No, They Can't: Why Government Fails-But Individuals Succeed

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“FIXING” THE ECONOMY

We spend too much time waiting for orders—and money—from Washington.

This happens because people think “something must be done” (by government) whenever bad things happen. When the housing bubble burst and stock prices tanked, President Obama told us: “The consensus is this: We have to do whatever it takes to get this economy moving again—we’re going to have to spend money now to stimulate the economy. . . .”

The idea, always implicit in the government’s thinking, but made explicit in the past few years, was that whatever the government spends money on will create a “multiplier effect”—that is, each dollar spent by the government will somehow generate more than a dollar’s worth of economic activity. That activity will create jobs.

The recession gave politicians a license to do what they wanted to do all along: spend. The usual checks on extravagance, weak as they are, were washed away. Budgets? We’ll worry about that later. Inflation? We’ll worry about that later.

WHAT INTUITION TEMPTS US TO BELIEVE:

Government can “get the economy moving again.”

WHAT REALITY TAUGHT ME:

Government does not spend money better than individuals do.

A true free market doesn’t require much. It needs property rights, so no one can take your stuff. Then, people trade property to their mutual advantage, life never being perfect, but generally improving with each trade. Resources move around without the need for a central, coercive government telling people which resources should go where—or telling them that they must get permission to do what they think advantageous.

Ever see the website that tells the story of the guy who starts with a paper clip and trades his way up to a house? It was just a stunt, but that’s roughly what happens when the market is left alone. People combine resources in new ways to create wealth—and, in the process, jobs.

When President Obama took office, he promised to “save or create” 3.5 million jobs. Should we credit him for saving any jobs? He says that unemployment would be worse without his stimulus. But how can we know? I assume his spending on expensive government jobs crowded out better, more sustainable jobs.

If the economy recovers and President Obama claims he caused that, it wouldn’t be the first time a “leader” ran in front of a crowd and claimed to have led the way. But politicians don’t deserve credit for what free people do.

Given time, an economy, unless crippled by government intervention, will regenerate itself. The Keynesians in the administration said government had to “jump-start” the economy because businesses weren’t hiring. But an economy is not a machine that needs jump-starting. The economy is people who have objectives they want to achieve.

For now, the big-government media are baffled that big spending hasn’t paid off. “Companies are sitting on billions of dollars of cash. And still, they’ve yet to amp up hiring or make major investment,” wrote the Washington Post.

C’mon, Post, don’t blame the companies. CEOs don’t just wake up one day and decide not to hire. They hold back, quite reasonably, because they don’t know what obstacles they’ll face next. Will activist government prop up housing prices? Impose a new health-care mandate? Forbid me to move to South Carolina?

When rules are unpredictable or unintelligible (is the investment firm you use in compliance with the 2,300-page Dodd-Frank finance regulatory act?), then businesses hesitate to hire. When new employees are threats because byzantine Labor Department regulations make it impossible to fire them, businesses hesitate to hire. When tax increases lie ahead, businesses hesitate to hire. I don’t blame them.

Nothing more effectively freezes business than what historian Robert Higgs calls “regime uncertainty.”

WHAT INTUITION TEMPTS US TO BELIEVE:

Government creates good things.

WHAT REALITY TAUGHT ME:

We see what government creates—but don’t see what might have existed instead.

Despite politicians’ talk of “giving” money to this or that (remember those tax rebate checks with President George W. Bush’s name emblazoned on them?), government has no money of its own. It has to take it from the private sector. Grabbing those scarce resources stifles the real economy.

One of the most important questions in politics should be: “Would the private sector have done better things with that money?” (And we should ask a similar question about the decision-making authority government takes from us every time it regulates.)

A healthy economy does not just create jobs-of-any-kind, it creates productive jobs. The pharaohs of ancient Egypt created plenty of jobs building pyramids, but who knows how much better the lives of ancient Egyptians (especially the slaves) might have been had they been free to engage in other work? They would all have had better housing, more food, or snazzier headdresses. Even as smart a person as economist John Maynard Keynes seemed to forget about that when he wrote in his General Theory back in 1936, “Pyramid-building, earthquakes, even wars may serve to increase wealth.”

By that logic, government could create full employment tomorrow by outlawing machines. Think of all the work there’d be to do then! Or government could hire people to dig holes and then fill them up (sadly, some government work resembles that).

Think about the two other methods to “increase wealth” that Keynes lumped in with pyramid-building: earthquakes and war. Now, sure, after a war or earthquake, there’s plenty of construction to be done. After the Haitian earthquake, Nancy Pelosi actually said, “I think that this can be an opportunity for a real boom economy in Haiti.” New York Times columnist Paul Krugman made a similar error. On CNN, he said if “space aliens were planning to attack and we needed a massive buildup to counter the space alien threat . . . this slump would be over in eighteen months.” Before that, he’d said the 9/11 attacks would be good for the economy.

This is Keynesian cluelessness at its worst. Sure, rebuilding after 9/11 or a Mars invasion would be good for the economy—but only if you ignore the fact that the same money and effort could have been used to make Crock-Pots, save for college, invest in Apple, or for countless other things.

Isn’t it obvious that those same workers could have done more productive work—with the resulting overall standard of living higher as a result? Does anyone really wish for earthquakes? There is something very wrong with mainstream politics and economics if some of its most respected practitioners overlook this point.

The economic philosopher Frédéric Bastiat called their mistake the “broken window fallacy.” If I break your window, it’s easy to see that I’ve given work to a glass-maker. But what we don’t see or think about is this: you would have done something else with the money you paid the glass-maker. That money would have created different jobs.

Reporters get confused by this. We favor government projects because we cover what is seen, not the unseen. The beneficiaries of the politicians’ conceit are visible. We see the windmills, solar farms, and housing subdivisions. The media see workers who got a raise from the new minimum wage. But we cannot see what didn’t happen because politicians acted. I cannot photograph the store that didn’t open because taxes went to homebuilders and solar farms. I cannot interview the worker never offered a job because the minimum wage priced him out of the market. I don’t even know who he is.

Creating jobs is not difficult for government. What is difficult is creating jobs that produce wealth.

As I write this, the New York Times reports that the Dodd-Frank regulation has been “a boon” to lawyers and corporate accountants. The article actually calls the regulations an “unofficial jobs creation act.”

Give me a break. Pyramids, broken windows, and extra accounting work do not produce wealth.

Under President Obama’s “stimulus” plan, jobs were created to weatherize buildings, build wind turbines, and repair roads. Politicians claimed these were valuable projects. But outside the market process, there is no way to know whether those were better uses of scarce capital than what would have been produced had the money been left in the private economy.

Since government services are funded through the compulsion of taxes, they have no market price. Without market prices, we have no way of knowing the importance that free people place on those services. We cannot calculate how much wealth we lose when politicians allocate resources.

Underlying President Obama’s (and Paul Krugman’s) call for more “stimulus” spending is the largely unexamined assumption that government spending will be more productive than spending by you and me.

But we don’t just throw our money off a cliff. We buy things. We invest, give to charity, save for college, save for retirement. All that is useful. Individuals do all kinds of things the government pretends that only it can do.

Krugman seems to think we’re all just goofing off here in the private sector, whereas the president and his wise advisers will steer money to truly productive uses, just as John Maynard Keynes believed back in Franklin D. Roosevelt’s day. Progressives say that FDR helped pull America out of the Great Depression. But his programs probably lengthened the Depression, even generating a depression within the Depression in 1937. Roosevelt’s Treasury secretary did complain: “After eight years of this administration we have just as much unemployment as when we started.” Sound familiar?

Amity Shlaes shows in her book The Forgotten Man that the New Deal failed because it interfered with the market’s natural regenerative processes. By creating uncertainty about what government would do next, government made businesses afraid to invest and hire. Again, sound familiar? Why expand if you fear new taxes? If you can’t even understand the rules?

WHAT INTUITION TEMPTS US TO BELIEVE:

It’s good for government to encourage home ownership.

WHAT REALITY TAUGHT ME:

When government interferes in a market . . . bad things happen.

U.S. politicians want to “support” the housing market. They’ve created housing subsidies, mortgage-backing Fannie Mae and Freddie Mac, the Federal Housing Administration, and zero down payments. What great ideas! The subsidies and loan guarantees would help more people buy homes, and since homeowners are more responsible citizens, everything will be better.

You’ve seen the result.

By the way, Canada has no Fannie, Freddie, FHA, or zero down payment loans, yet Canadians have a higher rate of home ownership than we.

The U.S. housing bubble was created by subsidies and regulations—including laws encouraging subprime mortgages and increased lending in neighborhoods with high loan default rates. Far from needing government to step in and “fix” the economy, housing is a mess precisely because of earlier government interference. Easy mortgage terms and guarantees contrived a housing boom that could not be sustained.

The media didn’t help. We interviewed people who said home values would always go up.

At 20/20, at the peak of the boom, I was embarrassed to anchor shows that my boss called “real estate porn.” Porn, because people love to look at elegant houses and fantasize. These shows rated well. In one, a promoter gave advice like “You can’t get rich if you’re a renter . . . even if you have credit card debt, the banks will loan you money.” 20/20’s producer introduced him to a couple who, sensibly, worried about “getting in over their heads.” The so-called expert said “no problem” and steered them toward a mortgage and home ownership.

I didn’t protest, but I should have. I chickened out because my ideas already made me something of an outcast at ABC. I had to pick my battles. And of course, maybe I was wrong. Maybe housing prices would rise forever. At the time, people said they would.

Then came the bust.

Now the FHA has taxpayers on the hook for almost a trillion dollars in home loan guarantees, the Federal Reserve has bought a trillion dollars’ worth of dubious mortgage securities, and taxpayers have already given Fannie and Freddie a $125 billion bailout, with Congress promising “unlimited” further assistance. Remember when Fannie CEO Franklin Raines told us: “It is private capital that is at risk, not the taxpayer’s. . . . We do not receive a nickel of federal money”?

When the housing bubble burst, President Obama insisted that the subsequent turmoil was “a stark reminder of the failures of . . . an economic philosophy that sees any regulation at all as unwise and unnecessary.” In other words, George W. Bush, who spent more money on regulation and hired more new regulators than any president before him, was somehow a deregulator? Then capitalists ran amok because benevolent government wasn’t there to mind the store?

Nonsense. The real culprits were politicians of both parties, who for years relieved big companies of the responsibility that market discipline imposes. The promise—explicit or implicit—to bail out companies deemed “too big to fail” destroys market discipline. That invites recklessness. Home ownership, all else being equal, is a good thing. But when government lumbers into the market and subsidizes folly, that’s a very bad thing.

WHAT INTUITION TEMPTS US TO BELIEVE:

Some institutions are too big to fail.

WHAT REALITY TAUGHT ME:

Failure makes markets work.

After the fall of Lehman Brothers in September 2008, everybody said we had to bail out American International Group (AIG) and the banks. Even the Wall Street Journal editorial page said so. So did those brilliant investment bankers. They must be brilliant, I thought, because they’re so rich; they probably understand markets in ways that I don’t.

When I was skeptical about bailouts, they scoffed. There was no doubt, they said, that our leaders had to “create liquidity, restore confidence, give banks time to get their balance sheets in order.”

It still seemed wrong to me. Businesses that make bad decisions should fail. That’s how capitalism works. Economists call it “creative destruction.” That allows markets to adjust to real price signals. If housing prices crash, so be it. They had risen so fast. Probably they were ridiculously high. Now maybe prices are back to realistic levels. I don’t know. The media don’t know. The Fed doesn’t know. Only the market knows.

A price is neither good nor bad; it is simply information—it tells buyers and sellers how much people value a particular product. No good comes from manipulating prices. That only deceives the market.

The media portrayed falling home prices as a tragedy. Why? There were winners and losers. Speculators lost, but renters who saved responsibly could now afford homes.

If some banks fail, some investors lose big, but that’s how markets work. America has a safety net to protect the truly needy. Bank deposits are insured up to $250,000. If you lost millions, that’s sad for you, but your losses will remind you, and others, to diversify next time.

So why the eagerness to bail out banks?

I confronted economist Steve Moore of the editorial board of the Wall Street Journal. I told him I didn’t understand why the Journal ran pro-bailout columns with titles like “Secretary Paulson Makes the Right Call.” He said something about a need to “calm the markets.” But he didn’t sound convinced. Months later, he said he was embarrassed that he supported the bailouts. “I want to apologize,” he said. “I drank the Kool-Aid.”

Panic produces that Kool-Aid. The Journal’s editors live and work among people who are at the center of the storm. The editors’ judgment is right about almost everything, but when Lehman fails and the market dives, friends call them to shriek, “It’s terrible! We’re losing everything! There’s going to be a global depression. Washington has to do something!”

I was relieved when the Journal ran an op-ed by George Mason University economist Russ Roberts with the headline “Don’t Just Do Something, Stand There.” Roberts correctly argued that politicians can’t wisely spend the trillions they commit, “even if they want to. . . . It is time to let the imprudent fail and the prudent pick up the bargains.”

But most of the media were in the center of the “do-something” panic. Our 401(k)s had been clobbered. The financial “experts” said government “had” to act.

Experts often believe government “has” to act. During the Y2K panic, “technology experts” said government “had” to act. The global warming scientists said the same thing during the global warming hysteria, as did the swine flu doctors, AIDS activists, flesh-eating-bacteria scientists, terrorism gurus, and so on. People close to a problem want big-government action. Many believe that if we don’t get it, disaster will happen. They don’t fake panic just to get government funds (well, maybe some, but most are genuinely superscared). But the flesh-eating-bacteria scientists and global warming alarmists don’t have the power to seize and spend trillions of your dollars. Treasury secretaries Hank Paulson and Tim Geithner did.

Both say that the world would now be in worse shape had they not thrown your money around. Again, how do we know? What if the government cut loose GM, Citigroup, and the others, forcing them to do what other businesses do in hard times: renegotiate with creditors and revalue assets? Wouldn’t prices have found a more solid floor? Wouldn’t scarce resources have flowed to more valuable uses? We’ll never know.

What we’ve got from the bailouts is worse than a temporary “systemic collapse.” We have big taxpayer losses, artificially propped-up prices, and Fannie and Freddie and the FHA putting taxpayers further at risk by continuing to subsidize big loans. We also have the moral hazard (the decreased pressure to avoid reckless behavior) and economic distortion created by declaring some institutions “too big to fail.” Those banks today, by the way, are even bigger than they were before the bailouts. Dodd-Frank didn’t even address that problem. In fact, the bailouts gave “too big” banks an advantage over smaller competitors because people prefer to park their money in a bank that’s “too big to fail.”

Jim Rogers, the successful investor and author, puts it well: “Why are 300 million Americans having to pay for Citibank’s mistakes? The way the system is supposed to work [is this]: People fail. And then the competent people take over the assets from the failed people, and then you start again with a new stronger base. What we’re doing this time is . . . taking the assets from the competent people, giving them to the incompetent people, and saying, ‘OK, now you can compete with the competent people.’ So everybody’s weakened: The whole nation is weakened.”

Had I been working at Fox Business when the bailouts began, I could have at least reported on it. I could have asked Hank Paulson or his colleagues about the moral hazard. I could have asked about panicky phone calls he got from his former coworkers at Goldman Sachs. I could have asked why AIG deserved my money but Lehman didn’t, and what right he had to force healthy banks to take bailout money. I would have tried to ask Tim Geithner why, if taxing the rich is so good, he didn’t pay thirty-five thousand dollars of his own taxes.

But I couldn’t do any of it because I was still at 20/20. My bosses had no interest in my asking whether it was smart for government to try to micromanage the economy. The same week that the House approved the stimulus plan and jobless claims hit an all-time high, 20/20 devoted our whole show to “Seduction: Why Him? Why Her?”

After Obama was elected, my colleagues seemed even less interested in criticizing government. When federal spending increased to a degree that I hadn’t even thought possible, my colleagues believed that this “stimulus” would “create jobs.” But most didn’t have much time to think about it. They were busy reporting on claims of sexual harassment at Starbucks.

When the millions of new jobs didn’t appear, Paul Krugman said that the initial plan to spend $500 billion was too small, and that even Franklin Roosevelt had been too timid: “the reason for FDR’s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious.”

Cautious? FDR began the modern transformation of the United States from an individualistic society with relatively little government bureaucracy into the society we have today, which takes for granted that the most important things in life—health, retirement, education, science, safety, poverty relief, and more—will be largely run and subsidized by government. This was enormous.

The stimulus was not timid, either.

President Obama said, “There is no disagreement that we need action by our government, a recovery plan that will help to jump-start the economy.” But there was plenty of disagreement. The Cato Institute ran a full-page newspaper ad signed by more than two hundred economists, including Nobel laureates, stating: “We the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s ‘lost decade’ in the 1990s. . . . Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.”

Many economists thought the stimulus spending was a terrible mistake. But the mainstream media weren’t interested.

WHAT INTUITION TEMPTS US TO BELIEVE:

Government officials act with the public good at heart.

WHAT REALITY TAUGHT ME:

Government officials act in their self-interest just like the rest of us—but when they do, it’s a bigger problem because government’s customers cannot take their business elsewhere.

So far I’ve referred to the hypothetical case in which well-intended government tries to create useful economic activity (but fails to allocate resources as efficiently as the private sector would). But let’s not pretend that political processes are devoid of, well, politics.

After Obama took office, a little window company in California, Serious Materials, got a lot of media attention. Fortune magazine said Serious was “booming.” Inc. magazine did a cover story, titled “How to Build a Great Company,” that said Serious was “on a roll.”

The company sure seemed to be. Vice President Joe Biden turned up at the opening of a Serious plant to say: “You are not just churning out windows; you are making some of the most energy-efficient windows in the world. I would argue the most energy-efficient windows in the world.” Biden laid it on pretty thick.

And why do I mention only the vice president? President Obama himself singled the company out: “Serious Materials . . . will now have a new mission: producing some of the most energy-efficient windows in the world.” How many companies get endorsed by the president and the vice president of the United States?

Rachel Maddow, usually not a big promoter of business, gushed that Serious was an example of “stimulus working.”

When Obama announced a new set of tax credits for so-called green companies, one window company was on the list: Serious Materials. Why? Serious’s products are not particularly special. Other companies make similar windows.

But Serious had one thing that definitely made it special: connections. Its executives gave money to Obama’s campaign. Of course, many companies did that. But the Freedom Foundation of Minnesota pointed out something else: Cathy Zoi, an Energy Department official who oversaw $16.8 billion in stimulus funds—much of it for weatherization programs that benefit Serious—happened to be the wife of Robin Roy, vice president of “policy” at Serious Materials.

Of all the window companies in America, maybe it’s a coincidence that the one that gets presidential and vice presidential attention and a special tax credit is one whose executives give thousands of dollars to the Obama campaign and one where the policy officer is married to the Energy Department’s weatherization boss.

Or maybe not.

As far as I know, there’s nothing illegal about this. Zoi (who now works for George Soros) disclosed her marriage and said, “I will not participate . . . in any particular matter that has a direct and predictable effect on [my financial interests].” But it sure seems wrong to me.

When we asked Serious Materials about all this, a spokeswoman said that my story was “full of lies.” But she wouldn’t say what those lies were.

On its website, Serious Materials said it did not get a taxpayer subsidy. But that’s just playing with terms. What it got was a tax credit, an opportunity that its competitors did not get: to keep money it would have paid in taxes. Let’s not be misled.

If government wants job creation, it would simplify regulations and cut taxes across the board. They wouldn’t single out certain companies for special treatment. Why should there be favoritism?

Because politicians like it. Big, complicated government gives them opportunities to do favors for their friends.

WHAT INTUITION TEMPTS US TO BELIEVE:

Capitalism is corrupt because big companies use their influence to manipulate the system.

WHAT REALITY TAUGHT ME:

That’s not capitalism. That’s crapitalism.

Crony capitalism—some call it “crapitalism”—is the economic system in which the marketplace is substantially shaped by a cozy relationship between government and business. Think Serious Materials. Under crony capitalism, government bestows privileges on some companies: import restrictions, bailouts, subsidies, loan guarantees, etc. In a true free market, a business has no more power to use government to gain advantage over competitors than you have to restrict your neighbors from throwing more-entertaining parties than yours.

Crony capitalism is as old as the republic itself. Congress’s first act in 1789—on July 4, no less—was a tariff on foreign goods passed to protect influential American businesses, like cotton growers.

Since then, American capitalism has become more perverted by special deals. One of President George W. Bush’s first acts upon entering office was to increase tariffs on steel to help out the steel industry. Crapitalism.

Crony capitalism, in the form of government bailouts, saved (temporarily?) General Motors and Chrysler. Legislators shouted, “These companies are too big to let them fail!” President Obama’s cronies, the United Auto Workers, got preferential treatment over other creditors. (This was even more outrageous because the union’s rigid work rules and fat pension deals helped bankrupt the companies.) If free-market capitalism is a private profit-and-loss system, crony capitalism is a private-profit and public-loss system. Companies keep profits but use government to stick the taxpayer with losses. Clever trick.

The public has become suspicious of bailouts, but the role that regulation plays in crapitalism is unappreciated. People assume that regulation tames corporations. That’s the intent, but regulation soon becomes a way for some businesses to gain advantage. It’s why Philip Morris joined the “war on tobacco” and General Motors pushes for clean-air legislation.

As economist Bruce Yandle writes in his famous article “Bootleggers and Baptists,” just as bootleggers loved alcohol prohibition because the law made them rich, “[i]ndustry support of regulation is not rare at all; indeed it is the norm.”

Heavy regulation helps bigger businesses crush competitors who might offer us better deals. Ask yourself which are more likely to be hampered by vigorous regulatory standards: entrenched corporations, with their big legal and accounting departments, or start-ups? When government decides to set “standards” for an industry, to whom will it turn for expertise? Brilliant newcomers? No, government doesn’t even know who they are. The older, lazier, bigger, arthritic businesses suggest the rules and make sure that their way is the only legal way.

This kills innovation. It’s hard to build a better mousetrap if regulations decree that only the existing one fits the codes.

WHAT INTUITION TEMPTS US TO BELIEVE:

Government should use the tax code to reward good behavior.

WHAT REALITY TAUGHT ME:

Show me a tax break, and I will show you results that even the program’s advocates wouldn’t like.

Our emotions tell us to watch for politicians’ motives. If they give pretty speeches that sound compassionate, surely their policies will be helpful.

But even the most well-intended policies have unintended consequences. For example, in the abstract, creating tax incentives to support “family-based agriculture” sounds nice. But such incentives distort markets in nasty ways.

Twenty-five years ago, there were about 150 alpacas in America. Now there are probably 150,000. One website advertises: “Have Uncle Sam Help You Buy Your Alpacas.”

Rose Mogerman raises alpacas in New Jersey. When I met her, dozens of alpacas were in her backyard. She told me that without the tax break, “I might have had two.”

Alpacas are cute. Rose sells fiber made from their fleece. But selling fleece doesn’t explain the growth in alpaca raising. At one auction, half-ownership of one male alpaca sold for $750,000. Economists at the University of California, Davis call the alpaca boom a speculative bubble. “Values wildly in excess of even the most optimistic scenarios,” wrote Tina L. Saitone and Richard J. Sexton in an article titled “Alpaca Lies? Speculative Bubbles in Agriculture.” They argue that “current prices are not supportable by economic fundamentals and, thus, are not sustainable.”

In other words, tax breaks led people to overinvest, bid up prices, and produce more animals than their fleece would demand. Kind of like the housing bubble. Alpaca breeders wrote me angry emails when I said that on TV, but recently on an alpaca Web forum others posted comments like these:

“I’m getting few hits and zero sales on quality girls. I’ve been lucky to sell a couple of males for $250 each.”

“I am so glad we did not purchase on borrowed money [the way] some folks did.”

Big government builds bubbles.

Another example: Electric vehicles are touted as “green” technology. So Congressman Charles Rangel pushed through a tax credit for electric vehicles. Ironically, the National Research Council points out that electric cars—because ultimately they plug into coal-fired plants—may be worse for the environment. But that didn’t deter Congress.

My Fox colleague Mike Huckabee and I were unintended beneficiaries of Rangel’s dumb law. When a golf cart dealer advertised that his $6,000 carts were “free” because of the $6,000 tax credit, Huckabee and I promptly bought carts. A friend of his bought seven. (I gave mine to the charity that helps manage Central Park.)

It’s possible that the credits led to a gain in electric car research, but I doubt it. It’s definite that the deal diverted resources that might have gone to solve real pollution problems, cure cancer, or—well, we’ll never know how those resources might have been used. What we do know is that the credit helped the golf cart industry. My dealer sold ten thousand.

At least the golf cart credit expired. Most government handouts never go away. If people propose cutting them, those benefiting from the deal, no matter how absurd it is, scream louder than the rest of us. After all, we’re busy dealing with our own lives. Most of us don’t even know that we’re being fleeced.

WHAT INTUITION TEMPTS US TO BELIEVE:

If auto companies are in trouble, government should encourage the purchase of new cars.

WHAT REALITY TAUGHT ME:

Wealth will be destroyed, and poor people will be hurt.

Cash for Clunkers was another program that impressed the economic illiterates. Congress said the program would “stimulate the economy” and “green the world” by giving people $3,000 to junk their old car and buy a new one. Good for consumers—good for car businesses! Greening the world was a bonus.

As usual, the program was judged only by its first and most visible consequences, violating Bastiat’s broken window fallacy, which Henry Hazlitt adapts in his classic book Economics in One Lesson: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

Cash for Clunkers did give the auto industry a boost. “Manufacturing plants have added shifts!” bragged Secretary of Transportation Ray LaHood. “Moribund showrooms were brought back to life, and consumers bought fuel-efficient cars that will save them money and improve the environment!”

It would be more accurate to say some consumers and workers benefited, but most of us lost, and the environment didn’t notice.

Let’s start at the beginning: The government paid car owners $3 billion to trade in old cars. But the government doesn’t have $3 billion to hand out. It borrows the money, which reduces the amount of money available for other investments. Moreover, the government must either raise taxes in the future to pay back the principal and interest—or the Federal Reserve will monetize the debt through inflation. Either way, we pay.

That isn’t all. Those car buyers were either going to trade in their used cars soon or they weren’t. If they were, Cash for Clunkers simply billed taxpayers for what car buyers would have funded. In the case of buyers who planned to keep their cars longer, the program imposed less visible costs: Without government’s bribe, car consumers would have bought other things—computers, washing machines, televisions. Sellers of those products lost those sales.

Mechanics who would have serviced the used cars lost business. Nor should we forget low-income people who depend on the used car market. Cash for Clunkers destroyed so many used cars that the average price of used cars rose $1,800. And politicians claim they help the poor.

And there is something revolting about the government subsidizing the destruction of useful things. It’s like the New Deal policy of killing piglets and pouring milk down sewers to keep food prices up. Leave it to politicians to think we can prosper by obliterating wealth.

Why are we stupid enough to believe such benefits can be pulled out of a hat? For the same reason we fall for magic tricks: our brains are not designed to think thoroughly—when the story right before our eyes looks so appealingly simple.

WHAT INTUITION TEMPTS US TO BELIEVE:

A new stadium will act as a giant jobs program.

WHAT REALITY TAUGHT ME:

The central planners always say that, and they’re almost always wrong.

Politicians love shiny new projects like sports stadiums. They get a big, easily photographed, and heavily reported ribbon-cutting ceremony. They give reporters “fact” sheets about how many jobs will be created. The fact sheets are prepared by consultants loyal to sports tycoons and the politicians. They make optimistic promises. The actual stadiums don’t pay the taxpayers back. Many make neighborhoods poorer.

Reporters focus on what they see: the new stadium. They ignore the smaller businesses that were taxed—sometimes condemned and bulldozed—to fund the project. A baseball stadium brings in fans only eighty-one days per year (only forty-one home games for basketball, just eight for football). There are also a few concerts and special events, but most days the stadium is empty. Neighborhood business owners who were conned into thinking that the new stadium would help them are surprised and poorer. The sports tycoons are richer. The politicians move on to their next boondoggle.

In the 1990s, economically ailing Cleveland built two new sports facilities. They were supposed to revitalize the economy. But $275 million worth of taxes later, neighborhoods near the new stadium look like slums.

The Florida Marlins asked Miami-Dade County to build them a new ballpark. The team claimed they were not profitable (later, leaked documents showed that the Marlins were profitable), and so taxpayers paid for 70 percent of a beautiful $500 million stadium.

Don’t you wish you could bill taxpayers to build your business?

But at least now there is hope. People aren’t endlessly stupid. When I first reported on the stadium scams, taxpayers routinely paid. Lately, more refuse. In New York City, we voted down a new football stadium. When we did, then-governor George Pataki complained: “It’s extraordinarily disappointing that people have said ‘no’ to over a billion dollars of private investments, said ‘no’ to thousands of construction jobs, said ‘no’ to thousands of hotel and restaurant convention center jobs, have said ‘no’ to the Olympics!”

Actually, George, it’s smart when the public says “no” to dubious promises like that.

WHAT INTUITION TEMPTS US TO BELIEVE:

If we just elect the right politicians, we can reinvent government and balance its books.

WHAT REALITY TAUGHT ME:

It’s not about electing the right people. It’s about narrowing their responsibilities.

Obama is hardly the first president to say he would “go line by line through the federal budget and eliminate wasteful and ineffective programs.” It’s not like no one thought of this before.

But it never happens. Every piece of pork has well-connected advocates who swear the money is vital to the national interest. They line up to testify. Even if they didn’t grease the palms of lobbyists and congressmen, their cries would be hard to resist: “This program will keep this poor woman, your constituent, alive! Would you be so cold as to deny her that?”

Congress appropriates the money, and then the permanent bureaucracy fights forever to preserve it. After all, its very life depends on it.

It’s not that people in government aren’t as decent or competent as those in the private sector (though the longer they stay, the worse they get). The difference lies in the feedback they face. Bureaucracies have no bottom line, no market prices for their “output,” fewer rewards for excellence. What they have is an incentive to keep their heads down and to spend all the money budgeted (or lose it next year).

It is absurd to think the humongous constellation of federal bureaucracies is going to identify and root out “waste” in any significant way. It’s just not in the nature of the beast. It doesn’t matter which party is in power. No one spends other people’s money as carefully as he spends his own.

You can’t change those incentives by electing a different president or a different Congress. The only way to do it is to switch from the noncompetitive, parasitic incentive structure of politics to the competitive, efficiency-seeking incentives of the free market. Good government has to mean less government.

Far from “fixing” the economy, President Obama’s “bold” actions diminished our freedom and exacerbated the troubles they were supposed to cure. In 2010, the United States fell to eighth place in the annual Wall Street Journal/Heritage Foundation ranking of nations called the Economic Freedom Index. In 2011, we fell to ninth. This year, we fell to tenth. Bill Beach, director of the Heritage Foundation’s Center for Data Analysis, came on my show to deliver the bad news: for the first time, “the United States fell from the ‘totally free’ to ‘mostly free’ group. That’s a terrible development.”

Terrible because each demotion in economic freedom makes prosperity harder to achieve. The lesson is clear: the more government intervenes in an economy, the worse people live. You see that looking at the countries at the bottom of the freedom list: Burma, Eritrea, Cuba, Zimbabwe, and North Korea.

Why did the United States fall on the list? “Our spending has been excessive,” said Beach. “We have the highest corporate tax rate in the world. [Government] takeovers of industries, subsidizing industries . . . these are the kinds of moves that happen in Third World countries.”

In other words, rule of law declined when the Obama administration declared contracts void, like when GM bondholders were forced to the back of the creditor line. And there’s more regulation of business, such as the Dodd-Frank law.

The laws of man cannot change the laws of economics. We cannot raise wages or create jobs or eliminate poverty by executive order. We do so by freeing people to save and invest and accumulate capital.

There are only two ways to get people to do things: force or persuasion. Government is brute force. If you doubt that, try ignoring your tax bill or some Environmental Protection Agency rule. Men with guns will soon appear to force you to obey. By contrast, the private sector—whether nonprofit or greedy business—must work through persuasion and consent. No matter how rich Bill Gates gets, he cannot force us to buy his software.

Government uses force in an attempt to defy economic logic, to make the square peg of political desires fit into the round hole of available resources and inevitable trade-offs. That’s why the consequences of government action are frequently different from those intended. Cash for Clunkers raised used car prices. The brand-new stadiums suck money from surrounding neighborhoods.

Politicians give speeches about how things ought to be—and it’s tempting to judge them by those speeches. But high hopes can’t alter reality. Ludwig von Mises wrote that understanding this is liberating: once people realized that they must adjust to economic forces “in precisely the same way as they must take into account the laws of nature, [that led to] policies of liberalism [classical liberalism, that is, what we today call libertarianism] and thus unleashed human powers that, under capitalism, have transformed the world.”

Libertarianism is liberating—but is it fair?