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.