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Thursday, June 1, 2006

The End Run to Freedom

Implementing Private Solutions Can Help Us Market the Virtues of Freedom to the Skeptics

Russell Roberts ([email protected]) holds the Smith Chair at the Mercatus Center and is a professor of economics at George Mason University.

What does the future hold for economic life in the United States? Will we move toward greater freedom or less? What role will ideas and rhetoric play, if any, in making sure that the direction is one that lovers of freedom prefer?

One way of looking at American economic policy in the twentieth century is that Keynes held sway over economic policy for the first 50 years. In the second half of the twentieth century, Milton Friedman and F. A. Hayek held the upper hand. In the first half of the twentieth century the dominant president was FDR, who centralized economic power. In the second half of the twentieth century the most important president from the perspective of economic policy was Ronald Reagan, whose advocacy of smaller government and antipathy to the Soviet Union spread the use of market forces in the United States and beyond, to Eastern Europe and Latin America. One could argue that the increased market orientation of the Chinese economy is part of this trend. In this story of the twentieth century and the future, the glass is half full.

But perhaps the glass is half empty. Government spending continues to grow. The limited government that Reagan espoused was more rhetoric than reality— the era of big government is clearly not over. In fact, government continues to grow and at an increasing rate of late. Even the rhetoric has faded now; few politicians seriously advocate real economic freedom. Even George Bush’s plan for “privatizing” Social Security required forced saving administered by the government.

So what’s a classical liberal to think? Is there any reason for optimism? My colleague and blogger extraordinaire Tyler Cowen thinks not, at least in the short run:

My prediction is that, in general, welfare states will increase in size in most places around the world. We can expect most areas of the world to become wealthier because of globalization as well as other reasons. And if you look at countries that are wealthy, they tend to have very generous welfare states. Also, I believe that the human desire for security is extremely strong, even when it is not efficient or rational. So as long as we experience economic growth, I think we can expect welfare states to grow. (“Interview, Tyler Cowen,” Region Focus, Winter 2006)

Tyler seems right. All evidence points to an increasingly centralized world, a world where taxes are higher, where welfare states are bigger, where individual liberty, at least economic liberty, is smaller. And the fundamental reason is that as we get wealthier, we buy more of the things we like. One thing we like is security. When you’re poor, a risk-free or less risky world is a luxury. When you get richer, you take more care and caution because you can afford to.

This effect of higher incomes on behavior is one reason, I suspect, that parenting today isn’t what it used to be. We make our children wear bike helmets; we program them so that they don’t roam freely in the neighborhood; and we discourage risky activity in a way previous generations never did. That desire for security and less risk funds the welfare state in America. That desire for security and less risk creates a seemingly never-ending demand for protectionism.

That desire for security and less risk creates the nanny state—the regulatory environment that makes seat belts, tobacco, cocaine, and prescription drugs the government’s business when it should be mine and mine alone.

If Tyler is right, as other nations get wealthier, they will become more like the United States in how they treat risk. The increased wealth will create a demand for regulation just as it has in the United States. And future growth in the United States will create even more paternalistic regulations here.

Could be. I might even wager that Tyler’s right. But I hope he’s wrong. And I can imagine at least one route to economic freedom, despite all the trends running in the other direction.

As we get wealthier, we do want more safety and security. That trend isn’t going to change. But why do that safety and security have to come from the government? Why can’t we get our safety and security from private, voluntary sources? The obvious answer is that that trend is also running in the wrong direction—we turn increasingly to the government for achieving the goals of security. We’re further from abolishing the FDA than ever before. We’re banning smoking in private restaurants in some cities and more are on the way.

But on the positive side, we’re closer to abolishing Social Security than ever before. Not very close, admittedly, but closer. True, President Bush’s privatization wasn’t real privatization, but it was closer to real privatization than expanding the government’s role in Social Security.

As we get richer, two things affect the Social Security debate, both trending toward freedom. First, money coming from private assets will increasingly dwarf those government Social Security checks. And that’s even before the system has to cope with the baby boomers, putting downward pressure on benefits. When people talk about the “riskiness” of private Social Security, they conveniently ignore the fact that half the American people own stocks and they like it. An increasing proportion of the American people already controls their retirement money through their own decisions.

The proponents of government-provided retirement always raise the specter of people starving in the street by their myopic failure to save for retirement or simply from bad decisions. But why can’t private, voluntary charity take care of those who struggle? The skeptic responds that there’s a free-rider problem—people simply will let others take care of the unfortunate. Too many people will step aside to let others take up the burden, and as a result, there won’t be enough money to help the poor. We need government, they argue, to tax everybody to provide for the poor elderly who won’t have the foresight or the good fortune to be self-sufficient.

Overcoming the Free-Rider Problem

But as America becomes wealthier it will be easier to overcome the free-rider problem to bring the poor out of destitution. That increases people’s willingness to try a private solution for taking care of the elderly.

There’s a fly in this ointment of freedom. As we get wealthier we’ll also have higher standards for what it means to take care of elderly people who are poor. That will push some Americans to keep favoring coercive government solutions. But if enough wealthy Americans fund those private alternatives to government, maybe we can show people that private solutions can actually work.

Call it an end run to freedom. We’re already seeing this strategy with educational reform. Instead of waiting for enough Americans to tire of the failure of the public school system and pressure politicians to support vouchers, people have turned down the “free” public schools and home-schooled their kids or sent them to private schools.

And some people have funded scholarships for poor kids to go to private schools. Yes, there’s a free-rider problem. But enough people give anyway to make privately funded scholarships a real way to show people that vouchers work, or even better, that we don’t need government schools.

As we get wealthier, these private end runs around the heavy hand of government are easier to fund. If we keep fighting the good intellectual fight and making the moral and analytical case for freedom, the end runs can help us market the virtues of freedom to the skeptics. We’ll never reduce the demand for security and safety. But maybe, just maybe, we can establish the superiority of private, voluntary solutions to government solutions.

  • Russell Roberts the host of the weekly podcast, EconTalk and co-creator of the Keynes-Hayek rap videos. His latest book is How Adam Smith Can Change Your Life. He is also a John and Jean De Nault Research Fellow at Stanford University"s Hoover institution.