It gives me the great pleasure to present to you today Professor Milton Friedman.
I want to talk today about the contrast between myths that are widely believed by the public
at large, and what I regard as the reality, which typically contradicts those myths.
As you are all aware, there has been a drastic shift in public attitudes and public opinions
in the past fifty years or so with respect to the role of the individual on the one hand,
and the role of government and collective institutions on the other. There has been
a shift in the philosophy and attitudes of the public from a belief in individual responsibility,
from a belief in a society in which the role of government was as an umpire, to a belief
in a society in which the emphasis is on social responsibility, and the role of government
as big brother and protector of the individual. As always when such shifts arise in public
opinion, they are largely produced and reinforced by the development of myths about prior experience.
Someone once wrote, and I'm not sure who it was, that a myth is like an air mattress:
there's nothing in it but it's wonderfully comfortable, and deflation causes an uncomfortable
jolt. Well my purpose today is to give you that jolt. When myths get established and
are adopted they tend to be so strongly held, they tend to become so much a part of you,
that when anyone comes along and differs with them and contradicts them, he risks automatically
being dismissed as a crackpot. But I shall nonetheless take the risk of being dismissed
as a crackpot because it seems to me so urgent that we deflate these myths, recognize what
the reality is, in order to be able to provide a basis for a change in our philosophy, a
reversal of the direction of our thought. In my opinion, if we do not do so, if we continue
on the road we have been going, if we continue to rely more and more on government and less
and less on the individual, we are condemned to a future of tyranny and misery. And therefore,
it seems to me essential for the future of this country that we recognize these myths
for what they are, and adjust our thinking to a correct perception of our present and
our past.
I am encouraged in this venture by another quotation, one which comes from a nineteenth-century
American humorist by the name of Josh Billings who wrote somewhere, "It ain't what people
know that causes trouble; it's what they know that ain't so." And that's what I am going
to devote this talk to, to trying to tell you about some things you know that ain't
so. I am going to try to cover five myths that are part of your thinking, and if they
are not part of your thinking they will tend to become so after you take your first course
in American history.
The first of those myths is the robber baron myth, the myth that somehow or other in the
nineteenth century there was an era of rugged unrestrained individualism in which heartless
monopoly capitalists exploited the poor unmercifully and ground them beneath their heels. The second
myth I am going to talk about is the Great Depression myth, the myth that the Great Depression
from 1929 until the late '30s was produced by a failure of private enterprise. The third
myth I want to talk about is the demand for government service myth, the myth that government
has had to step in because of a failure of the private market and a great widespread
demand for government services. The fourth myth I am going to talk about was suggested
by Mr. Eccles in his introduction; it's the free lunch myth, the myth that there is such
a thing as a free lunch. And the final myth I want to talk about is the Robin Hood myth,
the myth that somehow or other government operates by taking money from the rich and
giving it to the poor.
Let me start with the first of those myths, the robber baron myth, the myth that the nineteenth
century was a period in which the rich became richer and the poor poorer, that it was a
century in which you had a conflict between Wall Street and the working man, that it was
a period in which particularly the farmers of the Middle West were being ground beneath
the rapacious activities of the Wall Street financiers, in which there was widespread
farm distress and misery. This myth had its origins in the nineteenth century. It produced
the widespread greenback movement that you will learn about in your history books, a
party which at one time reached significant size, a party devoted to the idea that all
of the problems of the time could be solved if only the government would print enough
of those nice pieces of paper which are colored green on the back and which are called greenbacks.
It was a period that also gave rise to the free silver movement; to William Jennings
Bryan, the silver-tongued orator from North Platte if I remember rightly--from these areas,
who gave his famous speech on the cross of gold in 1896 in Chicago at the Democratic
Convention in which he asked whether mankind shall be crucified on a cross of gold, a speech
which got him the presidential nomination of the Democratic Party. And he subsequently
was the nominee of the Democratic Party for several subsequent elections, but fortunately
was never elected.
(laughter)
That was the myth. What was the reality? The reality is that there is almost no period
in human history which saw as rapid and widespread an increase in the well-being of the ordinary
man as the nineteenth century. That was the period when millions of people from all over
the world streamed to these shores. They came here with empty hands in the hope and the
belief that they could make a better life for themselves and their children, and they
succeeded. I suspect that most of the people in this room who are American residents and
citizens today are descendants of the people who came to these shores in that period. I
know, to take the immediate local case, the Eccles family derives from a Scotsman who
came to this country in the middle of the nineteenth century. My parents came here in
the 1890s from a part of Europe which is today part of the Soviet Union although at that
time it was part of Hungary. And I suspect most of the people in this room have similar
backgrounds. Now, do you suppose those people kept coming to these shores in order to be
exploited? Do you think they came here to be ground under the heels of rapacious monopoly
capitalists? Not a bit of it. A few people might have been led here under misapprehension.
You conceivably could have had an initial inflow of people who thought they were going
to improve their lot and ended up being worse off, but you would not have had a continuing
inflow. They would not have sent back to the old country for their relatives and friends.
You would not have had a flow of millions upon millions year after year. And of course
they were not exploited; they were not ground under the heels. They got jobs, they spread
out West--to the Middle West, to the Far West, to where we are now--and they made of what
was a desolate country a country that was prosperous and green and productive, and improved
their own lot.
With respect to agriculture in particular, that was a period when the number of farmers
increased. It was a period when the price of farm land rose. Now of course, then as
now every farmer would have liked it better if he had done still better. What happened
then, of course, was that the spread of farms, increasing productivity, the development of
machinery, the bringing under the plow of productive land led to a great increase in
production which led to a decline in the prices of farm products. So it's true, the prices
of farm products went down. But that was a sign of success; it was not a sign of failure.
And the evidence that it was a sign of success was the rise in the price of farm land. After
all, if this decline in the price of products had been a sign of failure, if it had been
an indication that the farmer was being ground under the heels of Wall Street, why would
people have been willing to pay higher and higher prices for the land from which those
crops were produced? So the actual story is one of great growth of productivity in agriculture,
a great development of agriculture in this country.
If we turn to the charge that that was a period of heartlessness, a period in which the rich
were willing to say "Let the public be damned," as one man was quoted incorrectly as saying,
if we turn to that charge, let me call to your attention that the nineteenth century,
the period when we came the closest we've ever come to pure unrestrained individualism,
a period when government spending- the spending of the federal government in Washington- amounted
to less than 3 percent of the national income, when essentially you had no restrictions on
immigration and few restrictions on economic activity, let me point out that that was also
the period of the greatest flowering of charitable activity in the United States. That was the
period when you had the establishment of many independent private schools and colleges around
the country. It was a period when the private non-profit eleemosynary hospitals grew and
sprouted in every city in the land. It was a period of the Carnegie libraries. It was
a period of the founding of the Society for the Prevention of Cruelty to Animals. You
name it and you will find that the charitable, eleemosynary activities date back to that
period of the nineteenth century.
So the robber baron myth is a myth, one that should be deflated. It gets its appeal from
a common fallacy, from the fallacy that one man's gain must be another man's loss. Of
course it is true that many men became wealthy during that period. There were robber barons,
there always are robber barons. People are people. Some are good, some are bad, some
are in between. And of course, some people did try to mistreat other people. That is
part of the course of history unfortunately. But the main part of the story is that the
process whereby some people became wealthy was also the process which opened up the country
and provided opportunities for millions of other people to have a modest competence,
to be able to improve their own lot. It was the robber barons who were instrumental in
building the railroads that joined the country together, who were instrumental in developing
the industries of this country, and in thereby providing the opportunities for the ordinary
man to improve his lot in life. Everybody can benefit. You can have some people become
wealthy not at the expense of other people, but by enabling other people to become wealthy.
We had robber barons then and we have robber barons today, but there is a big difference
between the robber barons then and the robber barons today. The robber barons then primarily
could get money only if people freely gave it to them. They got their money by selling
a service and nobody had to buy it, and if people bought it it was because it was a better
service than it was before. The robber barons today are in large part able to get their
money by sending a policeman to take the money out of your pocket. Now that's a figurative
expression not a literal expression. But how do you become wealthy today? By getting government
assistance. To mention only one very famous example, by getting government to assign you
some TV licenses, or by getting any one of a large variety of other sources of government
support. If you look at where modern wealth comes from, it almost always comes from political
influence which enables you to get benefits at the expense of the public at large. Now
that is a zero sum game. When the money is transferred from some to others through force
and coercion of the taxpayer, then it need not be that the one man's benefit is also
the other man's benefit. Then it can and often is that the party who gains- gains at the
expense of the party who pays.
So robber barons will always be with us. The crucial question is whether we have a form
of economic organization in which one robber baron keeps the other robber baron in check,
or whether we have a form of economic and political organization in which one robber
baron can help the other robber baron- at the expense of the public.
I want to turn to the second of these myths, the Great Depression myth. There is hardly
any view that is more widespread than the view that somehow or other the Great Depression
was produced by a failure of private business. That view is held not only by those who are
in favor of a greater role of government, it is held by almost everybody. I venture
to suggest that if you go to any bankers, the people who are here today at this banking
conference- and if you talk to them, I venture to say that nine out of ten of them--if they
hadn't heard what I'm going to say--would say, "Well of course the Great Depression
was a failure of private business. It was due to an overextension, over speculation,
in the 1920s, or it was due to excessive concentration of wealth in the hands of the wealthy at the
expense of the poor in the 1920s, or it was due to speculative investment abroad, or what-not,
but it was a failure of private business and government had to step in in order to rescue
private business from its own failure."
Nothing could be farther from the truth. The Great Depression was produced, in my opinion,
and I may say this is not a random opinion; I will be glad to refer you to a several-hundred-page
book in which it is documented; I won't tell you who the author is...
(laughter)
Mr. Eccles did that- the Great Depression was produced by a failure of government, by
a failure of monetary policy. It was produced by a failure of the Federal Reserve System
to act in accordance with the intentions of those who established it. It was produced
by a failure of the Federal Reserve System, despite the presence of knowledge on the part
of many of the people in the system about the right course of action.
It is interesting to speculate for a moment about why this myth is so widespread. The
answer is really very simple in this case: private enterprise has no press agents, the
free market has no press agents, the government has a great many press agents. The Federal
Reserve has a great many press agents, and the Federal Reserve of course would never
admit, never proclaim, that it produced the Great Depression. On the contrary. And again,
I don't mean to be criticizing individuals. We're talking about the way institutions operate.
You and I are the same as all the rest of us; we're all the same. The hardest thing
in the world is for anybody to admit that he made a mistake. If any one of us makes
a mistake, we can always find somebody else to blame.
And if you read, as I have for my sins had to read, the annual reports of the Federal
Reserve System over a fifty-year period, there is only one element of humor that lightens
that task. That is the cyclical fluctuation in the powers of the Federal Reserve. In a
good year, when things are good, when the economy is booming, you will read that the
Federal Reserve by its wise policy, by its efficacious management of money, has produced
this fine situation. However, let things get bad and all of a sudden the tone of the annual
report is different. Then you discover that despite the best efforts of the Federal Reserve,
outside forces combined to produce difficulties. Even at the depth of the depression in 1933,
when in the spring of that year the Federal Reserve System- which had been established
in order to prevent banking panics and keep banks from closing, when the Federal Reserve
System itself closed its doors and you had a banking holiday for seven days, and when
over the previous three years a third of the banks of this country closed their doors and
went broke because, in my opinion, of the poor policy followed by the Federal Reserve
System. Even in 1933, if you read the annual report you will discover how much worse things
would have been if the Federal Reserve hadn't behaved so well. Now as I say, I don't blame
the members of the Federal Reserve for that; any one of us would do the same thing. We
have to find somebody to blame.
But as an objective scholar I can tell you what the facts are. The facts were that from
1929 to 1933, the total quantity of money in the United States, the amount of currency,
the amount of bank deposits, what Mr. Eccles referred to as M2--that total amount of money
declined by one-third. The total number of banks went down by one-third. And why did
the quantity of money decline? It declined because the Federal Reserve System failed
to prevent the decline. The Federal Reserve System could have prevented the decline at
all times. There never was a moment during that period when the Federal Reserve did not
have the power to prevent the decline in the quantity of money. If it had prevented the
decline in the quantity of money you might still have had a recession, but it would have
been a garden variety recession. It would have been over in the middle of 1930 or early
in 1931 at the latest. It would not have been a major catastrophe not only for this country
but throughout the rest of the world. Moreover, this is not only hindsight. At all times the
people at the Federal Reserve Bank of New York and at a number of other banks were pleading
with the Federal Reserve Board in Washington to do the right thing. At all times there
were people in Congress who were arguing that the Federal Reserve System should take a different
course. At all times there were outside commentators. One of the Canadian banks was particularly
prescient, but there were other commentators who were pointing out the disastrous effects
on the American economy of the restrictive policies that the Federal Reserve System was
following which were causing, permitting and facilitating a whole series of bank runs.
So the Great Depression was not produced by a failure of business. On the contrary, it
was produced by a failure of government, and a failure of government in an area in which
responsibility had been assigned to government since the founding of this country. The Constitution
of the United States gives Congress the power to coin money and set the value thereof, and
it was in the management of this fundamental function of government that government failed
and produced the Great Depression.
We have learned from that failure. The Federal Reserve will not fail in the same way again.
This time it will fail in a different way.
(laughter)
This time it has been failing not by producing a great depression but by producing an inflation
because just as you will hear the story that it was business that was responsible for the
depression, so you will today hear the story that it is labor and management that are responsible
for inflation. It is the same kind of myth. Inflation is made in one place and one place
only, Washington, D.C. And in Washington, D.C. the chief immediate source of inflation
is the Greek temple on Constitution Avenue which houses the Federal Reserve Board. A
major accomplice of course sits in the halls of Congress in Washington. They are a major
accomplice because you tell them to be. The American people have been telling Congress
for many years, "Spend more money on us, please," but they have been telling Congress, "Don't
raise our taxes." Congress has been listening. It's been spending more money on you, but
on the other hand it's been very unwilling to raise taxes. As a result, it has imposed
inflation as a tax. That's one tax that you don't have to vote for but you have to pay.
Let me turn to the third of the myths I want to cover. This is the myth closely related
to the Great Depression myth. It is the myth that somehow or other the private market has
failed to provide certain important services and the government has had to step in in response
to an overwhelming public demand in order to provide those services.
The reality is very different. The reality is that if you look at every program that
the government has adopted in the direction of extending its scope, it took an enormous
propaganda campaign by special propaganda groups to get those measures passed. There
was no underlying public demand for those measures. On the contrary, the demand had
to be created, it had to be developed, it had to be produced, and it was created, it
was developed, it was produced by people who sincerely- I'm not questioning their sincerity-
who sincerely want to see an expansion in the scope of government.
Let me take some of the most prominent examples. Let me take the example which today is the
greatest sacred cow of them all, Social Security. Was there an overwhelming demand for Social
Security in the 1930s when the law was adopted? Far from it. There was no public demand for
it. It had to be sold. How was it sold? By the slickest devices of Madison Avenue, by
imaginative packaging and deceptive labeling. Social Security was sold as an insurance scheme.
It is not an insurance scheme. There is very little relationship between the amount of
money any one individual pays and the amount of money he is entitled to receive. Social
Security is a combination of a bad tax system with a bad way of distributing welfare. It's
got two components and I have never known anybody, whatever his political or other persuasion,
who would defend either component separately. If you look at the tax system, who can defend
a wage tax, a tax on wages up to a maximum, a tax on work, a tax which discourages employers
from hiring people and discourages people from going to work, and a tax which is borne
by the lowest wage groups. It's a regressive tax. You could never- in a million Sundays
you could never have gotten such a tax passed as a tax. Look at the benefit arrangements.
Here you have an arrangement under which the amount of money a person receives does not
depend on his poverty or his indigence; it depends on the accident of what industry he
worked in. If he happened to work in a covered industry, he gets a benefit. If he happened
to work in a non-covered industry, he doesn't. If he has only worked a certain number of
quarters and not more, no matter how indigent he is, he doesn't get anything. If he is sixty-five
and he decides to continue to work, earning more than a modest amount per year, not only
doesn't he get a benefit but, to add insult to injury, he has to pay taxes on the wages
he is receiving in order to finance the benefit he is not receiving.
(laughter)
If a man who is sixty-five years old has a million dollars in income from property and
doesn't work, he gets his full Social Security benefit tax free. If the same man goes to
work and earns $20,000 a year, he is in the position I just described- he doesn't get
any benefits. Is there anybody who would justify that system of distributing benefits? And
I could go on to all the difficulties with it. I've only touched the surface.
Note the misleading language. The Social Security system consistently refers to the taxes you
pay as a "contribution." Now tell me, do you regard taxes as contributions?
(laughter)
The word "contribution" denotes voluntary arrangements. If you buy an insurance program
you are contributing freely. If you contribute to the United Way freely, you are contributing
freely. But if you pay taxes on your wages as a condition for being employed, that's
a tax; that's not a contribution. Again, it always refers to the payments people get as
"benefits." They are not benefits; they are subsidies. What you have is a system of subsidizing
people on the one hand- and of taxing them...
What about the claim that it is insurance, that there is a relationship between the two?
Well, there is a minor relationship. It is true that, on the whole, those people who
pay more will receive more, other things the same, but every student of the subject has
pointed out that the relationship is very small, that most payments are independent
of most receipts. Moreover, what you really have is not a system under which people are
providing for their own security as the Social Security system will say it, as they describe
it. In their pamphlets they describe it as a way in which 90 percent of American workers
are providing for their own future. That's nonsense. What people today are doing is paying
taxes today to pay the subsidies to the people who are receiving benefits today. What you
have is a system of taxing the young, at any point in time, to subsidize the old. Now,
there may be nothing wrong with that. For the moment I am not discussing that issue.
I am discussing whether Social Security was a response to a broad scale public demand,
or whether it had to be sold to the people by the worst devices of Madison Avenue, and
the answer is it clearly was the latter. What you have is a system under which people today
are being taxed to pay benefits today to the people who are receiving them. So far, those
people who have been receiving payments have received much more than the actuarial value
of what they paid. That's because you've had a growing working force, you've had higher
wages being paid- the wage tax had gone up very sharply. But the number of recipients
is growing relative to the number of people paying and that's why Social Security is currently
in so much financial trouble. That's why the so-called reserve, which is not a reserve
at all, the so-called reserve has been getting smaller and smaller, and that's why you have
all the agitation for Congress to do something to make Social Security again financially
responsible. Again, for the moment, I am not discussing whether Social Security or the
separate parts are good or bad, but only whether it can be regarded as a program adopted in
response to a great public demand.
Let me take another more recent movement. Consider the imposition on you and me and
on our automobiles of all sorts of safety equipment-so-called safety equipment. Nothing
to prevent us individually from buying it, but now we are required to buy it by government.
Why? Was there a great public demand? Not at all, there was a man named Ralph Nader.
Now, maybe he arose in response to a public demand, but if so it was a public demand for
entertainment, not for safety.
(laughter)
But Ralph Nader launched a major propaganda campaign, and as a result of this propaganda
campaign, as a result of a great selling effort also characterized by misrepresentation-as
you know, his original weapon was a book Unsafe at Any Price, which damned the Corvair as
being an unsafe and knowingly unsafe car. Later studies have demonstrated that his claim
was not justified, but that did not prevent it from having its effect. It did not prevent
it from adopting it.
But, the extent to which this did not result from a great public clamor can be shown by
what has happened whenever the agency that was established to administer auto safety
regulations has overstepped its bounds. You will recall that a few years ago, it tried
to impose the requirement of an interlock, that no car could be started unless the seat
belts were fastened. And that produced such a great public outcry that Congress stepped
in and it had to be rescinded. You are now having a similar kind of a controversy about
the airbag.
Or again, let me take a very different example, one which has not yet emerged fortunately,
the drive for national health insurance. Is there a widespread drive for national health
insurance? Not so you can notice it. Indeed, the proponents of it have been trying to get
it passed year after year, and so far they haven't gotten it passed. As I say, fortunately,
because if so-called national health insurance were passed it would bear as little relationship
to insurance as Social Security does. It's not a program for national health insurance
at all. It's a program for socialized medicine. It's a program for making physicians government
employees. It's a program for creating long waiting lines and inferior medical service,
but that isn't the way it's labeled. The pressure for it is having to be created and built up
by propaganda.
Or again, let me take another modern version. Has the FDA's ban on saccharin been in response
to a great public outcry for it?
Let me turn to the fourth of my myths, the free lunch myth; the belief that somehow or
other government can spend money at nobody's expense. I don't know how many of you have
ever heard of a wonderful description of government that was made by a French economist by the
name of Frédéric Bastiat about 150 years ago. He said government is that fiction whereby
everybody believes that he can live at the expense of everybody else. And that is the
free lunch myth, the myth that somehow or other government can provide goods and services-
can spend money at nobody's expense. Now, the particular form which that myth takes
is very specific. It has two parts. One part is the belief that somehow or other you can
tax business without consumers or workers or individuals paying for it. Somehow business
is a big cornucopia out there that can be taxed at no cost. And the other form the myth
takes is that you can create money at no cost, that if you turn the printing press, if you
produce those greenbacks, that will enable people to become richer with nobody becoming
poorer.
Well, let me look at the first problem. Can you tax business? What's business? There is
no business to be taxed. There are people. Only people can pay taxes. Can I tax this
floor? Can I tax the building? The building can't pay taxes. Only people can pay taxes.
So when you talk about a tax on business it has to be paid by somebody. Either it's paid
by the stockholder or it's paid by the customer or it's paid by the worker. There is no other
way it can come from. There is no Santa Claus, no tooth fairy...
(laughter)
...that's going to provide a source by which the government can spend money that doesn't
come from somebody. Somebody has to pay and yet over and over again you hear the claim,
"Oh, we must not increase taxes on individuals; we'll increase taxes on business."
In connection with the current discussion of Social Security, this fiction arises. There
is the fiction that the Social Security tax is half on the individual and half on the
employer, that the individual only pays 5.75 percent and the employer pays an equal amount.
That's nonsense. That's bookkeeping, that's not economics, that's not reality. The part
that the employer pays is part of his wage cost. If an employer considers whether it
is worth his while to hire an additional worker, he has to consider as part of his cost not
only what he pays to the worker but also the extra taxes he will have to pay to the government.
It makes no difference to the employer at all if he pays the worker a bigger check,
and the worker pays a larger part of that directly to the government, or he pays the
worker a smaller check but in addition has to send a check to Washington. What matters
to him is the total number of dollars it costs him to hire an additional person. So the fact
is, the logic is, the reason is that the so-called tax on the employer is paid by the employee.
Now, this has always been clear from economic reasoning... general economic reasoning, but
it has also been subjected to empirical tests. In a book even from that temple of belief
in greater and bigger government, the Brookings Institution in Washington, published a couple
of years ago, demonstrated empirically that the tax on the employer was really paid by
the employee, that it was shifted to the employee. And it can't be any other way, as you will
see if you think about it. So business doesn't pay that tax and yet, despite this, you have
the great move in Congress right now in remedying the problem of Social Security to impose a
larger fraction of the tax on business, on the alleged grounds that somehow or other
that spares the worker. It doesn't have any such effect. It reduces the incentive to hire
people and thus is imposed on the worker.
Again, if you look at the taxing of corporate profits, the distinction you have to draw
is between who writes the check and who fundamentally bears the cost. It may well be that an official
of a corporation writes the check for the tax on profits- so-called profits. He writes
the check, but who pays it? He doesn't pay it. Here is the poor fellow who may be earning
a modest competence, he may be writing a check for ten million dollars, that isn't coming
out of his hide. Where is that ten million dollars coming from? It has to come from the
proceeds of the goods and services which the enterprise sells, and that ten million dollars
is ten million dollars less available either for cutting prices or for paying out dividends
or for paying wages and salaries. The tax is borne by people. And for this reason, I
must say I have always myself been strongly in favor of eliminating altogether the tax
on corporations so it is open and above board that you are taxing people and that you do
not conceal that fact by appearing to tax corporations.
Well again- with respect to money, can you print money at no cost? It's very cheap to
turn out those pieces of paper, but does that get society something for nothing? Not at
all, it's simply a different form of taxation. If you print money, people have more money
to spend. If they spend more money on the same amount of goods, prices go up, and in
effect, everybody is paying a tax through inflation. Once again, it is only a form of
taxation.
Let me turn to my final myth because it is in some ways the most pervasive, the most
dangerous, and the most deep-seated. That is the Robin Hood myth, the myth that government
has benefited the poor at the expense of the rich. That's the myth. Those are the terms
on which many a governmental program is sold.
What is the reality? The reality has been described in an article in the Journal of
Law and Economics by my colleague George Stigler under the title of "Director's Law." And Director
is the name of Aaron Director who was a professor at the University of Chicago Law School, and
I might also say my brother-in-law.
(laughter)
Director's Law is that almost invariably government programs benefit the middle-income class at
the expense of the very poor and the very rich. Now that may seem to you strange, but
let me first explain why it makes logical sense and second give you some empirical evidence
starting right here at home with higher education and the state financing of higher education.
On the logical level, you have a political system under which laws are passed by 51 percent
of the people voting one way against 49 percent of the people. Now, the way to get a law passed,
therefore, is to form a coalition covering 51 percent of the people. You might think
that you would take the bottom 51 percent versus the top 49 percent, but the more you
think about it, the more you realize that that's not a very effective way to form a
coalition. Why? Because those people who are at the bottom tend to be much less skillful
in political activity for the very reasons that leave them at the bottom in the economic
scale. They are at the bottom in the economic scale because they have low skills or low
abilities or low entrepreneurial capacity, or have been unfortunate to have been born
handicapped or in groups that are discriminated against. But those same features make them
relatively less effective in political activity. Who are the most effective people in political
activity? Those of us in the middle classes. We are the people who are literate, we are
the people who write for the newspapers, we are the people who mount the hustings, we
are the people who provide the candidates. Well you might say, why doesn't the coalition
come from the top all the way down 51 percent? Well, the answer is that gee, those people
at the top-that's a place we can get a lot of money from, and it's worth sacrificing
a few votes to get a large fraction of a tax base. And therefore the logically most reasonable
coalition is sort of 51 percent of the people, running from the lower middle class through
the upper middle class and leaving out the very rich at the top and the very poor at
the bottom. Now, it doesn't always work that way. Sometimes the very rich are able to use
their money to get an effective coalition, but most of the time that's the way it works.
Now, let me illustrate in the real world. One of my favorite examples is state finance
of higher education. This is always sold on the ground of providing opportunities to everybody
in the society to get an education, but what are the facts? I doubt that there is any program
financed by government in the United States which is as regressive in its financial impact
as the financing of higher schooling. Who are the people who go to school? Who are the
people who are attending this university? Mostly people who come from middle, upper-middle
or lower-middle income class families. If there are a few among you who come from lower-income
families, you are going to be among the middle and upper-income classes; you are the richer
among the poor. They are the people who go to school; they are the people who get the
benefit from it. Your training here will enable you to get higher incomes than you otherwise
could. Who pays for it? Well you pay for it, and your family and friends pay for it but
not through tuition. I am told your tuition covers about 15 percent of the cost of your
schooling. The taxpayers pay for it, including the people who don't go to school. Some years
ago, there was a study made for the state of California which showed that 50 percent
of the students at state-supported institutions of higher education came from the top 25 percent
of the income class and 5 percent came from the bottom 25 percent of the income class.
This is a program- when I talk in California and want to be demagogic, I say it's a program
to impose taxes on the people in Watts to send the children from Beverly Hills to college.
Now, you here in Utah know better what the local equivalents of that are. Now, I'm not
blaming you as individuals. I couldn't do that because I myself am a beneficiary of
state-supported higher education. I went through a school that has since become a state university,
Rutgers University in the state of New Jersey, on a state scholarship. Now, I think I benefited
from going to the university and I think maybe even the country at large did, although I
know there are many people who disagree with that.
(laughter)
But there's no reason why I shouldn't have paid for it. What did the poor citizens in
New Jersey get? The day I graduated from college I left New Jersey and I've hardly ever been
back since.
(laughter)
There is a strong case to be made that everybody who wants to go to universities should have
an opportunity to do so, provided he is willing to pay for it- not necessarily right now.
It is highly desirable to have arrangements under which he could borrow now to pay it
back later out of the higher income that his education will make possible. But there is
no justification for imposing taxes on lower-income people to finance the schooling of people
who are or will be in the higher-income groups. And yet, how much political movement is there
to impose full cost tuition on colleges? There is nobody who would have a ghost of a chance
of being elected to a legislature or to the state house on that program. It's the hardest
thing in the world legislatively to get higher tuitions imposed. Why? Because the middle
class looks after itself, because of Director's Law.
Now, what's true of higher education is true in every other area. Consider Social Security.
Now Social Security is also sold as a program to benefit the poor. What are the facts? Social
Security is a program which imposes unduly heavy taxes on the lower-income groups in
the society to provide higher benefits to upper-income groups in the society. How does
it work? It's not because of the regressive nature of the wage tax. It's not because of
the structure of benefits. It's because of a very simple phenomenon. At what age do younger
men from the lower classes go to work? Sixteen, seventeen, eighteen, nineteen. That's when
they start to pay Social Security taxes. At what age are you people going to go to work
and start paying Social Security taxes? Some of you may in part-time jobs have been doing
so, but you will be full-time Social Security payers only when you reach your middle twenties.
So they will pay taxes for more years than you will pay taxes.
Next, which one is going to receive benefits for longer? Every demographic study has shown
that the average expected length of life of the middle and upper-income classes is longer
than the average length of life of people from the lower-income classes. So those poor
suckers are going to pay taxes for more years and receive payments for fewer years than
you and I will. Now some of us, by virtue of continuing to work between 65 and 72, will
not be in that favored class. But already the fraction of people who work between 65
and 72 has been cut to a small part of what it used to be because of the incentive offered
by Social Security. And overall there is little doubt, therefore, that Social Security is
a program which transfers income from low-income classes to high-income classes.
The same thing is true of almost every other social program you can mention. I have often
challenged people to find a single governmental program in which the people who pay taxes
have higher incomes than those who get the benefits. I know only one and that is direct
relief and public assistance, the Aid to Families of Dependent Children. It's not a good program,
it's a terrible program, it's a welfare mess, but so far as I can find out it's the only
program that demonstrably transfers income from higher-income classes to lower-income
classes. And that's why it is such an unpopular program. Director's Law shows up in the unpopularity
of the welfare mess as well as in the popularity of Social Security, housing programs, and
the like. I could go down a great many others but time will not permit.
I come to my conclusion that if we are going to look forward to the future, to an end of
this reduction in our freedom and the growth in centralized government, we must begin to
dismantle these myths which are so widely accepted by people, which have become an unthinking
part of their philosophy and of their beliefs. And I hope that in the course of this hour
I have deflated your air mattress and given you an uncomfortable jolt. Thank you.