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IN DEFENSE OF CAPITALISM Giving the Free Market a Fair Shake "What I did, when I did it, was honest; now, through changed conditions, what I did may or may not be called honest. Politics demand, therefore, that I be brought to trial; but what is really being brought to trial is the system I represented." -- Samuel Insull, co-founder of Edison General Electric In 1881, a young English clerk named Samuel Insull sailed from England to America and took a low-paying job as a private secretary for a determined inventor named Thomas Edison. Insull worked hard, coming in before his boss in the morning and staying until long after Edison, who wasn't exactly lazy himself, had gone home at night. Over time, Insull's hard work and loyalty did not go unnoticed. He was promoted several times, eventually winding up in charge of Edison's business affairs. After twelve years absorbing as much knowledge as he could, Insull finally left to pursue his own American dream. He moved to Chicago, took out a personal loan for $250,000, and built the largest power plant in the world. At the time, electricity was like private jets are today -- grossly expensive and available only to those who don't spend much time worrying about their bank account. But Insull had a dream that electricity could be produced on a much larger scale and used by the masses. By developing revolutionary ideas, like variable pricing and inexpensive home wiring, he turned electricity from a luxury into a virtual commodity. Before long, Insull's new company was servicing over ten million customers in 32 states and had a market value of over $3 billion (somewhere around $66 billion in today's dollars, which is about the size of Amazon.com and Kraft Foods, combined). Insull also benefited personally. At one point, his net worth was estimated to be $100 million. Time magazine even celebrated his success by putting him on their cover in 1929. He was a true American success story -- a foreigner with virtually nothing to his name who had made it big through hard work and innovation. Then the world changed. As the Roaring Twenties morphed into the Great Depression, Insull's business struggled. The debt and equity he'd financed his company's growth with had become virtually worthless, leaving over a million middle-class Americans who'd invested in his stock in financial straits. The public outrage was palpable. In the matter of a few short years Insull had gone from hero to villain; from the poster boy for everything great about American capitalism to the poster boy for everything wrong with it. The government, seizing on the public's fury over their lost wealth, charged him with fraud, and though he was acquitted at trial, it didn't matter -- the damage was done. Insull was the most hated man in America, the Dick Cheney of the 1930s -- and all he'd done to deserve it was to build a remarkable company that, like so many others, suffered during the Depression. In 1938, Samuel Insull, who'd fled America for France (oh the irony), died of a heart attack in a Paris subway station. He had eight cents in his pocket. It was a sad and lonely ending for a man who exemplified the American dream by bringing affordable electricity to millions. Like O. J. Simpson, our free-market system seems to be put on trial at regular intervals. People love it until it stops working the way they think it should. Then it becomes the villain. Wall Street was loved; then it was hated. Alan Greenspan was idolized; then he was demonized. People envied those who flew in private jets; then they despised them. It's amazing how quickly opinions can change, especially when people are looking to blame someone else for their problems. The truth is that capitalism is neither good nor evil, it just is. Capitalism can't get you a job, a bigger house, or a better retirement -- you have to do all of those things for yourself. But what capitalism can do is foster an environment where those with the will to succeed have a better chance of achieving their dreams. Do hardworking people still fall through the cracks? Absolutely. Are there peaks and valleys as excesses in markets are worked out over time? No doubt. But I defy anyone to show me another system that has done as much to quickly raise the standard of living and quality of life of a country as capitalism has for America. You can't, because it doesn't exist. In 1949, someone who worked minimum wage over the summer would have enough money to buy the following items from that year's Sears' catalogue: A Smith-Corona typewriter; Argus 21 35mm camera; Silvertone AM-FM table radio; and Silvertone 3-speed phonograph. In 2009, that same person, working the same number of hours at minimum wage, would now be able to purchase: A Dell laptop computer; HP color ink printer, scanner, copier; Canon 8 megapixel digital camera; portable GPS system; 32" LCD HDTV television; 8GB iPod Nano; GE microwave; Haier refrigerator/freezer; Toshiba DVD/VCR combo; RCA home theater system; Uniden cordless phone; RCA AM/FM radio; Camcorder; Sony PlayStation 2; and about seven other things, but I think you get the point: Capitalism promotes innovation and competition -- two ingredients necessary for producing things that get progressively better even as they also get progressively cheaper. The truth is that a minimum-wage worker in America is still one of the wealthiest people in the world. Does that preclude us from trying to make things even better? Absolutely not -- but those who favor throwing away the system that made us the envy of the world are either dangerously naive or they have an agenda. You can probably identify which group they belong to by whether they make idiotic arguments like... "YOUR PRECIOUS FREE-MARKET CAPITALISM HAS FAILED." Capitalism hasn't failed, greed has failed. Think about it like this: You're a doctor with 50 sick patients, all of whom have the exact same symptoms: 20 of your patients are women, the rest are men. Ten of your patients are Asian, 5 are Arab, 5 are Mexican, 5 are African-American, and the rest are Caucasian. They have varying hair colors and are all different heights and weights. Some smoke and drink, some do neither. In other words, these fifty people seem to have nothing in common, yet they all have the same disease. Look around the world right now -- virtually every country is sick. Communists, socialists, capitalists, and everything in between, it doesn't matter -- the global recession infected everyone. Yet we look at all of these countries, with all of their different styles of government and different views on economic freedom, and we come to one nonsensical conclusion: Capitalism has failed. How can that be possible? The only thing those countries have in common is that they all fell victim to the idea that returns could be had without risk. Or, to put it another way, they all succumbed to greed. If you could trace the economic crisis back to one seminal event, you'd probably point the finger at the collapse of the U.S. housing market. But was that collapse triggered by a failure of capitalism, or by an abuse of it by the government? Under true free-market capitalism, the government would have no involvement in homeownership whatsoever. They wouldn't encourage it through artificially low interest rates, Fannie and Freddie, tax breaks, or a "Community Reinvestment Act," but they wouldn't discourage it either. Rates would be set by market participants, based on risk, reward, and a clear understanding that making bad loans would result in bankruptcy. But we've done the complete opposite of that. The housing market is manipulated by the government every step of the way. So while some may argue that we need more regulation to prevent these future "excesses," I would argue that it's the existing regulations that created those excesses in the first place. In other words, what has failed isn't the idea of free markets, it's the idea that a market can be free when it's run by an increasingly activist government. "SURE, IT'S ALWAYS THE GOVERNMENT'S FAULT. LET'S PLAY YOUR LITTLE GAME AND GET THE GOVERNMENT OUT OF EVERYTHING -- WHO WILL HELP THE POOR? WE HAVE AN OBLIGATION TO TAKE CARE OF OUR WEAKEST, AND ONLY THE GOVERNMENT CAN FILL THAT ROLE." Great, we (kind of) agree on something! "We" do have an obligation to help...but I think I have a different definition of "we" than you do. The kind of capitalism that has failed is "soulless capitalism," because success without compassion results in greed and excess -- and we had plenty of both. But that soullessness didn't come out of nowhere, it was bred by a government that continually tries to step in to do the jobs that individual Americans should be responsible for. We have never solved problems efficiently from the top down; we solve them from the bottom up. In countries with strong central governments, the people with the money and power are the politicians instead of the businessmen. Are those politicians selfless and charitable? Of course not, they're greedy and corrupt -- and the poor are even worse off than they are here. My point is that capitalism itself is just a vehicle -- we're the drivers. Any economic system will inevitably fail if individuals stop caring about the welfare of others. But which economic system is more likely to drive people out of poverty, one that cherishes the slogan "from rags to riches" or one that aims to help the poor via government bureaucracy? If you're struggling to answer that, consider what happened in the aftermath of Hurricane Katrina. Less than one month after the hurricane, private donations surpassed the $1 billion mark, most of which went to private aid organizations that quickly provided relief. Meanwhile, FEMA handed out $6.3 billion in taxpayer money, with nearly a quarter of that going to scammers. According to a GAO report, FEMA gave cash to inmates, sent checks to people who said they lived in cemeteries or post office boxes, and "reimbursed" people for rent even though they were living in hotels that were already being paid for by FEMA. Oh, and remember those FEMA debit cards? Well, according to the GAO, it turns out they were occasionally used for purchases that (prepare yourself for government-speak) "did not appear to meet legitimate disaster needs." In other words, people spent money meant for food and shelter on jewelry, travel, and porn. Just for good measure, FEMA also reportedly lost 381 debit cards worth $762,000. For some reason, we've become accustomed to the idea that the government must always come to the aid of everyone -- but it hasn't always been that way. Those in need used to rely on each other for help. In 1887, Congress passed a bill appropriating money to Texas farmers who were suffering through a catastrophic drought. These days, that funding would not only be authorized, it would probably be done so under an emergency program that gave more money to the farmers than they ever dreamed of. But not in 1887. Not with Grover Cleveland as president. Here's how he answered Congress' request: "I feel obliged to withhold my approval of the plan, as proposed by this bill, to indulge a benevolent and charitable sentiment through the appropriation of public funds for that purpose. I can find no warrant for such an appropriation in the Constitution, and I do not believe that the power and duty of the General Government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service or benefit. A prevalent tendency to disregard the limited mission of this power and duty should, I think, be steadfastly resisted, to the end that the lesson should be constantly enforced that though the people support the Government the Government should not support the people ." Time out. Maybe you need to pause and catch your breath. Go get a glass of water if you need to, and then read that paragraph again. When you're finished, read the rest of his response: "The friendliness and charity of our countrymen can always be relied upon to relieve their fellow-citizens in misfortune. This has been repeatedly and quite lately demonstrated. Federal aid in such cases encourages the expectation of paternal care on the part of the Government and weakens the sturdiness of our national character, while it prevents the indulgence among our people of that kindly sentiment and conduct which strengthens the bonds of a common brotherhood." Wow. Even more impressive was that Cleveland (who was a Democrat!) turned out to be a hundred percent right. Those "fellowcitizens" he put so much trust in donated ten times more money to those farmers than the amount the president had vetoed, once again proving that when individuals personally sacrifice to help each other, it not only makes us better people, it makes us a better country. It forces us to notice need instead of simply hiring corrupt politicians to notice it only when they can exploit, publicize, or politicize it. Unfortunately, Cleveland's unwavering belief in the individual didn't last long. It was squashed just a few years after his second term when progressive Republican Teddy Roosevelt took over and said idiotic things like: "Every man holds his property subject to the general right of the community to regulate its use to whatever degree the public welfare may require it." (See the "U. S. Presidents" chapter for a lot more on Teddy.) It just goes to show you that the "R" and the "D" are meaningless -- what really matters is whether someone believes in the spirit and unending compassion of the individual, or instead in the destructive power of the collective. "WE NEED A NEW KIND OF CAPITALISM, ONE WHERE THE GOVERNMENT HAS MORE CONTROL." Thanks for buying the book, Stalin. Actually, if you agree with that statement, your views are closer to those of French President Nicolas Sarkozy than those of Stalin. In January 2009, while hosting a two-day economic conference titled "New World, New Capitalism," Sarkozy said that "in capitalism of the 21st century, there is room for the state." Now, I'm not exactly sure when America started taking advice on capitalism from socialist France -- but plenty of people seem to be listening anyway. From German Chancellor Angela Merkel (If governments "are not in a position to show that we can create a social order for the world in which such crises do not take place then we'll face stronger questions as to whether this is really the right economic system"), to Alan Greenspan ("It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring"), to Newsweek magazine's cover ("We Are All Socialists Now"), there seems to be no shortage of voices begging the government to take more control over private markets. And that's exactly why we should ignore them all. It's easy to get caught up in the headlines and make decisions based on emotion, but it's much harder to objectively look at the decades of evidence that conclusively prove that the state runs things only one way: right into the ground. The reason why combining the government with private industry always fails is simple: their motives are completely different. Private companies exist to create wealth, the government exists (at least in theory) to provide protections critical to life, liberty, and the pursuit of happiness. Private companies closely manage expenses and ensure every dollar has a return; the government attempts to spend every dollar it's given and measures returns in campaign donations and polling data. Their constituencies are also different: Corporations serve shareholders and customers; the government (again, at least in theory) serves taxpayers, which means they have to serve politicians, special-interest groups, and the established bureaucracy first. The incentive to earn a profit goes hand in hand with the ability to operate efficiently and effectively. Take one away and the other will vanish faster than the taxpayer dollars that are continually wasted trying to overcome the simple rules of economics. Here are four examples of how a few high-profile public/private partnerships have played out in real life: 1 FANNIE MAE & FREDDIE MAC Fannie Mae was started by FDR in 1938 with a billion dollars and a mission: to buy up mortgages from private lenders so that those banks would have more capital to lend. It worked. By 1968 Fannie's loan portfolio had grown so large that it was weighing down the federal budget. So, our politicians did what they always do when faced with something they don't like: They hid it. President Johnson turned Fannie into a quasi-governmental corporation that would be publicly traded. That allowed him to take Fannie's debt off the government's books, an idea that worked so well they used it to form Freddie Mac two years later. Unfortunately, there was one big problem: Given their history, size, and importance in the mortgage market, virtually everyone knew the government wouldn't let them fail. That not only gave Fannie and Freddie an unfair advantage over their competition, it also gave them access to things like guaranteed lines of credit and exemption from state and local taxes. We all know how this story ends. The so-called implicit government guarantee turned into a very explicit one that resulted in the government seizing control of the two companies in September 2008. It also resulted in the $5 trillion in mortgage liabilities they'd racked up moving right back onto the very same books politicians removed them from in the first place. 2 AMTRAK Congress created Amtrak in 1970 (are you starting to detect a trend here?) as a for-profit corporation. They've lost money every single year since. Despite receiving over $30 billion in federal subsidies (not including another $1.3 billion that they picked up as part of the 2009 stimulus bill), Amtrak has never quite figured out how to fulfill their politically mandated mission and make a profit. So they've done neither. I realize that I'm no choo-choo-train expert, but I am a thinker, so let me take a stab at fixing Amtrak's problems: First, some of their lines require massive government subsidies because the costs simply don't justify the ridership. For example, the Sunset Limited, which runs from Los Angeles to New Orleans, requires somewhere in the area of $466 in government subsidies for every paying customer. Now, again, I'm a self-educated guy...but if that were my business and my money on the line (oh, wait, it IS) then I might take one look at the old annual report and think to myself, Huh, I bet if we stopped operating that line and instead moved the trains to a line with, you know, ACTUAL PASSENGERS, we could make a little more money. But that kind of common sense doesn't go over well at Amtrak. Their former chief executive, David Gunn, actually warned Congress that they shouldn't be fooled into thinking that the decisions were so black and white. "Do not be misled," Gunn said, "by those who quote huge per-passenger losses on certain routes. Most would conclude that by simply cutting the [Sunset Limited] train you would save tens of millions of dollars." But the actual savings, according to Gunn? "Less than $15 million." Oh my gosh, only $15 million a year -- what was I thinking? Why would we even bother closing a route that costs taxpayers only $15 million every year? Of course, while that kind of logic may explain why Mr. Gunn was fired by Amtrak seven months later, it can't explain why I can still go onto the Amtrak.com website and book myself a seat on the Sunset Limited for $133. And that brings me to Amtrak's second big problem: Pricing is dictated by politics. The Sunset Limited takes 47.5 hours to make the trip from L.A. to The Big Easy. Does anyone else see a problem with charging $133 for 47.5 hours? Here's a hint: That's a rate of $2.80 per hour! The IRS figures the cost of driving one mile at fifty-five cents. So, figuring that you can drive 65 miles per hour in most places, the cost to drive for an hour is about $36 -- over twelve times more than the cost per mile that Amtrak is charging for this route. The only reason the Sunset Limited route is still in existence is politics. Amtrak needs subsidies to stay in business, those subsidies have to be approved by Congress; therefore, Amtrak needs to keep certain politicians happy. They can't do that with heavy discounts on their delicious café-car microwave pizzas, so they do it with concessions and favors (like, for instance, keeping a moneylosing route open in exchange for votes from the politicians who represent the districts that the train runs through). Some might argue that that's actually a good thing -- America needs intercity rail service (even the money-losing kind) and the government is the only entity that can provide it. Fine -- but then let's have that debate; let's talk about nationalizing Amtrak and changing its mission. Until then, we're just kidding ourselves that a company reliant on the government for survival can ever produce a profit. 3 CITIGROUP In 2008, Citigroup, along with just about every other major bank in the country, opposed the idea of "cram downs" which would give bankruptcy judges the discretion to modify a borrower's loan. But, on January 7, 2009, news broke that Citigroup had changed their mind -- they would support cram-down legislation after all. Why the one-eighty? I can give you 40 billion good reasons. That, of course, is how much money Citi had taken in federal bailouts at the time they "changed their mind." So why should you care about any of this? Because when private companies start making decisions based on what's best for their political relationships instead of what's best for their shareholders, we're in big, big trouble. Cram downs are a terrible, awful thing for the banking industry. After all, if some judge can rewrite the terms of a contract, why would a bank ever want to give out another mortgage? Citigroup's support of this idea means they are acknowledging that their relationship with politicians is more important than their profits. If you're a fan of capitalism, that's a very scary prospect. 4 THE POSTAL SERVICE This might seem like an odd example, but it's actually a great study in how government meddling can prevent an organization from ever reaching its full potential. In 1971, the "Post Office Department" was turned into a quasi-governmental corporation called the "U.S. Postal Service." The USPS is run by a board of eleven, with nine of those people appointed by the president (meaning they're not exactly independent of the political process). There are other oddities, too. The USPS receives no government appropriations (good), but they have to adhere to a set of complex regulations that mandate each class of mail pay for itself (bad). They can borrow money by issuing debt (good), but all increases in mailing rates are decided by an independent body called the "Postal Rate Commission" (bad). They don't have to adhere to federal standards on employee pay (good), but they have a federally mandated monopoly on regular mail delivery (bad). Here's what all of that has added up to: After being semiprivatized, the USPS recognized the need to update their antiquated systems. By issuing debt (and bypassing the ridiculous federal acquisitions process) they adopted bar-code readers and optical scanners that, by 1986, were responsible for processing 90 million pieces of mail each day. Think that would've happened if they were still a government agency? But it wasn't all sunshine and lollipops. Remember those political appointees? Along with Congress, they wielded tremendous influence over the organization. By simply threatening to hold hearings on the Postal Reorganization Act (translation: "we'll make you a government agency again"), they could influence all major decisions made by the USPS. In the mid-'70s, the USPS sought to take advantage of their "semi-autonomy" by closing underutilized post offices. Like a national retail chain with underperforming stores, they realized that they could close some locations without impacting service. In fact, a GAO study calculated that they could save $100 million a year by closing 12,000 post offices, some of which served only a few people or were located absurdly close to other post offices. But politicians liked that idea about as much as they like the idea of closing down a money-losing Amtrak line that runs through their district. To stop it, they amended the Postal Reorganization Act to prohibit the closings, stating that "the rural post office has always been a uniquely American institution" and that "service" is more of a priority than "profit." In 1977 the USPS, under pressure to keep postal rates low, decided to suspend Saturday mail delivery. They calculated that it would save them $400 million a year and wouldn't adversely impact many businesses. In fact, polling indicated that most people preferred the loss of Saturday delivery to higher stamp prices. But Congress did not. The House passed a resolution opposing the change and the USPS dropped the idea, even though they knew their budget would suffer. Being unable to execute either of those business strategies has cost the USPS at least $500 million a year (likely much more given inflation) for the last 30+ years. The result? The USPS lost $2.8 billion in fiscal year 2008 and expects to lose another $3 billion to $6 billion in 2009. In early 2009, Postmaster General John Potter told Congress that the USPS is once again "facing losses of historic proportion. Our situation is critical." But their hands are tied. The Postal Accountability and Enhancement Act of 2006 mandated the USPS to fund its entire retiree health-benefit fund within ten years -- something, as postal officials point out, that no other government agency or private company is required to do. They tried to resurrect the idea of five-day delivery again, but leading politicians with oversight of the USPS, like Senator Susan Collins and Congressman Jose Serrano, have both said they would oppose it. The Postal Service brought back the idea of closing facilities, but politicians don't like that either. ( You try winning the next election after losing a few post offices in your district.) That leaves the USPS without very many options. They can't raise rates, close locations, cut employees, reform retirement benefits, or change their service. In fact, about the only thing they can do is continue to issue debt and accumulate losses -- all of which will have to eventually be paid back by the constituency they serve: the taxpayers. "SURE, THERE'S A LOT OF BUREAUCRACY IN GOVERNMENT, BUT IT CAN BE STREAMLINED." The Federal Acquisition Regulation, which provides guidelines for the procedures that government employees must follow when spending taxpayer money, contains over 6,000 pages of rules, and that doesn't even include the addendums created by each individual agency. Why is it so complicated? Because, like our tax code, it serves various competing interests, all of whom spend lots of time and money to make sure the provisions favor them. Take the 1956 Federal Aid Highway Act, which created the interstate highway system, for example. It appropriated $25 billion for the cause ($188 billion in today's dollars) and was, at the time, the largest public works project in American history. The entire bill was just 28 pages long. In 1991 the Federal Aid Highway Act was reauthorized with a bill called the Intermodal Surface Transportation Efficiency Act. It was 293 pages long. Why? Because over those three and a half decades people began to realize that these bills were really nothing more than blank slates upon which they could make their wildest (and most expensive) dreams come true. James Wilson illustrates this perfectly in his book Bureaucracy : "By 1991 we not only wanted to build more highways, we wanted to build them in ways that would aid mass transit, reduce air pollution, encourage the use of seat belts and motorcycle helmets, preserve historic sites, control erosion and outdoor advertising, use recycled rubber in making asphalt, buy iron and steel from U.S. manufacturers, define women as disadvantaged individuals, and protect Native American reservations -- among other things." Almost every one of those things was included in the bill because it was promoted by a special-interest group: environmental groups, safety groups, industry groups, Indian groups, the list goes on and on. With so many people competing for attention and dollars -- and so much complexity added to even the simplest piece of legislation -- how could we ever expect government to run efficiently? If you think your health-insurance plan is complicated now, imagine what it would look like after going through months of committee hearings, backroom bargaining sessions, and floor debates. You'd probably end up being able to visit only female, minority doctors who run zeroemission offices located on Indian reservations. Appointments would probably cost four times more and you still wouldn't be able to get any. My point is that government is not built for speed, efficiency, or productivity, the very things that make American business competitive. So while having a large, lumbering, lethargic government might be the price a country has to pay for success, allowing those qualities to leak out into our business community will undoubtedly mark the end of that success. REORGANIZING OUR REORGANIZATIONS It's not as though no one's ever noticed that our government runs about as well as Google (assuming, of course, that Google was being run by hundreds of morally ambivalent elected officials with no particular skill or talent other than getting reelected). Throughout the twentieth century we've made at least eleven (mostly unsuccessful) major attempts at reorganizing/streamlining/modernizing/restructuring our government. A look at just a few of them is below, but my question is this: If we're allowed to reorganize/streamline/ modernize/restructure our government so often, why can't we occasionally do the same thing for capitalism instead of declaring it worthless? 1905 "The Keep Commission," created by Teddy Roosevelt. Roosevelt explained, "It yet remains true that there is a good deal of clumsiness of work, and, above all, the inevitable tendency toward mere bureaucratic methods against which every Government official should be perpetually on his guard." It's amazing to think that in 1905, with a government infinitesimally smaller than we have today, we'd already created such a mess. (By the way, you might think that Teddy was an early Obama critic, since he once said, "I do not want you in any case to recommend a change simply for the sake of making a change; nothing could be more foolish" -- but you'd be wrong. As a progressive, Teddy would've really admired Obama for his ability to get individuals to cede control of nearly every area of their lives to the government.) 1911 "President's Commission on Economy and Efficiency" (haha), created by Howard Taft (haha). Roosevelt's commission apparently worked so well that we created another one just a few years later. The chairman explained, "After nearly two years of study of the problem, it is my belief that...$300,000,000 per annum could be saved if the Government were run on a businesslike basis." Not surprisingly, Congress ignored the commission's main recommendations, which is too bad considering that $300 million would mean annual savings of $6.4 billion in today's dollars. 1964 & 1966 "Task Force on Government Reorganization," created by Lyndon Johnson. Nothing like a government "task force" to strip out all of the bureaucracy! You can see how well this one worked by virtue of the fact that Johnson tried it again just two years later. 1969 "Advisory Council on Government Organization," created by Richard Nixon. Step one of this plan probably should've been: "Find a president who will not be forced to resign." 1970s "Reorganization Project," created by Jimmy Carter. Despite the super-creative name, all ten of Carter's reorganization attempts were approved by Congress, a first for any American president. It's just too bad that none of that legislation focused on a better way to rescue hostages or prevent oil shocks. 1982 "The Grace Commission," created by Ronald Reagan. This commission was tasked to work "like tireless bloodhounds" looking for ways to get the government "off the backs" of the American people. Their report to President Reagan summarized their findings: "We came up with 2,478 separate, distinct, and specific recommendations.... For practical purposes, these savings, if fully implemented, could virtually eliminate the reported deficit by the 1990s versus an alternative deficit of $10.2 trillion in the decade of the 1990s if no action is taken. "Equally important, the 2,478 cost-cutting, revenue-enhancing recommendations we have made can be achieved without raising taxes, without weakening America's needed defense build-up, and without in any way harming necessary social welfare programs." And? What happened? Hellooooo? Was anyone in Congress listening or were they all too busy looking for ways to spend more money? I think it might be time for Grace Commission Part II...and I nominate Ted Nugent and Chuck Norris to head it up. I dare Congress to get in their way. 1993 "National Performance Review," aka "National Partnership for Reinventing Government," aka "REGO," created by Bill Clinton. If the number of different names this effort had are any indication, efficiency was not a priority. "WE JUST NEED TO CHANGE THINGS TEMPORARILY, UNTIL WE GET BACK ON OUR FEET." In 1936, Johnstown, Pennsylvania, was hit by its second devastating flood in less than 50 years. The water rose 14 feet in some areas, over two dozen people were killed, and 77 buildings were destroyed -- resulting in total property damage estimated at over $40 million. To help the town rebuild, the government levied a temporary 10 percent tax on all alcohol sales across the state, with the proceeds earmarked to help flood victims get back on their feet. It worked. A lot of money was raised and the town eventually began to recover. Seventy-three years later, many of the Johnstown flood victims have long since died...but the Johnstown flood tax never did. In fact, over the years, greedy legislators have actually raised the rate (twice), bringing it to an absurd 18 percent. Since 1936, Pennsylvania has collected over $15.4 billion from this tax. The 2009-10 Pennsylvania Governor's Executive Budget projects the tax will net about $283 million for the state next year alone, from a "temporary" tax originally imposed to pay for $40 million in damages. The lesson should be obvious: Be very careful about giving the government any additional power or authority. No matter how temporary it may seem, it never is. "YOU'RE OUT OF YOUR MIND. WE'RE CALLING FOR MORE REGULATION -- THAT'S A LOT DIFFERENT THAN CALLING FOR NEW TAXES OR ANOTHER PATRIOT ACT." I'm glad you brought up the Patriot Act, because it's a good example of how the government is always able to expand its power during times of crisis. Our country's under attack! (Please let us eavesdrop on phone calls...) Johnstown is flooded! (Please let us tax alcohol to help the victims...) Our financial system will collapse! (Please let us nationalize a few banks...) And on and on and on. Despite all of the calls for "more regulation" (which is really just code language for bigger government), we should remember that, once put on the books, regulations are virtually impossible to get rid of. You've heard of archaic "blue laws" before (it's still illegal for anyone 16 or older to yell at an official at a sporting event in Massachusetts) but those same kinds of outdated regulations also apply to business. In 2003, a dairy farmer named Hein Hettinga had a craaaaaaaaazy idea: he wanted to undercut his competitors' prices. Now, I know what you're thinking, "Glenn, that's not crazy...businesses lower their prices all the time!" Not in dairy farming they don't. See, dairy farming is still governed by a system of regulations set up in the 1930s to protect the thousands of small farmers who ran small dairies and made their living by selling raw milk. But look around -- is that really still how the industry operates? Dairy farms now often have thousands of cows and major corporations (Dean Foods is the largest with $12.5 billion in annual revenues) are involved in every step of the process. Despite that, regulations that guarantee a set price to farmers who participate in federally operated regional pools remain on the books. Those regulations meant trouble for our friend Mr. Hettinga. His competition hated that he had driven down prices by twenty cents a gallon at Costco (which, according to a Costco senior vice president, was creating a snowball effect as competitors were also forced to slash prices). So those competitors set out to shut Hettinga down. With lobbyists being paid millions by Big Milk, politicians were more than happy to scratch each other's backs and crack down on Hettinga's tyrannous plan to save consumers money. Congress passed a bill forcing Hettinga to pay into a regional "pool" run by the federal government -- the Senate voted via unanimous consent (which means there was no roll-call vote) and the House passed the bill by 13 votes. Representatives who voted against the measure found an email in their inbox the next morning expressing "disappointment on behalf of the members of the International Dairy Foods Association for your vote." It added a thinly veiled threat: "We will be letting our member companies and their employees know of the outcome." Hettinga estimates that he has to pay up to $400,000 a month into an Arizona dairy-farming pool -- a sum that, ironically, will go to help his competitors. In late 2006 he filed a lawsuit against the government, claiming that the new law was unconstitutional because it was a Bill of Attainder (see our Constitution chapter for more on that). The case was dismissed, but, in April 2009, a U.S. Court of Appeals reversed that decision, meaning that Hettinga still has a fighting chance. "I had an awakening," Hettinga, who was born in the Netherlands, told the Washington Post . "It's not totally free enterprise in the United States." Unfortunately, he's right -- and allowing our government to rush through more regulations now (that will likely still be on the books 70 years from now) will only make that lack of free enterprise across all industries even worse. "POLITICIANS CAN LEARN TO RUN GOVERNMENT MORE LIKE A BUSINESS." There are a lot of people who believe that our politicians can be trained to run government more efficiently. Those people are wrong. Politicians step into office with preconceived ideas about the purpose of government and those ideas are not easily changed. Convincing people who care about [insert favorite issues/programs/pet projects here] that their primary focus should be on not spending money is like trying to convince John Goodman to fill up on salad at the buffet -- it's against everything they stand for. One way to clearly see that is by looking at how multiple generations of politicians do with managing taxpayer money. We all know about the debacle in Washington, but those numbers are so big they don't even seem real anymore. Instead, consider my home state of Connecticut (the Constitution State -- oh the irony!), where politicians have done a legendary job of running the "wealthiest state in union" right into the ground. In 1991, Connecticut was facing a revenue shortfall of about $2.7 billion. Using that crisis (a crisis, of course, that they created by being fiscally irresponsible), Connecticut's governor pushed hard for a state income tax. After a long stalemate with the General Assembly, the bill eventually passed. At the signing ceremony, Governor Lowell Weicker sounded optimistic. "When I sign this budget, Connecticut will be closing the book on its past and it'll be facing toward the future." Now, 17 years later, we have a pretty good idea of what that future looks like: The income tax that was passed to close a $2.7 billion deficit has been raised several times and now brings in over $7.5 billion a year. Add in the $350 million a year that the state currently receives from Indian casinos, and Connecticut now collects nearly $8 billion more in revenue than it did in 1991. Give any rational businessperson that kind of money and profits would be a given...but the same rules don't apply to the government. Despite all of those extra billions, Connecticut is still facing massive deficits: $1.2 billion this year and another $6 billion to $8 billion over the next two years. How could that possibly happen? Simple: the government cannot be restrained . Even if their intentions back in 1991 were good, things change. New politicians get voted in, old politicians find new donors -- and "good intentions" get run through the shredder. In Connecticut's case, out-of-control spending (surprise, surprise) was the culprit. In 1991, when the so-called crisis was happening, the state's total spending was about $7.6 billion. In 2008, total spending is projected to be $18.8 billion -- an increase of 147 percent. To be fair, the $7.6 billion in 1991 dollars would translate to $11.4 billion today, but that still means the brainiacs in Hartford are spending 65 percent more than they were in 1991. The point is that, like Oprah, government only knows how to get bigger. (Oops, guess an Oprah bookclub selection is out...and I was so close, too.) Try as they might to slim down, the natural order of things will always take over and ensure they grow larger than anyone ever thought possible. The only way to stop that, or at least slow it down, is by taking away their source of food: money and power. A TALE OF TWO COUNTRIES In 1939, Finland and its neighbor to the south, Estonia, were identical in many ways. But in 1940, everything changed. The U.S.S.R. occupied Estonia and kept the small country under communist rule for the next fifty years. Finland, meanwhile, remained free. Mart Laar, Estonia's former prime minister, described what communism did to his country: "Look at what happened in this context during these fifty years and then you can understand how terrible the communist system really is. And it's not only in the economy. This is in all fields of life -- the social structure, cultural standards, education, health care, or whatever. When you compare those two countries...then you will find what communism really means, and how bad it is. Our economy, our nature, and our environment were destroyed." After the Soviets left in 1991, Estonia embraced capitalism, turning itself into a "Baltic Tiger" that experienced massive economic growth. They also did something that most socalled capitalist countries haven't done: They instituted a flat tax. Not right off the bat -- they tried the whole "progressive" thing first, but they eventually realized that creating class warfare was not a way to leave the Soviet era in the past. Estonians now pay a flat tax rate of 22 percent and, even better, it's scheduled to drop to 18 percent within a few years. It takes Estonians an average of just 10-15 minutes to file their returns online. By 1994, just a few years free from communist rule, Estonia's life expectancy at birth was 72.6 years. Finland, just fifty miles away -- but also fifty years ahead in medical advancements -- had a life expectancy at birth of 75.9. But, once free and able to invest in their own health-care system, Estonia began to quickly pick up speed. In the 14 years from 1994 to 2008, Estonia gained 2.6 years in life expectancy, a rate of growth virtually identical to Finland's. Another great measure of how communism thwarts improvements in almost all areas is the infant-mortality rate. By 1994, Estonia was experiencing 19.1 infant deaths for every thousand live births, compared to Finland's rate of 5.3. But now? Estonia has cut their number of infant deaths to 7.5 per thousand, a remarkable drop of 60 percent in just fourteen years. Estonia has experienced other, non-health-care-related improvements as well: In 1990, 20 percent of Estonia's workforce was clustered in the agriculture and forestry industries -- not exactly the hallmark of a high-growth, first-world country. By 1999, they had diversified employment and cut the number of workers in agriculture and forestry almost in half. In 1993, Estonia's GDP per capita was just $5,480 -- compared to $16,100 in Finland. By 2007, Estonia's GDP per capita had grown to $21,100, an annual compound growth rate of over 10 percent, far higher than Finland's annual growth rate of 5.8 percent over the same time period. In 1993, Estonia had 25 telephones per 100 people, compared to 62 in Finland. By 2006 the numbers had shifted dramatically. Estonia had 41.4 main lines and 127 cellular phones for every hundred people. Both of those numbers surpassed Finland, and this is one reason why The New York Times called Estonia "a sort of Silicon Valley on the Baltic Sea." Pretty remarkable accomplishments for a country that had Soviet tanks patrolling its streets just a decade earlier -- and it all happened because markets became less regulated. Socialists, like progressives, are very patient people. They understand that the best way to turn America from a freedom-loving Republic into a government-loving Nanny State is by influencing generation after generation of children by transforming their message into cartoons, songs, and, like this kid-focused propaganda piece from 1906, even poems... MY PAPA IS A SOCIALIST My papa is a Socialist, my mamma, too, and I, And if you'll wait a minute now, I'll tell the reason why; I'm sure that when you understand, you certainly will see, You'd better all be Socialists, and vote with pa and me. You see this earth is long and wide, good things above, below, And there are lots of people, too, who want to make things go; Besides, we're all just quite alike, need food and clothes and rest, And if we all were Socialists, we all would share earth's best. But now John D. owns all the oil, most banks, and railroads, too, And then a few own all the land, so what can poor folks do But tramp and starve and beg for jobs, and work and work and work? And all the wealth we make, but scraps, we give the wealthy shirk. Now isn't every papa, most, the very biggest goose, To give away most all he makes to men who don't produce? So that a few rich families may all be living fine, While all we weary working folks must suffer, want, and pine. And then they do such foolish things, I often wonder why They "strike" and lose their jobs, and let us freeze and starve and cry; When, if all joined the Socialists, in four years more or five We'd all be wealthy partners in the world's greatest working hive. For if they'd stop to think, they'd see how easy 'twas to make, Together, all we'd want to have, and what we'd make, we'd take; So that the children, all alike, our papas, mammas, too, Would all enjoy earth's happiness, as Socialists want all to. So papa is a Socialist, mamma, we children, too; We want to make all children rich and happy, too, don't you? Good food and homes, nice shoes and clothes, we children want, don't you? So all of us are Socialists; please, won't you be one too? -- From "Songs of Socialism" by Harvey P. Moyer, Co-operative Printing Co. (1906). You have to love how the author continually bashes "the rich" while also promising the kids that socialism can make them "wealthy" and "rich" and help them buy all sorts of nice things. But instead of complaining about how they target kids with this nonsense, maybe it's time we join them. Here's my updated version of their little poem... MY PAPA IS A CAPITALIST My papa is a Capitalist, my mamma, too, and I, And if you'll wait a minute now, I'll tell the reason why; I'm sure that when you understand, you certainly will see, You'd better be a Capitalist, and vote with pa and me. You see, we're very lucky to be living in a nation, That knows rewarding hard work will encourage innovation. For there are many people who, when offered an incentive, Will use their brains and brawn to be amazingly inventive. Our country's prospered like no other, based on a single notion, That caused millions of people to board ships and cross the ocean. What made so many immigrate and cross the churning sea? The answer's really simple. Just one word: It's "Liberty." The chance to live in freedom, where their dreams are not restrained, The chance to pursue goals and know they can be obtained. The promise of a better life drew, like moths to flame, Millions upon millions who sought freedom, fortune, fame. Look around the world and see the countries that have failed, And you will find the reason is that hope had been curtailed. If your future's been decided and your dreams have been ignored, You've got no motive to succeed -- because there's no reward. But if you are enabled, placed in charge of your own fate, The world can be your oyster. That's what makes this country great. It's the nature of humanity to always improve our lot, To have a bigger chicken in an even bigger pot. So papa is a Capitalist, mamma and children too; We're in control of our own lives. And happier, as are you. The things we want we work hard for, so the things we lack are few. So all of us are Capitalists; please, won't you be one too? -- From Arguing with Idiots by Glenn Beck (2009). "THERE'S NO PROBLEM WITH GOVERNMENT GETTING BIGGER, WE JUST NEED TO EMBRACE IT. SURE, SOCIALISM MAY NOT HAVE THE GREATEST TRACK RECORD, BUT THAT'S ONLY BECAUSE IT'S NEVER IMPLEMENTED THE RIGHT WAY!" Saying that socialism doesn't work is like saying that Blagojevich did a bad job as Illinois' governor -- it's vastly understating just how dismal the results really are. In Venezuela, where socialist "reforms" have been under way for quite some time, the percentage of people living below the poverty line is still over 40 percent. That's some success story! In Laos, another socialist country, the rate is over 30 percent. The people who would be least surprised by those statistics are our Founding Fathers. They knew that government could be good, but that, in practice, almost none of them ever were. Even governments that started out with good intentions eventually became too powerful and corrupt. They also knew that people were exactly the opposite -- over time they usually did the right thing and made the right decisions. The result was a system of checks and balances that put significant limits on the size and power of government while simultaneously unleashing the power of the individual. Unfortunately, we are now shredding that system faster than Enron employees shredded spreadsheets the day they were raided. When you confront a big-government advocate about the consistent failure of socialism over and over and over again, what you'll usually hear back is something about how none of those countries ever did it right. In other words, their claim isn't that socialism failed, it's that the implementation of socialism failed. That's a convenient little rebuttal, but it's also pretty ridiculous. The theory of "perfect socialism" is just that...a theory. To compare a theoretical, textbook version of a political system with a practical system that has proven itself for hundreds of years is completely unfair. Yet "theory" is how supporters of these systems continually justify their losing positions. If only every person who makes over $1 million a year would give $50,000 to those who live in poverty...there would be no poverty. If only every coal plant were forced to shut down...there would be no global warming. If only... Yeah, we get it -- there's a perfect world in your head just waiting to bust out. Maybe you should go buy an island and start your own utopian Marxist micro-nation where songbirds chirp and lollipops dance. Oops -- I almost forgot!...you can't buy an island because YOU HAVE NO MONEY. And why do you have no money? Because YOU SIT AT HOME THINKING ABOUT THIS CRAP. My point is that if the perfect economic system worked just as well in the real world as it does in the textbooks, then we'd all be using it. We'd also all be very wealthy, very thin, have no need for an army, an education, or currency of any kind. TEXTBOOK IDIOCY Comparing "textbook" socialism to capitalism is unfair for another reason as well: The system of capitalism we're currently operating under is far removed from the way it was drawn up. I mentioned the housing market earlier as a great example of that, but so is the size of government. In 1950, government spending was responsible for just 24 percent of our GDP. By 2008, that number had rocketed to over 37 percent and -- hope you're sitting down -- Goldman Sachs projects it to hit a catastrophic 83 percent by the end of the decade. Consider this illustration, which is based on a sketch from The 5,000 Year Leap (a mustread book for anyone who cares about what our Founders really believed). It's a three-headed eagle, and it represents how our Founders originally set up our system of government. Each of the heads symbolizes a different branch of government: executive, legislative (which has two eyes -- one for the House and one for the Senate), and judicial. The eagle also has two wings: a "problem-solving" wing and a "money-saving" wing. The problem-solving wing represents our compassion. We have to help the poor, the elderly, the sick, the victims of disasters, the repressed around the world, etc. The money-saving wing represents conservation. It understands that while we have to solve problems, we also have to conserve our resources for the future. It's important that those two ideals are represented by equal-sized wings, as they provide the balance necessary for the eagle to fly. The entire eagle was also placed as close to anarchy as possible to underscore that while our Founders understood that government was necessary, they wanted it as limited as possible. Now, here's an updated version of the Founders' Eagle: You'll notice a few important changes. First, both the executive and judicial heads have grown quite large and they're also trying to eat each other. The legislative branch, meanwhile, has shrunk and, just for good measure, is also now blindfolded -- illustrating their inability to see how grotesque the system has become. The problem-solving wing is now enormous, representing our desire to solve every problem, domestic and foreign, regardless of the cost. Conversely, the money-saving wing is now on fire since conserving for the future is the last thing on any politician's mind. You'll also notice that the entire eagle has also shifted on the scale -- we are no longer bordering on anarchy, we're bordering on tyranny. I would ask anyone who wants to argue that small-government, free-market capitalism has failed to take a good look at these two eagles first. Has the system our Founders set up for us really failed...or have we failed it? "THEY MAY NOT BE PERFECT, BUT FRANCE IS DOING SOCIALISM RIGHT -- WE SHOULD BE MORE LIKE THEM." I can (and will) give you all sorts of stats and stories to prove that the French have created an unsustainable society, but the best evidence of all comes from an opinion column. Along with what this writer actually says, it's where he says it that's shocking: The New York Times . "I lived for about a decade, on and off, in France and later moved to the United States. Nobody in their right mind would give up the manifold sensual, aesthetic and gastronomic pleasures offered by French savoir-vivre for the unrelenting battlefield of American ambition were it not for one thing: possibility. You know possibility when you breathe it. For an immigrant, it lies in the ease of American identity and the boundlessness of American horizons after the narrower confines of European nationhood and the stifling attentions of the European nanny state, which has often made it more attractive not to work than to work." The key word he used was "possibility" because it really sums up everything that capitalism is about. You stay at work an extra hour because of the possibility that your boss might notice and eventually promote you. You put your home on the line to start your own business because of the possibility that you might become the next Microsoft or Google. You spend your life savings to send your children to college because of the possibility that they will be presented with a life full of endless possibilities . As the Times columnist said, France has lost that -- and it's not hard to understand why. Archaic laws, senseless social programs, poor (but free) education, enclaves filled with disenfranchised immigrants and unemployed youths, and massive public debt have combined to make France a nice place to visit, but a pretty depressing place to live. I talk a lot about how our government -- to borrow a term from the great economist Thomas Sowell -- can't think "beyond stage one." They try to solve problems with obvious solutions without thinking about the consequences of those solutions. But we didn't invent that kind of narrow, short-term thinking...France did. France decided that the best way to keep their citizens working was to create all kinds of laws and regulations for employers to follow. Most of us know about their 35-hour work week and long summer vacations, but that's only the start. The number of rules that French companies have to follow in order to hire or fire someone would put the New York City Teachers' Union to shame. But what France forgot was that for every action there is an equal and opposite reaction. The consequence of all those laws to prevent unemployment was massive unemployment, especially among the young. It's really just common sense -- if you can hire and fire at will, you are much more likely to take a chance on new employees, especially young ones without much experience. But when "at will" instead turns into ironclad, virtually lifelong commitments, you're much more careful about whom you hire. The numbers show that this is exactly what's happened as 23 percent of young people in France are unemployed. To fight that trend, France's former prime minister created another set of regulations, called the "first job contract." It gives employers the ability to hire anyone under 26 years old for what is essentially a two-year trial period. During that time the draconian state employment rules are loosened, enabling companies to take more chances. Now, 64 percent of all French youths aged 15-24 take part in the temporary work program within a year of completing their education -- but many of them hate the idea. Having grown up in a country where a job was always viewed as a right, they believe the "first job contract" program victimizes them and, as they say in their protests, "institutionalizes insecurity." Maybe one reason why they say that is that -- pardon my French -- they're not that smart . After all, most students in France go to schools that are virtually free and have no restrictions on entry (including no minimum test scores or grade point average). In addition, teachers are government employees, which makes sense, considering that over 25 percent of all jobs in France are in the public sector. The result of this wonderfully non-discriminatory, sunshine-and-lollipops approach to education is a drop-out rate of 40 percent, lecture halls that are bursting at the seams, universities without any interest in research, and the distinction of not even placing one school in the top 40 of the most recent worldwide rankings. France has only three schools in the top hundred. Combining terrible educations with a government that acts like a countrywide HR department from hell does not set the French up for economic success. And it shows. While the government takes 44 percent of GDP in taxes every year (the euro-zone average is closer to 40 percent), it's not nearly enough. Someone has to pay for all the free education, health care, and short work weeks -- and, right now, it's France's lenders. A government-commissioned report pointed out that, without drastic action, France's debt load will go from 66 percent of GDP today to 80 percent by 2010 to a catastrophic 100 percent in 2014. Is America destined for the same fate? If we keep going the way we are, absolutely. For proof, just listen to the way a recent Economist article described the general attitude there: "[In France] there is a lingering culture of suspicion of profit, and a demonisation of business leaders, encouraged by a mainstream left that still equates efficiency with injustice." Now ask yourself: Is America moving toward that way of thinking, with all of its laws and feel-good regulations, or away from it? Copyright (c) 2009 by Mercury Radio Arts, Inc. Excerpted from Arguing with Idiots: How to Stop Small Minds and Big Government by Glenn Beck, Kevin Balfe All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.