American Public Policy at the Crossroads

By Robert E. Wright, AIER

EBHS Virtual Conference 18 May 2021

Of course there never existed a time when some American government or another did not restrict certain activities and impose monetary and/or in-kind taxes on citizens. I won’t bore you with a detailed survey, which is available in the Congressional Quarterly history of U.S. economic policy reference book that I edited with Tom Zeiler a few years back.

Nor will I here attempt to rigorously demonstrate the obvious, that the number and real size of taxes and regulations have grown enormously since first settlement, usually during wars or other emergencies via the ratchet effect described by Bob Higgs in books like Crisis and Leviathan.

What I would like to establish -- obviously in a big book, not this short talk -- is that almost all regulation, and the taxation that supports it, is ultimately a form of private and/or public rent-seeking, a point elucidated by French political economist Frederic Bastiat in the first half of the nineteenth century. What has evolved since is a sophisticated version of Shirley Jackson’s 1948 short story “The Lottery,” where some people are sacrificed for the greater good, or rather what passes for it.

For those not conversant, Jackson’s story is about farm towns that maintain an institution called the lottery by which one villager each year was randomly chosen to be stoned to death to ensure an ample harvest. The fictional story shocked many readers because Jackson set it in postwar, post-New Deal America, when many people were wondering if they were not being sacrificed to public policies of unproven merit.

From this line of thought emerges the hypothesis that American society is not so much systemically racist as its government is systemically exploitative, sometimes but not always along racial lines. Big government and big business both benefit from this system of exploitation and hence were happy to jump onto the BLM/CRT bandwagons to distract from the real problem, which boils down to the government taking from Paul to pay Peter for no other reason than Paul was unlucky in the circumstances of his birth and hence less politically powerful than Peter, who, unlike Jackson’s villagers, do not have to personally bludgeon Paul to benefit from his life force.

What I mean by a policy crossroad is a juncture where a single policy, or an entire policy set, stops serving the public interest and instead imposes a cost on a specific individual or group for the benefit of another individual or group. Such blatant, coerced redistribution was unacceptable to the Founders and Framers, who instead urged the formation of voluntary associations to aid the poor, educate and doctor the masses, and encourage agriculture, commerce, and manufacturing. Tens of thousands of organizations dedicated to such pursuits incorporated before the Civil War, and untold others formed and operated under less formal articles of association. DeTocqueville and others marveled over their ubiquity and I hope to publish my book about them, tentatively titled Liberty Lost: The Rise and Demise of Voluntary Association in Antebellum America, by year’s end.

That is not to say, of course, that America’s Founders and Framers saw no scope for government action. As the preamble of the Constitution declares, government should “promote the general welfare” while also securing the “blessings of liberty.” Unfortunately, the Founders and Framers never made absolutely clear what they meant by the general welfare, leaving some room for debate.

Some government policies aid all and hence clearly promote the general welfare, however construed. Those policies that aid one or more without imposing costs on others also, it seems, would fall under general welfare promotion. They are sometimes called Pareto improving policies. Those that serve the public interest on average (total benefits > total costs, though with some individuals bearing net costs), sometimes called Kaldor-Hicks improving, may be justifiable if the net costs are unknowable or random or evenly spread and small.

Policies that meet such criteria do exist. Prohibitions on murder and slavery are prime examples of policies that aid all, as are taxes used to defend citizens from physical violence. Pareto policies include most that increase efficiency, as in trash collection, if those injured are identified and compensated. Some Kaldor-Hicks policies, like some public infrastructure projects that cannot find sufficient private funding due to market failures like asymmetric information, can also be justified by the US Constitution’s crucial Preamble.

Policies like those that clearly promote the general welfare are, however, rare relative to the universe of all possible policies. America’s Founders and Framers realized that and hence favored limited government and numerous checks and balances designed to keep policies far from the crossroads of exploitation.

The fatal flaw in the governance system the Founders created was the so-called police power of the state, a doctrine that provided state and municipal governments with considerable discretion to regulate a wide range of economic and social activities, from selling alcohol to cussing or spitting in public to hunting on Sunday. Almost no such policies aided everyone, few were Pareto improving, and many were not even Kaldor-Hicks improving because the costs of enforcement exceeded the benefits of banning. Yet judges allowed the so-called police powers not just to persist, but over time to proliferate to the point that many found it acceptable for governors to declare entire classes of citizens unnecessary and others as expendable in response to a pandemic that even in its grossest exaggeration was mild in historical terms.

Especially in the context of early America, it was often far easier and cheaper for people with minority views on police power policies to move to jurisdictions with more amenable rules. That reduced local political tensions because over time like-minded people tended to cluster, as in Pennsylvania’s Amish country, the slave South, or the Burned-Over-District of western New York. The result was tremendous heterogeneity between states on statewide policies and within states on local policies, like zoning, alcohol sales, and school curricula.

Over time, governments in locales in relatively high demand due to natural amenities like beaches, mountains, and generally salubrious weather patterns found they could tax and regulate more without triggering out migration. Lower demand districts, like the flat and frigid northern Great Plains, taxed and regulated less in order to retain population.

Eventually, that led to serious political polarization due to selective sorting and reinforcement through the school system and everyday experience. People who valued liberty most moved to the center of the continent and Alaska, while those who valued it least congregated on the coasts and Hawaii. Local school districts everywhere reflected local views, so in South Dakota students get a robust entrepreneurship curriculum while in Loudon County, Virginia Critical Race Theory is all the rage. 

Finally, a sort of confirmation bias creeps in. People in Place X with Policy Set Y think Y must be fine because X remains populated and functioning at some level, even if it is despite Y rather than because of it.

Mobility is not always cheap and may have become less common, rather than more, as Americans over the last half century accumulated stuff faster than moving industry productivity increased. Keep in mind that college professors are unusually peripatetic in large part because they have to be due to the nature of the higher ed job market. Members of most other occupations, though, can find work in many locations and once they settle down and have kids often do not want to move, even within a metropolitan area, a predilection that gave rise to the notoriously hellacious American commute. Online work has further increased the tendency to stay put even as careers twist and turn over time and space.

The relative decline in mobility, along with federal tax laws, allowed state and local governments to raise tax rates and assert increasing levels of control without losing population. Many municipalities, however, have hit the limit of what even their self-selected and selectively educated local populations will put up with, inducing more political strife over policy sets or, where the municipal government is too large or corrupt to be swayed, old fashioned out-migration or housing cost declines. Because the effects of many policy decisions made in 2020 were so palpable, one in ten Americans moved despite the pandemic and the many restrictions it spawned. The sorting continues and may have lasting effects on housing and rental markets. 

I kid you not, a friend of mine recently passed on a $1,500 a month one bedroom on Manhattan’s Upper East Side because she thought it too expensive. Manhattan isn’t completely depopulated, it is just that rents have plummeted in response to the city’s failed policy set, including police defunding and irrational Covid restrictions. Sure, some people fled to New Jersey, Connecticut, Massachusetts, and the Hudson River Valley but others stayed after negotiating lower rents, which rent moratoria made easier to do by essentially abrogating existing lease agreements. Look for landlords to seek compensation for their losses in a politically palatable form, including increased barriers to entry like stricter zoning and permitting regimes, some of which will take the guise of mandating expensive “green” buildings.

In any event, those who seek to transform America of course find geographical mobility problematic. California tried to limit it by taxing the assets of those who vote with their feet for a full decade after they flee. Before the pandemic I joked that California would soon have to build a Berlin-style wall but Covid allowed it to build paper walls in the name of public health, i.e., one of the alleged police powers of the state.

A more ambitious program is attempting to federalize traditionally local policies in the name of efficiency or social justice or climate change or public health. A spate of books about states’ rights has done little to stem the trend because the federal government holds most of the purse strings, which it uses to fiscally strangle those who oppose its mandates.

It is, of course, very costly to flee the United States in terms of opportunity cost, at least for the present, and in absolute terms. For example, Americans cannot just move to Canada if so inclined. All that most Americans who dislike a policy set, increasingly an homogenous one made in Washington, DC, can do is to resist. We caught the slightest glimpse of what that might look like on 6 January. Increasing insistence on payment in cash or crypto to facilitate tax evasion is another, less visible but very real sign of resistance.

American public policy is at a major crossroads but its future path remains unclear. The nation’s direction may come down to chance, or the actions of a key policymaker or two, as it did when Alexander Hamilton and James Madison coaxed several disparate interests into adopting the Pareto-improving national Constitution.

Some fear that America will take the road heading toward bloodshed, even civil war, or disunion. It is possible, though, that conservatives, by which I mean those who wish to preserve America’s written and unwritten constitutions, will capitulate, or the progressives, by which I mean those who wish to upend federalism and other checks and balances, will remain content to control major U.S. cities while again leaving the rest of the country to its own devices.

America’s mounting fiscal difficulties, however, render capitulation by either party increasingly unlikely and will soon pull many fence-sitters into the fray on one side or the other. Nobody knows the country’s debt limit but the progressive side seems bent on discovering it and little stands in its way, especially if the filibuster is ended or subverted through so-called budget reconciliation, Washington, DC becomes a state, and/or SCOTUS gets expanded to 13 members.

Once the federal government’s credit is shattered, which increasingly seems like a question of when rather than if, real resources will have to be redistributed and disagreements over competing policy sets will grow increasingly acrimonious as the Shirley Jacksonian lottery-like nature of most policies becomes increasingly clear to increasingly larger segments of the population. 

Maybe, though, the masses will be assuaged or befuddled with the accounting legerdemain inherent in a Universal Basic Income program and the country will simply descend into a no-growth equilibrium with limited innovation. At least then the border crisis will ease, end, or possibly reverse. 

Perhaps, the masses will rebel against too much government and insist on a return to federalism, if not limited government. That seems unlikely, though, as they are increasingly easily duped with misinformation and disinformation due to their substandard public education and progressive control of much of mass and social media.

It is difficult to hold out much hope for a generation that suffered so silently through the 9/11 debacle, the global financial fiasco, and the botched Covid response. I guess it comes down to whether those government-induced traumas have a cumulative effect, like the lead up to the American Revolution.

For those unfamiliar, the roots of that world-changing event formed during a war started in response to terrorist attacks known in America as the French and Indian War and in Europe as the Seven Years’ War. A little-known mortgage crisis that began in 1763 prepared the ground for the Stamp Act resistance of 1765. Continued economic malaise forced the distant federal government, then in London of course, to increase taxes, which led to more resistance and, eventually, the Boston massacre and tea party, which fomented the final straw, the Coercive Acts. Most of the current denizens of Massachusetts whom I have met are too physically and morally cowardly and intellectually stunted to play the role of revolutionary again but potential pockets of revolution can be found in many places throughout the country.

My apologies again for speaking in such generalities but this paper should have been delivered in Atlanta last year, not via Zoom right now, partly due to fear of Covid but largely due to public policies of dubious merit. I believe that economic and business history can be a very valuable policy analysis tool when deployed minutely, as Andrew Smith and I do in a paper soon coming out in Business History Review about the role an obscure SEC rule adopted in the mid-1970s played in fomenting the global financial crisis of 2008. But business and economic history can be even more valuable when carefully deployed to address Big Picture questions, like the state of the union.

Thank you for your time and Zoomtention.