Reality. Caputured in user friendly symbols and processed for understanding. ♪ Music ♪ The Idea Channel. I want to talk today about the contrast between myths that are widely believed by the public at large and what I regard as the reality which typically contradicts those myths. As you are all aware, there has been a drastic shift in public attitudes and public opinions in the past fifty years or so with respect to the role of the individual on the one hand and the role of government and collective institutions on the other. There has been a shift in the philosophy and attitudes of the public from a belief in individual responsibility, from a belief in a society in which the role of government was as an umpire, to a belief in a society in which the emphasis is on social responsibility and the role of government as big brother and protector of the individual. As always when such shifts arise in public opinion, they are largely produced and reinforced by the development of myths about prior experience. Someone once wrote, and I'm not sure who it was, that a myth is like an air mattress: there's nothing in it but it's wonderfully comfortable, and deflation causes an uncomfortable jolt. Well my purpose today is to give you that jolt. When myths get established and are adopted they tend to be so strongly held, they tend to become so much a part of you, that when anyone comes along and differs with them and contradicts them, he risks automatically being dismissed as a crackpot. But I shall nonetheless take the risk of being dismissed as a crackpot because it seems to me so urgent that we deflate these myths, recognize what the reality is, in order to be able to provide a basis for a change in our philosophy, a reversal of the direction of our thought. In my opinion, if we do not do so, if we continue on the road we have been going, if we continue to rely more and more on government and less and less on the individual, we are condemned to a future of tyranny and misery. And therefore it seems to me essential for the future of this country that we recognize these myths for what they are and adjust our thinking to a correct perception of our present and our past. I am encouraged in this venture by another quotation, one which comes from a nineteenth-century American humorist by the name of Josh Billings who wrote somewhere, ¨It ain't what people know that causes trouble, it's what they know that ain't so." And that's what I am going to devote this talk to, to trying to tell you about some things you know that ain't so. I am going to try to cover five myths that are part of your thinking, and if they are not part of your thinking they will tend to become so after you take your first course in American history. The first of those myths is the robber baron myth, the myth that somehow or other in the nineteenth century there was an era of rugged unrestrained individualism in which heartless monopoly capitalists exploited the poor unmercifully and ground them beneath their heels. The second myth I am going to talk about is the Great Depression myth, the myth that the Great Depression from 1929 until the late thirties was produced by a failure of private enterprise. The third myth I want to talk about is the demand for government service myth, the myth that government has had to step in because of a failure of the private market and a great widespread demand for government services. The fourth myth I am going to talk about was suggested by Mr. Eccles in his introduction; it's the free lunch myth, the myth that there is such a thing as a free lunch. And the final myth I want to talk about is the Robin Hood myth, the myth that somehow or other government operates by taking money from the rich and giving it to the poor. Let me start with the first of those myths, the robber baron myth, the myth that the nineteenth century was a period in which the rich became richer and the poor poorer, that it was a century in which you had a conflict between Wall Street and the working man, that it was a period in which particularly the farmers of the Middle West were being ground beneath the rapacious activities of the Wall Street financiers, in which there was widespread farm distress and misery. Now this myth had its origins in the nineteenth century. It produced the widespread greenback movement that you will learn about in your history books, a party which at one time reached significant size, a party devoted to the idea that all of the problems of the time could be solved if only the government would print enough of those nice pieces of paper which are colored green on the back and which are called greenbacks. It was a period that also gave rise to the free silver movement; to William Jennings Bryan, the silver-tongued orator from North Platte if I remember rightly--from these areas, who gave his famous speech on the cross of gold in 1896 in Chicago at the Democratic Convention in which he asked whether mankind shall be crucified on a cross of gold, a speech which got him the presidential nomination of the Democratic Party. And he subsequently was the nominee of the Democratic Party for several subsequent elections, fortunately never elected. That was a myth. What was the reality? The reality is that there is almost no period in human history which saw as rapid and widespread an increase in the well-being of the ordinary man as the nineteenth century. That was the period when millions of people from all over the world streamed to these shores. They came here with empty hands in the hope and the belief that they could make a better life for themselves and their children, and they succeeded. I suspect that most of the people in this room who are American residents and citizens today are descendants of the people who came to these shores in that period. I know, to take the immediate local case, the Eccles family derives from a Scotsman who came to this country in the middle of the nineteenth century. My parents came here in the 1890's from a part of Europe which is today part of the Soviet Union although at that time it was part of Hungary. And I suspect most of the people in this room have similar backgrounds. Now do you suppose those people kept coming to these shores in order to be exploited? Do you think they came here to be ground under the heels of rapacious monopoly capitalists? Not a bit of it. A few people might have been led here under misapprehension. You conceivably could have had an initial inflow of people who thought they were going to improve their lot and ended up being worse off, but you would not have had a continuing inflow. They would not have sent back to the old country for their relatives and friends. You would not have had a flow of millions upon millions year after year. And of course they were not exploited, they were not ground under the heel. They got jobs, they spread out West--to the Middle West, to the Far West, to where we are now--and they made of what was a desolate country a country that was prosperous and green and productive, and improved their own lot. With respect to agriculture in particular, that was a period when the number of farmers increased. it was a period when the price of farm land rose. Now of course, then as now every farmer would have liked it better if he had done still better. What happened then, of course, was that the spread of farms, increasing productivity, the development of machinery, the bringing under the plow of productive land led to a great increase in production which led to a decline in the prices of farm products. So it's true, the prices of farm products went down. But that was a sign of success; it was not a sign of failure. And the evidence that it was a sign of success was the rise in the price of farm land. After all, if this decline in the price of products had been a sign of failure, if it had been an indication that the farmer was being ground under the heels of Wall Street, why would people have been willing to pay higher and higher prices for the land from which those crops were produced? So the actual story is one of great growth of productivity in agriculture, a great development of agriculture in this country. If we turn to the charge that that was a period of heartlessness, a period in which the rich were willing to say "Let the public be damned," as one man was quoted incorrectly as saying, if we turn to that charge, let me call to your attention that the nineteenth century, the period when we came the closest we've ever come to pure unrestrained individualism, a period when government spending--the spending of the Federal government in Washington--amounted to less than 3 percent of the national income, when essentially you had no restrictions on immigration and few restrictions on economic activity, let me point out that that was also the period of the greatest flowering of charitable activity in the United States. That was the period when you had establishment of so many independent private schools and colleges around the country. It was a period when the private non-profit eleemosynary hospitals grew and sprouted in every city in the land. It was a period of the Carnegie libraries. It was a period of the founding of the Society for the Prevention of Cruelty to Animals. You name it and you will find that the charitable, eleemosynary activities date back to that period of the nineteenth century. So the robber baron myth is a myth, one that should be deflated. It gets its appeal from a common fallacy, from the fallacy that one man's gain must be another man's loss. Of course it is true that many men became wealthy during that period. There were robber barons, there always are robber barons. People are people. Some are good, some are bad, some are in between. And of course some people did try to mistreat other people. That is part of the course of history unfortunately. But the main part of the story is that the process whereby some people became wealthy was also the process which opened up the country and provided opportunities for millions of other people to have a modest competence, to be able to improve their own lot. It was the robber barons who were instrumental in building the railroads that joined the country together, who were instrumental in developing the industries of this country, and in thereby providing the opportunities for the ordinary man to improve his lot in life. Everybody can benefit. You can have some people become wealthy not at the expense of other people, but by enabling other people to become wealthy. We had robber barons then and we have robber barons today, but there is a big difference between the robber barons then and the robber barons today. The robber barons then primarily could get money only if people freely gave it to them. They got money by selling a service and nobody had to buy it, and if people bought it it was because it was a better service than it was before. The robber barons today are in large part able to get their money by sending a policeman to take the money out of your pocket. Now that's a figurative expression not a literal expression. But how do you become wealthy today? By getting government assistance. To mention only one very famous example, by getting government to assign you some TV licenses, or by getting any one of a large variety of other sources of government support. If you look at where modern wealth comes from, it almost always comes from political influence which enables you to get benefits at the expense of the public at large. Now that is a zero sum game. When the money is transferred from some to others through force and coercion of the taxpayer, then it need not be that the one man's benefit is also the other man's benefit. Then it can and often is that both parties, That the party who gains gains at the expense of the party who pays. So robber barons will always be with us. The crucial question is whether we have a form of economic organization in which one robber baron keeps the other robber baron in check or whether we have a form of economic and political organization in which one robber baron can help the other robber baron at the expense of the public. I want to turn to the second of these myths, the Great Depression myth. There is hardly any view that is more widespread than the view that somehow or other the Great Depression was produced by a failure of private business. That view is held not only by those who are in favor of a greater role of government, it is held by almost everybody. I venture to suggest that if you go to any bankers, the people who are here today at this banking conference and if you talk to them, I venture to say that nine out of ten of them--if they hadn't heard what I'm going to say-- that nine out of ten of them would say, Well of course the Great Depression was a failure of private business. It was due to an overextension, overspeculation, in the 1920's, or it was due to excessive concentration of wealth in the hands of the wealthy at the expense of the poor in the 1920's, or it was due to speculative investment abroad, or what-not, but it was a failure of private business and government had to step in in order to rescue private business from its own failure. Nothing could be farther from the truth. The Great Depression was produced in my opinion--and I may say this is not a random opinion; I will be glad to refer you to a several-hundred-page book in which it is documented; I won't tell you who the author is, Mr. Eccles did that--the Great Depression was produced by a failure of government, by a failure of monetary policy. It was produced by a failure of the Federal Reserve System to act in accordance with the intentions of those who established it. It was produced by a failure of the Federal Reserve System despite the presence of knowledge on the part of many of the people in the system about the right course of action. It is interesting to speculate for a moment about why this myth is so widespread. The answer is really very simple in this case: private enterprise has no press agents, the free market has no press agents, the government has a great many press agents. The Federal Reserve has a great many press agents, and the Federal Reserve of course would never admit, never proclaim, that it produced the Great Depression. On the contrary. And again, I don't mean to be criticizing individuals. We are talking about the way institutions operate. You and I are the same as all the rest of us; we're all the same. The hardest thing in the world is for anybody to admit that he made a mistake. If any one of us makes a mistake, we can always find somebody else to blame. If you read, as I have for my sins had to read, the annual reports of the Federal Reserve System over a fifty-year period, there is only one element of humor that lightens that task. That is the cyclical fluctuation in the powers of the Federal Reserve. In a good year, when things are good, when the economy is booming, you will read that the Federal Reserve by its wise policy, by its efficacious management of money, has produced this fine situation. However, let things get bad and all of a sudden the tone of the annual report is different. Then you discover that despite the best efforts of the Federal Reserve outside forces combined to produce difficulties. Even at the depth of the Depression in 1933 when in the spring of that year the Federal Reserve System which had been established in order to prevent banking panics and keep banks from closing, when the Federal Reserve System itself closed its doors and you had a banking holiday for seven days, and when over the previous three years a third of the banks of this country closed their doors and went broke because, in my opinion, of the poor policy followed by the Federal Reserve System, even in 1933 if you read the annual report you will discover how much worse things would have been if the Federal Reserve had not behaved so well. Now as I say, I don't blame the members of the Federal Reserve for that; any one of us would do the same thing. We have to find somebody to blame. But as an objective scholar I can tell you what the facts are. The facts were that from 1929 to 1933 the total quantity of money in the United States, the amount of currency, the amount of bank deposits, what Mr. Eccles referred to as M2--that total amount of money declined by one-third. The total number of banks went down by one-third. And why did the quantity of money decline? It declined because the Federal Reserve System failed to prevent the decline. The Federal Reserve System could have prevented the decline at all times. There never was a moment during that period when the Federal Reserve did not have the power to prevent the decline in the quantity of money. If it had prevented the decline in the quantity of money you might still have had a recession, but it would have been a garden variety recession. It would have been over in the middle of 1930 or early in 1931 at the latest. It would not have been a major catastrophe not only for this country but throughout the rest of the world. Moreover, this is not only hindsight. At all times the people at the Federal Reserve Bank of New York and at a number of other banks were pleading with the Federal Reserve Board in Washington to do the right thing. At all times there were people in Congress who were arguing that the Federal Reserve System should take a different course. At all times there were outside commentators. One of the Canadian banks was particularly prescient, but there were other commentators who were pointing out the disastrous effects on the American economy of the restrictive policies that the Federal Reserve System was following which were causing, permitting and facilitating a whole series of bank runs. So the Great Depression was not produced by a failure of business. On the contrary, it was produced by a failure of government, and a failure of government in an area in which responsibility had been assigned to government since the founding of this country. The Constitution of the United States gives Congress the power to coin money and set the value thereof, and it was in the management of this fundamental function of government that government failed and produced the Great Depression. We have learned from that failure. The Federal Reserve will not fail in the same way again. This time it will fail in a different way. This time it has been failing not by producing a great depression but by producing an inflation because just as you will hear the story that it was business that was responsible for the Depression, so you will today hear the story that it is labor and management that are responsible for inflation. It is the same kind of myth. Inflation is made in one place and one place only, Washington, D.C. And in Washington, D.C. the chief source, immediate source of inflation is the Greek temple on Constitution Avenue which houses the Federal Reserve Board. A major accomplice of course sits in the halls of Congress in Washington. They are a major accomplice because you tell them to be. The American people have been telling Congress for many years, "Spend more money on us, please", but they have been telling us, "Don't raise our taxes". Congress has been listening. It's been spending more money on you, but on the other hand it's been very unwilling to raise taxes. As a result, it has imposed inflation as a tax. That's one tax that you don't have to vote for but you have to pay. Let me turn to the third of the myths I want to cover. This is the myth closely related to the Great Depression myth. It is the myth that somehow or other the private market has failed to provide certain important services and the government has had to step in, in response to an overwhelming public demand in order to provide those services. The reality is very different. The reality is that if you look at every program that the government has adopted in the direction of extending its scope, it took an enormous propaganda campaign by special propaganda groups to get those measures passed. There was no underlying public demand for those measures. On the contrary, the demand had to be created, it had to be developed, it had to be produced, and it was created, it was developed, it was produced by people who sincerely--I'm not questioning their sincerity-- who sincerely wanted to see an expansion in the scope of government. Let me take some of the most prominent examples. Let me take the example which today is the greatest sacred cow of them all, Social Security. Was there an overwhelming demand for Social Security in the 1930's when the law was adopted? Far from it. There was no public demand for it. It had to be sold. How was it sold? By the slickest devices of Madison Avenue, by imaginative packaging and deceptive labeling. Social Security was sold as an insurance scheme. It is not an insurance scheme. There is little relationship between the amount of money any one individual pays and the amount of money he is entitled to receive. Social Security is a combination of a bad tax system with a bad way of distributing welfare. It's got two components and I have never known anybody, whatever his political or other persuasion, who would defend either component separately. If you look at the tax system, who can defend a wage tax, a tax on wages up to a maximum, a tax on work, a tax which discourages employers from hiring people and discourages people from going to work, and a tax which is borne by the lowest wage groups. It's a regressive tax. You could never in a million Sundays, could never have gotten such a tax passed as a tax. Look at the benefit arrangement. Here you have an arrangement under which the amount of money a person receives does not depend on his poverty or his indigence; it depends on the accident of what industry he worked in. If he happened to work in a covered industry, he gets a benefit. If he happened to work in a non-covered industry, he doesn't. If he has only worked a certain number of quarters and not more, no matter how indigent he is, he doesn't get anything. If he is sixty-five and he decides to continue to work, earning more than a modest amount per year, not only doesn't he get a benefit but to add insult to injury he has to pay taxes on the wages he is receiving in order to finance the benefit he is not receiving. If a man who is sixty-five years old has a million dollars in income from property and doesn't work, he gets his full Social Security benefit tax free. If the same man goes to work and earns $20,000 a year, he is in the position I just described--he doesn't get any benefits. Is there anybody who would justify that system of distributing benefits? And I could go on to all the difficulties with it. I have only touched the surface. Note the misleading language. The Social Security System consistently refers to the taxes you pay as a "contribution". Now tell me, do you regard taxes as contributions? The word "contribution" denotes voluntary arrangements. If you buy an insurance program you are contributing freely. If you contribute to the United Way, you are contributing freely. But if you pay taxes on your wages as a condition for being employed, that's a tax; it's not a contribution. Again, it always refers to the payments people get as "benefits". They are not benefits; they are subsidies. What you have is a system of subsidizing people on the one hand and of taxing them on the other. What about the claim that it is insurance, that there is a relationship between the two? Well there is a minor relationship. It is true that on the whole those people who pay more will receive more, other things the same, but every student of the subject has pointed out that the relationship is very small, that most payments are independent of most receipts. Moreover, what you really have is not a system under which people are providing for their own security as the Social Security System will say it, as they describe it. In their pamphlets they describe it as a way in which 90 percent of American workers are providing for their own future. That's nonsense. What people today are doing is paying taxes today to pay the subsidies to the people who are receiving benefits today. What you have is a system of taxing the young at any point in time to subsidize the old. There may be nothing wrong with that. For the moment I am not discussing that issue. I am discussing whether Social Security was a response to a broad scale public demand or whether it had to be sold to the people by the worst devices of Madison Avenue, and the answer is it clearly was the latter. What you have is a system under which people today are being taxed to pay benefits today to the people who are receiving them. So far, those people who have been receiving payments have received much more than the actuarial value of what they paid. That's because you have had a growing working force, you've had higher wages being paid, the wage tax had gone up very sharply. But the number of recipients is growing relative to the number of people paying and that's why Social Security is currently in so much financial trouble. That's why the so-called reserve, which is not a reserve at all, has been getting smaller and smaller and that's why you have all the agitation for Congress to do something to make Social Security again financially responsible. Again, for the moment, I am not discussing whether Social Security or the separate parts are good or bad but only whether it can be regarded as a program adopted in response to a great public demand. Let me take another more recent movement. Consider the imposition on you and me and on our automobiles of all sorts of safety equipment--so-called safety equipment. Nothing to prevent us individually from buying it, but now we are required to buy it by government. Why? Was there a great public demand? Not at all, there was a man named Ralph Nader. Maybe he arose in response to a public demand, but if so it was a public demand for entertainment not for safety. Ralph Nader launched a major propaganda campaign and as a result of this propaganda campaign, as a result of a great selling effort also characterized by misrepresentation-- as you know, his original weapon was a book "Unsafe at Any Price", which damned the Corvair as being an unsafe and a knowingly unsafe car. Later studies have demonstrated that his claim was not justified, but that did not prevent it from having its effect. It did not prevent it from adopting it. But, the extent to which this did not result from a great public clamor can be shown by what has happened whenever the agency that was established to administer auto safety regulations has overstepped its bounds. You will recall that a few years ago it tried to impose the requirement of an interlock, that no car could be started unless the seat belts were fastened. That produced such a great public outcry that Congress stepped in and it had to be rescinded. You are now having a similar kind of controversy about the airbag. Or again, let me take a very different example, one which has not yet emerged fortunately, the drive for national health insurance. Is there a widespread drive for national health insurance? Not so you can notice it. Indeed the proponents of it have been trying to get it passed year after year, and so far they haven't gotten it passed. As I say, fortunately, because if so-called national health insurance were passed it would bear as little relationship to insurance as Social Security does. It's not a program for national health insurance at all. It's a program for socialized medicine. It's a program for making physicians government employees. It's a program for creating long waiting lines and inferior medical service, but that isn't the way it is labeled. The pressure for it is having to be created and built up by propaganda. Or again, let me take another modern version. Has the FDA's ban on saccharin been in response to a great public outcry for it? Let me turn to the fourth of my myths, the free lunch myth, the belief that somehow or other government can spend money at nobody's expense. I don't know how many of you have ever heard of a wonderful description of government that was made by a French economist by the name of Fredàric Bastiat about 150 years ago. He said government is that fiction whereby everybody believes that he can live at the expense of everybody else. And that is the free lunch myth, the myth that somehow or other government can provide goods and services and spend money at nobody's expense. The particular form which that myth takes is very specific. It has two parts. One part is the belief that somehow or other you can tax business without consumers or workers or individuals paying for it. Somehow business is a big cornucopia out there that can be taxed at no cost. And the other form the myth takes is that you can create money at no cost, that if you turn the printing press, if you produce those greenbacks, that will enable people to become richer with nobody becoming poorer. Let me look at the first problem. Can you tax business? What's business? There is no business to be taxed. There are people. Only people can pay taxes. Can I tax this floor? Can I tax the building? The building can't pay taxes. Only people can pay taxes. So when you talk about a tax on business it has to be paid by somebody. Either it's paid by the stockholder or it's paid by the customer or it's paid by the worker. There is no other way it can come from. There is no Santa Claus, no tooth fairy that's going to provide a source by which the government can spend money that doesn't come from somebody. Somebody has to pay and yet over and over again you hear the claim, "Oh, we must not increase taxes on individuals; we'll increase taxes on business". In connection with the current discussion of Social Security, the same fiction arises. There is the fiction that the Social Security tax is half on the individual and half on the employer, that the individual only pays 5.75 percent and the employer pays an equal amount. That's nonsense. That's bookkeeping, that's not economics, that's not reality. The part that the employer pays is part of his wage cost. If an employer considers whether it is worth his while to hire an additional worker, he has to consider as part of his cost not only what he pays to the worker but also the extra taxes he will have to pay to the government. It makes no difference to the employer at all if he pays the worker a bigger check and the worker pays a larger part of that directly to the government, or he pays the worker a smaller check but in addition has to send a check to Washington. What matters to him is the total number of dollars it costs him to hire an additional person. So the fact is, the logic is that the so-called tax on the employer is paid by the employee. This has always been clear from general economic reasoning, but it has also been subjected to empirical tests. A book even from that temple of belief in greater and bigger government, the Brookings Institution in Washington, published a couple of years ago, demonstrated empirically that the tax on the employer was really paid by the employee, that it was shifted to the employee. And it can't be any other way, as you will see if you think about it. So business doesn't pay that tax and yet, despite this, you have the great move in Congress right now in remedying the problem of Social Security to impose a larger fraction of the tax on business on the alleged grounds that somehow or other that spares the worker. It doesn't have any such effect. It reduces the incentive to hire people and thus is imposed on the worker. Again, if you look at the taxing of corporate profits, the distinction you have to draw is between who writes the check and who fundamentally bears the cost. It may well be that an official of a corporation writes the check for the tax on so-called profits. He writes the check, but who pays it? He doesn't pay it. Here is the poor fellow who may be earning a modest competence, he may be writing a check for ten million dollars, that isn't coming out of his hide. Where is that ten million dollars coming from? It has to come from the proceeds of the goods and services which the enterprise sells, and that ten million dollars is ten million dollars less available either for cutting prices or for paying out dividends or for paying wages and salaries. The tax is borne by people. For this reason, I have always myself been strongly in favor of eliminating altogether the tax on corporations so it is open and above board that you are taxing people and that you do not conceal that fact by appearing to tax corporations. With respect to money, can you print money at no cost? It's very cheap to turn out those pieces of paper, but does that get society something for nothing? Not at all, it's simply a different form of taxation. If you print money, people have more money to spend. If they spend more money on the same amount of goods, prices go up and in effect everybody is paying a tax through inflation. Once again, it is only a form of taxation. Let me turn to my final myth because it is in some ways the most pervasive, the most dangerous, and the most deep-seated. That is the Robin Hood myth, the myth that government has benefited the poor at the expense of the rich. That's the myth. Those are the terms on which many a governmental program is sold. What is the reality? The reality has been described in an article in the Journal of Law and Economics by my colleague George Stigler under the title of "Director's Law." And Director is the name of Aaron Director who was a professor at the University of Chicago Law School, and I might also say my brother-in-law. Director's law is that almost invariably government programs benefit the middle-income class at the expense of the very poor and the very rich. Now that may seem to you strange, but let me first explain why it makes logical sense and second give you some empirical evidence starting right here at home with higher education and the state financing of higher education. On the logical level you have a political system under which laws are passed by 51 percent of the people voting one way against 49 percent of the people. The way to get a law passed, therefore, is to form a coalition covering 51 percent of the people. You might think that you would take the bottom 51 percent versus the top 49 percent, but the more you think about it, the more you realize that that's not a very effective way to form a coalition. Why? Because those people who are at the bottom tend to be much less skillful in political activity for the very reasons that leave them at the bottom in the economic scale. They are at the bottom in the economic scale because they have low skills or low abilities or low entrepreneurial capacity, or have been unfortunate to have been born handicapped or in groups that are discriminated against. But those same features make them relatively less effective in political activity. Who are the most effective people in political activity? Those of us in the middle classes. We are the people who are literate, we are the people who write for the newspapers, we are the people who mount the hustings, we are the people who provide the candidates. Well you might say, why doesn't the coalition come from the top all the way down 51 percent? The answer is that those people at the top--that's a place we can get a lot of money from and it's worth sacrificing a few votes to get a large fraction of a tax base. And therefore the logically most reasonable coalition is 51 percent of the people, running from the lower middle class through the upper middle class and leaving out the very rich at the top and the very poor at the bottom. It doesn't always work that way. Sometimes the very rich are able to use their money to get an effective coalition, but most of the time that's the way it works. Let me illustrate in the real world. One of my favorite examples is state financing of higher education. This is always sold on the ground of providing opportunities to everybody in the society to get an education, but what are the facts? I doubt that there is any program financed by government in the United States which is as regressive in its financial impact as the financing of higher schooling. Who are the people who go to school? Who are the people who are attending this university? Mostly people who come from middle, upper-middle or lower-middle income class families. If there are a few among you who come from lower-income families, you are going to be among the middle and upper-income classes; you are the richer among the poor. They are the people who go to school, they are the people who get the benefit from it. Your training here will enable you to get higher incomes than you otherwise could. Who pays for it? Well you pay for it, and your family and friends pay for it but not through tuition. I am told your tuition covers about 15 percent of the cost of your schooling. The taxpayers pay for it, including the people who don't go to school. Some years ago there was a study made for the state of California which showed that 50 percent of the students at state-supported institutions of higher education came from the top 25 percent of the income class and 5 percent came from the bottom 25 percent of the income class. When I talk in California and want to be demagogic, I say it's a program to impose taxes on the people in Watts to sent the children from Beverly Hills to college. You here in Utah know better what the local equivalents of that are. I'm not blaming you as individuals. I couldn't do that because I myself am a beneficiary of state-support of higher education. I went through a school that has since become a state university, Rutgers University in the state of New Jersey, on a state scholarship. I think I benefited from going to the university and I think maybe even the country at large did, although I know there are many people who disagree with that. But there's no reason why I shouldn't have paid for it. What did the poor citizens in New Jersey get? The day I graduated from college I left New Jersey and I've hardly ever been back since. There is a strong case to be made that everybody who wants to go to universities should have an opportunity to do so, provided he is willing to pay for it--not necessarily right now. It is highly desirable to have arrangements under which he could borrow now to pay it back later out of the higher income that his education will make possible. But there is no justification for imposing taxes on lower-income people to finance the schooling of people who are or will be in the higher-income groups. And yet how much of a political movement is there to impose full cost tuition on colleges? There is nobody who would have a ghost of a chance of being elected to a legislature or to the state house on that program. It's the hardest thing in the world legislatively to get higher tuitions imposed. Why? Because the middle class looks after itself, because of Director's law. What's true of higher education is true in every other area. Consider Social Security. Social Security is also sold as a program to benefit the poor. What are the facts? Social Security is a program which imposes unduly heavy taxes on the lower-income groups in the society to provide higher benefits to upper-income groups in the society. How does it work? It's not because of the regressive nature of the wage tax. It's not because of the structure of benefits. It's because of a very simple phenomenon. At what age do younger men from the lower classes go to work? Sixteen, seventeen, eighteen, nineteen. That's when they start to pay Social Security taxes. At what age are you people going to go to work and start paying Social Security taxes? Some of you may in part-time jobs have been doing so, but you will be full-time Social Security payers only when you reach your middle twenties. So they will pay taxes for more years than you will pay taxes. Next, which one is going to receive benefits for longer? Every demographic study has shown that the average expected length of life of the middle and upper-income classes is longer than the average length of life of people from the lower-income classes. So those poor suckers are going to pay taxes for more years and receive payments for fewer years than you and I will. Some of us, by virtue of continuing to work between 65 and 72, will not be in that favored class. But already the fraction of people who work between 65 and 72 has been cut to a small part of what it used to be because of the incentive offered by Social Security. And overall there is little doubt, therefore, that Social Security is a program which transfers income from low-income classes to high-income classes. The same thing is true of almost every other social program you can mention. I have often challenged people to find a single governmental program in which the people who pay taxes have higher incomes than those who get the benefits. I know only one and that is direct relief and public assistance, the Aid to Families of Dependent Children. It's not a good program, it's a terrible program, it's a welfare mess, but so far as I can find out it's the only program that demonstrably transfers income from higher-income classes to lower-income classes. And that's why it is such an unpopular program. Director's law shows up in the unpopularity of the welfare mess as well as in the popularity of Social Security, housing programs, and the like. I could go down a great many others but time will not permit. I come to my conclusion that if we are going to look forward to the future, to an end to this reduction in our freedom and the growth in centralized government, we must begin to dismantle these myths which are so widely accepted by people, which have become an unthinking part of their philosophy and of their beliefs. And I hope that in the course of this hour I have deflated your air mattress and given you an uncomfortable jolt. Thank you. May we go with the first question. I feel I might have a slight bias, having been in Washington and worked with the Republican National Committee at the time that President Ford lost. I can't help but wonder what your feelings are about the present economic position of the United States, in particular what your feelings are about Carter and his policies, and if they may be a little bit swayed coming from Georgia rather than somewhere else. I don't believe there is any fundamental difference between the policies of President Carter and the policies of President Ford. They both have adopted policies which are politically profitable. Suppose you go back and look at the previous Administrations. Can you see any connection between the professed objectives of the people who sought office and what they did when they got into office? You know, every President of whatever party has the capacity once elected to rise above campaign promises. There was Richard Nixon, a right-wing free-enterprise politician, very effective in his pre-election statements. Nobody in this country gave better speeches against price and wage controls than Richard Nixon did. Nobody in this country was as strong an anti-communist as Richard Nixon was. Upon being elected President, he makes the trip to China, an entente with Communist China, and he proceeds to impose price and wage controls. Here is his successor, Jerry Ford, a splendid congressman, a fine man, a man firmly in favor of the free enterprise system. As President he signs the bill continuing price controls on oil. That's when he lost me. So I say to you that I think the issue is not a partisan issue. We will not solve our problem by electing the right people. We will only solve our problem by making it politically profitable for the wrong people to do the right thing. How do you do. In light of pressures from the ecology and the population, how should this alter the economic policies of our country? We have spent the past two days driving across the Middle West, the empty spaces of Nebraska and of Wyoming, and I must say pressures of ecology and population were not very obvious to us as we drove across. There are no problems of population. The United States is an underpopulated country by the standards of almost any place in the world. I'm not saying that it is desirable to have a bigger population. I think that that's a false issue so far as the United States is concerned, that what is desirable is to have a system under which parents, people who choose to have children, bear the costs and the full responsibilities of those children. If we have a system of that kind under which you do not artificially encourage population or artificially discourage population, then you will tend to have about the right population. The figment of Malthusianism is very real in some parts of the world, but it has not been real in the advanced countries of the world. It has not been real in Great Britain, it has not been real in Japan, it has not been real in the United States. The rate of population growth in the United States has been slowing down as you know. So I do not believe there is a real problem of population. In fact, as you know, most of this country has fewer people per acre now than it did a hundred years ago. People have voluntarily chosen to concentrate in large conglomerations in big cities and then they complain that there are big cities. The ecology problem, the problem of pollution and of maintaining clean water and clean air, that's a very real problem. That's not the same as the population problem, not at all. There, too, a large part of our problem arises from governmental measures that have had the opposite effects to those which are desired. Let me give you a very simple example right now. There's a big hue and cry about the steel industry and about imposing higher tariffs or import quotas on steel. Every ecologist in this country ought to be on the right side of that issue, which is a free trade issue. If Japan chooses to subsidize the export of clean air to the United States, why should we object? Isn't that what it's doing when it sends steel here? But here we have this great hue and cry that we should somehow or other subsidize steel either by tariffs or quotas or in other ways to enable steel to produce both its products and its pollution at home. Personally I'm just in favor of free trade. I want even rules. I don't want to give any subsidy to pollution. On the contrary, I would like to tax those activities that create pollution. But we're going about it in a very foolish and unwise fashion. We're going about it by trying to regulate the equipment which people use, and that's a very bad way to do it. Far better to impose an effluent tax and then leave it to the ingenuity of people to minimize the cost. So there is a real problem about pollution and ecology. It's not a growing problem, make no mistake about it. The only reason we have so much more attention devoted to ecology and pollution today than we did fifty or seventy-five years ago is that we're rich enough to be able to afford the luxury. The water is cleaner today and safer to drink than it was a hundred years ago not only in the United States but all over the world. The air is cleaner today. The automobile has been a source of less pollution not more. Have you ever seen any calculations of what the streets of our big cities would look like if we were still using horses to pull things? So there is a real problem, and the fact that we are rich enough means that we should pay attention to that problem. We can afford to do something more about it than we did earlier. But we must not go haywire and create more myths that somehow or other we've been destroying an untroubled continent. You know, there are more acres of woods growing now than there were a hundred years ago because it has been profitable to grow wood for lumber. The greatest protection of wild life has not come from governmental measures to protect wild life. It has come from the Audubon Society and from other private associations, and it has come interestingly enough from the people who are providing for profit private hunting preserves. This has given them an incentive to establish wild life sanctuaries privately in Canada to preserve the source of the birds and so on which other people hunt. So all I'm saying to you is there's a real problem here, but put it in perspective and don't think that the answer is always another governmental law, which will restrict the freedom of people to use their own resources. Thank you. Can we have the next question? All the economists seem very rhetorical on history and things past, and based on present economic conditions, Doctor, I would like to impose on you as a revelator and seer where do you think we are going as a nation in what time period? Well, I will be glad to answer that but the answer has to be divided into two parts. It's possible to state fairly clearly where we're going in the next year or two, but where we're going to go over a longer period than that is not written in the books. It's not foreordained; it depends on us. We are still masters of our own destiny. There is no determinism which dictated five thousand years ago where we are going to be next year or the next ten years. And so the question of what happens over the next ten to twenty years depends on whether the American people continue to move in the direction of bigger government and more government control, or whether we have a change in attitudes and beliefs and we have a pressure on government to hold it down to size, to cut it back, to give more room for individual freedom. But so far as the next year or two is concerned, I'll be glad to respond because there you can see pretty well what's in the pipeline. We are a little more than two and a half years down the road of an expansion which started in March or April or May of 1975. On the average over the postwar period those expansions have lasted about three and a half years, so we have about another year to go on the average. So 1978 ought to be a continued period of reasonably rapid growth in output. It is also a period when we will be facing increasing inflation. Inflation we can predict for a longer period than most other things because inflation in any year tends to reflect monetary growth of two years earlier. For the next year or two, therefore, it's already more or less foreordained as a result of the policies which the Federal Reserve and the Congress have been following that inflation is going to be higher than it has been. There was a temporary bulge in January and February as a result of the severe winter and I'm not saying it will necessarily be higher than that, but from December 1975 to December 1976 inflation was at the rate of a little under 5 percent for consumer prices. That is, I think, the low point for a considerable period ahead. I think the rate of inflation over the next several years will average somewhere between 7 and 9 percent. Since interest rates tend to move up or down with inflation, I expect interest rates to be rising and to be higher than they are now. Of course interest rates are extraordinarily low right now in any real terms. But, to go along your line, that's more or less the prospect for the next nine months or year in respect of real output, for the next two years in respect of prices. What are the imponderables and uncertainties in that picture? The first and most important imponderable I believe is the energy problem. It's again a case like the Great Depression. The energy problem is not a technical problem, it's not a physical problem, it's not a problem produced by private business. It's a problem which was produced primarily, you will be surprised to find, by Richard M. Nixon on August 15, 1971 when he imposed wage and price controls, and the only element of those wage and price controls that still exists of any significance is the control on the price of oil. If you had never had that wage and price control and never had the price of oil controlled you would not be having any energy problem at all. You know economists don't know much but there's one thing we know very, very well and that's how to produce shortages. Tell us what you want a shortage in. If you want a shortage in lettuce, we'll set a maximum legal price for lettuce below the price that prevails in the market and I guarantee you, you will have a shortage of lettuce. You want a shortage of housing? In New York City we'll set a maximum price, rent control--a maximum price on rent--you'll have a shortage of housing. You want a shortage of funds available to borrow for mortgages? Just have a usury law. That sets a maximum limit on the interest rate that may be charged. And if that usury law sets a limit below what would otherwise prevail in the market you'll have a shortage of funds available for mortgages. In the same way, if you want to have the appearance of a shortage in oil just set a maximum price on oil. Make it unprofitable for people to produce it, make it profitable for people to use it. And in what we have been doing in oil as a result of that oil price control imposed on August 15, 1971, we have gone the standard natural route of government controls. We have gone from price control to an allocation of oil. We have a program whereby we implicitly tax heavily domestic producers of oil and subsidize imports from abroad. You know, it's insane. Here we supposedly have a problem about our excessive imports from the OPEC countries and yet we are following a policy which amounts to a subsidy of three dollars a barrel on every barrel of oil imported from OPEC and other foreign countries. How silly can you be? Alright, so Mr. Carter has come out now with an energy program which would make all of this much worse. It's not a program for energy; it's another case of misleading labeling, of misleading advertising. It's a tax program. It's a major tax program which would make the energy problem worse not better. It would reduce the incentive to produce energy, it would lead to a wasteful use of energy. If that energy program were adopted, which fortunately it looks as if it will not be, then I might very well change the forecast I have been giving you. Then I might expect a recession to develop in 1978 and I might expect under those circumstances double-digit inflation by 1979. But as I say, fortunately that program is not going to be adopted. However, unfortunately, a sensible program isn't going to be adopted either. We are going to continue, I'm afraid, with our present program which will have the effect of sort of mildly hobbling us, supporting OPEC, enabling that cartel to last longer than it otherwise would. At any rate, what happens in that energy area is a major imponderable for the short term. To go to the long-term prospect. That depends as I say entirely on what we do. If we continue down our present path, then if you want to see what's going to happen to us just look at the history of Britain over the past ten years. We've been following exactly the same path Britain has. We are about fifteen years behind them; that is to say, about fifteen years ago the British government was spending the same fraction of their national income as our governments are now spending of ours and that has produced, as you know, in Britain inflation, financial difficulties, near collapse of the economy. Or if you don't want to go so far afield for an example, look at New York City. New York City is the most advanced welfare-state community in the country and that has produced in New York City increasing financial difficulties, and increasing loss of control by the citizens of New York over their own destiny. That's where we're headed if we keep on our present line. On the other hand, if we stop this and turn around and start going the other way--this is a great country, we have great resources, we have an able, energetic, skillful people, we have lots of land, we have lots of know-how--there is no reason why we cannot continue on the path of increasing prosperity and increasing freedom that has characterized so much of our history. So I'm not going to predict which of these two paths we'll go down, those are the alternatives. Thank you for your question. Let's have the next one. Well, you touched on what I was going to ask on, saying as far as where we're going, say England. I was going to mention that. But I would like to ask if we were able to turn this around, which I don't know if we will be able to, do you think we could maintain a decent balance of payments? The balance of payments is no problem. Again, that's only a problem of pricing. How do you get a balance of payments problem? The same way you get a problem in oil or in houses or in lettuce or wheat or anything else, by fixing the price. We had balance of payments problems so long as we had fixed exchange rates. The relevant price in this case is the exchange rate between the U.S. dollar and other currencies and we had balance of payments problems as long as we had a fixed exchange rate. Now, fortunately, this is the good thing that Mr. Nixon did on August 15, 1971. You have to look at both sides. And the good thing he did was to close the gold window, to end the attempt by the U.S. to maintain a price of $35 an ounce of gold, which also had the effect of ending the fixed exchange rates between the dollar and other currencies. So long as we have freely floating exchange rates, there is nothing of less significance than the balance of payments. The market will fix it. If we are buying more goods abroad than people want to buy from us, then foreigners are accumulating dollars. And what will they do with those dollars? They will try to buy their own currencies. In the process they will bid the price of their own currencies up. The effect of that will be to make their goods more expensive to us and our goods cheaper to them, and that will restore balance. So what you're saying is that the problems are caused when governments go contrary to natural laws? Well no, let's not say that. Let's not put it that way. That makes it too easy because we really don't know what these natural laws are. The problems are caused when government acts in a bad way, in a way that specifically distorts the incentives and the opportunities that are open to people. Because there is real room for government; we need government. We need government to do the right things, and now we have to examine and analyze what are the right things to do. We need government to protect one man from being hit over the head by another man. The great tragedy of the modern era and of the expansion of government, in my opinion, is that as government has increasingly been doing things it has no business doing it's been doing the things it ought to do less well. So I'm not really willing to accept the simple statement about natural laws because that leads you into the question of defining what natural laws you are talking about. Thank you. Let's have the next question. My question deals with the point of using Madison Avenue tactics to ram programs through people's throats. Surely, Dr. Friedman, those who claim no knowledge of economics and indeed many economists, too, listen to you. Why do they listen? Well, because there is faith in your knowledge and ability to analyze economic problems and launch an academic campaign. Suppose in the future, God forbid, you are found to be wrong? Surely, Dr. Friedman, does not the fault lay in our faith than in the decision made us? Does not the myth then grow out of the faith, the same faith we use to believe in you now? Yes, it does, but there's big difference--quite a difference. I don't have any objections to Madison Avenue tactics. I think advertising serves a very useful function so long as it is competitive. I think it's fine for me to be able to talk to you, as long as other people can talk to you and you can hear other views, and you can make up your mind. The thing I object to about government use of Madison Avenue tactics is that it is unrestrained and it doesn't have effective competition; that it is financed not voluntarily, not by the people who buy the product; that you and I have to pay taxes to hire people to persuade us to pay still more taxes. That's the feature of it that I object to. I have no objection to individuals in their private capacity getting up on platforms, as I'm getting up on this one, to try to persuade people to one view or another. But should the people you and I pay with taxes be in that position? Should we have employees of the Social Security Board sending around propaganda for extending Social Security? Is that an appropriate use of governmental money? I don't think so, and that's what I object to. Granted it is not, but aren't the people supposed to be intelligent enough to know deceit from truth? No. They're sup posed to be intelligent enough to choose among alternative purveyors of supposed truth. The problem is the one-sidedness. We believe the whole justification for free press, for free speech, for our whole system of adversary justice--the whole justification--is that people will be best able to distinguish truth from falsity if they have an opportunity to hear a variety of different opinions. If you only have one opinion spoken, to shift grounds, if we go to the Soviet Union, the people in the Soviet Union are enormously sceptical about what they hear from their government but they cannot know the truth because they don't hear it. They have to conjecture what is the truth because they only hear one side. They don't believe that, don't misunderstand me. They become experts at reading between the lines. But they still don't have access to the full variety of opinion which would enable them to choose and decide intelligently and reasonably about what's right. So let's by all means have a clash of opinions. Let different beliefs clash in the market place of ideas, but let's not have a monopoly or subsidization of one brand of ideas versus another. Thank you very much. Yes sir, you mentioned about the imports of steel. I would like to allude to that. We hear from the American steel industry that in Japan, for instance, steel producers are producing at less than cost with support of the government so as to keep employment up there, and as a result the American steel industry here is not going to be able to compete. So they are going to shut down and we are going to have higher unemployment here. What is your answer to that? Well, that's a very good question and it's a very easy answer. I may say the answer I'm giving is not my answer. It was the answer that was given by Adam Smith, the man whose face appears on my tie I may say. It was given by Adam Smith in 1776 in The Wealth of Nations. From that time to this, hardly any professional economist has believed in tariffs or protection or anything but free trade. But the answer is very straightforward. Let us suppose for a moment that the Japanese flood us with steel. That will reduce employment in the American steel industry, no doubt. However, it will increase employment elsewhere in America. We will pay for that steel with dollars. What will the Japanese do with the dollars they get for the steel? They aren't going to burn them. They aren't going to tear them up. If they would, that would be best of all because there's nothing we can produce more cheaply than green pieces of paper: And if they were willing to send us steel and just take back green pieces of paper, I can't imagine a better deal. But they are not going to do that, they are not stupid, they are smart people. They are going to use those dollars to buy goods and services. They are going to spend them. In the process of spending them, they spend them directly in the United States and that directly provides employment in the United States. They may spend them in Brazil or in Germany or in China or anywhere else, but whoever gets them in turn is going to spend them. So the dollars that we spend for the steel will find their way back to the U.S. as demand for U.S. goods and services. You will have less employment in the steel industry, you will have more employment in the industries producing the goods we export. Overall, total employment will not be affected. But overall the American consumer will be benefited because he will get the steel more cheaply and the goods made from the steel more cheaply than he otherwise would. That's the benefit to the American consumer. Now why is the steel industry and similar industries--why are they so effective in their campaigns for protection? Because of a very common problem that affects not only this but lots else, and that is the difference between the visible and the invisible. The people who are going to lose their jobs in steel are very visible, they are a collective group, you can name their names. Suppose we restrict imports from Japan, then people are going to lose their jobs in these export industries. They will be widely spread over the country. You and I couldn't name one person, but that doesn't mean they are any less real. But the greater propaganda effect of the steel industry is because you can see the visible as the most potent political force than the invisible people who will lose their jobs. I urge on those people who think there's some sense to the steel industry argument to consider it in a more absurd setting. You very often bring out the logic of an argument by carrying it to an extreme. You know, you could have a great employment in the city of Logan, Utah of people growing bananas in hothouses. If we had a high enough tariff on the import of bananas it could become profitable to build hothouses and grow bananas in those hothouses. That would give employment. Would that be a sensible thing to do? If that isn't sensible, then neither is it sensible to artificially restrict the import of steel. Now with respect to the charge that the Japanese government is subsidizing the export of steel, number 1, it's very dubious that it's true. But suppose it were true. Then that would be a foolish thing for the Japanese to do from their own point of view. But why should we object if they're giving us foreign aid? We've given them
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quite a bit. Thank you.
