Worst Ten Economic Mistakes of the 20th Century
2014-03-30 · Guest: Burton Abrams (Professor of Economics at University of Delaware) · 81:20
Economic Folly and Damaging Government Policies
Bob Zadek interviews economist Burton Abrams about his book, The Terrible 10: A Century of Economic Folly, which identifies the most damaging government policies of the 20th century. They discuss how policies like Prohibition, the creation of the Federal Reserve, and the structure of Social Security and Medicare have caused profound economic harm and wealth redistribution. The conversation also covers the modern-day conflict between Tesla Motors and state-protected auto dealerships, as well as a libertarian perspective on non-interventionist foreign policy.
Topics: Economics, Public Policy, Prohibition, Social Security, Medicare, Tax Reform, Tesla Motors, Auto Franchise Laws, Foreign Policy, Libertarianism
Speakers:
- Bob Zadek - Host
- Burton Abrams - Professor of Economics at the University of Delaware and Research Fellow at the Independent Institute
- Caller (Mark) - Student of Professor Abrams
- Elon Musk - CEO of Tesla (Audio Clip)
- Auto Dealer Representative - (Audio Clip)
Introduction to the Terrible 10 [00:00]
Bob Zadek: Hello everyone, welcome to the Bob Zadek Show. I’m your host, Bob Zadek, every Sunday at 9:00 AM on Talk 910. Thanks so much for listening. We are the only live libertarian talk radio show in the Bay Area and around the country on the weekends. Thanks so much for listening. We proudly are the show of ideas, not attitude. I’m your host, Bob Zadek. 800-345-5639 to join the conversation. 800-345-5639.
When I grew up listening to lists, Billboard had its Top 40, Fortune has its Fortune 100. Only a free-market economist could build a list of “The Terrible 10: A Century of Economic Folly.” That economist is Burt Abrams. Burt lists for us in a wonderful and readable book his list of the ten worst mistakes in the 20th century—economic mistakes of the 20th century. A lot of the items on the list will surprise you; some will not.
Here to share the results of his scholarship and his study, I’m happy to welcome on the show for the first time, Burton Abrams. Burt, thanks so much for joining us this Sunday morning.
Burton Abrams: Well, thank you very much, Bob. It’s my pleasure.
Bob Zadek: And I should mention that Burt is a research fellow at the Independent Institute here in the Bay Area. He’s the director of their Government Cost Calculator. And Burt, I’ll ask you to explain that in a second because it’s a fun website to go to. Burt teaches economics at the University of Delaware. He has a PhD from Ohio State University. And Burt, interestingly enough, has taught around the world in Croatia, South Africa, Australia, and China. Burt, thanks so much for joining us. Now Burt, tell us before we get into the book, tell us—because it’s a cool website—the Government Cost Calculator. It is at mygovcost.org. M-Y-G-O-V-C-O-S-T dot org. What is the mygovcost.org calculator? What does it tell those who check out the website?
Burton Abrams: Well, it will allow you to calculate what your tax liabilities are likely to be given your expected income over your lifetime, and also what benefits you might get and whether you’re losing or winning in this—and of course, most people are losing. I will say that I took over this role after the hard work had been done by my predecessors at the Institute. So they did the real hard work in putting the calculator together. But it is a fun site to go to and just to see how government impacts you and the effect that it has. I think there’s still a lot of impacts that the government has that might not be being picked up. There’s a lot of redistribution that goes on in very covert ways, and so I think we can even improve on it over time.
Bob Zadek: We’ll discuss today some of those covert—how sinister that sounds, and how sinister it is—these covert methods which the government has to redistribute wealth. And I know I don’t have to explain this to my audience, but redistribution of wealth simply means the government making a decision that there is somebody or a group of people in this country who deserve your money or property more than you deserve it. So the government makes a decision that you are not as deserving of your property as somebody else, and the government simply takes your property away and gives it to somebody else because of their worldview. And it is one of the most sinister, offensive, and obnoxious items of governmental policy. And we actually will discuss some of those sinister means by which the government, quote, “redistributes” wealth, which means take from A to give to B. We’ll discuss that during the course of the next hour.
The Terrible 10 Methodology [04:52]
Bob Zadek: Now Burt, your book is, as I said, The Terrible 10: A Century of Economic Folly. Now of course, I suspect that when one is making a list of economic mistakes in a century, the list could go on and on and on. How did you possibly make a decision what policy decisions actually made the cut? How did you sort out economic follies that were less significant than those that were more significant? What was your method?
Burton Abrams: Well, the primary method is what we call benefit-cost analysis, where we take a look at what benefits did we get from a policy or program and what were their costs to society. And obviously, I wanted to get the worst ones that had the greatest magnitude of costs in excess of any possible benefits, and try to do some quantitative assessment of what were the losses to the economy that arose from those kinds of policies.
So, it’s an interesting topic. When I tell my students and my graduate students about what are the worst economic policies that were ever passed, it always touched off an interesting discussion and debate about what were the worst policies. But there are a number that continue to arise regardless of the number of people that the question was asked to. And those fairly well were put into the book.
We can talk about the Great Depression and the Federal Reserve’s bungling of it that really exacerbated the recession and made it into a Great Depression. And then there’s other policies such as the Hawley-Smoot Act, which was the worst tariff act that we’ve ever imposed, that was partially responsible for creating World War II in addition to all sorts of animosity across the globe. And these imposed enormous costs on the economy.
So, a number of them are very obvious, I think would be identifiable by almost anyone that’s taken economics courses. But then there are some that were a little more covert. And one of them that’s in the book is based on some of the research that I had done listening to the Nixon tapes and found out that Richard Nixon very skillfully manipulated Arthur Burns and the Federal Reserve into pursuing a monetary policy that Arthur Burns frequently said would be disastrous. But nonetheless, Arthur Burns caved in to President Nixon’s manipulations and started the printing press going. That touched off a decade of inflation, our worst inflation in about a hundred years, and required three recessions to correct.
Bob Zadek: What is most interesting, Burt, what I found to be most interesting is these are serious mistakes with profound economic cost on all of us. The nation suffered profoundly as a result of these really bad mistakes. And we’re going to get into them right straight away. But to introduce the topic, what struck me, Burt, as I read your book was how many of these mistakes are repeated. We don’t learn, which makes me think that government, of course, when they adopt these policies, they do so ignoring as not a valid criteria for adoption, ignoring whether or not these policies make economic sense, but rather there is other motives. And the fact that they are economically unsuccessful doesn’t matter because there’s a greater goal in the part of those politicians adopting them.
Prohibition and the War on Drugs [08:29]
Bob Zadek: For example, the first one you mention in the book is Prohibition, which we—which of course has its parallel today in 2014 in the so-called drug wars. And it is an exact parallel. Now Burt, we could spend an hour on just Prohibition. There is so much good stuff in there, including its direct relationship to the income tax, another folly in your book. But tell us from an economic standpoint why Prohibition was economically so damaging to the country and why it was such a failed policy and why it made your list of the top ten economic follies. And remember, I’ll remind my audience, remember as Burt speaks, think about today and what’s going on in the drug wars, and forgetting about how you feel moralistically about drugs. The issue is, is it good policy for the country? So Burt, if you would.
Burton Abrams: Well, the war on drugs indeed has a very direct parallel to the period of Prohibition. And the similarities and arguments are almost identical. You could substitute war on drugs for Prohibition and go down the line. It obviously, alcohol and the consumption of alcohol was something that was fairly widespread in the United States at the turn of the century. And many immigrants were coming in at that time from Eastern Europe and Southern Europe where consumption of alcohol was an everyday normal occurrence—drinking beer and wine and other drinks.
So the country was changing, and there were a number of people in the country, mostly rural Protestants it turns out, that found this to be a threat to their way of life and they didn’t like other people consuming alcohol. So they were able to muster forces to pass a constitutional amendment, in fact, to prohibit the sale and distribution of alcohol. This set in motion a series of negative consequences that haunted the economy for some 14 years. And it led to disrespect of the law, tremendous rise of organized criminals, wealthy organized criminals, bribery of government, filled the prisons with convicted alcohol smugglers, caused general disrespect for the law. It was an activity that was fairly widely desired by the public at large, and it was an attempt by the government to impose a government standard of morality, a morality that was held by a small minority of the people in the United States at the time.
Bob Zadek: Now there’s a core principle, Burt, which I just want to point out to my friends who are listening to the show. The core principle is that any law that criminalizes behavior that most people think is not criminal—that’s bad policy. You cannot affect people’s natural—the majority of people’s natural behavior by making an act criminal. Think about immigration laws where we try to criminalize the improvement of one’s life, which is what our immigration laws attempt to do. Think about drug laws which criminalize activity that most people think is okay. There are many such statutes.
And you have to—when you make an otherwise neutral activity criminal—neutral in the sense that it doesn’t harm somebody else—when you make it criminal, you create disrespect for the law. You make otherwise honest, law-abiding citizens into criminals. It has a profound disruption on the social fabric as well as economic issues like incarceration, trial, and enforcement, all so that you can impose a moral code. So this principle that Burt identifies has profound economic consequences, but also it tears at our social fabric. Thank you very much, Burt, for mentioning the area of Prohibition. Now ultimately, the economic cost caught up with us and Prohibition was repealed, was it not? Of course it was.
Burton Abrams: That’s true. It was repealed by another constitutional amendment, the only constitutional amendment to be repealed.
The Income Tax and Amediosis [13:26]
Burton Abrams: And interestingly, you raised the issue about the income tax. The income tax was instituted in 1913 by another constitutional amendment. And that actually provided a tremendous revenue source for the government. Prior to that, alcohol taxes were a major source of domestic tax.
Bob Zadek: I think it was 25% of our domestic budget was from excise taxes at the time.
Burton Abrams: Yes. And we relied heavily on import tariffs through the 19th century and such. And so suddenly we had an income tax and a corporate income tax that gave the government a substantial revenue flow, and the importance of the alcohol tax fell dramatically. So it actually—the income tax paved the way for Prohibition. It would have been extremely costly to have imposed Prohibition if it relied heavily on alcohol taxes for funding the government. So that’s an interesting how one change in the government leads to another change that becomes a rather negative effect.
Bob Zadek: The income tax was passed in—or the amendment became law in 1913, which was the darkest year for the Constitution. It was the year of the income tax and the 17th Amendment that caused the direct election of senators. That was the darkest year for the Constitution. Now, we have a caller already from Wilmington. Mark, welcome to the show. Mark, are you there?
Caller (Mark): Yeah, I’m here right now.
Bob Zadek: Hi Mark, welcome to the show. What’s on your mind this morning?
Caller (Mark): Well, I just wanted to say I’m a student of Professor Abrams, so good morning, Professor. I guess good afternoon out here in Delaware. It’s actually like 12:00, so good afternoon.
Bob Zadek: Mark, please don’t discuss your grade.
Caller (Mark): I guess I won’t do that. I won’t disclose that it’s actually pretty strong right now, so thank you. But I’ll get to my question. I guess I was just curious, you know, as we discuss the different events and mistakes that you identify in your book, is there a pattern that you observe between these, or would you identify these as very isolated instances of stupidity?
Bob Zadek: What a—that’s a very good question, Mark. Thank you for asking it. Burt?
Burton Abrams: Well, I think a large number of the mistakes are made because politicians focus on a very short-run time horizon. And I give a name to that, and this is something that other economists in the past have noted, that politicians are only concerned about the next election and obviously are passing laws and doing things to get votes for the next election. But I gave a name to it to make it a little more attractive, and I call it “amediosis,” and people that have amediosis are “amediacs.” And it seems that the politicians are constantly focused on the short run and don’t take into account the long-run implications of their actions and their acts.
And we see that very clearly in Nixon’s pressuring of the Fed to stimulate the economy through excessive production of money so that it would window-dress the economy going into his election. He was not worried about the subsequent inflation. He was warned repeatedly that this was going to cause inflation, but he said, “Well, that’ll be someone else’s problem down the road, and I’ve seen people beaten on unemployment but not on inflation,” although later it became inflation could defeat presidents, in part because it got out of hand.
And we see this also in our Social Security and Medicare programs that were set up—not initially in Social Security, it was supposed to be a fully funded or full reserve system, and eventually the politicians started robbing the trust funds, if you will, so that now they’re pay-as-you-go systems and had very negative effects on long-term savings rates in the country. Today, most people depend extremely heavily on Social Security and Medicare to take care of the bulk of their costs in retirement. And so consequently, we observe that since 1978, the personal savings rate in the United States has dropped from about 12% down to 4%. There’s been a secular decline, and people that have researched it have tied them into these promises of government support in retirement. So one need not save as much.
But the sad part of it is that the taxes don’t go into savings. They’ve been handed out in a Ponzi-type scheme to people that retired earlier who received far more benefits than any of the taxes that they paid into the system. And so consequently, the full reserve is no longer there, and the future generation is going to have to pick up the tab for that. And part of the tab is that there is much less private wealth that has been created as a result of those systems that people think they’re saving, but there’s no saving and there’s no real capital formation behind that, only government promises to tax people in the future.
Bob Zadek: Now Burt, what’s interesting is when you mention this cool phrase, what do you call them? Amediacs. Amediacs. And amediosis. And what’s interesting, as I said in my introduction to the show, isn’t that—or let me put it differently—a lot of political commentators have expressed the opinion, which is quite compelling to me, that what’s going on now with Obamacare, where Obama is delaying and putting deadlines out into the future to increase his stats so he can boast about how many people have, quote, “enrolled” in Obamacare, he’s causing a longer-range problem both in affecting the cost of the policies next year, but he’s been putting these decisions out into the future as a way to, many people fear, affect the outcome of the 2014 elections. So Burt, that’s another very immediate, in the news every day, example of amediosis—dealing with the immediate problem, kicking it into the future in order to affect the outcome of an election. Mark, thank you so much for that wonderful question. We appreciate your being a listener to the show.
Social Security and the Savings Crisis [20:41]
Bob Zadek: All right, Mark is gone. Now Burt, let’s segue into Social Security, which of course is the—as you observe in the book, but the phrase has been around for some time—it is the third rail of American politics. You don’t mess with Social Security. Now, Social Security, which is depended upon, relied upon, dare I say beloved by Americans, it’s strange—not to me, but it might appear strange—that you would list the creation of Social Security as a folly. Most people would say, “No, that’s an example of the government doing the right thing.” And before you answer, Burt, this is Bob Zadek. I’m speaking with Burt Abrams. Burt is an economics professor in the University of Delaware. Burt has written a wonderful book, an easy read, informative read, The Terrible 10: A Century of Economic Folly. And Burt outlines the ten, in his opinion, the ten worst economic mistakes in American history. 800-345-5639 if you wish to join the conversation, if you have your own economic folly that you fear Burt has omitted, we’re happy to hear from you.
Now Burt, we’re going to go to break in about a minute, but Social Security—give us the headline now, and after break we’ll come back and embellish that. In a headline, why is Social Security per se a mistake?
Burton Abrams: Well, there’s several aspects of it that in my opinion are a mistake. And one is it is a major redistribution program which few people understand, and they aren’t aware of the amount of redistribution that goes on as a result of the program.
Bob Zadek: So it’s not just giving people retirement insurance, but rather it is making value judgments and taking money from one person solely because somebody in a position of power decided another person deserves that item of property more than the person who created it.
Burton Abrams: Absolutely. And the other part is that people are replacing private savings with Social Security taxes. And the Social Security taxes were initially intended to go into a savings fund which would lead to lending of money and building of capital in the economy. But instead, it went away to the first retirees. For example, Ida Fuller was the first person to receive a Social Security check. She had paid into the system about $21 in Social Security taxes, and she collected over her lifetime over $20,000 in income. Now, the reason she was able to get such generous benefit was because they were robbing the trust fund. And the early retirees all thought Social Security was a great system. It was for them.
Bob Zadek: It was pretty much—that had Ponzi scheme—it wasn’t a Ponzi scheme as you point out in your book, but it had a lot of the attributes. The first people out made all the money, and the people at the end of the stream—that would be my listeners—they get left, the music stops and they get no chair, which is how every Ponzi scheme works. Now this isn’t quite a Ponzi scheme as you point out, but it has a lot of the characteristics. Burt, we’re going to go to break now. We’ll continue on the importance of savings and how the government destroyed the system of private savings by instituting Social Security in 1935. This is Bob Zadek. I’m talking with Burt Abrams. 800-345-5639. 60-second break, we’ll be right back.
[Break]
Bob Zadek: Well, that 60 seconds wasn’t so bad, was it? 60 seconds of commercials is not all that much. This is Bob Zadek. Welcome back to the show. I’m speaking with Burt Abrams. Burt is an economics professor in University of Delaware, and he has written The Terrible 10: A Century of Economic Folly, where Burt outlines for us what in his opinion were the ten worst economic mistakes of the 20th century. The depressing thing is we are repeating them again in the 21st century. Don’t we ever learn?
We are talking now about Social Security. And Burt, let me just tee up the issue if I may, and you can correct me where I misstate the issue. But if we didn’t have Social Security and people were responsible, they would put aside money for their retirement because they would say to themselves, “Well, I better take care of my retirement when I stop working.” So people would put away a few bucks every week, and they would put it away in some savings vehicle. It might be a bank account, it might be a money market fund, it might be stocks and bonds, it might be a mutual fund. And that money would then be in the economy, and it would then find its way back to business where business could invest it, create jobs, and create wealth and create goods and services for us.
But now with people believing they have Social Security, and perhaps in their head they say, “Well, my retirement funds are taken care of, therefore there is no need to save.” Now, the money they would otherwise put away in retirement funds and find its way into the economy now goes back to the government, and the government doesn’t do a very good job of creating wealth or creating jobs. It just moves it around, which means the net result of it is people don’t (a) have enough money when they retire, or (b) the other effect is the economy doesn’t grow because it’s deprived of this recycling of money, because the government doesn’t do a very good job when it takes our money, it doesn’t create jobs. Now Burt, with that perhaps simplistic introduction, tell us why Social Security is economic folly. And I should mention 800-345-5639 to join my conversation with Burt Abrams. Burt, please.
Burton Abrams: Okay, well let me give you a numerical example of a family of two which only had one income earner throughout the income-earning years, retiring in 2011. Average wage salary would have been $43,500 upon retiring. And they—that family has paid into Social Security and Medicare some $360,000 in taxes, and that is including in a computed interest rate of a real interest rate of 2%. So not only do they pay in taxes, but we’re giving them credit for saving, as it were. And so at retirement, they would have had in $359,000 in their retirement account using Social Security and Medicare taxes. Now this couple can expect to receive over $800,000 in Social Security and medical benefits. And so this sort of middle-class, lower-middle-class family is getting benefits of about $450,000 in excess of what they’ve saved, if you will.
Bob Zadek: What a good deal! What a good deal!
Burton Abrams: That money wasn’t saved, and they still are going to get an additional $450,000 in benefits.
Bob Zadek: From whom? From whom do they get that money?
Burton Abrams: Well, there is the rub. They’re going to be getting that money from other potential retirees or savers who are not going to be getting anywhere near this kind of lucrative payback, in fact are going to lose money. And so look at this family. They are getting a retirement benefit of equivalent of $805,000. Now this family only earned $43,500 and back lower over time, middle salary, average salary. And what incentive is there for them to save? How could they have—in fact, they could never have saved that much money on that salary to come up with $805,000. They would have been saving 25% or 30% of their salary in order to have achieved that kind of retirement benefit.
So this is an example of the redistribution that’s behind the scenes. So we talk about this $43,500 family. Now they’re going to be—if they’re under retirement age, they’re going to be available and eligible for a substantial subsidy on the purchase of health insurance if their employer doesn’t provide them with a health insurance. So there’s so much redistribution going on, and most people don’t know how much redistribution is occurring and don’t quite understand the payback from their own Social Security payments and their Medicare payments. And there is a massive amount of redistribution that takes place. But worse yet is that all of this alleged saving—the couple basically says, “Well, I’ve got $800,000 banked to pay for medical and cash payments under Social Security”—but that money never was saved. That all has to come out of current taxes.
Bob Zadek: And it’s not—you know, when I read that in your book, I said to myself, being mindful of this politically powerful AARP, American Association of Retired Persons, I said to myself, “Why isn’t there a movement of the AAWP, American Association of Working Persons, who rise up in angry protest and say, ‘No, there are more of us than the AARP, we will not pay for them’?” There isn’t any countervailing political force to protect—there should be an association of people in their 20s who are saying, “No more. We have an important—we are a swing voter, we are a—we throw elections one way or the other, 2012 being an example, and we don’t want to pay for them.” But how docile, because they don’t know, the workers are and allow themselves to have their wealth transferred to somebody else is astonishing to me. Why—I wonder to myself—why aren’t they, the workers, more politically active? And I guess, Burt, the reason is, as you mention in your book, that there is this economic doctrine of concentrated benefit and dispersed cost. Each of us suffer a cost which is too small to get all walked up over, but the people receiving the benefit get huge benefits, and that’s worth fighting for. So the energy of the people receiving the benefits is far more intense than the energy of the people creating the benefit. And that’s what causes this political imbalance.
Burton Abrams: Bob, there are currently 63 million people receiving Social Security benefits. And there are many, many of this baby boomer generation, of which I’m one of them, that are nearing retirement and are—have paid our income taxes, have paid our Social Security and Medicare taxes all our lives in anticipation of getting some of this back. So the lobbying group is much larger than the 63 million. There may be 20 or 30 million more that are within a few years of retirement that are also saying, “Wait a minute, now why are we going to be the ones that—when the music stops, we are left without the chairs?” And so this is why it’s such a very difficult subject. What it appears to be happening, though, is that there’s going to be some kind of needs-based revision, means-testing for Social Security payments. So if you also saved privately and you have a good retirement income privately, you don’t need all of your Social Security, and so that’s going to be taken away. And I find this to be also a very counterproductive policy because now what message is that sending for people to save privately? You do a good job, you save privately, you want a nice retirement, and then you get kicked by having some of the Social Security you were expecting taken away from you. So it’s another disincentive for people to save privately. So it’s quite a mess, and it’s one of those problems that is not easily solved.
Medicare and Hidden Subsidies [34:32]
Bob Zadek: Now you also mention—you really have picked a lot of very popular programs. You pick Medicaid and Medicare as examples of economic folly, which means very bad, very bad, top ten bad economic decisions.
Burton Abrams: I must say it’s mostly the Medicare rather than Medicaid. President Obama has doubled the number of people that qualify for Medicaid, which means free—free medical care for the family and their children. And many of those new people that are coming online are above poverty level. The Medicaid that was originally set up was for people that were clearly in the poverty level and the benefits went primarily to their children. And so the idea was these are people that are in severe financial distress, severe economic distress. And I think most people would say that, you know, helping people out that are in really—that are destitute—that providing healthcare for them and their children is not the worst policy one can come up with. But that’s a type of welfare program.
The Medicare program is a retirement program. And it replaces private retirement planning for a government-paid-for retirement program. And here again is the problem: that money that gets put into that Medicare system is the money that is not saved for retirement and it winds up being consumed rather than saved, and this has a long-run detrimental effect on the economy. I don’t think you can say the same about Medicaid, unless it’s too generous and it encourages people to drop out of the labor force. But most of the conditions for Medicaid is that you’re really destitute. Most people would try to avoid being in that situation. So if a Medicaid program, a safety net for the very poorest in society is in place, it has its—it’s not a folly. You might dispute the magnitude of it or the conditions for qualifying for it, but I wouldn’t call that the folly. I think the Medicare is the real folly.
Bob Zadek: And Medicare—so Medicare was—first of all, Medicare is a wealth transfer from working Americans to retired Americans. And the strange thing is, as a class, as a demographic class, retired Americans are the wealthiest of the demographic classes broken down by age group classes. So it’s a little hard to justify transferring wealth from people who are productive and working and trying to accumulate a nest egg, to transfer wealth from them to those who comparatively don’t need it. And isn’t that—isn’t that what Medicare does?
Burton Abrams: Well, it—yes, it does transfer wealth. One of the problems is how do we measure wealth? You know, but most—many of these people that are receiving Medicare now have paid for that program. They think they’ve paid for it. They’ve paid for it at work and they’ve worked hard, they’ve paid their FICA insurance, and so this was part of the deal. And, you know, if they were lucky and then had a house and were able to pay off their house in retirement, they had anticipated a nice retirement. So now saying to them, because you own a house and you have some wealth, we’re not going to give you what was contractually agreed to. And I find that to be a little disturbing change of plan. You’re absolutely right, I’d rather have had this fully funded. There would be no problem here that if they had a large income in retirement, we have an income tax that would take back a certain portion of that income, the higher the income you have, the more that it would pull back. And so that would be a more reasonable outcome. But the way it is now, it’s just a—it’s almost like a class warfare that’s being set up, that the young people are paying taxes, transferring it to the elderly.
I don’t think we’re measuring income very well either here too. I mean, when I told you about the family that had one income earner and earned $43,000, the other adult in the household was actually doing work. They were doing work around the home, they were raising children, those were all—cooking meals, maybe shopping—these are all productive activities, but those are untaxed activities. And most people say, “Well, yeah, that’s fine, why should they be taxed?” But if you had two members that were out working, they’re both paying taxes, they’re paying twice as much Social Security tax as the one-income-earner family. They’re paying twice the income or more. And they’re not going to get twice the benefits. In fact, they’re going to receive far less than twice the benefits. And still they had to do the household chores, or hired someone to do the chores, or hired a nanny to take care of the kids or a babysitter. So they had more costs for working two jobs. And so it’s very complex. How do we measure income? What’s the best way to measure income? Do we measure wealth? Do we punish people with wealth in retirement by taking away their contractual payments that were set up by Social Security and Medicare? I’m a little uneasy with those kinds of policies.
Bob Zadek: Burt, at the risk of stress-testing our budding friendship, I will take issue with one sentence of what you said. You said, in describing the retirement people, they paid into the system, they paid Social Security and in this case Medicare taxes, therefore they’re kind of entitled to the benefits. Except for the fact that what they paid in is minuscule compared with what they took out. And the whole concept—and the same is true of Social Security—what you pay in is unrelated to what you get out. It’s not a break-even system. It is a pay-as-you-go system. So the people who went through this gesture of paying a few pennies of Medicare taxes, that shouldn’t entitle them—the word “entitle” is an important word—to the enormous benefits just because they paid a portion of the cost into the system. So they did not—they are not entitled to the enormous benefits they are getting simply because they paid a few pennies into the system.
Burton Abrams: Well, I would agree with you to keep our friendship alive, but that was true mostly for the earlier retirees. Like Harry and Bess Truman paid nothing into Medicare and they were cards number one and two in the Medicare system. What a great trivia question! They obviously were major beneficiaries of the system and they received much more in benefit than they paid in. But today, the retirees that are occurring have really paid in their working lives. And what’s reasonable to assume is not only to count the amount of taxes they paid in, but accrued interest, because that would have been what they would have received had they been doing this privately. And it turns out that they’re not receiving extraordinary payouts. So, you know, the early beneficiaries, the Ida Fullers and the Bess and Harry Trumans, they were the ones that received tremendous amount of payments, and I’ll be honest, my parents probably received far more than they paid into the system, as most of our parents did. And now to put the burden on the current group of retirees is somewhat—I don’t think it’s unfair. I don’t think they’ve paid in on average much more than they’re receiving in benefits, unless they’re both high-income earners. Now you get two members of a household that work outside the house and they’re both high-income earners, let’s say earning $65,000 a year each and earning average high over their lifetime, they get even less. They actually lose out on that because they’re paying in two sets of taxes, they get the same Medicare benefits as a low-income family that have two adults, they get the exact same Medicare benefit, except now Medicare is being somewhat means-tested, and so high income in retirement from your private savings, you have to pay more for Social—for Medicare, and your Social Security payments are likely to be reduced in the future. So I think those individuals are actually worse off as a result, and they’ve paid in.
Bob Zadek: Burt, you mentioned another area that I want to get to because you have so much in your book and we’re going to, as always, run out of time, which I hate. But you mentioned, and it’s important that my listeners understand the dynamics of this. So you mentioned what you call in your book “tax follies.” And they are specifically what is called “tax expenditures.” I hate the phrase, by the way. It’s not an expenditure, but it’s a way—we’re talking about things like charitable contributions and the mortgage interest deduction. Now you identify those as follies. So talk about—and we only have a few minutes left—what is the folly of these allowed deductions which cost the government, if you can—I hate this concept, but I’ll say it—cost the government lots of taxes by encouraging certain kinds of behavior.
Burton Abrams: These tax expenditures—and you’re absolutely right, it’s a very bad name—I would call them hidden subsidy programs. Good, good. That’s what they actually are. And let us—what if we had a tax system that just charged the regular income tax with no deductions, no at all, and you paid your taxes?
Bob Zadek: The flat tax or the fair tax, as they’re called.
Burton Abrams: Or even the current tax. And then at the end of the year, the government sees how you spent your money and says, “Oh, you spent your money, you spent $10,000 on interest expense on your mortgage. We’re going to send you a check for $4,000.” And put that as a line item on the budget. The budget, the federal budget would be a trillion dollars higher than it is now. But those—all of those subsidy programs are hidden because they never collect the tax. They merely allow you to deduct the expenditures from your income. And it’s a hidden subsidy. It’s no different than if the government actually wrote you a check for your marginal tax rate times the deduction that you took. And there is a trillion dollars in these subsidy programs.
Bob Zadek: And that means that—and you made such an important point, Burt, I want to make sure my friends out there don’t miss it. The point is that if the government would do the same thing economically—write a check to people with mortgages—that would be an expenditure, it would be a line item, and the country would say, “We are spending money as a welfare payment to homeowners.” But if you treat it as a tax deduction, it’s buried and nobody knows, which is why the tax law is so huge and complicated, because the government writes checks to people but bury it and nobody knows the amount.
Burton Abrams: And the defenders of this say it’s not an expenditure, it’s actually a tax deduction. So it’s like saying that if you pay farmers not to grow wheat and leave their land fallow, you could hide that as a tax expenditure too. Say you don’t have to pay taxes for the next ten years, and it would appear like a tax deduction, but it’s nothing more than a subsidy program. And if—let us see what these subsidy programs are and then we—when it’s transparent, then we can make a reasoned debate about whether it’s socially desirable to do that. A lot of countries do not allow people to deduct the interest on mortgages. That is a huge subsidy program that exists in the United States; it doesn’t exist in Canada. And the question is, do we want to spend those hundreds of billions of dollars in subsidy to people that buy homes? So my view is I’d rather have a tax system that’s transparent and where you can see what subsidies are and who’s getting them. We can’t see that. We don’t see it in Social Security—it’s extremely non-transparent. We don’t see it in the tax loopholes that we have that are really subsidy programs. And I think making it more transparent allows people to make better decisions about whether it’s socially desirable or not.
Improving the Process [48:51]
Bob Zadek: And Burt, in your book, towards the closing part of your book, you have a very important section which you identify as how to improve the process. And what was interesting to me, it was pure libertarianism. You mention—and you mention so much of—you mention the rule of law and well-defined property rights, good rules for the central bank—we didn’t get into the role of the Fed—economic freedom and get rid of money in politics. And all of those can be said and are in the news today. The complaint about Obamacare is—and the GM bailout and the abrogation of mortgage obligations during the so-called subprime mortgage crisis—the complaint was we lost the rule of law, we surrendered well-defined property rights, the central bank behaved very badly, and we are being deprived of economic freedom. So Burt, the lesson of your book, what I find was the almost thrilling takeaway, is how you talk about the 20th century, which was 14—it ended 14 years ago. But all of the lessons, all of the mistakes in your book are still happening today. And the public must read your book, learn from history so we can put a stop to it and we can get back to the vibrant economic America that we had more than a hundred years ago, and we seem to have lost our way. So I found, Burt, your contribution is it brings us back. It reminds us what we’re doing wrong. It reminds us the mistakes are continuing to happen and they must stop. Now Burt, we have only 30 seconds for you to say your parting message to our listeners.
Burton Abrams: Well, I don’t—I think you’ve said it all there, Bob, and I think we’ve got a great friendship going here. I hope so. And I hope people read the book and enjoy it and I’m trying to think of what are the next few follies that I’ll add to the next edition of the book.
Bob Zadek: Do you blog? Can the audience follow you?
Burton Abrams: Yes, I do. Occasionally I do a blog on the Independent Institute. They publish my op-ed pieces and also the blogs that I do on at the Independent Institute. So when you look up—
Bob Zadek: Burt, we’re going to have to go. Sorry to cut you off. We’re going to have to go to break right now. Thank you so much for giving us an hour of your valuable time and for sharing what you have learned about your book. This is Bob Zadek. I spent a wonderful hour with Burt Abrams. I’ll be back in 60 seconds. We’re going to talk about Tesla Motors and its fight with the automobile industry. It’s fun stuff. I’ll be back real short.
Tesla v. The Auto Dealer Cartel [52:45]
Bob Zadek: Welcome back to the Bob Zadek Show. I’m your host, Bob Zadek, every Sunday at 9:00. Thanks so much for listening. 800-345-5639 to join the conversation and share your point of view with my friends around the country. We are the show of ideas, not attitude. We are the only live libertarian talk radio show on the air all weekend. The other libertarians are out playing and I’m here chatting with my friends. What a wonderful way to spend a Sunday.
Tesla Motors. Interesting company, interesting approach to business, and very much in the news these days. Tesla Motors, as you probably know, is a relatively new, a startup automobile company. They manufacture automobiles in Northern California. What makes them special? Lots of things. The product is special and the means of selling their product is special. Why is the product special? Because they make an all-electric car. And their car has become very popular. It’s expensive up to now. Their first model was a two-seater, a very flashy-looking, very attractive, expensive two-seat roadster. It was very popular with the celebrity types. It was expensive, over $100,000. They have recently come out with a sedan which is more in the range of, I think, $70,000 or $80,000. Quite spiffy to look at, and the reports are that the car performs quite well and people who buy it really enjoy it.
This is not the car guys revisited. We are not going to talk about automobiles as such, because I know nothing about them. I grew up in New York. I didn’t have a car—I didn’t drive a car until my 18th birthday, and I wasn’t very good at driving it. And I didn’t own my own car until I was about 22 or 23. So I didn’t grow up in a car world. I recently found out how to put windshield washer fluid in my car, and I was boasting to all my friends that I accomplished that. So I’m not a car guy. We’re not going to talk about the mechanics of the car. I am a libertarian. I enjoy free-market economics, and therefore the economics of Tesla’s model and how it sells its product is what has caught my attention.
Now, a bit of background. When the car companies were being created—the original General Motors, Ford, Chrysler, and the 40 or 50 others that have since been absorbed or fallen by the wayside—they were selling cars through dealers. And they set up a system of automobile franchises. That is, they would go to a local business guy and give that local business guy a franchise: “You can sell Fords in this geographic area.” And there was a franchise agreement entered into. And in the franchise agreement, just like any other franchise, there were very strict rules on how the franchisee, the Ford dealer, can behave—the hours it had to be open and how big a sign had to be, all of these rules because the auto companies called the shots. And that was the system we have had from the 1920s or 1930s through and including this morning and ongoing.
And what happened was the franchisees started to accumulate some political power. They were in various communities very large collectors of sales tax, and that got them important. They were relatively big business in a community, and they would sponsor the Little League and other civic activities, and they therefore became the favorites of the Chamber of Commerce and local politicians. They employed a lot of people. So they accumulated political power. And the franchisees started to get the legislature to enact in various states, to enact laws to protect the franchisees from the big bad auto companies. And most states, because of the political power of franchisees, gave the franchisees most of what they wanted.
So that today, under state law, a manufacturer—Ford, Chrysler, GM—cannot terminate a franchise because it makes no economic sense. So if a business decision is, “Let’s terminate the franchise,” they can’t do it. They only can terminate for cause, which means politics has now interfered with the otherwise freedom of contract. They can’t get rid of a franchise if the geographic area has become less economically important. So even though the franchisee is not selling a whole lot of cars because people don’t live there anymore, they can’t terminate the franchise. They can’t terminate the franchise even if the contract expires. It has to continue, which means owners of franchises can pass the franchise off to their kids as part of their estate. And it becomes an asset. Even though it’s just a contract, but it’s a contract where the auto companies can’t terminate.
So the franchisees have lots of political power. As a result of which, the franchisees get to have a lot of equal bargaining power with the manufacturers, and they have lots of power vis-à-vis car buyers. So they have lots of power because the legislatures have given them power. And that’s the system we have today.
And now we—this franchise system interjects a middleman between the manufacturer and you and I, the car buyer. And if you want to draw a comparison, if you choose to buy a computer, you could go to Best Buy and there will be a store which will have 10 or 15 models of computer from 10 or 15 manufacturers. If you want to buy an Apple product, you have to go to an Apple Store because Apple has chosen to sell direct. Now, Ford is not allowed to sell direct. Why? Because state laws, being protective of franchisees, do not allow a car manufacturer to sell direct. So you cannot have the automobile manufacturer equivalent of Apple. You can’t have a Ford store owned by Ford the manufacturer. You have to go through a middleman.
Now, why do you and I care? Well, statistically, because there are auto dealers, it adds about $1,800 to the cost that you and I pay for a car. So we are forced to pay $1,800 as a subsidy, as a wealth transfer to car dealers. In other words, it’s about $25 billion with a “B” dollars a year. Now, that’s the environment that we have in terms of how cars are sold today.
Along comes Tesla, very creative car company. They say to themselves, “We do not need and we do not want to sell through franchisees. We want to follow the Apple model. We want to set up a Tesla store where employees of Tesla the manufacturer will interact directly with you and me.” Tesla says, “Our employees will not be paid on a commission basis, therefore they will not have pressure to sell cars. They are employees designed to explain how our technologically very different car works.” That’s what they want.
And the issue before us today is Tesla is running into litigation as the auto dealers and manufacturers are attempting to use our old friend crony capitalism to prevent Tesla from selling a car to you and me just the way Apple sells their products to you and me. Now, we have a soundbite, Raymond, which will set forth this quite nicely. Raymond, if you can play the soundbite: “Why franchise laws are needed.” I’d appreciate it.
Auto Dealer Representative (Clip): Now if you talk to auto dealers, they say basically these laws and the extra costs are really necessary. We need these state laws to protect our investment, not just the investment in our business, but our investment in the people. It’s a significant investment. And we signed up for it. Right. But—
Bob Zadek: So the car dealers say, “We need to have this protection because we invest a lot of money in building our business, and if the car dealers can sell direct, we lose our investment.” In other words, the car dealers are saying, “Please, legislature, protect us from competition. Oh, please protect our investment. We cannot compete. We need governmental protection.” Now, the Tesla approach—we have a soundbite, Raymond, the Musk approach.
Elon Musk (Clip): Taking a page from the Apple playbook, Musk is selling his product directly to consumers. No hard sell, no commission for employees, and uniform prices at every store. We don’t actually train people to sell in this sense; we actually train people to educate. So we always wanted it to be a really low-key, kind of friendly environment where we’re not constantly trying to close deals. If the public is overwhelmingly in favor of something and then the legislators vote against the overwhelming public interest, that’s a perversion of democracy. I mean, that’s the whole idea of democracy: you vote for people and then they carry out the will of the people. And in this case, they’re not doing that because the car dealers are such huge contributors to their political campaigns on the local level. Although there are some very powerful special interest groups that are trying their best to stop us, I feel like ultimately—maybe I’m being overly optimistic here—I think ultimately if you have the support of the people, then you will prevail.
Bob Zadek: The voice you heard was Elon Musk, who is the founder and CEO of Tesla Motors, explaining how he is engaged in a political battle just for the right to sell his cars to you and to me. Just for the right of protecting his buyers from what many perceive to be the high-pressure, if not unpleasant and deceitful tactics of salesmen at automobile franchises. Now, there have been statistics, and in polls recently taken, most people in the poll, the majority of people when asked to rank occupations that they do not trust, car salesmen statistically rank at the bottom, even below politicians. Even below politicians.
So the system—now, my own experience when I recently bought a car, I found the whole experience to be quite pleasant. I didn’t feel pressured, I didn’t feel like I was being conned. So my personal experience, of course, is a car salesman was quite a nice fellow and was honest and I found it to be pleasant. But most people, according to polls, do not. They feel there’s ritual, there is this game that car salesmen play, which they offer you a price and then they say, “I don’t think I can get my manager to go along with it,” and they go back and they have this fake drama before in the manager’s office in front of a window and you watch it going on and it seems like the salesman is fighting for you on your behalf and he comes out and he says, “I did it. I got my manager to agree.” And all of that is sort of pre-planned and it’s a ritual.
Now, that’s what the public perceives. This is not—this show is not about whether car dealers and car salesmen are good guys or bad guys. I don’t—some are and some aren’t. It’s not about that. But it is about how the political process has been lined up against a startup manufacturer who has a product that the public at least is interested in, and who has a decision how to sell his product directly, and how politicians and business people are using the political process to prevent Tesla Motors from selling in the model it wants to sell. And that’s what’s offensive to me.
Now, Tesla Motors is litigating state by state because these functions—these laws are state by state. They’re somewhat uniform but they’re not always uniform. And therefore, Tesla has to go into a state and litigate only for the right to set up its own Tesla store. Now, their stores are quite interesting. Since they cannot in some states sell cars directly—they have to sell through a franchise system and they do not have and will not have franchisees—what they do is quite interesting. They go into a mall, not to a “auto row” somewhere in some suburban area, they go into a mall. And in the mall is a Tesla store. And in the Tesla store is a Tesla employee who is not a salesman. He’s informed. Think of the techies that you interact with at the Apple Store. They are, in my experience, fun to deal with, high energy, smart, looking to help. I never get the feeling ever they’re trying to sell me anything. They’re just really cool employees and kids.
So you go into Tesla Motors and the employee will be there to explain the mechanics and the electronics of how Tesla works and give you all the information you need to help you make a decision. There will often be a car that you can test drive, or you can make an appointment to test drive a car. So right now it sort of has the look and feel of a car dealer. However, now you say, “You know, I’ll do it. I’ll buy a Tesla.” The employee cannot take your order because he’d be selling and he’s not allowed to do that. But rather, he leads you over to a computer terminal and you log in and you buy the car online just as you would if you were home. So you are not buying the car from the dealer directly because there is no dealer. You’re buying the car online. And that is what Tesla is doing in some states to get around the prohibition of selling cars without going through a franchise system.
Now, the car—what’s interesting is General Motors is scared to death. Why are they scared to death? Because their whole business model is being called into question. And they are seeking political help yet again. The cowards at General Motors who cannot make or sell a car without government help are running to the government yet again, those crony cowards. And they are saying, “Please, legislature, require Tesla to play by the same rules that we have to play by and require Tesla to sell through franchisees, adding $1,800 to the cost of the car that you and I have to pay in order to keep these intermediaries alive.” How offensive is that? Can’t General Motors ever learn that if they’re going to make money, they have to make money not through legislative activities, but by learning how to make and sell a darn car and stop running to the courts for help? It is so offensive to me. 800-345-5639 if you share my outrage at how these car dealers and car manufacturers go running like helpless infants into the courts because they can’t make money in the marketplace, they have to make money in the halls of the legislature. It’s truly offensive.
And what’s also interesting, one of the most recent fights and what caused this to come to my attention is there was a battle in, of all places, New Jersey with Governor Christie, who of course has his own automobile-related problems as in the imposed traffic shutdown on the George Washington Bridge that Christie either did or did not know about, depending upon whether you believe the investigation was a whitewash or an honest investigation of his activities. That’s for another time and another place. But not only does Christie have his automobile problems with the George Washington Bridge, but he recently had a spat with Tesla Motors. It seems that Tesla was given temporary permission to set up a Tesla store in the model that I described earlier. And he was selling—he, they were selling cars at the mall and making a few bucks and selling a few cars. And their temporary license came up for renewal, and the automobile dealers pressured Christie, and Christie’s Motor Vehicle Department shut down Tesla Motors and said, “No more. We’re getting a lot of pressure,” and Tesla was required to stop selling so that people in New Jersey could not buy Tesla cars anymore. That’s now in the courts in New Jersey. But that was the most recent event that brought this to my attention.
It’s sort of interesting in a somewhat strange way. In the New Jersey fight between Tesla Motors and Governor Christie and his administration, notice the perversion of the usual good guys and bad guys. In Tesla v. New Jersey, we have a Northern California capitalist—now there’s a rare breed, a Northern California capitalist—which is shut down by an East Coast Republican, or at least a RINO Republican. So how interesting it is and how again the old saw that politics make strange bedfellows is true.
This battle will be ongoing for some time. To me, I am quite unsympathetic to the position of the automobile franchisees. I think they are not deserving of any protection whatsoever. If the economic model is failed, if car dealers can save you and me money by selling direct, well then they have been replaced by something else. That’s the way capitalism works. It is called in the world of free-market capitalism “creative destruction,” which means in a free-market system, there comes a time that certain economic models are no longer viable and they die to be replaced by another economic model. And it is not the task of government to protect a dying, failed, or outmoded economic model, in this case the economic model being the automobile franchise system.
Now, some people have observed that the model is necessary because if you buy a Tesla car and if there are no dealers, then you worry about who’s going to repair it. There are no dealers. Well, to me that is an issue for Tesla Motors and its buyers to work out. It is not how public policy should be driven. It is not the job of government to worry who’s going to fix your car. Let the marketplace decide. If people are willing to buy a Tesla car and figure out if there is a risk of getting it repaired, that is theirs to take. But let the free market take hold. Do not have government interfere with the operation of the free market. The fact that the franchisees might go out of business is not the concern of government. I say this with apologies to all the very nice people out there who own or work for automobile franchises. I mean you no animus. The fact is the free market is the free market, and what’s best for consumers should be the only determining factor. And I am not willing to pay $800 more for a car just so you can have a job and have your name on a Little League team. 800-345-5639 if you believe I’m being a tad heartless.
Foreign Policy and the Ukraine Crisis [77:33]
Bob Zadek: In the parting moments of our show, I guess I’d like to spend a few minutes talking about the issue—the non-economic issue in the Ukraine. It is a very interesting issue because it forces us to make a decision in very tangible terms about how we want our foreign policy to be formulated. In short, do we as a country, as a matter of our foreign policy, do we care at all about what happens to the Ukraine? And if we do care, why? What is the standard by which we determine what we care about and what we don’t care about in foreign policy?
To me, the standard is bell-clear. We care about matters of foreign policy that directly—underline directly—that directly affect the protection of the United States. If we are not directly affected, then we emphatically do not care. Every country, every person should operate in furtherance of their rational self-interest. And our rational self-interest, I believe, is unaffected by what happened in Crimea and what happened in Ukraine.
Now, if it turns out that there is a threat to our national well-being, a direct threat—not some vague, amorphous threat sometime in the future—if there is a direct threat, then of course we care. But it has to be direct, and it’s a matter of how you apply the word “directly.” If there’s no direct threat, then we don’t care. And whatever happens out there in the world is not of our concern. And the message our foreign policy should be is that if you threaten us directly, you will suffer consequences. But other than that, we are simply one country in the world operating for the benefit of American citizens and for the collective benefit, direct benefit of the country. And other than that, that should be our foreign policy. That is—in libertarian dogma, that is the non-aggression principle. If there is no aggression against us, we exert no aggression against somebody else. It’s a very simple foreign policy, easy to understand, easy to apply, and one that will inure to our economic and geopolitical well-being.
Thanks so much for listening. Bob Zadek, I’ll be back next Sunday with another 90 minutes of ideas, not attitude. Thanks so much for listening. Enjoy your Sunday.