Why Government Is the Problem (Essays in Public Policy Series #39)

Why Government Is the Problem (Essays in Public Policy Series #39)

by Milton Friedman

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"The major social problems of the United States—deteriorating education, lawlessness and crime, homelessness, the collapse of family values, the crisis in medical care—have been produced by well-intended actions of government. That is easy to document. The difficult task is understanding why government is the problem. The power of special interests

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"The major social problems of the United States—deteriorating education, lawlessness and crime, homelessness, the collapse of family values, the crisis in medical care—have been produced by well-intended actions of government. That is easy to document. The difficult task is understanding why government is the problem. The power of special interests arising from the concentrated benefits of most government actions and their dispersed costs is only part of the answer. A more fundamental part is the difference between the self-interest of individuals when they are engaged in the private sector and the self-interest of the same individuals when they are engaged in the government sector. The result is a government system that is no longer controlled by "we, the people." Instead of Lincoln's government "of the people, by the people, and for the people," we now have a government "of the people, by the bureaucrats, for the bureaucrats," including the elected representatives who have become bureaucrats. At the moment, term limits appear to be the reform that promises to be most effective in curbing Leviathan."

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Hoover Institution Press
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Essays in Public Policy Series, #39
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1st Edition
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6.00(w) x 9.00(h) x 0.50(d)

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Why Government is the Problem

By Milton Friedman

Hoover Institution Press

Copyright © 1993 Board of Trustees of the Leland Stanford Junior University
All rights reserved.
ISBN: 978-0-8179-5442-0



When a preacher gives a sermon, he usually has a text. Generally, the text expresses a thought that he agrees with and is going to expound. I have been trying to find the word for an antitext because I have a text for this essay that I am persuaded is wholly wrong. The text comes from the September–October 1991 issue of Freedom Review, about as inappropriate a place as possible. It is the statement, "Reagan's fatuous doctrine that government is the problem." That's my text — or my anti-text — for this essay.

The text leaves me two tasks: one easy, one difficult. The first task is to demonstrate that government is the problem; that's the easy task. The hard task is to understand why government is the problem. Why is it that able, public-spirited people produce such different results according to whether they operate in the political or the economic market? Why is it that if a random sample of the people who read this essay and are not at present in Washington were to replace those who are in Washington, our policies would very likely not be improved? That is the real puzzle for me.

As to the easy task, let me just first count the ways — to plagiarize words from a love poem — in which government is the problem. Let's list our major social problems and ask where they come from.

Adapted from the 1991 Wriston Lecture, presented in New York City on November 19, 1991, under the auspices of the Manhattan Institute. Richard Stern, and Stephen Stigler.

Showing That Government Is Their Problem


One major social problem is clearly the deterioration of our educational system. Next to the military, education is the largest socialist industry in the United States. Total government spending on schooling — I call it schooling rather than education because not all schooling is education and vice versa — comes close to total government spending on defense, if, with the so-called peace dividend, it is not already greater. The amount spent per pupil in the past thirty years has tripled in real terms after allowing for inflation. Although input has tripled, output has been going down. Schools have been deteriorating. That problem is unquestionably produced by government.

Lawlessness and Crime

If there is any function of government that all but the most extreme anarchist libertarians will agree is appropriate, it is to protect individuals in society from being coerced by other individuals, to keep you from being hit over the head by a random or nonrandom stranger. Is there anybody who will say we are performing that function well? Far from it. Why not? In part because there are so many laws to break; and the more laws there are to break, the harder it is to prevent them from being broken, not only because law enforcement means are inadequate but, even more, because a larger and larger fraction of the laws fail to command the allegiance of the people. You can rigidly enforce only those laws that most people believe to be good laws, that is, laws that proscribe actions that they would avoid even in the absence of laws. When laws render illegal actions that many or most people regard as moral and proper, they can be enforced only by brute force. Speed laws are an obvious example; alcohol prohibition, a more dramatic one.

I believe a major source of our current lawlessness, in particular the destruction of the inner cities, is the attempt to prohibit so-called drugs. I say so-called because the most harmful drugs in the United States are legal: cigarettes and alcohol. We once tried to prohibit the consumption of alcohol at tremendous cost. We are now trying to prohibit the use of narcotics at tremendous cost. The particular consequence that I find most indefensible is the havoc wreaked on residents of Colombia, Peru, and other countries because we cannot enforce our own laws. I have yet to hear an acceptable justification of that consequence. Coming back home, whether or not you believe that it is an appropriate function of government to prevent people from voluntarily ingesting items that you regard as harmful to them — and whether you believe that it is an appropriate function of government because of the harm to them or to third parties — the attempt to do so has been a failure. It has caused vastly more harm to innocent victims, including the public at large and especially the residents of the inner cities, than any good it has done for those who would choose to use the prohibited narcotics if they were legal. There would be some innocent victims (e.g., crack babies) even if drugs were legalized. But they would be far fewer, and much more could be done to reduce their number and help the remainder.


What produced the current wave of homelessness around the country, which is a disgrace and a scandal? Much of it was produced by government action. Rent control has contributed, though it has been even more damaging in other ways, as has the governmental decision to empty mental facilities and turn people out on the streets and urban renewal and public housing programs, which together have destroyed far more housing units than they have built and let many public housing units become breeding grounds for crime and viciousness.

Family Values

Government alone has not been responsible for the extraordinary collapse that has occurred in family values and the resulting explosion in the number of teenage pregnancies, illegitimate births, and one-parent families. Government has, however, contributed to these social problems in major degree. Charles Murray's study of these phenomena in his book Losing Ground provides persuasive evidence that these social problems owe a great deal to mistaken and misdirected governmental policies. Personally, I would add another misdirected governmental policy, which he does not consider, that I believe played a key role in the breakdown of social and cultural values — though by a rather indirect route — namely, military conscription. But that is an argument for a different day.


Another social problem is the high cost of housing and the destruction of housing. The North Bronx looks like the pictures recently coming from Yugoslavia of areas that have been shelled. There is no doubt what the cause is: rent control in the city of New York, both directly and via the government taking over many dwelling units because rent control prevented owners from keeping them up. The same results have been experienced wherever rent control has been adopted and enforced, though New York is by all odds the worst case.

In addition, the proliferation all over the country of building regulations, zoning laws, and other governmental actions has raised the cost of housing drastically. A friend in California has been a building contractor since before World War II. I asked him, "Suppose you were to build the identical house today that you built in 1945 in one of your large housing projects, and suppose that the price of labor, material, and so on were the same now as it was then. How much more would it cost you now than it did then because you must get government permits and demonstrate that you have satisfied government requirements?" He thought about it a while and finally concluded, "At least one-quarter of the total cost."

Medical Care

Government has played an increasingly large role in medical care. For decades, total spending on medical care was about 3 to 5 percent of national income. It is now 12 or 13 percent and rising. The acceleration of spending dates from the introduction of Medicare and Medicaid in 1965. In an earlier essay of mine (Input and Output in Medical Care, Hoover Essays in Public Policy series), I cited figures on hospital cost per patient day, adjusted for inflation. The cost was twenty-six times as high in 1989 as it had been in 1946 ($545 compared with $21); personnel per occupied hospital bed was seven times as high (4.6 compared with 0.7), while the number of hospital beds per 1,000 population had been cut in half (from 10.3 to 4.9). Medical care has advanced greatly since 1946, but it did so before 1965 as well as after, yet most of the increase in cost occurred after 1965. Those seven times as many people per hospital bed are clearly not people who are attending to patients; they are mostly people who are filling in forms to satisfy government requirements.

Financial System

You are all fully aware of the weakness of our financial system. Is there any doubt that that weakness owes much to Washington? The savings and loans crisis was produced by government, first by the accelerating inflation of the 1970s, which destroyed the net worth of many savings and loan institutions, then by poor regulation in the 1980s, by the increase in the amount covered by deposit insurance to $100,000, and, more recently, by the heavy-handed handling of the crisis. You know the litany; I don't have to spell it out.

Highway Congestion

We all complain about highway congestion. That is interesting for a different reason. The private automobile industry is able to produce all the automobiles anybody wants to drive, but the government is apparently not able to produce a comparably adequate highway system, a clear contrast.


A similar contrast exists with respect to airlines and airports. The private aircraft industry has been able to build all the aircraft that the commercial airlines wanted to buy, and the airlines have been able to recruit the necessary pilots, attendants, mechanics, and so on. Where is the bottleneck? In airports, in air control facilities. Why? Because those are run by the government.


I have not even mentioned the botched economic policies: the reverse Reaganomics that the Bush administration practiced contributed to the recession of 1990 — 1991, condemned us to a very slow and erratic recovery from a mild recession, and, very probably, promises a relatively slow 1990s, almost regardless of what the Clinton administration does. Nor have I mentioned such things as over-regulation of industry or agricultural policies under which taxpayers pay people to grow crops that are going to be destroyed or stored or given away. I have not mentioned tariffs and quotas or affirmative action and wage and hour laws.

In light of this list, is there any doubt that government is the problem?

None of this means that government does not have a very real function. Indeed, the tragedy is that because government is doing so many things it ought not to be doing, it performs the functions it ought to be performing badly. The basic functions of government are to defend the nation against foreign enemies, to prevent coercion of some individuals by others within the country, to provide a means of deciding on our rules, and to adjudicate disputes.

I wonder if any of the liberal pundits who go around saying that the private market and capitalism, not government, is the problem can name any corresponding set of major problems that afflict our society that derive from private enterprise.

Their knee-jerk answer is clear: pollution. Private enterprise, they will say, is responsible for polluting the air, for polluting the water, for destroying the earth. I suggest to them that they compare the pollution in countries that have been run by the government, such as Poland or the Soviet Union or Romania, with the pollution in this country. The difference is not that our government has been more efficient in avoiding pollution; it is that private enterprise finds that it is not profitable to pollute; it is more profitable to avoid pollution. There is a real function for government in respect to pollution: to set conditions and, in particular, define property rights to make sure that the costs are borne by the parties responsible. Actual government policy, however, has been neither efficient nor effective. An example is the recently passed Clean Air Bill. It will clean the pockets of industry far more effectively than it will clean the air.

Explaining Why Government Is The Problem

One common explanation of why government is the problem, and one that I have often stressed, is the influence of special interests. Government actions often provide substantial benefits to a few while imposing small costs on many. A dramatic example occurred to me recently when I was talking to a taxicab driver in New York City. (Taxicab drivers seem to be the source of all anecdotes.) I have long been interested in the problem of regulation of taxicabs, so I asked him the market price of a medallion to drive a taxicab. As you know, the number of taxicabs is limited by government fiat. The medallion signifying permission to operate a taxicab is transferable and traded in a relatively free market. Its current price is apparently now somewhere between $100,000 and $125,000.

If the limitation on the number of taxis were removed, the benefits would greatly exceed the losses. Consumers would benefit by having a wider range of alternatives. The number of cabs would go up and so would the demand for drivers. To attract more drivers, the earnings of drivers would have to rise. In economic jargon, the supply curve of drivers is positively sloped.

Why does the limitation of the number of cabs persist? The answer is obvious: the people who now own those medallions would lose and they know it. Although they are few, they would make a lot of noise at city hall. The people who would end up driving the additional cabs do not know that they would have new jobs or better jobs. There is no New Yorker who would find it worth his or her time and effort to lobby city hall to remove the arbitrary limitation on medallions simply to get better cab service. It does not pay the individual taxi riders to do so. They are right; it is rational ignorance on their part not to do so.

The phenomenon of concentrated benefits and dispersed costs is a valid explanation for many governmental programs. However, I believe it does not go far enough to explain the kind of situation in which we now are. For example, it does not explain why, once a government enterprise is established, it should be so much less efficient than a comparable private enterprise. Maybe concentrated benefits lead to the establishment of a government enterprise. However, why on those grounds should the U.S. Post Office be less efficient than United Parcel Service?

One answer is that the incentive of profit is stronger than the incentive of public service. In one sense I believe that is right, but in another sense I believe it is completely wrong. The people who run our private enterprises have the same incentive as the people who are involved in our government enterprises. In all cases the incentive is the same: to promote their own interest. My old friend Armen Alchian, who is a professor at the University of California at Los Angeles, put the point this way: There is one thing, he said, that you can trust everybody to do and that is to put his interest above yours. The people who run our private enterprises are people of the same kind as those who run our public enterprises, just as the Chinese in Hong Kong are the same as the Chinese in Mainland China; just as the West Germans and the East Germans were not different people, yet the results were vastly different.

The point is that self-interest is served by different actions in the private sphere than in the public sphere. The bottom line is different. An enterprise started by a group of people in the private sphere may succeed or fail. Most new enterprises fail (if the enterprise were clearly destined for success, it would probably already exist). If the enterprise fails, it loses money. The people who own it have a clear bottom line. To keep it going, they have to dig into their own pockets. They are reluctant to do that, so they have a strong incentive either to make the enterprise work or to shut it down.


Excerpted from Why Government is the Problem by Milton Friedman. Copyright © 1993 Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of Hoover Institution Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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