors by violent means. In legal markets, competitors can only be “destroyed”by producing better and/or cheaper products than theirs. In illegal marketscompetitors are ofen simply murdered. Murder is used to create “barriers to

entry” into the business, to borrow a phrase rom economics.Te police are ofen “silent partners” in this murder and mayhem sinceexisting drug gangsters can easily pay off the police and become “inor-mants” and alert the police o any new entrants into their business. Tatway the police do their dirty work or them by arresting their competitors.

In legal markets a brand name that is established by years o good per-ormance and/or low prices is a valuable asset that uels prots. In illegalmarkets, a brand name is established by especially brutal acts o violence.Te ability o drug gangs to intimidate their rivals is the only “brand name”that counts in such a business.

Worse yet, there are economies o scale, so to speak, to such violentbehavior. I a drug gang is especially notorious in say, Los Angeles, that actwill make it easier or it to enter and dominate the illicit drug markets inChicago, New York, Miami, and other cities.

Te use o violence to create extraordinary monopoly prots in theillicit drug markets has also lured thousands o children into the business.Tey work as “spotters” o police or “runners” who deliver the drugs to the

drug gang’s customers. In most states children under the age o 18 are usu-ally placed on probation or drug-related crimes, and in some states a jailterm cannot extend past age 17. Facing little or no negative consequencesor their participation in the illegal drug trade, these children grow up tobe some o the most hardened and violent criminals in American society.

Ending the war on drugs would cause a dramatic, unprecedented dropin violence in American cities. Te healthcare costs associated with the waron drugs would plummet as well, and hospitals would be able to devote more

resources to other kinds o medical care, an especially valuable benet nowthat the baby boom generation is approaching retirement age and will bemaking more and more intensive use o healthcare. Te only losers wouldbe the myriad government bureaucracies that are unded by the war ondrugs, and o course the drug gangsters themselves.


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In government, ailure is success. Tat’s what I call DiLorenzo’s FirstLaw o Government. When the welare state bureaucracy ails to reduce

poverty, it is rewarded with more tax dollars and more responsibilities.When the government schools ail to educate children, they are reward-

ed with more tax dollars and more power to meddle in education. When

NASA blows up a space shuttle, it is rewarded with a large budget increase

(unlike a private airline which would probably go bankrupt). And when

the Fed caused the worst depression since the Great Depression in 2007, it

was rewarded with a vast expansion o its powers.

DiLorenzo’s Second Law o Government is that politicians will rarely,

i ever, assume responsibility or any o the problems that they cause withbad policies. No one group in society is more irresponsible than politi-

cians. Tere are a ew exceptions, but in general they will always blame

capitalism or our economic problems even when capitalism is not even

the economic system that we live under (economic ascism or crony capi-

talism would be more accurate). Nothing is more irresponsible than know-

ingly destroying what’s lef o our engine o economic growth with more

and more governmental central planning, even i it is given the laughable

name o “public interest regulation.”

DiLorenzo’s hird Law o Government is that, with ew excep-

tions, politicians are habitual liars. he so-called “watchdog media” is

C H A P T E R 3

Who Will Regulatethe Regulators?

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more appropriately labeled the “lapdog media,” or pointing out the lies opoliticians is the best way to end one’s career as a journalist. Do this, and

your sources o inormation will cut you off.One o the biggest governmental lies is that nancial markets are un-

regulated and in dire need o more central planning by government. Lais-sez-aire is said to have caused the “Great Recession.” Fed bureaucrats have

lobbied or some kind o Super Regulatory Authority to supposedly rem-edy this problem. Tis is all a lie because according to one o the Fed’s own

publications (“Te Federal Reserve System: Purposes and Functions”), theFed already has “supervisory and regulatory authority” over the ollowing

partial list o activities: bank holding companies, state-chartered banks,oreign branches o member banks, edge and agreement corporations, U.S.state-licensed bank branches, agencies and representative offi ces o or-

eign banks, nonbanking activities o oreign banks, national banks, savingsbanks, nonbank subsidiaries o bank holding companies, thrif holding

companies, nancial reporting procedures o banks, accounting policies obanks, business “continuity” in case o economic emergencies, consumer

protection laws, securities dealings o banks, inormation technology used

by banks, oreign investment by banks, oreign lending by banks, branchbanking, bank mergers and acquisitions, who may own a bank, capital“adequacy standards,” extensions o credit or the purchase o securities,

equal opportunity lending, mortgage disclosure inormation, reserve re-quirements, electronic unds transers, interbank liabilities, Community

Reinvestment Act sub-prime lending “demands,” all international bank-ing operations, consumer leasing, privacy o consumer nancial inorma-

tion, payments on demand deposits, “air credit” reporting, transactions

between member banks and their affi liates, truth in lending, and truth insavings.

In addition, the Fed also engages in legalized price xing o interest

rates and creates price ination and boom-and-bust cycles with its “openmarket operations.” In addition, nancial markets are just as heavily reg-ulated by the Securities and Exchange Commission, Comptroller o the

Currency, Offi ce o Trif Supervision, and dozens o state governmentregulatory agencies. All o this is the Washington, D.C. denition o “lais-

sez-aire” in nancial markets.DiLorenzo’s Fourth Law o Government is that politicians will only

take the advice o their legions o academic advisors i the advice promisesto increase the state’s power, wealth, and inuence even i the politicians

know that the advice is bad or the rest o society. Te academics happily


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Who Will Regulate the Regulators? 11·

play along with this corrupt game because it also increases their notorietyand wealth. A glaring example o this phenomenon is the act that, in the

afermath o the onset o the “Great Recession” there was almost no discus-sion at all by government offi cials, the media, or op-ed writers about the vast literature o economics that documents the gross ailures o govern-ment regulation over the past century to promote “the public interest.”

Tere has always been some kind o government regulation o eco-nomic activity in America, but the ederal regulatory state got its rst bigboost with an 1877 Supreme Court case known as Munn v. Illinois. Te

two Munn brothers owned a grain storage business and the powerul arm

lobby in their state wanted to essentially steal their property by having thestate legislature impose price ceilings on grain storage. Such laws had pre- viously been ruled unconstitutional as a violation o the Contract Clauseo the U.S. Constitution. But the plunder-seeking armers prevailed, and itwas hailed by statists everywhere as a victory or “the public interest.” Tus,the very rst major example o “public interest regulation” was unequivo-cally an act o legal plunder that beneted a very narrow special interest atthe expense o the public, which would have beneted more rom a ree

market.Either because o ignorance or corruption (or both), the statist aca-

demics o the time sang the “public interest” tune with regards to regula-tion, creating the myth that markets always “ail” and that the remedy isbenevolent and wise government regulation in the public interest. Te aca-demics did this despite the act that there was glaring evidence all aroundthem that regulation was always and everywhere a special-interest phe-nomenon, as indeed almost all governmental activity is.

As historian Gabriel Kolko wrote in his 1963 book, Te riumph o Con-servatism, big business in the early twentieth century sought governmentregulation because the regulation “was invariably controlled by leaders othe regulated industry, and directed toward ends they deemed acceptableor desirable.” Government regulation has generally served to urther the very economic interests that are being regulated. Chicago School econo-

mists labeled this phenomenon the “capture theory o regulation.”

Most academic economists, seduced by the prestige, employment, and

money that came rom being governmental advisors, ignored all o thisreality and instead spent roughly fy years—rom the pre-World War Iyears to the 1960s—inventing myriad actually empty theories o “marketailure.” A popular book at the time was entitled Anatomy o Market Fail-ure, by Francis Bator. Tis literature was (and is) based on the raudulent


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technique o comparing real-world markets to an unobtainable, theoreti-cal, utopian ideal (“perect competition”) and then condemning the real

world or being “imperect,” all the while assuming that the politics o gov-ernment regulation would perectly “correct” these imperections. Econ-

omist Harold Demsetz labeled this charade “the Nirvana Fallacy.” Com-paring real-world markets to “Nirvana” will always cause one to conclude

that markets are “imperect” by comparison. Te market ailure theoristsnever once compared government to Nirvana to subject interventionism

to the same criteria. Te Austrian School o economics is the only schoolo thought within the economics proession that never participated in this

arce.o its credit, the Chicago School o economics joined with the Aus-

trians in exposing many o the market ailure/regulation–is-always-goodallacies. Hundreds o journal articles and books were published that redis-covered the old truth that “as a rule, regulation is acquired by the industry

and is designed and operated primarily or its benet,” as Nobel laureateGeorge Stigler wrote in 1971.

Tis kind o research was expanded over the years to show that large

corporations ofen support and lobby or onerous government “saety”and environmental regulations because they understand that the regula-tions will be so costly to enorce that they will likely bankrupt their smaller

competitors while deterring others rom entering the market in the rstplace. Businesses long ago discovered that the only way to have a long-

lasting cartel is to have the cartel agreement enorced by the government.Privately-enorced cartels always break down because o cheating by the

cartel members. Te railroad and trucking industries were cartelized by

the ederal Interstate Commerce Commission (ICC) or many decades, orexample. Te ICC set monopolistic prices in these industries and prohibit-ed genuine competition. Te Civil Aeronautics Board (CAB) cartelized the

airline industry by prohibiting price competition until it was deregulatedin the late 1970s. Tere was vigorous competition in the electric power in-

dustry in the U.S. until it was ended by government regulation in the earlytwentieth century by the creation o monopoly ranchises by state and lo-cal governments. A& enjoyed a government-sanctioned monopoly or

many decades as well.During the period o history when government-sanctioned monopoly

was increasingly the norm, the Fed was created to acilitate the creationo a banking industry cartel. As Murray Rothbard wrote in A History o

Money and Banking in the United States,


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Who Will Regulate the Regulators? 13·

the nancial elites o this country . . . were responsible or put-ting through the Federal Reserve System, as a governmentally

created and sanctioned cartel device to enable the nation’s banksto inate the money supply . . . without suffering quick retribu-tion rom depositors or note holders demanding cash.

In other words, giving the Fed more regulatory authority is not unlikegiving an alcoholic another bottle o whisky, a murderer another gun, or abank robber a ski mask. It is bound to make things worse, not better.


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Regulation and the Stock Market 15·

Mises wrote that passage in 1962 when government was minisculecompared to today’s omnipotent, Leviathan state. With their blizzard o

regulations the courts and regulatory agencies have eviscerated three othe most important ingredients o capitalism: private property, reedomo contract, and reedom o association. Genuinely private property rightsbarely exist in the business world any more thanks to regulatory controlsthat affect every business in America.

Te volume o government regulation o business is mind numbing.Each year the Competitive Enterprise Institute in Washington, D.C. pub-lishes en Tousand Commandments (edited by Clyde Wayne Crews, Jr.),

an accounting o the scope o ederal regulation. Te 2011 edition o thepublication showed that the monetary cost to businesses o complying withederal regulations was estimated at $1.752 trillion, an amount equivalentto 50 percent o the entire ederal budget or that year. Tis amount exceedsall corporate pre-tax prots and is nearly double the amount o incometax revenue collected in that year. Tere are more than 80,000 pages osmall-print regulations listed in Te Federal Register , with no ewer than 58ederal regulatory agencies working diligently to add thousands more each

year. Tousands o additional pages o regulations are enorced by stateand local governments.

Obviously, American corporations must spend inordinate amounts otime, in addition to billions or trillions o dollars, complying with govern-ment paperwork, rules, and regulations instead o concentrating on mak-ing better and cheaper products. Prots are reduced, jobs are destroyed ornever materialize in the rst place, and stock prices are stied. Te instabil-ity o property rights caused by pervasive regulatory edicts leads investors

to be much less certain about the value o the contracts they enter into,since rules and regulations are constantly changing, and sometimes seemto come out o nowhere.

As a rule, most government regulation produces very little, i any ben-et to the consumers in whose names they are promulgated. Tat was theconclusion o Nobel laureate Ronald Coase, who as a University o Chi-cago law proessor edited the prestigious Journal o Law and Economics ormany years at a time when that journal published hundreds o scholarly

studies o the effects o regulation. Afer editing and publishing hundredso such studies Proessor Coase (in J.F. Weston’s, Large Corporations in aChanging Society) concluded that:

Tere have been more serious studies made o government reg-ulation o industry in the last feen years or so, particularly in


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the United States, than in the whole preceding period. Tese

studies have been both quantitative and nonquantitative . . . the

main lesson to be drawn rom these studies is clear: they all tendto suggest that the regulation is either ineffective or that when

it has a noticeable impact, on balance the effect is bad, so that

consumers obtain a worse product or a higher-priced product

or both as a result o regulation. Indeed, this result is ound so

uniormly as to create a puzzle: one would expect to nd, in all

these studies, at least some government programs that do more

good than harm.

Universities with schools o business rarely teach anything about

entrepreneurship in particular or the virtues o ree-market capitalism

in general, but offer numerous courses in “business law,” “administra-

tive law,” “business ethics,” and “corporate social responsibility.” All o

these courses ocus on teaching students how to become good corporate

bureaucrats who ignore prot making by pandering to the myriad agents

o the state instead. Even accounting is taught according to the dictates

o the Securities and Exchange Commission. Because o the stranglehold

that government regulators have over every business more and more topbusiness executives have backgrounds as lawyers, lobbyists, or publicists,

the tools o governmental manipulation, as opposed to manuacturing

and engineering.

Regulation has also all but destroyed ree speech in the business

world. Very ew business people will speak out against government regu-

lation out o ear o regulatory retribution, a tax audit, and other orms

o harassment by the government. Many American corporations are so

intimidated by the regulatory state that they give away billions o dollarsto political activist groups that lobby or even more regulation and inter-

ventionism. Te Capitol Research Center in Washington, D.C., estimated

that or every philanthropic dollar that large American corporations give

to pro ree enterprise organizations like the Mises Institute they donate

three dollars to anti ree enterprise organizations. Some o them appar-

ently believe that they are “buying” the good graces o regulators, but

they are in reality giving away the “rope” with which the state will “hang”

them economically. Others are simply victims o extortion by lef-wingactivist groups.

Te ederal bureaucracy is utterly incapable o managing its own bud-

get let alone the budgetary decisions o thousands o private businesses.

Government enterprises are notorious or being lazy, slothul, ineffi cient,


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In chapter 5 o F.A. Hayek’s 1944 classic, Te Road to Serdom, the No-bel laureate warned that the state need not directly control all or even

most o the means o production to exert totalitarian control over theeconomic lie o a nation. He cited the example o Germany where, as

o 1928, “the central and local authorities directly control 53 percent” o

the German economy. In addition to this, wrote Hayek, private industry

in Germany was so heavily regulated that the state indirectly controlled

“almost the whole economic lie o the nation.” It was through such to-

talitarian controls that Germany traveled down “the road to serdom.” As

Hayek urther stated, “there is, then scarcely an individual end which is

not dependent or its achievement on the action o the state, and the ‘socialscale o values’ which guides the state’s action must embrace practically all

individual ends.” In other words, government regulation was so pervasive

that the pursuit o prot, driven by consumer preerences, was mostly re-

placed by the whims o regulatory bureaucrats.

It may sound shocking to some, but modern-day America compares

avorably to the ascist Germany o the 1930s with regard to the degree to

which the state intereres with and controls economic activity. First o all,

government expenditures at all levels o government account or about 40

percent o national income. It differs by a ew percentage points year by

C H A P T E R 5

Our TotalitarianRegulatory Bureaucracy

18


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Our otalitarian Regulatory Bureaucracy 19·

year, but it has been in the 40 percent range in recent years. Tis doesn’t

count all o the off-budget government agencies that exist at the ederal,

state, and local levels o government, as James Bennett and I discussed inour book, Underground Government: Te Off-Budget Public Sector. I this

is included, government expenditures as a percentage o national income

would be at least 45–50 percent, which is not so ar rom the 53 percent in

Nazi Germany that Hayek alluded to.

As or regulation, there are nine cabinet-level departments at the ed-

eral level that regulate, control, and regiment housing, transportation,

healthcare, education, energy, mining, agriculture, labor, and commerce

in general. On top o dozens o ederal regulatory agencies the state gov-ernments also supply a mountain o regulation. Te state o Alabama’s

Web site, or instance, lists regulatory agencies and commissions that regu-

late: retirement, geology, public health, education, conservation, natural

resources, industrial relations, agriculture, senior citizens, tourism, travel,

veterans, environmental management, orensic science, business develop-

ment, rehabilitation, banking, insurance, labor, transportation, youth ser-

vices, children’s affairs, lm making, ports, disabilities, arts, real estate, oil

and gas, orests, ethics, surace mining, alcoholic beverages, auctioneers,and “aith-based initiatives.” And Alabama is a relatively conservative state;

most other states probably have much longer lists o regulatory unctions.

Because o the inevitable ailures o all governmental planning in a de-

mocracy, Hayek wrote that “the conviction [will grow] that i effi cient plan-

ning is to be done, the direction must be ‘taken out o politics’ and placed

in the hands o experts—permanent offi cials or independent autonomous

bodies.” Moreover, the “cry or an economic dictator is a characteristic

stage in the movement toward [central] planning o an entire economy.Tis indeed describes many o the above-mentioned regulatory unctions

but is especially descriptive o the central planning “czars” who now popu-

late the executive branch o the ederal government. As o 2010 these in-

cluded political appointees who are given “czar” status or the ollowing

categories: Aghanistan, AIDS, auto recovery, borders, Caliornia water,

cars, Middle East, Persion Gul, Pakistan, South Asia, climate, domestic

violence, drugs, economics, energy, environment, aith-based initiatives,

government perormance, Great Lakes, green jobs, Guantanamo base clo-sure, health, inormation, intelligence, science, stimulus legislation, pay,

regulation, Sudan, ARP, technology, terrorism, urban affairs, weapons,

weapons o mass destruction, war, oil, manuacturing, cybersecurity, sae

schools, and Iran.


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It would be very diffi cult indeed to argue against the proposition thatthe U.S. economy today is even more heavily controlled, regulated and

regimented by the state than Nazi Germany was at the time Hayek waswriting Te Road to Serdom. Americans have traveled many miles downthe road to serdom by deluding themselves that the god o democracy willsomehow save them rom statist slavery. As Hayek warned, “there is no justication or the belie that, so long as power is conerred by democraticprocedure, it cannot be arbitrary . . .”


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When the U.S. government prosecuted the Microsof Corpo-ration during the 1990s (afer a decade o “investigations”

that turned up nothing illegal) the head o the U.S. JusticeDepartment’s Antitrust Division, Joel Klein, rationalized

the lawsuit by saying that it was in keeping with the long history o con-

sumer protection regulation in America, beginning with the Sherman An-

titrust Act o 1890. In reality, the history o antitrust regulation has been a

history o politically-inspired witch hunts launched against America’s most

innovative and entrepreneurial businesses, usually instigated by their sour-

grapes competitors.

In the June 1985 issue o the peer-reviewed International Review o Lawand Economics I showed that the industries accused o “monopolization”

by Senator John Sherman and his colleagues were expanding production

our times aster than the economy as a whole, on average (some as much as

ten times aster) or the decade prior to the 1890 Sherman Act. Tey were

also dropping their prices aster than the price level was dropping during

this ten-year period o price deation. Te “trusts” were subjected to politi-

cal attack precisely because they had been making products cheaper and

cheaper, much to the dismay o their less effi cient but politically-connected

rivals. Antitrust was a protectionist racket rom the very beginning.

C H A P T E R 6

Antitrust, Anti-Truth

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Te judge in the Microsof antitrust case, one Tomas Peneld Jack-

son, was so biased that he was thrown off the case (i.e., red) by the panel

o three ederal judges who had appointed him. One example o his biaswas a magazine interview in which he compared Microsof ounder Bill

Gates to John D. Rockeller (and to Al Capone). Judge Jackson was way off

base when he compared Gates to Capone, but not so much when he com-

pared him to Rockeeller. As Dominick Armentano demonstrated in his

book, Antitrust and Monopoly : Anatomy o a Policy Failure, Rockeeller’s

Standard Oil Company caused the price o rened petroleum to all rom

over 30 cents/gallon in 1869 to 5.9 cents in 1897 while creating myriad

new products and stimulating innovation in the entire industry. For this,Rockeeller was prosecuted and orced to break up his company despite the

act that he had more than 300 competitors when he supposedly “monopo-

lized” the oil industry.

In his classic, Antitrust and Monopoly , Dominick Armentano careully

examined fy-ve o the most amous antitrust cases in U.S. history and

concluded that in every single case the accused rms were dropping prices,

expanding production, innovating, creating new products, and generally

beneting consumers. It was not consumers who were being harmed, butthe less-effi cient, sour-grape competitors o these companies. For example,

the American obacco Company was ound guilty o “monopolization” in

1911 even though the price o cigarettes (per thousand) had declined rom

$2.77 in 1895 to $2.20 in 1907, all despite a 40 percent increase in raw ma-

terial costs to the company.

In what is perhaps the best example o nonsensical double-talk in an-

titrust history, in 1944 Judge Learned Hand ound Alcoa guilty o “mo-

nopolizing” the virgin ingot aluminum market by employing “superior

skill and oresight” which the judge said “orestalled” competition by those

businesses with less skill and oresight. He condemned Alcoa or being

extremely adept at correctly anticipating market demand or its product

and then supplying that demand, to the “exclusion” o higher-priced com-

petitors.

Alcoa “embraced every new opportunity” with a “great” organization,

intoned Judge Hand, and it staffed the organization with “elite businesspersonnel.” Tis “sin” must be published, he said.

In 1962 the government prohibited the Brown Shoe Company, which

had 1 percent o the shoe market, rom acquiring Kinney Shoes, which

also had a whopping 1 percent market share at the time. A company with 2


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Antitrust, Anti-ruth 23·

percent o the market supposedly threatened competition in the industry,the government ludicrously claimed.

In 1969 IBM had a 65 percent market share in the computer marketand was sued by the ederal government or allegedly monopolizing thecomputer industry. IBM was mired in a court battle or thirteen yearsbeore the government nally gave up on the case. In the meantime, thecompany was eclipsed in the marketplace by Intel, Microsof, and othercompanies. Tis governmental assault on IBM undeniably weakened thecompany.

In 1962 the government orced the Schwinn Bicycle Company to di-

vorce itsel rom its network o dealers. Foreign competition then droveSchwinn into bankruptcy.

General Motors was never prosecuted or violating the anti-monopolylaws, but the company’s ear o antitrust drove it to adopt a policy rom1937 to 1956 o never allowing its market share among the “Big Tree”automakers to exceed 45 percent. Tis contributed to the company’s com-petitive downall at the hands o oreign automakers, especially ones romJapan.

RCA was prohibited by antitrust regulators rom charging royalties toAmerican licensees, so the company licensed its products to Japanese com-panies instead. Tis led directly to the overwhelming dominance o theJapanese electronics industry in the American marketplace.

Antitrust regulation killed Pan American World Airways by orbid-ding it rom acquiring domestic routes. Without these “eeder” routes orits international ights, the company went bankrupt.

Monopoly is impossible in a ree market. Government is the real source

o monopoly with its monopoly ranchises, protectionist tariffs, licensinglaws, “certicates o need,” and other monopolistic regulatory gimmickslike antitrust regulation.


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The “Luddites” were early nineteen century British textile workerswho protested the introduction o mechanized looms by destroy-

ing them and issuing proclamations denouncing the new technol-ogy in the name o the mythical King Ludd o Sherwood Forest.

What the Luddites ailed to understand—and what today’s neo-Luddites

ail to understand—is that “labor-saving technology” that reduces produc-

tion costs and prices increase consumer demand or the product being

produced, which in turn generates more jobs in the industry, not less.

In 2011 neo-Luddism was on display when the Obama adminis-

tration blocked a proposed merger between A& and -Mobile USA. Ac-

cording to the New York imes on August 31, 2011 , stopping the mergerwould supposedly “help save jobs o American workers.” “Te view that

[the Obama] administration has is that through innovation and through

competition, we create jobs,” Deputy Attorney General or Antitrust

James M. Cole was quoted as saying. Mergers usually reduce job creation

“through the elimination o redundancies,” said Cole. “So we see this as a

move that will help protect jobs in the economy,” he added. Te ormula or

job creation in the American economy, according to the Obama adminis-

tration, was the protection and expansion, i need be, o cost-increasing“redundancies.” American industries’ oreign competitors must have been

cheering on the Obama administration.

C H A P T E R 7

Antitrust Luddites

24


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Antitrust, Anti-ruth 25·

In reality, as opposed to the Obama administration’s “economic anal-ysis,” the reduction o “redundancies” in business is another way o say-

ing “cutting costs to become more competitive in international markets.”When a company succeeds in becoming more competitive in this way itsmarket share expands and more jobs are created in that company.

It is true that “innovation” can create jobs. What the Obama admin-istration didn’t understand is that a merger like the A&/-Mobile alli-ance is an innovation. It was a proposed innovative way to reduce the costo providing cell phone services. Constant innovation is a necessity in anindustry as hyper-competitive as the cell phone industry.

Te Obama administration’s position on the proposed merger was acombination o Luddism and mercantilism. Te mercantilists o the eigh-teenth century believed in the superstition that wealth was created not byproduction but by the hoarding o gold. Te Obama mercantilists appar-ently believed that existing jobs, not gold, must be hoarded. Tey ailed torecognize that the economy is dynamic, with jobs constantly being createdand destroyed as new-and-improved industries and business practices re-place the older and less effi cient ones (effi cient in serving consumers, that

is).As usual in antitrust cases, the Obama administration deended its

blocking o the merger by arguing that the merger would somehow re-duce competition. But how, exactly, could that happen? At the time therewere more than 180 cell-phone companies in the U.S, with hundreds morearound the world posing as potential competitors in the U.S. market. A&and -Mobile would never have been able to raise prices at all, let aloneraise them to monopolistic levels, with hundreds o competitors waiting in

the wings to take advantage o their oolish pricing decision.Te obvious objective o the proposed merger was to reduce prices

in order to make more prot. Tis is not to say that they would have suc-ceeded in doing so, or there is no such thing as a sure thing in business.What is certain, however, is that the blocking o the proposed merger bythe Obama administration prohibited these two companies rom tryingto become more competitive and even bigger job generators than they al-ready were.


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At the heart o the U.S. government’s continued takeover o thehealthcare sector o the economy was a law passed during the

Obama administration that would eventually drive the privatehealth insurance industry out o business or transorm it into a

de acto nationalized industry. Te law imposed additional taxes and other

costs on health insurance companies while creating a government health

“insurance” bureaucracy to ostensibly “compete” with private companies.

Tis is all part o a long-term plan to nally achieve the socialist pipe dream

o socialized medicine in America, socialism having perormed so won-

derully in so many other countries. Like all government monopolies, this

one would operate with all the compassion o the IRS and the effi ciency othe post offi ce.

Some years ago the Nobel laureate economist Milton Friedman stud-

ied the economic history o healthcare supply in America. In a 1992 study

published by the Hoover Institution entitled “Input and Output in Health

Care,” Friedman noted that 56 percent o all hospitals in America were

privately owned and operated as or-prot enterprises in 1910. Ten afer

decades o subsidies or government-run hospitals, the number had allen

to 10 percent. It took decades, but by the early 1990s government had taken

over almost the entire hospital industry. Te tiny portion o the industry

that remains private and or-prot is regulated so heavily that it might as

C H A P T E R 8

Socialized Healthcare vs.the Laws of Economics

26


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Socialized Healthcare vs. the Laws o Economics 27·

well be considered as an appendage o the state as well. Te overwhelmingmajority o decisions made by “private” hospital administrators have to do

with complying with government’s bureaucratic edicts, not patient care perse.

Friedman’s key conclusion was that, as will all bureaucratic systems,government-owned or government–controlled healthcare created a situ-ation whereby increased “inputs” such as expenditures on equipment,inrastructure, and the salaries o medical proessionals, actually led todecreased “output” in terms o the quantity and quality o medical care.For example, while medical expenditures rose by 224 percent rom 1965

to 1989, the number o hospital beds per 1,000 population ell by 44 per-cent and the number o beds occupied declined by 15 percent. During the1945–1989 period that Friedman studied, costs per patient-day also rosealmost twenty-our-old even afer price ination was taken into account.Increased government domination o hospital care resulted in less servicewhile ueling astronomical cost increases.

Tis kind o result is present in all government-run bureaucracies be-cause o the absence there o any kind o market eedback mechanism.

Since there are no prots in an accounting sense in government, there is noreliable mechanism or rewarding good perormance and penalizing poorperormance. In act, in all government enterprises exactly the oppositeis true: poor perormance is typically rewarded with larger budgets aferpromises are made to “do better” with more money.

Costs always explode in any industry whenever government gets involved. In 1970 the government orecast that the hospital insurance (HI)portion o Medicare would be “only” $2.9 billion annually. Since the actual

expenditures were $5.3 billion, this was a 79 percent underestimate o cost.In 1980 the government orecast $5.5 billion in HI expenditures; actualexpenditures were more than our times that amount—$25.6 billion. Yetgovernment always promises cost reductions whenever it begins to takeover any industry.

In response to the cost explosion that its own policies caused, govern-ment then granted itsel even more extraordinary powers over the health-care industry by enacting twenty-three new taxes in the rst thirty years o

Medicare (see Ronald Hamoway, “Te Genesis and Development o Medi-care,” in Roger D. Feldman, ed. American Health Care).

All government healthcare monopolies, whether they are in Canada,Great Britain, or Cuba, experience an explosion o both cost and demand,the latter since healthcare is “ree” under such a system. (O course it is not


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“ree”; the costs are simply buried in general tax bills). Whenever anythinghas a zero explicit price associated with it consumer demand will increase

dramatically and healthcare is no exception. At the same time, routine bu-reaucratic bungling will guarantee gross ineffi ciencies that will ester andget worse and worse every year. As costs get out o control and begin toembarrass those who alsely promised cost reductions, the politicians canbe expected to do what politicians always do in such situations and imposeprice ceilings on the industry, usually disguised by some kind o slick eu-phemism like “global budget controls.”

Price ceilings always stimulate demand while reducing supply, thereby

creating shortages. Non-price rationing becomes necessary. Tis meansthat government bureaucrats, not individuals and their doctors, inevitablydetermine who will get medical treatment and who will not, what kind omedical technology will be available, how many doctors and nurses therewill be coming out o medical and nursing schools, and so orth. Tey as-sume totalitarian control over the industry, in other words.

All countries that have adopted socialized healthcare have sufferedrom the disease o price control-induced shortages o care. I a Canadian,

or instance, suffers third-degree burns in an automobile crash and is inneed o reconstructive plastic surgery, the average waiting time or treat-ment is nearly ve months. Te waiting time or orthopedic surgery is also

almost ve months; or neurosurgery it is three months; and it is even morethan a month or heart surgery (see Te Fraser Institute publication byBaccus Barua, Mark Rovere, and Brett J. Skinner, Waiting Your urn: Hos- pital Waiting Lists in Canada, 2011 Report ). Tis o course is why so manyo the more affl uent Canadians in need o emergency care have ooded

American hospitals or so many years.A January 16, 2000 New York imes article entitled “Full Hospitals

Make Canadians Wait and Look South,” by James Brooke, provided manyexamples o how Canada’s nationalized healthcare system has created seri-ous, lie-threatening shortages. For example, a fy-eight-year-old grand-mother awaited open-heart surgery in a Montreal hospital hallway withsixty-six other patients as electric doors opened and closed all night long,

bringing in reezing drafs rom sub-zero weather. She was on a ve-year

waiting list or her heart surgery at the time.In oronto, twenty-three o the city’s twenty-ve hospitals turned away

ambulances in a single day because o a shortage o doctors. In Vancou- ver, ambulances were at one time “stacked up” or hours in the parkinglot while heart attack victims waited in them beore being treated. At least


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Socialized Healthcare vs. the Laws o Economics 29·

one-thousand Canadian doctors and many thousands o Canadian nurseshave lef or the U.S. to avoid price controls on their salaries. “Few Cana-

dians would recommend their system as a model or export,” wrote JamesBrooke in the New York imes.

Canadian price control-induced shortages also maniest themselves inscarce access to medical technology. Per capita, the United States has eighttimes more MRI machines, seven times more radiation therapy units orcancer treatment, six times more lithotripsy units, and three times moreopen-heart surgery units. Tere are more MRI scanners in Washingtonstate, with a population o around ve million, than in all o Canada with

a population o more than thirty million (see John Goodman and GeraldMusgrave, Patient Power: Solving America’s Health Care Crisis). Tis will

be America’s uture i it continues down the road o socialized medicine.


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S E C T I O N 2

Politics and Thieves


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In 2009 the Washington establishment and the national media eignedoutrage over the act that Governor Rod Blagojevich o Illinois had

been selling political avors. Te governor had apparently been taking“bids” or Barack Obama’s vacated U.S. Senate seat since he, as gov-ernor, was entitled to appoint Obama’s replacement. Federal prosecutorPatrick Fitzgerald provided perhaps the biggest laugh line when he claimedthat Abraham Lincoln would roll over in his grave i he learned that a Chi-cago politician had been engaged in such shady behavior.

In reality, Lincoln would be rolling his eyes over the stupidity o sucha statement. As Pulitzer prize-winning Lincoln biographer David Donald

once noted, Lincoln had become the master political string puller in Illi-nois by the time he ran or president. As a young man Lincoln said that hismain aspiration was to become “the DeWitt Clinton o Illinois,” reerringto the ormer New York governor who is credited with inventing and per-ecting the “spoils system” o institutionalized political corruption.

As president one o Lincoln’s very rst acts was to put Congress intoa special session in June o 1861 to begin work on the Pacic Railway bill,which would eventually result in the greatest spectacle o political graf andcorruption in American history up to that point (the Credit Mobilier scan-dal). Lincoln beneted personally rom this legislation which gave him, aspresident, the right to choose the eastern starting point o the government-subsidized transcontinental railroad. He chose Council Bluffs, Iowa, where

C H A P T E R 9

Pay to Play: Why the Fuss?

33


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he had purchased a large parcel o land in 1857. Many o Lincoln’s el-

low Republican luminaries, rom Taddeus Stevens to Justin Morrill and

Oakes Ames, and even General Sherman, accumulated ortunes as a resulto the Pacic Railroad legislation.

Te selling o political avors—including appointments to govern-

ment offi ces—is what denes Washington politics (and all other politics

in America). With the lone exception o Congressman Ron Paul in recent

decades, virtually every Washington politician spends most o his time

selling political avors o one kind or another. Legislation and regulation

is “sold” or campaign “contributions, kickbacks, high-paying jobs or rela-

tives and riends, promises o private-sector jobs and monetary avors, etc.It’s what politicians do and what politics is about. Governor Blagojevich

was just doing a politician’s typical dishonest day’s work.

Government has become so adept at selling political avors that schol-

arly treatises have been written about a veritable science o political extor-

tion. A case in point would be the book, Money or Nothing: Politicians,

Rent Extraction, and Political Extortion, by Fred S. McChesney. Much has

been written about governmental grants o avors to businesses and other

groups in return or “campaign contributions,” but McChesney ocuses onan even more insidious phenomenon: politicians threatening to impose

menacing costs on businesses or entire industries with regulation and taxa-

tion unless the businesses and industries pay up and “contribute” to their

campaigns. He calls it “a orm o political extortion or blackmail.”

Political extortion or blackmail may take the orm o threats to impose

price controls, or example, or threats to withdraw occupational licenses,

corporate charters, or building permits. Or, it can come in the orm o

threats to raise the cost o doing business through a special excise tax oran especially onerous and costly regulation. Te purpose o the threats is

to solicit campaign “contributions” rom the threatened businesses. Politi-

cians even have their own language o political extortion and blackmail.

Tey call such legislation “milker bills,” since they “milk” campaign contri-

butions rom businesses that the politicians call “cash cows.”

Tere are also “juicer bills” that are designed to “squeeze” cash out o

threatened businesses. And there are “etcher bills” that are designed or

the same purpose—to “etch” cash rom corporate lobbyists with threaten-ing legislation. Among the examples cited by Proessor McChesney are:

• Product liability legislation that is proposed periodicallyto etch campaign cash rom both sides o the debate.


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Pay to Play: Why the Fuss? 35·

• Proposed legislation to restrict utures trading thatetches loads o cash rom utures traders.

• Proposed price controls on pharmaceuticals, whichsqueezed millions rom the pharmaceutical industry.

• Proposed price controls on cable television which hadthe same effect.

• Proposals to ban smoking altogether, or to impose evenmore extreme taxes on tobacco products, always etches

millions rom the tobacco companies.• Proposals to increase excise taxes on alcoholic beverages

are tried and true juicer bills.

• Proposals to “tax the wealthy” more heavily and “makethem pay their air share” are classic examples o etcherlegislation.

In each instance, once a “suffi cient” amount o cash has been extractedrom the threatened individuals, corporations, or groups, the menacinglegislation is dropped. It is no different, in other words, rom the practice ounderworld thugs who demand bribes in return or allowing a business toexist in “their” neighborhood. Governor Blagojevich, who was eventuallysentenced to ourteen years in prison, was a sacricial political lamb whowas used by the Chicago political machine that, in 2009, had migrated intothe White House. Teir apparent purpose in going afer Blagojevich or do-ing what they themselves had done all o their political careers was to tryto dupe the public into believing that Chicago politicians are not really thegang o thieves and crooks that so many people think they are.


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Several years ago the Association o Community Organizations orReorm Now (ACORN), the lef-wing activist group that Barack

Obama was employed by afer leaving law school, was in the newsafer one o its “tax counselors” was videotaped giving advice on

tax evasion to two people posing as a pimp and a prostitute. Te impos-

ters told the “counselor” that they wanted a government-subsidized loan to

open a brothel where they would house dozens o teenage girls they would

bring into the country illegally rom Central America. On the videotape

the “counselors” happily advised them on how to go about applying or the

government loan without the legal authorities nding out about what they

were really up to.As sleazy as this story was, it pales by comparison to ACORN’s pri-

mary unction over the past thirty years to so. ACORN has been a major

player in what can be described as a legalized extortion racket adminis-

tered by the Federal Reserve Board, the Comptroller o the Currency, and

other government agencies. Te racket started with President Jimmy Cart-

er’s 1977 Community Reinvestment Act (CRA), which empowered “com-

munity groups” like ACORN to effectively extort billions o dollars rom

banks. Such groups are empowered by the CRA to “protest” proposed bank

expansions or mergers. Tey le a protest with the Fed, while demanding

that the bank that is proposing to merger or expand give it—ACORN—

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Fed-ACORN Criminality

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Fed-ACORN Criminality 37·

millions o dollars, to supposedly be lent by ACORN to sub-prime borrow-ers. ACORN always keeps a hefy portion o the money or its own salaries

and expenses, o course. WaMu Bank, which went bankrupt, once boastedo having made $375 billion in CRA loans, and the Fed gave CountrywideBank an award afer it made $600 billion in such loans beore it, too, wentbankrupt during the sub-prime mortgage meltdown o 2008–09.

Much o the money that ACORN and other similar, lef-wing“community groups” receive rom banks is used or political activities suchas the mass registration o Democratic Party voters; supporting lef-wingpolitical candidates at all levels o government (the arther to the lef, the

better); organizing rallies, protests, and lobbying efforts or various plankso its “People’s Platorm,” etc. Te ACORN “People’s Platorm” once prom-ised, “We will continue our ght until the American way is just one way,until we have shared the wealth. . . .” Socialism, in other words.

Te CRA itsel is based on a alsehood—that banks will systematical-ly walk away rom billions o dollars in prots that are just waiting to bepicked up by someone in low-income and minority neighborhoods. Bank-ers are supposedly so blinded by prejudice that they must be orced by

government to make these billions in prots that are waiting or them inthe sub-prime mortgage market.

Te reality is that the Fed orces mortgage lenders under the CRAto make billions o dollars in bad loans to unqualied borrowers. WhenForbes magazine columnists Peter Brimelow and Leslie Spence interrogat-ed Boston Fed offi cial Alicia Munnell about the Fed’s claims o systemiclending discrimination in the early 1990s, Munnell was orced to admitthat she had no evidence o it. She and other Fed offi cials (and the Clinton

administration) continued to increase CRA enorcement anyway. Tis sug-gests that the goal o the CRA has always been a orced redistribution owealth, not ghting racial discrimination. Charges o discrimination aresimply used as a ruse to intimidate any un-cooperating mortgage lenders.


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The single most important tax reorm o the 1980s was the index-ation o the ederal income tax to ination and the reduction o

the number o ederal income tax brackets rom feen to three.Prior to that, ordinary middle class workers were pushed up into

higher and higher tax brackets by simply receiving cost-o-living pay rais-

es. Te result was that a couple o years o cost-o-living raises actually re-

duced one’s standard o living by diminishing one’s overall take-home pay

afer taxes, while enriching the state.

Under this corrupt scheme the Fed would print excessive amounts o

money, creating price ination. Te ination led to cost-o-living increases

that in turn caused “bracket creep” and higher tax payments. Te ederalgovernment’s budget became bloated while the taxpayers suffered. Politi-

cians never had to take the heat or voting or tax increases; ination did it

or them. It was truly a orm o taxation without representation (not that

taxation with representation is any better).

Te ederal government is no longer capable o plundering the middle

class in this particular manner, thanks to income tax indexation. But state

and local governments do through the vehicle o property taxation. Ev-

ery time property values rise, as they did in a major way in the rst seven

years o the twenty-rst century, property tax revenues automatically go

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Price Gouging:The Real Problem

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Price Gouging: Te Real Problem 39·

up without any politician ever having to vote to raise taxes. Property taxassessments do their dirty work or them.

So when the Fed’s expansionary monetary policy caused the real es-tate bubble, the extraordinary increases in property values were accom-panied by equally extraordinary property tax increases. (Afer the bubblehad burst, local governments were eager to raise property tax rates so asnot to lose property tax revenue, which is determined by property value x tax rate).

For example, in Maryland local governments reportedly collected 35percent more in property tax revenues in 2005 than they did in 2000. It is

unlikely that the quality or quantity o government “services” improved bya third or more during that time. Citizens were simply paying over a thirdmore or the same—or worse—“services.”


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In 1996 President Bill Clinton signed into law a “reedom to arm” billthat was supposed to end most arm subsidies. At the time, the primaryorm o arm subsidy was price supports—price oors that are orce-ully imposed by the state that are above ree-market prices.

Ending price supports would certainly allow agricultural markets towork more effi ciently, but it is rare indeed—and a bit odd—to observe gov-ernment voluntarily ending a subsidy program that benets a powerul po-litical constituency, namely, wealthy corporate armers. Te reality is thatthe subsidies did not end; they just took on a different orm.

A principle o public choice economics is that politicians will alwaysdo all they can to disguise subsidies to less-than-meritorious groups, suchas millionaire corporate armers. I they can subsidize them through pro-tectionism, or price supports, this is much preerred than simply writingthe millionaire businessman a check. Te latter policy would make it tooeasy or the taxpaying public to smell a rat. But price controls had createdsuch gross distortions in agricultural markets that government apparentlydecided that it was nally time to get rid o them—sort o. In their place

came “transition payments” that were supposedly designed to temporarilyease the pain and suffering o the poor millionaire armers who had losttheir guarantee o above-market prices or everything they sold.

Tis ploy was yet another example o the public being duped by a gov-ernment bait-and-switch scheme. Te transitional payments were never

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Farmed Robbery

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Farmed Robbery 41·

truly transitional, and they were probably never intended to be. Te powero the agricultural lobby was never diminished, and it immediately went to

work lobbying or increases in the new subsidies and to make them perma-nent. And they have succeeded. Each year there is an avalanche o “supple-mental spending bills” that increases the amounts o corporate arm wel-are the American taxpayers must ork over amounting to tens o billionso dollars annually.

By calling the programs “transitional” congress guaranteed itsel a per-petual stream o campaign contributions rom armers, who could be re-lied upon to lobby and cough up millions o dollars in cash, year afer year,

in return or legislated extensions o the programs.How this system o armed robbery works was explained in a Febru-

ary 1, 2005 article in USA oday about exas cotton armers. Te articleeatured one Eugene Bednarz, who had harvested our-thousand bales ocotton. Altogether, that year’s cotton production was expected to exceed7.5 million bales, the best yield in more than fy years.

Tis also meant that there would be the largest thef o taxpayers’ in-come by the arm lobby in more than hal a century. Te way the new

system works is that i the market price o cotton alls below a government-mandated price support level, then the government will use taxpayer dol-lars to pay the armers the difference between the actual price they get ortheir cotton and the arbitrarily-determined price-support price.

At the time, the market price o cotton was 35 cents per pound, withthe price-control price set at 52 cents per pound. A bale o cotton weighsabout ve hundred pounds. Tus, Mr. Bednarz was paid the difference—17cents—or each pound o his cotton. Consequently, the government wrote

him a check or $340,000 or doing absolutely nothing. No consumer ortaxpayer received any benet whatsoever in return. exas cotton armersas a whole gured to benet in this way to the tune o some $637,500,000in that year.

Cotton, wheat, corn, soybean, and rice amers make out like banditsthrough this scheme, while others, such as sugar armers, plunder thetaxpayers in a slightly different manner, through government-mandatedsupply reductions that push up prices three to our times the world price.

Everything that is made with sugar becomes more expensive as well.Virtually everything government does increases the cost o living by

driving up prices. Yet, most Americans still believe in the airy tale that it isthe ree market that causes higher prices and that it is government, throughbenevolent and omniscient regulation, that is needed to “save” us.


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As soon as the ederal government announced its multi-trilliondollar bailouts o Wall Street plutocrats during the rst years o

Te Great Recession, deenders o the bailouts pulled out whatthey apparently considered was a secret weapon: the myth o

Alexander Hamilton as the supposed inventor o American capitalism.

Hamilton, it was said, would approve o the bailouts or it was he, afer

all, who rst proposed protectionist tariffs or “inant” industries, and the

introduction o European-style mercantilism in America, complete with

myriad subsidies and “bounties” or various industries. (Hamilton did so

in his amous Report on Manuactures).

One Wall Street institution—Forbes magazine—published an articleentitled “Alexander Hamilton versus Ron Paul” to make the point that lib-

ertarian critiques o corporate welare should be dismissed because Hamil-

ton was supposedly such a great statesman and economic genius compared

to Congressman Ron Paul and his like-minded supporters.

Te Wall Street Journal joined in the Hamilton worship by publishing

an article by business historian John Steele Gordon in which he argued

that our real problem is that central banking is not centralized enough and

we need more central planning by the Fed, not less. Gordon called or an

economic strongman in the orm o a nancial markets dictator/regulator;

he supported the bailouts; and blamed the crisis on—Tomas Jefferson!

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The Founding Father of Crony Capitalism

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who would purchase government bonds, he argued, so that they wouldnaturally become a powerul lobbying orce or higher taxes and bigger

government. Tey would do so to assure that there was always enough taxrevenue in the reasury to guarantee that they would receive the interestpayments on their bonds. He was right: government bondholders, and theinvestment bankers who market the government’s bonds, have always beensupportive o Big Government. Tis is why Wall Street investment bank-ers were rst in line or government bailouts as soon as the Great Reces-sion commenced. Te state takes care o its own, rst and oremost, as anyMaa-style gang would do.

Hamilton’s main arguments in avor o an empire o crony capitalistswere put orth in his Report on Manuactures. In his 1905 biography oHamilton William Graham Sumner wrote that Hamilton’s report advocat-ed “the old system o mercantilism o the English school, turned aroundand adjusted to the situation o the United States.” Jefferson himsel oncewrote that Hamilton’s “schemes” or protectionism, corporate welare, andcentral banking were “the means by which the corrupt British system ogovernment could be introduced into the United States.” Sumner and Je-

erson were right.Hamiltonian mercantilism is essentially the economic and politicalsystem that Americans have lived under or several generations: A king-like president who rules through executive orders and disregards constitu-tional constraints on his powers; state governments that are mere puppetso the central government; corporate welare run amok; tens o trillions odollars o accumulated government debt; and perpetual boom-and-bustcycles (and periodic price ination) caused by the umbling antics o the

aux central planners at the Federal Reserve Board. Tis is Hamilton’s curseon America—a curse that must be exorcized i American reedom andprosperity are ever to be reinvigorated.


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O all the Republican presidential candidates in 2011–2012, onlyRon Paul espoused the American oreign policy philosophy o

Washington and Jefferson. For this he, and all other like-mindedstatesmen over the past seven decades, have been misleadingly

smeared as “isolationists.” In this context, “isolationist” is truly Orwellian.

By advocating peace and ree trade, and only supporting just and deensive

war, Ron Paul is advocating the maximum possible interaction between

the peoples o the world.

It is the international division o labor and reedom o commerce that

is in act the very source o human civilization. All o the goods and ser-

vices that we enjoy and utilize in our daily lives are the result o the effortso hundreds, or thousands o people rom all over the world who all spe-

cialize in something and, motivated by sel interest, see to it that we get our

bread, our bee, our beer, and everything else. It is restrictions on trade that

are truly “isolationist,” and nothing restricts mutually-advantageous trade

among the people o the world more than war does. War leads to isolation-

ism. People interact peaceully and benecially in the ree market; they kill

each other when they are at war.

Te core principle o economics is that as long as there is private prop-

erty and reasonably ree markets, individuals, in pursuing their own sel

interests, will specialize in whatever they are best at, selling those things to

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The Curse of Instigationism

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others, and using the proceeds to purchase things which they are not verygood at producing.

organized crime the unvarnished truth about government

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