IN THIS ISSUE
The “Lodger Evil” and the Transformation of Progressive Housing Reform, 1890–1930
David T. Beito and Linda Royster Beito
Dynamics
of Intervention in the War on Drugs: The Buildup to the Harrison Act of 1914

Audrey Redford and Benjamin Powell
Understanding a Cuban Transition
Roy C. Smith and Ingo Walter
Regime Uncertainty and the Great Recession: A Market-Process Approach
Wolf von Laer and Adam Martin
Cryptocurrency and the Problem of Intermediation
Cameron Harwick
The INDEPENDENT REVIEW
VOLUME 20 | NUMBER 4 | SPRING 2016
A Journal of Political Economy
R
Stagnation by Regulation in America’s Kudzu Economy
Bruce Yandle
B R
Circus Maximus: The Economic Gamble behind Hosting the Olympics and the World Cup
By Andrew Zimbalist | Brad R. Humphreys
The Illusion of Well-Being: Economic Policymaking Based on Respect and Responsiveness
By Mark D. White | Daniel D. Moseley
Advanced Introduction to the Austrian School of Economics
By Randall G. Holcombe | Vlad Tarko
The Philanthropic Revolution: An Alternative History of American Charity
By Jeremy Beer | Robert M. Whaples
The Forgotten Depression, 1921: The Great Crash That Cured Itself
By James Grant | Joseph T. Salerno
Stages of Occupational Regulation: Analysis of Case Studies
By Morris M. Kleiner | Edward Timmons
Perilous Partners: The Benefits and Pitfalls of America’s Alliances with Authoritarian Regimes
By Ted Galen Carpenter and Malou Innocent | Christopher J. Coyne
Going for Broke: Deficits, Debt, and the Entitlement Crisis
By Michael Tanner | Antony Davies
I I,  S W, O, CA -
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CANADA$11.50
$15.00
CANADA
A I
$12.00
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Economic Modeling: Why the Standard Model Survives Bad Performance
Steven D. Gjerstad and Vernon L. Smith
V . 2 0 | N.  | S        
E ...
Will Cryptocurrencies
Take Over?
The INDEPENDENT
REVIEW
Volume 20
Number 4
Spring 2016
Articles
Reflections
Book Reviews
A Journal of Political Economy
The “Lodger Evil” and the Transformation of
Progressive Housing Reform, 1890–1930
David T. Beito
and Linda Royster Beito
485
Dynamics of Intervention in the War on Drugs:
The Buildup to the Harrison Act of 1914
Audrey Redford
and Benjamin Powell
509
Understanding a Cuban Transition
Roy C. Smith
and Ingo Walter
531
Regime Uncertainty and the Great Recession:
A Market-Process Approach
Wolf von Laer
and Adam Martin
547
Cryptocurrency and the Problem of Intermediation
Cameron Harwick
569
Stagnation by Regulation in America’s Kudzu Economy
Bruce Yandle
589
Circus Maximus: The Economic Gamble behind
Hosting the Olympics and the World Cup
By Andrew Zimbalist
Brad R. Humphreys
599
The Illusion of Well-Being: Economic Policymaking
Based on Respect and Responsiveness
By Mark D. White
Daniel D. Moseley
602
FRONT COVER:
Will Cryptocurrencies Take Over?
(See article on page 569)
Etceteras . . .
Advanced Introduction to the Austrian School
of Economics
By Randall G. Holcombe
Vlad Tarko
605
The Philanthropic Revolution: An Alternative
History of American Charity
By Jeremy Beer
Robert M. Whaples
609
The Forgotten Depression, 1921: The Great Crash
That Cured Itself
By James Grant
Joseph T. Salerno
612
Stages of Occupational Regulation: Analysis of
Case Studies
By Morris M. Kleiner
Edward Timmons
616
Perilous Partners: The Benefits and Pitfalls of
America’s Alliances with Authoritarian Regimes
By Ted Galen Carpenter and Malou Innocent
Christopher J. Coyne
619
Going for Broke: Deficits, Debt, and the
Entitlement Crisis
By Michael Tanner
Antony Davies
622
Economic Modeling: Why the Standard Model
Survives Bad Performance
Steven D. Gjerstad
and Vernon L. Smith
627
Annual Index
633
Thank You . . .
639
Cover Image: © Petar Chernaev/iStock
Copyright © 2016, Independent Institute. All rights reserved. The Independent Review (ISSN 1086-1653) is
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articles are their own and are not attributable to the editors, advisors, or Independent Institute.
BOOK REVIEWS
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Circus Maximus: The Economic Gamble behind Hosting
the Olympics and the World Cup
By Andrew Zimbalist
Washington, D.C.: Brookings Institution Press, 2015.
Pp. xiii, 174. $25 hardcover.
Andrew Zimbalist has written a timely and important book addressing a topic of
vital importance for taxpayers, sports fans, and public officials around the world.
The May 2015 indictment of a number of Fédération Internationale de Football
Association (FIFA) executives by the U.S. attorney general for corruption related to
the awarding of the 2010 Copa America soccer tournament and the subsequent
resignation of newly reelected FIFA president Sepp Blatter highlight the seedy underside of the process of allocating sports mega-events, which Zimbalist examines in
detail. The increasingly vocal opposition to Boston’s bid to host the 2024 Summer
Olympic Games also provides a rich backdrop for this book. Circus Maximus is required
reading for anyone interested in a thorough, no-holds-barred account of how sports
mega-events are awarded and what impact these events have on host communities.
The book contains a narrative account of the awarding and hosting of the
Olympic Games and FIFA World Cup since their inceptions and an analysis of the
short-run and long-run economic consequences of these mega-events. It also discusses in detail the financing, economic impact, legacy effects, and existing scholarly
research on sports mega-events. Zimbalist has done a thorough, well-organized job
of marshalling both primary evidence and existing research to paint a comprehensive
and disturbing picture of the Olympic Games, the World Cup, and the opaque,
Byzantine organizations that control the awarding of these events.
To order any book reviewed in this section, please visit
www.IndependentReview.org and select the desired book
review.
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The book will be eye-opening for readers familiar only with the citius, altius,
fortius pageantry, the feel-good fellowship, the international spectacle associated with
the staging of the Olympic Games and World Cup, and the mythic Olympic Movement ideals that the International Olympic Committee (IOC) touts as its guiding
principles. Zimbalist thoroughly debunks the ideas that the IOC and to a lesser extent
FIFA primarily champion human rights, celebrate athletic performance, and provide
important economic and social benefits to host countries. For example, Zimbalist
points out that the IOC’s principle of nondiscrimination, clearly articulated in the
Olympic Charter, was violated from the get-go. The IOC excluded women athletes
from participating in the inaugural 1896 Athens Games and likely for racially motivated reasons stripped Native American Jim Thorpe of his medals won at the 1912
Stockholm Games. Zimbalist also thoroughly discredits the idea that the Games and
the World Cup generate substantial tangible economic benefits for host countries
by documenting the long history of cost overruns, “legacy” effects such as whiteelephant facilities too large and too lavish for local athletes and teams to use after
the events end, commercialization, and corruption that both the IOC and FIFA have
left in their wakes.
Students of the economic history of the Olympic Games and World Cup will
recognize that not every event has been a financial fiasco. Both the 1984 Los Angeles
and the 1992 Barcelona Summer Games were successful in terms of their financing
and, in the case of Barcelona, their lasting impact on local infrastructure and worldwide perception of the host city. Zimbalist argues that these successful outcomes were
the result of unique sets of circumstances that are very unlikely to be replicated in any
other setting. Los Angeles had no competitors for the hosting of the 1984 Games,
which forced the IOC to waive its infamous and onerous requirement that local
governments guarantee the full cost of hosting the games no matter what they cost
and to extensively utilize existing facilities rather than building new ones. Barcelona
was more than fifteen years into a meticulously mapped and competently executed
urban-redevelopment plan, so the organizers of the Barcelona games seamlessly integrated the Games and their facilities into this plan. Equally important for elevating
Barcelona’s status as a world-class tourist destination is the fact that it has a mild,
sunny climate, central location, and rich cultural history and had been neglected for
decades by the Franco regime in Spain.
Potential host cities and regions would benefit from a close study of Zimbalist’s
case studies and arguments that outcomes like those in Barcelona and Los Angeles are
the exceptions; one theme in the book is that the most likely outcome resembles that
of the 2012 London Summer Games. Organizers originally forecast total costs of
$5 billion for the London Games, but subsequent analysis revealed the actual costs
exceeded $15 billion. Zimbalist also documents the general lack of substantial legacy
effects of the London Games, despite dedicated efforts by the organizers to ensure a
positive and lasting legacy. These organizers, like all local organizing committees,
clearly had good intentions and lofty goals. But Zimbalist’s cautionary tales highlight
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the fact that the rules set by the IOC and FIFA, their idiosyncratic allocation of the
huge broadcast rights and sponsorship fees generated by these events, and the nature
of hosting sports mega-events, make it difficult to host an economically beneficial and
sustainable World Cup or Olympic Games.
The book also serves as an excellent reference for readers interested in expanding
their knowledge of the organization and governance of FIFA and the IOC and in
locating the existing body of scholarly research on the economics of sports megaevents. All of the relevant research papers published in peer-reviewed academic
journals are referenced and summarized. Zimbalist has collected a wealth of information about past bids, costs, attendance, and television viewership from a wide variety
of sources and concisely presented it in an easy-to-access format. He also explains
clearly the striking differences between ex ante “economic impact reports” forecasting billions of dollars of tangible economic benefits flowing from sports mega-events
and ex post econometric analyses that show little or no actual benefits.
Given the critical nature of the book, Zimbalist closes with suggestions for
improving the way that sports mega-events are conducted and the way that the rights
to host these games are allocated. The suggestions approach the issue both from
above (aiming at changing FIFA and the IOC) and from below (aiming at changing
the way potential hosts view and organize the Games and the World Cup). At the top,
Zimbalist correctly points out that many of the problems documented in the book
flow directly from the monopoly power enjoyed by the IOC and FIFA. These two
extragovernmental organizations answer to nobody, completely control the rights to
host these hugely popular events, and own all associated intellectual-property and
broadcast rights. Both organizations make extreme demands on host communities,
requiring large, new, state-of-the-art facilities, even, in the case of the Olympic Games,
for less-popular sports such as indoor cycling, softball, and swimming. This requirement drives up costs, and primarily benefits the IOC and FIFA because these lavish
facilities and elite competitors generate worldwide interest in watching the competitions, which primarily benefits the broadcast rights holders. Proposed use of existing
facilities has not been rewarded since Los Angeles (an exceptional case), and efforts at
putting on “sustainable” events appear to be fruitless. Worse, both the World Cup
and the Olympic Games are awarded through a competitive process where potential
hosts must compete with the number and lavishness of planned facilities. Zimbalist
observes that the IOC and FIFA set the rules, and the voting members of these
organizations that determine the host city or country are ill equipped to assess the
overall economic development potential of various bids. The solution is not to reform
the allocation process but to use international organizations focused on economic
development such as the World Bank and the International Monetary Fund, to assess
bids that contain important economic components.
The economic remedy to monopoly is competition. Here, Zimbalist points out
that the general public appears to have little interest in substitutes for the Olympic
Games, as indicated by the ill-fated Goodwill Games held a few decades ago. This is
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an apt analogy, but perhaps the increasing popularity of alternative media such as
streamed video will change the playing field in this area.
Zimbalist’s bottom-up solutions amount to potential hosts standing their
ground when their bids do not meet the stringent IOC and FIFA requirements
for new facility construction and other economic goodies (exemption from import
duties and taxes, special treatment for the “Olympic Family”). The key issue here
would appear to be the requirement that local fiscal authorities guarantee to cover
any and all costs of hosting sports mega-events, including security costs and cost
overruns associated with facility and infrastructure construction. This requirement
means cooperative action on the part of all potential hosts during the bidding process. So long as a sufficient number of potential hosts emerge, such cooperation
appears to be an unlikely outcome. However, Zimbalist documents the existence of
long-term cycles in the leverage enjoyed by the IOC and FIFA as the number of
bidders waxes and wanes. This leverage ebbed in 1984 when Los Angeles was the
only bidder for the Games and forced the IOC to waive its financial-guarantee
requirement, but it increased in the following decades. Zimbalist posits that it may
again be ebbing. But one wonders why taxpayers in potential host cities should wait
for these long-term cycles to play out. In any event, Zimbalist makes a clear and
persuasive case that the entire process is in dire need of reform and that taxpayers
and decision makers need to better understand the process and history of hosting
sports mega-events.
BRAD R. HUMPHREYS
West Virginia University
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The Illusion of Well-Being: Economic Policymaking Based on
Respect and Responsiveness
By Mark D. White
New York: Palgrave MacMillan, 2014.
Pp. ix, 206. $35 paperback.
The central arguments in Mark White’s book will be familiar and attractive to those
inspired by the work of Friedrich Hayek and James Buchanan. White argues that
policy makers are too keen to appeal to metrics of happiness or well-being to justify
their policy recommendations. White holds that policy makers pretend that they are in
the business of improving the well-being of everyone and that they appeal to poorly
designed empirical studies to support their policy recommendations. He argues that
much of the current empirical research on happiness and well-being has yielded
results that are arbitrary, inaccurate, and oversimplified and, thus policy recommendations that rely on empirical studies of happiness and well-being are not sound. He
contends that the true interests of individuals should be the policy makers’ concern,
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but those interests are too complex and subjective to be accurately described with the
results of surveys by positive psychologists and the quantitative methods used by
behavioral economics. According to White, policy makers and happiness researchers
are guilty of value substitution: they paternalistically impose their own values onto the
values of the people whose well-being they purport to be investigating. He advocates
an approach to policy making that focuses on enhancing the choices available to
individuals in a society and responding to the concerns that people actually express
via democratic processes.
The Illusion of Well-Being consists of four chapters. The first two chapters present
White’s arguments that the current research in psychology and economics on happiness and well-being does not track the true interests of the individuals whose interests
are being studied. The third chapter presents his argument that those researchers are
guilty of value substitution and that many theorists who advocate the ethics of care
also embrace an approach to caring that is overly paternalistic. The fourth chapter
presents White’s own proposal for how policy making ought to be conducted: policy
makers should make rules and laws that are based on respect and responsiveness. He
maintains that policy makers should focus on constitutional economics instead of on
welfare economics. That is, he contends, they ought to focus on creating rules that
maximize the degree and extent of mutually consistent choices instead of trying to
directly produce outcomes that increase aggregate happiness.
In the chapters that attack policy making based on concerns of happiness and wellbeing, White discusses how the historical development of utilitarian moral philosophy
worked in tandem with the development of welfare economics. He also claims that the
current psychological research on happiness is fundamentally misguided because it is
based on a vague and indeterminate concept: “The nature of happiness itself is too
vague and multifaceted to be defined with any precision—at least without missing
much of the complexity that captures what makes it so valuable to people—or measured
to even a minimal degree of accuracy and meaningfulness” (p. 43). Likewise with the
concept of well-being: White argues that economic models of rationality that focus on
preference satisfaction are also misguided because “sincerely held preferences and
desires . . . don’t seem to contribute to what we would normally think of as personal
well-being” (p. 74). He also contends that the concept of an individual’s preferences
that is used in rational-choice theory is ethically impoverished because the economist’s
concept of a preference cannot explain the way in which moral judgment motivates us to
act. “There is no obvious way to incorporate principles and ideals alongside preferences
in economic models of choice, although there have been a number of suggestions made
in recent years” (p. 102), He argues that the “balancing of our preferences along with
the principles and ideals we hold dear comes down to judgment, which, unlike standard
economic models of decision making, is essentially qualitative and impossible to specify
or model” (p. 104, emphasis in original). White’s Kantian moral psychology is worthy
of serious consideration, but I take it to be an important and challenging research
project to specify the exact nature and relation of choice, preferences, values, character,
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principles, and ideals. White does discuss the topic in other work (see Mark D. White,
Kantian Ethics and Economics: Autonomy, Dignity, and Character [Stanford, Calif.:
Stanford University Press, 2011]), but I take the issue to remain an open and pressing
area of inquiry at the intersection of moral psychology and economics. (For a suggestion of how rational-choice theory may account for the role of moral judgments in
political agents, see Geoffrey Brennan and Daniel D. Moseley, “Economics and Ethics,”
in The International Encyclopedia of Ethics, edited by Hugh LaFollette [Oxford:
Blackwell, 2013], 1552–61.)
Three weaknesses in White’s arguments deserve attention. First, from the outset
of the book, his arguments are intended to show that policy makers should not
rely on economic or psychological measures of happiness or well-being in forming
policies. However, White does not distinguish importantly different kinds of policy
makers: policy makers in the federal government, in state governments, in lower
levels of government (counties and towns), in universities, in hospitals, in religious organizations, and in various levels of business. Given the widespread use
of customer-satisfaction surveys in many of these organizations, which are often
helpful tools in many contexts for measuring efficiency, it would be foolish for
administrators in many sectors to consider those data to be an arbitrary or irrelevant measure of happiness. It is not wise to allow these data to be decisive in
making policy, but they are not an arbitrary and irrelevant measure of happiness.
Data about various forms of injury and infectious disease may also provide helpful
information about unhappiness that policy makers should consider. White’s characterization of the role of empirical evidence in policy making overgeneralizes from
his central case of the way federal policy makers often place too much emphasis
on gross domestic product as a measure of economic health (and a measure of the
happiness of the various countries’ inhabitants).
Second, White does not persuasively make the case that surveys that examine
self-reports of happiness are guilty of value substitution. He correctly emphasizes that
researchers need to be careful to avoid bias in framing their questions to study
participants. However, he does not take seriously the fact that well-crafted surveys,
which control for many of the forms of bias that he discusses, can reasonably use selfreported happiness as a proxy for expressions of subjective well-being. There is the
danger that “framing effects” will influence these reports, and there is the danger of
cognitive biases on the part of the researchers and study participants. However, a wellcrafted survey can be implemented in a manner that avoids many of White’s concerns.
Just as a poorly designed philosophy exam will not do a good job of testing students’
philosophical skills and probably express the values of the professor who constructed
the exam, a poorly designed customer-satisfaction survey will not do a good job of
tracking what people want and will probably express the values of the researcher who
constructed the survey. However, the biases may not be due to the researcher’s values
(the researcher may just be careless or not adequately trained in how to conduct a
study), and that flaw would not be due to value substitution.
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Third, the utilitarian can construe White’s own proposal to encourage respect
and responsiveness in policy making as a means for producing the best outcomes.
Borrowing Robert Nozick’s distinction between historical and end-result theories
of justice, White claims to be advancing a historical approach that focuses on the
historical processes that have created the institutions to be evaluated as just or unjust
(pp. 136–42). However, when characterizing his own conception of policy making
based on respect and responsiveness, he argues that policy making should maximize
the degree and extent of autonomous choice (p. 148). Given White’s own assumptions and commitments in the argument, there are two problems with this proposal.
First, it is an end-result approach instead of a historical approach: it is a consequentialist theory that takes the good to be autonomous choice. So White’s own theory
may be construed as a version of consequentialism that takes the capacity to make
autonomous choices to be the good that is central to well-being. Second, White’s
own proposal is an end-result approach that requires policy makers to create rules that
bring about his own comprehensive conception of the good; that is, White’s own
prescription of how policy making should be done involves a value substitution that
imposes his own values on policy makers who may not endorse his commitment to
liberal neutrality.
The book has the casual tone of an undergraduate class lecture, and in the
manner of a class lecture the discussion jumps from a careful and scholarly assessment
of the academic literature to jokes and wisecracks. Student readers may find the shift
in tone to be refreshing, a pleasant respite from the dreary arguments, but researchers
may quickly become impatient with the pedantic tone and trite digressions. It is
impressive, though, how in his central line of inquiry White manages to touch on a
wide range of topics that are of central importance to the ethics of economics,
economics in ethics, and ethics out of economics. The book would be well suited
as a textbook to supplement the classic literature for an undergraduate course on
philosophy, politics, and economics.
DANIEL D. MOSELEY
Duke University and University of North Carolina at Chapel Hill
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Advanced Introduction to the Austrian School of Economics
By Randall G. Holcombe
Cheltenham, U.K.: Edward Elgar, 2014.
Pp. xi, 126. $27.95 paperback.
Following the fall of socialism in eastern Europe and the past two recessions, the
Austrian School of economics has received unprecedented interest. The Austrians
have long argued that socialism cannot allocate resources efficiently against mainstream
claims that central planning can deliver faster growth than capitalism (see David Levy
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and Sandra Peart, “Soviet Growth and American Textbooks,” Journal of Economic
Behavior & Organization 78 [2011]: 110–25). Similarly, the past two recessions have
made it clear that aggregate supply and demand do not tell the whole story and that
the causes of specific capital misallocations need to be understood (Lawrence H.
White, The Clash of Economic Ideas [Cambridge: Cambridge University Press, 2012]).
But the Austrian School is more than just these two instances of going against the
mainstream. The most interesting aspect of the school is that it claims to provide a
coherent account of the entrepreneurial market process from which such contrarian
ideas logically follow.
Randall Holcombe’s “advanced introduction” is, hence, a very welcome contribution to the literature on the Austrian School. The book is aimed toward readers
who are already familiar with the neoclassical equilibrium framework but are curious
to learn more about the Austrian theory of what happens outside the equilibrium.
Other recent introductions to Austrian economics have been either at a more introductory level (Gene Callahan, Economics for Real People [Auburn, Ala.: Ludwig
von Mises Institute, 2004]) or at a far more encyclopedic level (Peter Boettke, ed.,
The Elgar Companion to Austrian Economics [Cheltenham, U.K.: Edward Elgar,
2004]; Peter Boettke and Christopher Coyne, eds., The Oxford Handbook of Austrian
Economics [Oxford: Oxford University Press, 2015]). By contrast, Holcombe’s book
is geared toward those who aren’t yet sure whether to invest the time to read the
Austrian literature.
Does the book succeed? The challenge to provide a very concise account of
an increasingly large literature is considerable. Furthermore, because Austrian economics goes against some key elements of neoclassical economics, both in terms of
foundations and in terms of policy implications, to be convincing a sympathetic
presentation needs to avoid straw-manning neoclassical economics. In my view, with
a few exceptions, Holcombe does an outstanding job in meeting both challenges. His
book is by far the best short introduction to Austrian economics that exists on the
market today.
The first chapter introduces the key elements of the Austrian toolbox. First of all,
the Austrian theory models all economic agents as fallible; they have access to limited
and dispersed knowledge—that is, they know different things, and no one has full
knowledge of what the others know. This assumption may create serious difficulties
for building mathematical models, but it is nonetheless realistic. This is the situation
that people face in the real world. Once we set up the analysis in such a manner, the
main dilemma that economic theory needs to solve is, how do people’s plans ever get
coordinated? This question is more complicated than just the question about resource
allocation, and it includes an inherent time dimension.
The mechanism that Austrian economics uses to explain coordination is the
agents’ entrepreneurial alertness to various opportunities for profit. All social order,
the market in particular, is defined by the process of its emergence as all agents are
constantly searching for opportunities that are yet unnoticed by others. In the case of
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markets, arbitrage plays a particularly important role in creating the system of equilibrium prices, which in turn provides information for wide-scale coordination.
As Holcombe points out, several departures from the neoclassical models follow.
Most importantly, competition is understood as a rivalrous and dynamic process, and
the subjectivity of preferences looms much larger because of the assumption of
heterogeneous knowledge. For example, different firms may make different assumptions about consumer demand, and their rivalrous competition provides a test as to
which firm has made a better guess. In this way, the market reveals itself as a discovery
process—a discovery of consumer demands and a discovery of new cost-reducing
production methods. One of the key Austrian insights Holcombe reiterates throughout the book is that
goods and services do not have intrinsic value that somehow can be discovered independent of the transactions that determine and reveal that value.
The market generates that information about the value of goods and services, so the information does not exist without the market to create it.
This is especially significant with regard to capital goods, because they are
durable goods whose value depends upon the value of the final goods they
will produce. Expectations about future market conditions, clouded by the
uncertainty of the future, determine the value of capital goods, and capital
markets are required to coordinate these expectations of investors. (p. 48)
The second chapter provides a good overview of the Austrian theory of the firm
as developed by authors such as Nicolai Foss, Peter Klein, Richard Langlois, and
Frederic Sautet. This theory focuses on division of knowledge and the learning
processes facilitated by the organizational environment of the firm. In the same way
that the information provided by prices would not be generated without the market
process, certain forms of knowledge required in the production processes would not
exist without the environment of the firm. Holcombe also makes clear the reason for
another important departure from mainstream economics: because of the dynamic
understanding of markets, as long as free entry exists, profits are understood as a sign
that productivity increases are taking place rather than as a sign of monopolistic
inefficiencies that need to be rectified by the government.
Although Holcombe presents such insights well, in my view this chapter remains
the weakest in the book because it does not do a fair job of presenting the mainstream
background on which the Austrian theory builds and from which it departs to some
extent. For instance, there is no explicit mention of Ronald Coase, Armen Alchian,
Harold Demsetz, or Oliver Williamson, although their ideas are briefly described.
Even worse, the chapter uses production functions as its main counterpart but misrepresents them. Ironically, Holcombe describes production functions as doing much
more than they actually can. He refers to the “recipe given in the production function” (p. 22) and claims that the production function embeds the “management
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function of the firm” (p. 24). In fact, the production function is a black-box perspective on the firm that says nothing about how the firm operates internally. It only tells
how many output goods are produced with given combinations of inputs; it is an
accounting perspective of the firm that says nothing about how the outputs are
produced. In other words, it contains no recipe or description of management.
Despite this error, the chapter still does a good job of emphasizing the need to
account for entrepreneurship in the theory of the firm, but it would greatly benefit
from using Gary Miller’s “managerial dilemmas” (Managerial Dilemmas [Cambridge:
Cambridge University Press, 1992]) as a term of comparison instead of the theory
of production functions.
The third chapter gets at the core of the policy implications. One question that
often arises is why most Austrian economists are much more libertarian minded than
the rest of the profession. Is this just a sociological artifact of how the school survived?
As Holcombe explains, sociology provides only a small part of the answer. The more
interesting part has to do with the implications of focusing on dispersed knowledge,
on the entrepreneurial process, and on the role of the price system as a mechanism for
coordination. Holcombe starts by describing the socialist calculation debate,
explaining why the efficient allocation of resources, including for research and development, cannot occur absent market prices for capital goods. Second, he addresses
the mixed economy, noting that by distorting price signals it often generates unintended consequences while at the same time hampering the market mechanism for
dealing with unexpected problems. Third, he provides a brief look at long-term
economic history and then revisits the connection between profit making and economic progress. He concludes this chapter with a brief discussion of welfare concerns,
criticizing “the static view of welfare maximization” for overlooking “the fact that
inefficiencies in resource allocation present a profit opportunity for entrepreneurs”
and for being “overly optimistic about the prospect of government intervention
producing an improvement in resource allocation” (p. 66). A possible critique of this
chapter is that it doesn’t explicitly address industrial policy, which is still advocated in
a development context by prominent economists such as Dani Rodrik.
The fourth chapter focuses on the Austrian business cycle theory (ABCT).
This chapter may be the best in the book, and it is one from which both Austrians
and non-Austrians can benefit. Holcombe’s presentation is very careful and rigorous.
First, he points out that ABCT holds that booms and busts would occur even
without central banks: “the cycle is caused by fluctuations in the money supply,”
and it is “completely endogenous to the economy; that is, there is no outside
shock that leads to the cycle” (p. 73). The ABCT in its simplest form is essentially
a tragedy-of-the-commons theory of the fractional-reserve banking system. From
the point of view of competing firms and banks, aggregate consumer demand is
a commons, and banks have the incentive to “overgraze the commons” by lending too much, hence producing the unsustainable boom. As Holcombe explains,
“A bank cannot unilaterally decide that the economy [is] entering a boom phase”
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because if it reduces loaning activity in the boom period, “it would eliminate its
source of profit” (p. 75).
Second, Holcombe moves on to explain the more widely known aspect of
ABCT—namely that central banks, rather than solving the commons problem,
make matters worse because they add another source of monetary expansion and
distort the signal provided by interest rates: “This [distortion] adds another degree
of uncertainty to entrepreneurs because to anticipate the future they must anticipate
the actions of the central bank” (p. 77). Third, he connects the simple theory
of fluctuations to the theory of capital structure, explaining why the booms and
busts do not occur uniformly throughout the economy but tend to be localized in
specific sectors. He then also connects the discussion about business cycles to the
theory of entrepreneurship as developed by Joseph Schumpeter and Israel Kirzner
and discusses the possibility that creative destruction may itself cause business cycles.
Finally, if ABCT is a tragedy-of-the-commons theory, what can be done? Holcombe
ends the chapter by pointing to the research on free banking, which explains how,
before central banks acquired the role of lenders of last resort, private banks organized in clearinghouses for the purpose of monitoring each other and occasionally
helping the members that got in trouble.
The last chapter provides an overview of the history of the Austrian School, how
it reemerged in the 1970s and grew into the present active research program. The
chapter also includes some brief remarks about the school’s ideology and methodology.
For a long time, economists curious about the Austrian School faced the problem
that all substantive introductions to the school were gigantic books. Hence, they were
naturally skeptical about whether the required time investment was worth it, and, at
best, they became aware only of small disconnected parts, such as ABCT. Not anymore. Randall Holcombe has done the apparently impossible: writing a short introduction to the Austrian School that presents all the key elements in its toolbox and
shows how the most controversial implications follow from the basic framing of
the problem in terms of coordination, entrepreneurship, dispersed knowledge, and
out-of-equilibrium processes.
VLAD TARKO
Dickinson College
F
The Philanthropic Revolution: An Alternative History
of American Charity
By Jeremy Beer
Philadelphia: University of Pennsylvania Press, 2015.
Pp. ix, 124. $19.95 paperback.
Robert Higgs and Elizabeth Bernard Higgs reminded Independent Review readers
in a recent “Etceteras” column that “[a] ship cannot make much headway when it
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is held back by a sea anchor. In our voyage toward a truly free society, lack of
compassion for the less fortunate acts as such an anchor” (“Compassion—a Critical
Factor for Attaining and Maintaining a Free Society,” The Independent Review 19,
no. 4 [Spring 2015]: 627).
In The Theory of Moral Sentiments, Adam Smith argues that compassion—from
the Latin compati, “to suffer with”—is innate: “By the imagination we place ourselves
in . . . [the] situation [of someone in need], we conceive ourselves enduring all the
same torments, we enter, as it were into his body, and become in some measure the
same person with him, and thence form some idea of his sensations, and even feel
something which, though weaker in degree, is not altogether unlike them” (part I,
sec. I, chap. 1, at http://oll.libertyfund.org/titles/2620). If so, the question becomes
how to express our compassion.
In recent decades, the American voter has expressed this compassion largely
by taxing the rich and redistributing resources directly to the not-as-rich through
programs such as Temporary Aid to Needy Families, the Earned Income Tax
Credit, Medicare, and school lunch programs. Unfortunately, these programs have
mixed motives—some not so altruistic—and mixed results. Another expression of
compassion is the mammoth philanthropic movement, capped by more than eighty
thousand foundations with $715 billion in assets. Such foundations, headlined by
the Bill and Melinda Gates Foundation, whose net worth exceeds $42 billion, are
often touted by skeptics of big government as an antidote to it. And in some
ways they are. But, argues Jeremy Beer, president of the American Ideas Institute,
in many ways they provide yet another attempt to solve the world’s problems from
the top down.
As Beer sees traditional historiographies of philanthropy in America, they
fall into one of three camps—a celebratory story of “unadulterated progress and
unquestionable goodwill”; a leftist critique of “systems of social control intended
to maintain class boundaries and serve middle-class and elite interests”; and a story
about reformers “leading, happily, to the advancement of the American welfare
state . . . paving the way toward a necessary safety net, even if they often betrayed
class biases and had less than pure motives” (pp. 10–11). To these three kinds of
history, Beer adds a fourth “counterhistory” that cannot be ignored—a history
of secular “philanthropy’s” marginalization of traditional, theologically grounded
charity. He carefully draws a picture of an increasingly powerful philanthropic
establishment frustrated by traditional charity, which it often ridicules as “irrational, wasteful, parochial and politically backward” (p. 6). Although the modern
philanthropic movement has done much good, Beer demonstrates that its critique of
charity betrays serious problems and often misses the point.
At root, modern philanthropy suffers from the same knowledge problem
Austrian economists see in centrally planned economies. One of the most telling
epigraphs in the volume comes from Andrew Carnegie, who gave away nearly
$350 million (around $8 billion at today’s prices) for projects that included the
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construction of nearly three thousand libraries and pensions for steelworkers and
teachers. Carnegie asserted that “one of the serious obstacles to the improvement
of our race is indiscriminate charity. It were better for mankind that the millions
of the rich were thrown into the sea than so spent as to encourage the slothful,
the drunken, and the unworthy. Of every thousand dollars spent in so-called charity
today, it is probable that nine hundred and fifty dollars is unwisely spent—so
spent, indeed, as to produce the very evils which it hopes to mitigate or cure”
(p. 1). I recall reading this statement years ago and nodding in agreement. After
all, Carnegie was a genius at making money. Doesn’t that make him a genius at
spending it to improve humankind? He did build almost three thousand libraries,
surely a worthy cause. However, this view is wishfully naive. How did Carnegie know
that 95 percent of “so-called charity” was being misspent? How did he really know
that his own money was being spent more wisely? He didn’t. To know how to
be wisely charitable, you have to know a great deal about the recipient of the charity.
And Carnegie didn’t. This is one of Beer’s core arguments, which unfolds as
he examines the history of the philanthropic revolution—of philanthropy versus
charity—aptly citing witnesses who understood why charity means much more
than “scientifically” giving money away to worthy causes.
Below the thin, rarefied air of philanthropic professionals, many Americans
have breathed and still breathe the Judeo-Christian ideal that the purpose of charity
isn’t merely to solve problems of scarcity; rather, it is to give “testimony” of God’s
love and so to “unlock the secret of the universe”—transferring wealth “from this
world to the next” and thus “placing treasure in heaven” (p. 17). This traditional
view of charity prevailed at the country’s founding, but Beer shows that it came
under attack beginning with the Second Great Awakening around 1830, which
spread the idea that humankind could be perfected on earth. This idea of perfection clashed with traditional charities, which rarely tried to stigmatize and reform
recipients. Traditional charity didn’t make careful delineations between the deserving and undeserving poor. It was too lenient; it sought to aid the poor, not to
change them. Unfortunately, the new noble, philanthropic goal of eliminating
poverty at its root led to some high-handed practices (often sharpened by a revulsion toward poor Irish Catholic immigrants)—including programs that effectively
kidnapped children from poor families to place them into “wholesome” homes where
they could be reeducated.
With the Civil War, the progressive movement, and the rise of the New Deal
state, the attack on the inadequacies of traditional charity intensified, but the
latter’s supporters kept pushing back, showing that philanthropy was missing
the mark by ignoring the spiritual. True charity isn’t a one-way giving from the
benign but remote (and often condescending) elite to those they deem needy;
it is a mutual exchange between people with equal dignity. The benefactor gives
financial aid but also a genuine smile, time, understanding, a piece of him- or
herself, which is to his or her eternal credit. This is true compassion. The recipients
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pay back as they share themselves with benefactors and pray for them. This personalist approach is at the core of traditional Judeo-Christian teaching. Jane Addams,
founder of Hull House in Chicago, put this distinction most succinctly when she
spotted the problem with a wealthy philanthropist: “He tried to be ‘good to them’
but not ‘with them’ she noted” (p. 87). The poor and broken aren’t a theoretical
problem; they are human beings. One incisive though anonymous homilist wrote that
the poor “are with us, and their present wants clamor for our help. Shall we say that
they are improvident, thriftless, intemperate? Then more loudly do their needs cry
to us. We are not asked to encourage their vices, but to relieve their necessities”
(qtd. on p. 65). Dorothy Day went one step further, seeing charitable acts and
giving, as Beer puts it, “as a way for the giver to enter into poverty, to share it
with the suffering, to bring more love into the world.” Just as God in the person
of Christ entered into human poverty and shared its suffering. “When we succeed in
persuading our readers to take the homeless into their homes,” Day clarified, “then
we will be known as Christians because of the way we love one another” (p. 92).
Blessed are the poor in spirit; theirs is the kingdom of God.
In contrast, cut off from their spiritual roots, philanthropists during this era
increasingly embraced an alternative to eradicate poverty—eugenics and the forced
sterilization of those unfit to pass along their genes. (Today some have descended one
step deeper by justifying abortion as a means of ending poverty.)
Beer closes The Philanthropic Revolution with thoughts about how to revive
the personalist, localist tradition of charity in our society. Quoting Gary Anderson on
the Book of Sirach earlier in the book, he reminds us that “having money
is tantamount to a spiritual ordeal whose outcome is determined by whether one
has the courage to give it away” as well as the compassion to give oneself away at the
same time (The Place of the Poor in the Biblical Tradition [New Haven, Conn.: Yale
University Press, 2013], p. 59, qtd. on p. 23). Beer’s point is not a wholesale
condemnation of modern philanthropy—which has achieved many good things that
traditional charity alone could not accomplish, such as the eradication of disease.
His sobering point is to remind me and the rest of his readers that this isn’t enough.
ROBERT M. WHAPLES
Wake Forest University
F
The Forgotten Depression, 1921: The Great Crash
That Cured Itself
By James Grant
New York: Simon and Schuster, 2014.
Pp. xii, 254. $28 hardcover.
The Forgotten Depression is a narrative history of the depression of 1920–21. Although
it is informed by a very definite theory—the Austrian business cycle theory—it is not a
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standard work in applied economics. It does not first present the theory in a rigorous
formulation and then move on to apply the theory by adducing pertinent qualitative
facts and statistical data to explain a complex historical event such as a depression. It
instead proceeds by way of anecdotes and contemporary media accounts, liberally
seasoned with telling quotations from politicians, policy makers, economists, business
leaders, and other contemporary observers of the unfolding depression. Data on
money, prices, and production are inserted at crucial points to keep the reader abreast
of the economy’s precipitous decline, but they do not dominate and weigh down the
story. James Grant, a masterful stylist, effectively weaves these disparate elements into
a seamless and compelling narrative that never flags in pace or wanders off track. The
book should appeal to a wide variety of readers, from college students and business
professionals to academic economists and policy makers.
By proceeding anecdotally, Grant gives the reader an intimate “feel” for the
intellectual milieu prevailing at the time, offering a bracing immersion into an economic paradigm unimaginably alien to contemporary thinking about business cycles.
It is for this reason that the book is especially valuable for academic economists
whatever their theoretical bent or policy predilections. Grant conveys to the reader
a clear understanding of a policy for curing depressions that was nearly universally
prescribed in the era before macroeconomic concepts and formulas fastened themselves upon the minds of economists and media opinion molders. This policy is today
derisively referred to as “liquidationist.”
To understand the liquidationist position, one must first grasp its foundational
concepts and assumptions. In the world of the early 1920s so richly portrayed by
Grant, there was no national macroeconomic entity with which economic theory and
policy were concerned: “As far as the political-economic mind of 1920 was concerned,
there was no ‘U.S. economy.’ And as the economic totality was yet unimagined, so
too was the government’s role in directing, managing and stimulating it” (p. 128;
see also p. 67). Economists—with a few notable exceptions—did not think of the
“price level” as a unitary statistical construct or worry overmuch about its fluctuations. Nor did they try to calculate “aggregate demand” or total spending or even
consider either relevant to economic performance. Indeed, for most economists, the
core of the market economy was the interdependent system of money prices, including
wage and interest rates. Money prices were seen as the foundation for the calculations
of revenues, costs, profits, and asset values upon which entrepreneurs based their
resource-allocation decisions. Furthermore, it was widely recognized that money
prices were in constant flux as they coordinated economic activities in the face of
ceaseless change in consumer tastes, business organization, technology, population,
labor skills, and so on. As Grant aptly and incisively expresses his theme in the preface,
“The hero of my narrative is the price mechanism” (p. 2).
The favorable view of liquidation as a cure for depression thus arose naturally out
of the belief that the price mechanism, when left undisturbed, benignly adapts
resource allocation and production to the underlying economic realities. As Grant
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points out, to liquidate, as the term was used at the time, simply meant “to throw on
the market” (p. 172). In this sense, “liquidating” labor, inventories, farms, and
businesses was a call to allow the price system to operate to discover the configuration
of wages, prices, and asset values appropriate to the reemployment of idle resources in
the production of goods most urgently demanded by consumers. If this price adjustment incidentally resulted in deflation, then so be it. In lieu of the fictitious concept of
a unitary price level, inert and resistant to movement, money prices were conceived as
naturally and fluidly (but not instantly) moving up and down like a swarm of bees in
flight. The fact that the “price swarm” might be ascending or descending would not
inhibit and, indeed, might be required to facilitate necessary changes in the relative
positions of money prices. (The metaphor of a “price swarm” wasn’t coined until
1942 by Arthur W. Marget in The Theory of Prices: A Re-examination of the Central
Problems of Monetary Theory, 2 vols. [New York: Kelley, 1966, pp. 2:330–36], but
it aptly describes the earlier classical-liquidationist view of the value of money.)
Deflation presented no special problem because the classical view of the value of money
still prevailed. In this view, money’s value was simply the unaveraged array of money
prices inverted to reveal the alternative quantities of each good or service that exchanged
for the money unit—for example, the dollar. Money prices fluctuated freely, so then
must the value of money, which was determined in the same integral market process.
Grant’s judicious choice of quotations shows how pervasive and deeply ingrained
was the view that the only sure cure for the depression was deflation and liquidation
of overblown resource and asset prices. Here are some examples.
Benjamin Strong, the governor of the Federal Reserve Bank of New York,
foresaw the need for deflation and liquidation at the height of the postwar boom in
1919, writing that an anticipated change in Federal Reserve Board and Treasury
policy “will insure during the next year or two a very considerable liquidation of our
banking position . . . and a considerable decline in the price level” (qtd. on p. 92). The
Berkeley economist Adolph C. Miller, a member of the Federal Reserve Board,
opined in 1919, “Where there has been inflation, there must follow a deflation, as a
necessary condition of economic health,” although Miller doubted that this deflation
could and would be done (qtd. on pp. 94–95). Another member of the board and
concurrently the comptroller of the currency, John Skelton Williams, in early 1921
viewed the global collapse of commodity prices as “inevitable” and welcomed the day
when “the private citizen is able to acquire, at the expenditure of a dollar of his hardearned money, something approximating the quantity and quality which that dollar
commanded in prewar times” (qtd. on p. 118). As Grant concludes, the entire Federal
Reserve Board was in remarkable agreement: “A continuing, drastic and perhaps
violent rollback in prices, and therefore in wages, was the way forward” (p. 118).
The Federal Reserve Bank of Boston identified “two important conditions
precedent to the laying of enduring foundations for the future stability of business,
namely, liquidation and deflation . . . and an increasingly satisfactory banking
situation with reserves augmented and loans decreasing [i.e., bank credit contraction]”
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(p. 120). A. Barton Hepburn, a former comptroller of the currency, also declared for
bank-credit contraction and price deflation in 1920, lamenting, “The people of the
country have by no means realized as yet the necessity for economy, liquidation of
loans and curtailment in the use of credits. We will never be able to bring about
the desired deflation until the general extravagance is curtailed” (qtd. on p. 98).
Even some prominent academic economists took up the case for deflation.
Professor Edward W. Kemmerer of Princeton University, a leading monetary theorist,
vigorously exhorted an audience of bankers in mid-1920, “We must have contraction. . . . We can’t go ahead with our business and make much progress . . . until we
get substantial contraction” (qtd. on p. 125 n.).
Politicians also joined the chorus calling for deflation. In his inaugural address
in March 1921, President Warren G. Harding perceptively declaimed in its favor,
“The economic mechanism is intricate and its parts interdependent, and has suffered
the shocks and jars incident to abnormal demands, credit inflations, and price
upheavals. . . . Prices must reflect the receding fever of war activities. . . . We must face
a condition of grim reality, charge off our losses and start afresh [i.e., liquidate].
It is the oldest lesson of civilization” (qtd. on pp. 135–36).
There was no fear among contemporary observers that, as current macroeconomic jargon would put it, “aggregate supply curves” would shift slowly and painfully
to the right because entrepreneurs’ and workers’ expectations would adjust very
slowly to the new reality. For liquidationists, in contrast, deflation would proceed
very rapidly because bankers, investors, entrepreneurs, and consumers expected it to
do so. And they expected it to do so because the intellectual paradigm and the
monetary policy regime fostered such expectations. Even though the Fed was up and
running, it did not yet see its task as preventing money prices from adjusting to
changed conditions of money supply and demand.
Contemporary economic observers also did not fret about the modern specter
of a runaway deflationary spiral that might result from plunging prices stoking
expectations of further declines in prices and inducing consumers and entrepreneurs
to delay purchases into the indefinite future. The reasons they ignored such an
eventuality were obvious. First, such an event had never been experienced previously
under the gold standard. Second, according to the liquidationist view, credit contraction and deflation was the most expeditious method for realigning money prices
and costs, in particular wage rates. It was well understood that capitalists and entrepreneurs did not react to some abstract price level but to actual or expected price
margins. Deflation under a freely operating price mechanism did not just lower the
height of the price swarm but also deftly reconfigured it so that price margins
expanded to the point where entrepreneurial pessimism and malaise gave way to
optimism and energetic risk taking.
The liquidationist policy was criticized at the time by a small but notable
group of economists, foremost among them Irving Fisher, John Maynard Keynes,
and the Swede Gustav Cassel. These economists formulated what came to be known
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as the “stabilizationist position,” according to which maintaining a constant price
level was the necessary and sufficient condition for ridding the economy of business
cycles, especially depression and unemployment. For these economists, deflation was
“a cruel and colossal blunder” (p. 123). Cassel denied that gradual deflation was possible and foretold that the Fed would not be able to control the rate of descent of
prices or the level to which they would tumble. Writing two years after the 1920–21
depression had already ended, Keynes claimed that deflation would induce “everyone
in business to go out of business for the time being” and “everyone who is contemplating expenditure to postpone orders so long as he can” (qtd. on p. 124).
In any event, as Grant demonstrates, the liquidationists proved to be correct.
Cassel’s dire warning that deflation, once unleashed, would become unhinged from
economic fundamentals was not substantiated. And Keynes’s dire assessment of the
effect of deflation was proved false two years before he wrote it down. During the
depression, total spending or nominal gross national product (GNP) tumbled by
24 percent from $91.5 billion in 1920 to $69.6 billion in 1921, and real GNP shrank
by 9 percent. As Grant puts it, there was a “perpendicular plunge in commodity
prices,” which never before had “fallen so far and so fast” (p. 182). Both farm prices
and wholesale prices plummeted by more than one-third in 1921. Unemployment
reached 15.3 percent in 1921. But despite “the breakneck rate of decline” of prices—or
rather because of it—the liquidation process came naturally to an end, and prices
reached a finite bottom beginning in March 1921. Contrary to Cassel and Keynes,
deflation did not continue indefinitely or bring about a cessation of all economic
activities and business expenditures. In fact, the U.S. economy entered a remarkably
strong and rapid recovery in 1921 (pp. 186–90).
Paradoxically, in the immediate aftermath of its greatest triumph, the liquidationist
position was completely discredited and placed beyond the pale of rational discourse.
By the mid-1920s, the early Fisher–Keynes macroeconomics of price-level stabilization
swept the field in the English-speaking world. Under the sway of this sophisticated
brand of monetary crankism, policy makers and politicians deliberately disabled the
price mechanism and ensured that less than a decade later a garden-variety recession
would be transformed into the tragedy of the Great Depression.
JOSEPH T. SALERNO
Pace University
F
Stages of Occupational Regulation: Analysis of Case Studies
By Morris M. Kleiner
Kalamazoo, Mich.: W. E. Upjohn Institute, 2013.
Pp. xviii, 289. $20 paperback.
Occupational regulation has significantly grown in breadth and scope over the past
several decades in the United States. The White House has taken notice—recently
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releasing a report documenting the costs and benefits of occupational licensing
(U.S. Department of the Treasury, Council of Economic Advisors, and U.S. Department of Labor, Occupational Licensing: A Framework for Policymakers [Washington,
D.C.: White House, July 2015], at https://www.whitehouse.gov/sites/default/
files/docs/licensing_report_final_nonembargo.pdf). No researcher has done more
to shed light on and bring attention to the effects of this important labor-market
institution than Morris Kleiner. In his latest work, Stages of Occupational Regulation,
Kleiner presents case studies of seven different occupations that have varying degrees
of occupational regulation. As more states begin to regulate entry into particular
professions with occupational licensing laws, the effects are likely to differ, and this
is precisely what Kleiner illustrates.
Occupational regulation is often separated into three distinct levels of restriction. Licensing laws, the most onerous of the three, make it illegal for an individual to
practice in a profession without first meeting certain requirements (such as passing an
exam or completing a specified amount of schooling). Certification laws do not
restrict entry but instead protect titles: individuals are barred from using specific titles
(for example, “certified financial analyst”) without first completing a set of entry
requirements; they are free to practice in the profession if they don’t complete these
requirements, but only if they do not use the protected title. Registration laws
maintain a list of professionals that is made available to the public and is the leastrestrictive form of occupational regulation.
In this book, Kleiner presents a very careful and comprehensive empirical examination of the effects of licensing on seven professions. Although numerous regression
results are presented and discussed, readers whose eyes glaze over when they are
presented with t-statistics can easily gloss over these results and still learn a great deal
about the effects of occupational regulation. A recurring theme is how occupational
licensing parallels unionization. Kleiner points out the similarities and differences
between the two institutions—most notably that whereas unionization rates have
substantially declined, the percentage of workers directly affected by occupational
licensing has substantially increased (p. 8).
Interior designers are professionals who are licensed in just four states and the
District of Columbia (p. 16). Kleiner is unable to find evidence that licensing has
resulted in any significant labor-market changes (such as higher wages or slower
employment growth) for interior designers, but at the same time a careful summary
of the existing literature provides little evidence that regulation has increased consumer
safety or improved the quality of services, arguments that proponents of occupational
regulation often make.
Kleiner finds similar results for mortgage brokers and preschool teachers, where
a slightly larger number of states (eighteen and twenty-seven, respectively) license
each profession (p. 11). What seems to emerge in Kleiner’s book is that occupational
regulation does not impose measurable costs on consumers until most states regulate
a profession. For electricians and plumbers, who have to be licensed in nearly all
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states, licensing seems to have increased wages without reducing the incidence or
severity of on-the-job injury (pp. 156–66). In the case of a fully mature regulated
profession, dentistry, Kleiner shows that dentists can increase earnings by limiting the
number of tasks that dental hygienists are allowed to perform (pp. 190–91). Once
again, there is little evidence that consumers benefit from dentists protecting their
turf by means of more intrusive regulation of dental hygienists (pp. 201–2).
Alice Ramey noted in her review of Kleiner’s first book, Licensing Occupations: Ensuring Quality or Restricting Competition? (Kalamazoo, Mich.: Upjohn
Institute, 2006), that she was “left wanting more” (“Book Review: Licensing Occupations,” Monthly Labor Review [June 2010]: 56). Reading Kleiner’s second volume
on the effects of occupational regulation invokes a similar feeling for me. My feelings
are not an indictment of Kleiner’s work but instead a testament to the importance of
the institution and the relative lack of attention devoted to the subject. For example,
although Kleiner finds that licensing has not affected wages or employment for interior designers, the estimates presented may not tell the whole story. Aspiring interior
designers may be discouraged from entering the profession, a factor that would not
present itself in employment estimates. Trying to hammer down the effects of occupational regulation on individuals who are considering entry into a profession is
difficult. In fact, research by Mario Pagliero suggests that state bar exams are made
more difficult when the number of candidates increases (“The Impact of Potential
Labor Supply on Licensing Exam Difficulty,” Labour Economics 25 [2010]: 141–52).
A more thorough discussion of the political economy of occupational regulation
would also be enlightening. What might explain why Alabama, the District of
Columbia, Florida, Louisiana, and Nevada enacted licensing legislation for interior
designers, yet efforts to regulate that same profession were regularly thwarted in
Minnesota (p. 21)? Also, licensing grows and spreads quickly for some professions
but very slowly for others. In one case I have researched, occupational licensing
for opticians grew rapidly in the 1950s but then stalled suddenly in 1988, when
California was the final state to enact a new licensing law (Edward Timmons and
Anna Mills, Bringing the Effects of Occupational Licensing into Focus: Optician
Licensing in the United States, working paper [Arlington, Va.: Mercatus Center,
February 17, 2015]). Professional organizations’ political gamesmanship in securing
licensing remains an understudied issue.
I have no doubt that Kleiner is already searching for solutions to these issues and
trying to obtain a better understanding of the effects of occupational regulation.
His hard work, passion, and dedication to bringing attention to this issue has no
doubt inspired new and younger researchers like myself to pursue new studies of
occupational regulation. Readers across all ranges of understanding of the issue would
be well served by a careful reading of Stages of Occupational Regulation.
EDWARD TIMMONS
St. Francis University
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Perilous Partners: The Benefits and Pitfalls of America’s
Alliances with Authoritarian Regimes
By Ted Galen Carpenter and Malou Innocent
Washington, D.C.: Cato Institute, 2015.
Pp. ix, 597. $24.95 cloth.
Over the past several years, the U.S. government has extended its counterterrorism
efforts into Africa and partnered with several governments in the region. These
partnerships typically involve the host government granting permission for the
United States to carry out military and drone operations in the region. In return, the
U.S. government has provided a variety of aid—money, weapons, equipment—to its
host governments while also looking the other way regarding human rights abuses.
Such arrangements create a fundamental tension between two tenets of U.S. foreign
policy—U.S. national security on the one hand and the advancement of global human
rights on the other. More often than not, members of the U.S. government choose to
enter into arrangements with unsavory despots to advance the former goal while
directly undermining the second. A senior official succinctly captured the existing
approach, noting that “[t]he countries that cooperate with us get at least a free pass
[regarding human rights abuses]. . . . Whereas other countries that don’t cooperate,
we ream them as best we can” (quoted in Craig Whitlock, “Niger Rapidly Emerging
as a Key U.S. Partner,” Washington Post, April 14, at https://www.washingtonpost
.com/world/national-security/niger-rapidly-emerging-as-a-key-us-partner/2013/
04/14/3d3b260c-a38c-11e2-ac00-8ef7caef5e00_story.html). This fundamental tension is at the heart of Ted Galen Carpenter and Malou Innocent’s important book
Perilous Partners.
Carpenter and Innocent point out that this tension existed well before the
current war on terror and can be traced back several decades to the early days of the
Cold War. And, of course, relationships with authoritarian despots existed before
the Cold War—for example, with the Soviet Union during World War II—but such
Cold War partnerships became a normalized part of U.S. foreign policy. As part of
its Cold War strategy, the U.S. government established a network of client states,
controlled by some of the worst governments in the world, to attempt to counter
the Soviet Union’s influence. This normalization resulted in what the authors
refer to as the “ethical rot” of U.S. foreign policy because the partnerships undertaken in the name of promoting liberty, democratic governance, and free markets
legitimized and strengthened regimes that actively undermined these very values
and institutions.
Following an introductory chapter, the book is broken into two parts totaling
sixteen chapters. The first part focuses on the relationships between the U.S. government and its questionable Cold War allies, and the second part is focused on partnerships formed after September 11, 2001. These chapters, which make up a large
majority of the book, are reason enough to read it. Unless the reader is completely
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closed-minded, the content of these chapters should make even the staunchest advocate of intervention question the value of such partnerships. I cannot hope to do
justice to this content, but the core theme is that members of the U.S. government
have been active participants—both directly and indirectly—in empowering and
entrenching some of the worst governments in the world while knowingly
undermining the very values they purport to hold dear. The associated costs have
fallen largely on those living under these regimes, who are often among the most
vulnerable to begin with.
Of course, one might respond that these partnerships are a necessary cost of
achieving broader foreign-policy goals that yield net benefits. Two issues emerge
from this line of reasoning. The first issue deals with determining the recipients of
the net benefits. Even if we assume that these partnerships contribute to the national
security of U.S. vital interests, those who suffer under these regimes certainly do not
see these partnerships as generating a net benefit. Under this scenario, the U.S.
government is advancing the interests of its own citizens by actively harming other
innocent citizens.
The second issue deals with the assumption that these unscrupulous partnerships actually advance security. The fact, however, is that in numerous instances the
partners of the U.S. government were willing and knowing participants in perpetuating violence and insecurity. For example, Carpenter and Innocent discuss the difficulties of the U.S.–Pakistan partnership following 9/11 (chapter 14), which included
the Pakistani government undertaking actions that promoted violence and
undermined the U.S. government’s stated goals in the region. At best, the benefits
of these perilous partnerships are murky and unpredictable, while the costs are positive and often significant—innocent people are and will continue to be harmed by the
U.S. government’s support of regimes that are known to be committing a variety of
human rights abuses.
The concluding chapter offers an approach for dealing with the fundamental
tension that motivates the book. Carpenter and Innocent’s strategy is one based on
“ethical pragmatism,” which suggests that the U.S. government should maintain an
“arm’s length relationship” with questionable partners and only under certain situations. Specifically, the U.S. government is justified in forming partnerships “when
national survival or another vital interest is truly in jeopardy” (p. 500). However,
when the issue is one of secondary interests—or interests “that are pertinent but not
indispensable to the preservation of America’s physical integrity, independence,
domestic liberty, and economic health”—then only “modest exertions” are justified
(p. 501). The bar for forming questionable partnerships must be still higher in cases
of “peripheral interests,” the “loss of which would be more of an annoyance than a
significant blow” (p. 502).
Ultimately, this proposed solution is unsatisfying. For one thing, the categories of various interests are broad and unclear, making it difficult to ascertain
what is to be included in and or excluded from each. Also missing is a discussion
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of the incentives and constraints facing the key decision makers in the U.S. government. The authors implicitly model the U.S. government as a centralized
and homogenous “brain” that balances the costs and benefits of partnerships
to maximize the national security of U.S. citizens. In reality, however, the political
decision-making process is made up of a host of different interests that often yield
policies that not only fail to further national security but also actively contribute to
undermining it.
As Carpenter and Innocent note, “most of the close relationships that Washington
developed with such allies and clients during the Cold War involved little more than
the protection and promotion of peripheral interests” (p. 502). One might make a
similar argument about the relationships in the post-9/11 period. This raises a crucial
issue. If the members of the U.S. government have historically squandered precious
lives and resources (both American and non-American) in the pursuit of insignificant
peripheral interests, why should we expect them to suddenly start following a strategy
of ethical pragmatism? Absent some major shift in incentives, it is likely that members
of the government will continue to overstate perceived threats against supposed vital
U.S. interests while perpetuating existing relationships and forming new relationships
with authoritarian despots.
In the closing lines, Carpenter and Innocent write that the effectiveness of
their proposed strategy is “dependent on the subjective judgement of policymakers, with all of their human frailties” (p. 504). My reading of the insightful
history of U.S. partnerships provided in Perilous Partners is that U.S. policy makers’
judgment is often terrible and that their human frailties are great. This combination is deadly when it comes to matters of foreign affairs and the empowerment
of governments that brutalize innocent people. It is also crucial to realize that the
domestic costs of these partnerships are not just the “ethical rot” of American
values but also the real loss of liberties at home due to expansions in the scope
of domestic-government power associated with a proactive foreign policy (see
Christopher J. Coyne and Abigail R. Hall, “Perfecting Tyranny: Foreign Intervention as Experimentation in Social Control,” The Independent Review 19, no. 2
[Fall 2014]: 165–89).
As I read Perilous Partners, I was continually reminded of the saying “Show
me your friends, and I shall tell you who you are.” This book is extremely important precisely because it shows the reader who the friends of the U.S. government
are. In doing so, it also sheds light on the nature and character of those who
constitute that government. Upon reflection, it becomes clear that what is needed
is not a new framework to guide policy makers but rather a fundamental rethinking of the scope and scale of power that the U.S. political elite currently wield in
foreign affairs.
CHRISTOPHER J. COYNE
George Mason University
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Going for Broke: Deficits, Debt, and the Entitlement Crisis
By Michael Tanner
Washington, D.C.: Cato Institute, 2015.
Pp. x, 215. $18.95 paperback.
To economists who specialize in data analysis and public policy, watching contemporary political debates about the fiscal health of the U.S. government is like listening as the crew of the Titanic argue about whether the iceberg is going to leave a
scratch in the paint and who is going to be responsible for fixing it. Virtually all
discussion involves some chipping away around the edges that leave the looming
iceberg intact.
The prevalent inability to discuss the fiscal crisis constructively is due to the
inability to grasp the magnitude of the problem. Michael Tanner does a superb job
of making the key points of the problem both clear and palatable for a lay audience
without glossing over details that are important to specialists.
Tanner begins with a thorough and compelling summary of the government’s
fiscal problems, detailing the three components of government debt: debt held by the
public, intragovernmental debt, and unfunded liabilities. Much debate has revolved
around whether intragovernmental debt should be included in the official measure of the government’s debt and whether unfunded liabilities are debt at all
(see Timothy C. Irwin, “Defining the Government’s Debt and Deficit,” Journal of
Economic Surveys 29, no. 4 [2015]: 711–32).
Tanner helpfully sidesteps this debate by describing the three categories of debt
on a continuum from “hard” to “soft.” The softer the debt, the more options the
government has about paying it back. For example, intragovernmental debt need
not be paid back on a certain schedule and, where Social Security is concerned, can
be arbitrarily reduced by altering the Social Security benefits schedule. Describing
debt in this way takes the more realistic middle ground—soft debt does indeed matter,
but the government will find ways to get around paying at least some of it. The value
of unfunded liabilities, as Troy Davig, Eric M. Leeper, and Todd B. Walker demonstrate (“Unfunded Liabilities and Uncertain Fiscal Financing,” Journal of Monetary
Economics 57, no. 5 [2010]: 600–619), suffers from the added problem of being
extremely sensitive to assumptions about population and economic growth as well as
future fiscal and monetary policy. Although there is tremendous uncertainty as to the
true value of unfunded liabilities, most estimates have one thing in common: they
range from “extremely large” (around $90 trillion) to “unbelievably huge” (around
$220 trillion) (Joseph Lawler, “Economist Laurence Kotlikoff: U.S. $222 Trillion
in Debt,” Real Clear Policy, December 1, 2012). Laurence J. Kotlikoff and Scott
Burns (The Coming Generational Storm [Cambridge, Mass.: MIT Press, 2004]) estimate that these unfunded liabilities will result in significant economic upheaval as the
U.S. government fights both the laws of economics and mathematics in a futile attempt
to fulfill its financial obligations.
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Tanner’s discussion of the federal debt is thorough and correct, though he
uses the common metric for describing the magnitude of the debt: debt per gross
domestic product (GDP). Debt per GDP is useful for comparing debts across
countries. For example, Greece’s debt is around U.S.$350 billion. From the U.S.
perspective, that amount isn’t overly large. The U.S. federal government spends
$350 billion every six weeks. The amount is roughly equivalent to the annual economic output of the state of Maryland. From Greece’s perspective, however, the
amount is gargantuan. Greece’s $350 billion debt is around 1.8 times the entire
country’s annual economic output. For the United States, an equivalent-size debt
would top $30 trillion. Debt per GDP puts a country’s debt in perspective by
scaling it relative to the size of its economy.
And here Tanner understates our already bleak financial condition. The government doesn’t own the GDP. GDP is (roughly speaking) the total of the people’s
incomes. When one asks a bank for a loan, the bank will compare the proposed loan
to the borrower’s ability to pay off the loan. And the borrower’s income is a reasonable proxy for this ability. As a consequence, it is debt relative to the borrower’s
income that matters. However, GDP is not the government’s income. Tanner correctly puts the federal government’s debt and unfunded liabilities at more than
$90 trillion (p. 8), or 500 percent of GDP. But the more compelling comparison is
the government’s debt to the government’s income. That ratio is 3,000 percent—that
is, the federal government’s $90 trillion debt is thirty times the size of the federal
government’s annual income. If we extend Tanner’s opening example of the family
budget, this is like a household with a $50,000 annual income being $1.5 million
in debt. More disturbingly, at 2.4 percent interest (the current average rate on federal government obligations), interest on the government’s debt and unfunded
obligations is almost 75 percent of federal revenues. In short, the federal government is bankrupt now.
Tanner cites Douglas Elmendorf and Greg Mankiw’s list of four reasons why
public debt is harmful (p. 10), though I disagree with one of them: that all money
borrowed today must be repaid with interest. Tanner’s government–household analogy
helps the reader understand the magnitude of the federal budget, but the analogy
fails on this one point. Unlike a household, a government can assume that it will
continue to exist forever. As a consequence, it need never repay its debt. All that
is necessary is that it be able to service its debt in perpetuity.
There are two additional reasons why public debt is harmful that none of the
three authors mentions. First, the greater the public debt is, the easier it is for
politicians to claim much ado about nothing. In early 2012 and in response to
growing voter concern about the deficit, President Barack Obama proposed a budget
that contained $300 million in cuts to community block grants. Opponents argued
that cuts should come from elsewhere because community block grants serve the
neediest Americans. Whether to cut this $300 million from the budget dominated
the news for the better part of a month. And therein lies the danger of such massive
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debts (and spending). To any reasonable person, $300 million sounds like a tremendous amount of money. Yet federal spending is so great that the government blows
through $300 million every forty-two minutes. The government spent more money
while politicians were talking about the problem than the proposed cuts themselves.
Second, the greater the public debt is, the greater is the danger to the Federal
Reserve’s autonomy. For all the discussion of the economic benefits of low interest
rates to the housing market, the student-loan market, and the stock market, the single
largest beneficiary of low rates is the federal government itself. Tanner points out that
interest on the federal debt was more than $250 billion in 2014 (p. 9). But that
amount ignores interest on intragovernmental debt—the bulk of which is held by
the Social Security trust fund. If we include that interest, the annual interest expense
is more than $400 billion. Yet that amount still ignores the interest on the present
value of unfunded liabilities. Although the latter is not interest in the accounting
sense, every year that the government foregoes having money in the bank to cover
those future liabilities is a year’s worth of interest the government fails to earn to
put toward those liabilities. This effect is not to be confused with crowding out, in
which increased government borrowing drives up interest rates due to increased
demand for loanable funds (for empirical evidence, see Eric M. Engen and R. Glenn
Hubbard, “Federal Government Debt and Interest Rates,” NBER Macroeconomics
19 [April 2005]: 83–160).
As of 2015, the federal government is paying an average of 2.4 percent interest
on its outstanding debt. Counting just the money owed to the public and the
intragovernmental debt, each percentage point increase in interest rates costs the
federal government an additional $180 billion annually. The historical average
interest rate the federal government has paid on its debt is 6 percent. As Tanner
notes, if interest rates merely rise to their historical average, the federal government’s
annual interest expense will exceed $1 trillion annually (p. 9). The federal government cannot afford this extremely large expense. The more the Federal Reserve
raises interest rates, the greater the political pressure will be from the federal government to prevent rates from rising further.
Tanner paints a correctly bleak and well-documented picture of the impending
federal bankruptcy. To his credit, he follows this picture with an honest and thorough
summary of counterarguments, including both the ridiculous (government debt isn’t
really debt because we owe the money to ourselves) and the reasonable (debt is bad
sometimes, just not now). He also provides a superb summary of the major contributors to the debt crisis, including Social Security, Medicare, and the Affordable
Care Act, and demonstrates throughout a remarkable ability to make the mindnumbing details of these entitlements interesting and clear.
One point that Tanner mentions but does not develop is that federal tax revenues have averaged a remarkably constant 17 percent (plus or minus some noise)
of GDP going back to the 1950s (p. 4). Over that same period, the top personal
income tax rate has ranged from a high of more than 90 percent to a low of less than
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30 percent; effective corporate tax rates have ranged from 15 percent to 45 percent;
estate tax rates from 35 percent to 75 percent; payroll tax rates from less than
5 percent to more than 15 percent. These ranges suggest that it doesn’t matter
whether we tax the rich a lot or a little, whether we tax corporations or consumers,
whether we confiscate deceased persons’ estates or not. Nothing the government
has done in its wide-ranging and varied tax policies has changed the fact that the
government’s tax receipts total 17 percent of the economic pie.
That result underlines Tanner’s conclusion that the solution to the impending
U.S. financial catastrophe lies not in growing taxes but in limiting spending.
ANTONY DAVIES
Duquesne University
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