how china became capitalist - cato institute · pedro schwartz the immorality of europe’s welfare...

P. J. O’ROURKECaught in the Greece trap

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PEDRO SCHWARTZThe immoralityof Europe’s welfare states

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How China Became Capitalisto one foresaw that the “social-ist modernization” that thepost-Mao Chinese govern-ment launched would in 30

years turn into what scholars today havecalled China’s great economic transforma-tion. How the actions of Chinese peasants,workers, scholars, and policymakers coalesceinto this unintended consequence is the sto-ry we tried to capture. Today, we don’t needto present any statistical data to convinceyou the rise of the Chinese economy, eventhough China still faces enormous chal-lenges ahead. Many Chinese are still poor, farfewer Chinese have access to clean waterthan to cell phones, and they still face manyhurdles in protecting their rights and exer-cising their freedom. Nonetheless, China hasbeen transformed from the inside out overthe past 35 years. This transformation is thestory of our time. The struggle of China, inother words, is the struggle of the world.Against conventional wisdom, we take

the end of 1976 as the start of post-Maoreform and argue that China basically becamea market economy by the end of the 90sbefore it joined the World Trade Organiza-tion in 2001. In the new millennium, the

Chinese economy has kept its growth momen-tum and become more integrated with theglobal economy. As an account of how Chi-na became capitalist, our book focuses main-ly on the first two decades of reform. Withinthis time frame, our account is split intotwo parts by a dividing event, the 1989 Stu-dent Movement. The first part of the story is a tale of two

reforms. One was designed by Beijing; itsgoal was to revitalize the state sector andsave socialism. The other resulted fromgrassroots initiatives. The state-led reformcame in two phases. The first one startedat the end of 1976 under Hua Guofeng.Hua was Mao’s designated successor, whoconsolidated his power base after arresting

BY RONALD COASE AND NING WANG

Continued on page 8

On October 24, a Wall Street Journal editorial paid tribute to Edward H. Crane’s “35 years building the CatoInstitute and promoting free people and free markets.” Crane stepped down as President and CEO in Octoberand was succeeded by John A. Allison. PAGE 4

RONALD COASE is a Nobel laureate and the Clifton R.Musser Professor Emeritus of Economics at the Univer-sity of Chicago Law School. NING WANG is an assis-tant professor at the School of Politics and Global Stud-ies at Arizona State University. This essay is based ontheir recent book How China Became Capitalist.

January/February 2013 Vol. XXXV No. 1

JOHN B. TAYLORThe limitsof monetarypolicy

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2 • Cato Policy Report January/February 2013

Editorial

BY DAVID BOAZ

“Libertarianismis the idea that adultindividualshave the

right and theresponsibilityto make theimportantdecisionsabout theirlives.

give a lot of speeches and interviews about liber-tarianism. Often I have to begin simply byexplaining what libertarianism is. Always I’mlooking for effective ways to convey the essential

libertarian ideas. So today I’m just setting out verybriefly my Top 10 Ways to Talk about Libertarianism.

10. When I talk in the broadest terms aboutAmericans who hold libertarian views, I often use thepopular journalistic phrase “fiscally conservative andsocially liberal”—as in my new ebook with David Kirbyand Emily Ekins, The Libertarian Vote: Swing Voters, TeaParties, and the Fiscally Conservative, Socially Liberal Center.

9. I’m also partial to Adam Smith’s lovely phrase, “thesimple system of natural liberty.” Set up a few simplerules, protect people’s rights, and liberty is what hap-pens naturally.

8. The most eloquent piece of libertarian writing in history is Thomas Jefferson’s Declaration ofIndependence, and “life, liberty, and the pursuit of hap-piness” is a great statement of the libertarian vision.

7. I like this rarely quoted line from Ayn Rand:

If men of good will wish to come together for thepurpose of upholding reason and establishing arational society, they should begin by following theexample of the cowboys in Western movies whenthe sheriff tells them at the door to a conferenceroom: “Gentlemen, leave your guns outside.”

Exactly. Civilized people rely on persuasion, not force.

6. Sometimes I organize a speech around three keyideas of libertarianism:

Spontaneous order: the understanding that most ofthe order in society, from language and law to theeconomy, happens naturally, without a central plan; Natural rights: the rights to life, liberty, and proper-ty that we have inherently, not as a gift fromgovernment; and Limited government: the political system thatprotects our rights without infringing on ourfreedom.

5. At Tom Palmer’s urging, I created a speech, or atleast a speech opening, around the theme that“Libertarianism is the application of science and rea-son to the study of politics and public policy.” That is,libertarians deal in reality, not magic. We know that

government doesn’t have magical powers to ignorethe laws of economics and human nature.

4. Inspired by Robert Fulghum’s bestseller All I ReallyNeed to Know I Learned in Kindergarten, I like to tell peo-ple that you learn the essence of libertarianism—whichis also the essence of civilization—in kindergarten:

Don’t hit other people.Don’t take their stuff.Keep your promises.

3.Another pithy explanation I like came from a high-school libertarian newsletter some 20 years ago:

Smokey the Bear’s rules for fire safety also apply togovernment—keep it small, keep it in a confined area,and keep an eye on it.

2. In Libertarianism: A Primer, I described the funda-mental libertarian principle this way:

The corollary of the libertarian principle that“Every person has the right to live his life as hechooses, so long as he does not interfere with theequal rights of others” is this:No one has the right to initiate aggression against theperson or property of anyone else.

This “non-aggression axiom” is perhaps most associ-ated with Ayn Rand and Murray Rothbard, but itsroots go back to Spencer, Mill, Locke, Pufendorf, andeven Epicurus.

1. And finally, the number 1 way to talk about liber-tarianism—or at least a sentence I found effectivewhen I was talking about Libertarianism: A Primer ontalk shows: “Libertarianism is the idea that adult indi-viduals have the right and the responsibility to makethe important decisions about their lives.” Every wordis important there: We’re talking about individuals.We’re talking about adults; the question of children’srights is far more complex. Responsibility is just asimportant as rights.

Of course, today government claims the power tomake many of those decisions for us, from where tosend our kids to school to what we can smoke to howwe must save for retirement. And that is why it’simportant for us to promote the ideas of liberty andto do so as effectively as we can.

”

ITop 10 Ways to Talk about Libertarianism

BEST OF THE BESTIn the latestClaremont Review ofBooks, John Blundell,former director gen-eral of London’sInstitute of EconomicAffairs, named JamesTooley’s The BeautifulTree (Cato Institute,2009) as one of thefive best public policybooks of the last

50 years. Tooley’s book—which Blundell called“a masterpiece”—recounts his personal journeyinto how the world’s poorest people are educating themselves through private means.“Reading his work was the single most eye-opening moment of my life in public policy,”Blundell concluded. The book has earned highpraise since its release—receiving the 2010Fisher International Memorial Award from theAtlas Economic Research Foundation—and wasalso featured in a documentary on BBC.

I SHALL BE RELEASED“A Treasury economist rummaging in thedepartment’s library has stumbled on a histori-cal treasure hiding in plain sight,” the New YorkTimes reported in October. The discovery—a fulltranscript of the 1944 Bretton Woods confer-ence—was uncovered by Kurt Schuler, an econo-mist who has written for the Cato Institute, andAndrew Rosenberg, a researcher who began hiswork on the volume while interning at Cato. Thetranscript lays bare some of the previouslyobscure details from the World War II confer-ence, during which the allied nations cametogether to create both the InternationalMonetary Fund and the World Bank. Thesedetails, the Times added, are “sort of the econ-omists’ equivalent of a Bob Dylan fan findingunknown lyrics.”

Cato NewsNotes

Should concert ticket scalpers and secondary markets be reined in forthe sake of rewarding genuine fans and artists? In the new issue of Reg-ulation, David and Emma Harrington examine the Better Oversight ofSecondary Sales (BOSS) Act—noting that the law is “a net designed to

scoop up large-volume scalpers while letting die-hard fans and small fishswim on.” By delving into the billion-dollar-a-year concert industry, they con-clude that “with so much money at stake, the greater concern ought to bethat calls for government intervention are profiteering disguised as consumerprotection.”Pierre Lemieux argues that as fiscal problems deepen at all levels of gov-

ernment, the role of private, voluntary associations will become even moreprominent. Lemieux demonstrates how nonprofits like the AppalachianMountain Club—America’s oldest recreation and conservation organiza-tion—can address various forms of market failure. “This should be seen as anopportunity,” he concludes. Elsewhere in this issue, Victor Stango argues that “despite their claims, credit

unions seem unable tooffer competitive paydayloans,” and Adam C.Pritchard notes that the“conspicuous flaws with[initial public offerings]suggest that we shouldput an end to them, if wecan establish a viablealternative.”Jeffrey A. Eisenach

and Kevin W. Caves askwhat happens whenlocal phone service isderegulated, and findthat “early returns sug-gest liberalization bene-fits consumers just aslong distance deregula-tion did.” Other contrib-utors include Christo-pher S. Yoo on the trade-offs between clashing regulatory paradigms and A. Barton Hinkle on the embar-rassing state of investigative journalism.The Fall 2012 issue features reviews of books on the moral limits of mar-

kets, a new theory of social justice, and how to cure the health care crisis. Asalways, it wraps up with Peter Van Doren’s survey of recent academic papers. n

Regulation is available by subscription or online at www.cato.org/regulation.

IPOs, credit unions, and phone service in the latest Regulation

Are We Cracking Down onScalpers—or Consumers?

January/February 2013 Cato Policy Report • 3

hen a young California invest-ment manager named Ed Cranespent 1976 in Washington, henoticed how much influence afew think tanks had despite their

relatively small budgets. He thought there oughtto be a public policy research organization—athink tank—dedicated to the American princi-ples of liberty and limited government. When he returned to San Francisco, he cofounded theCato Institute, which opened its doors in January1977. He served as President and CEO untilOctober 2012.A genetic libertarian, Edward Harrison Crane

was born in the Los Angeles suburb of View Park,California. Once referred to by the Washington Postas “the lion king of button-down libertarianism,”Crane has dedicated his life to guiding the Cato Institute from a three-person outfit in SanFrancisco to one of the most prominent publicpolicy research organizations in the country.“Ed Crane has taken the different path, a sin-

gle-minded free thinker whose life has been livedlargely out of step with his times—or perhaps astep or two ahead of them,” the Post continued.From the beginning he insisted that Cato

stick to firm libertarian principles and take onthe big issues.While many avoided Social Security as a third

rail issue, for instance, the Cato Institute, in its1979 inaugural edition of Cato Policy Report, com-missioned Carolyn Weaver to argue in favor ofprivatizing the system. More books and studiesfollowed, and in 1995, on the 60th anniversary ofthe creation of the program, the Cato Instituteestablished the Project on Social Security Choice.The 2001 President’s Commission to StrengthenSocial Security drew heavily on the work of the

T H E L E G A C Y O F

Edward H.Crane

Illustration: Alexander Hunter for the Washington Times


LEFT: CRANE PRESENTS A BUST OF F. A. HAYEK TO YEVGENY PRIMAKOV, THEN CHAIRMAN OF THE COUNCIL OF THEUNION OF THE SUPREME SOVIET AND LATER PRIME MINISTER, AT CATO’S 1990 MOSCOW CONFERENCE, “TRANSITIONTO FREEDOM.” EDWARD LOZANSKY OF THE INDEPENDENT UNIVERSITY OFMOSCOW LOOKS ON. TOP RIGHT: CRANEMET WITH PRESIDENT ANDMRS. REAGAN IN LOS ANGELES. BOTTOMRIGHT: STEVE FORBES AND THEWALL STREET

JOURNAL WERE AMONG THOSE CONGRATULATING CRANE AS HE STEPPED DOWN AFTER 35 YEARS.

ED CRANE TALKS WITHMILTON AND ROSEFRIEDMAN AT A PICNIC TO CELEBRATE THE CATOINSTITUTE’S 25TH ANNIVERSARY (NOTEMILTON’SCAP) IN 2002.



Institute’s scholars .Under Crane’s leadership, Cato was among the

first organizations to hold major conferences inChina and the then Soviet Union. These sympo-siums helped expose those nations to the animat-ing principles behind an open and civil society.In 1988 the first of four conferences, titled

“Economic Reform in China: Problems andProspects,” was held in Shanghai. As a front-pagestory in theChina Daily noted, the event centeredaround one question: “Should China reform itseconomy step by step or all at once?” It featuredspeakers such as Nobel laureate MiltonFriedman, political scientist Alvin Rabushka, andauthor George Gilder. The gathering enabledChinese and Western scholars to discuss theprogress of China’s reform movement and con-sider what kinds of market reforms are essentialfor further modernization and development.In 1990 Cato held a weeklong conference in

Moscow titled “Transition to Freedom: The NewSoviet Challenge.” The largest gathering of classi-cal-liberal thinkers ever to take place in the Soviet

A FOUR-HOUR MEETING WITH RUSSIAN PRESIDENT

VLADIMIR PUTIN (RIGHT) WAS THE HIGHLIGHT OF

CATO’S 2004 MOSCOW CONFERENCE, “A LIBERALAGENDA FOR THENEWCENTURY.”

CRANE AND CATO VICE PRESIDENT ROGER PILONWELCOME JUSTICE CLARENCE THOMAS TO A LUNCH

WITH CATO SCHOLARS IN 1994.


Union, the event included Nobel laureate JamesBuchanan, Charles Murray, and numerousRussian scholars and members of parliament.“When Cato’s president Edward H. Cranereminded the large audience that ‘the govern-ment that governs least governs best’ . . . hun-dreds of Russians clapped and cheered wildly,”the Wall Street Journal reported. “Only a handfulof die-hard Communists sat glum-faced, armsfolded.” Crane presented a bust of F. A. Hayek to Yevgeny Primakov, chairman of the Council ofthe Union of the Supreme Soviet, as more than1,000 Soviet citizens attended their first openforum.Today, the Institute has become a leading

voice on the national stage. “Cato has managedthe difficult feat of becoming both a fount oftrue-blue libertarian ideas and a reputable sourceof information even for those who don’t share itsviews,” columnist Steve Chapman wrote in theChicago Tribune last year. “It may be the most successful think tank in Washington.” And as the Wall Street Journal recently acknowledged, thecontinued success of the Institute moving for-ward “will build on the foundation of Mr. Crane’sbroad shoulders.”But the most enduring impact of his legacy

will remain with the future of the libertarianmovement at large. “In the long run, the ideolo-gy of freedom will win,” Murray said at the CatoClub 200 retreat in September. “And when thehistory is written of how it is that, in the lastquarter of the twentieth century, the flickeringflame of freedom became strong enough towithstand the winds, Ed Crane’s name will fig-ure very largely.” n

TOP TO BOTTOM: ED ANDKRISTINA CRANEMARRIED IN SHANGHAI IN 1988, DURING CATO’SCONFERENCE “ECONOMIC REFORM IN CHINA,”SURELY THE FIRST CONFERENCE ON FREE MAR-KETS AND THE RULE OF LAW EVER HELD IN THE

ANCIENT NATION OF CHINA. CRANE AND LONG-TIME CATO SUPPORTER ANDREAMILLEN RICH,FORMER PRESIDENT OF LAISSEZ FAIRE BOOKS,TALKED AT A BENEFACTOR SUMMIT. CRANETALKED WITH SEN. RAND PAUL AT CATOUNIVERSITY IN 2011.


the “Gang of Four” and ending the Cul-tural Revolution. Even though loyal toMao, Hua was an economic modernizer.With full support of Deng Xiaoping andother Chinese leaders, Hua launched hiseconomic program of modernization,which would be later disparaged as “theLeap Outward.” Essentially, it was a state-led, investment-driven program, with afocus on heavy industry; it is a good exam-ple of what economists called “big-pushindustrialization.” But the program lastedbarely over two years. It was called off inearly 1979, partly due to its own defectsand partly due to leadership change: atthe end of 1978 the Central Committeeheld a meeting, at which Deng Xiaopingand Chen Yun came back to power andHua was no longer in charge.Deng Xiaoping is widely known in the

West. Ezra Vogel’s recent biography hasdocumented in detail Deng’s role in Chi-na’s reform. In comparison, Chen Yun is ashadowy figure. But Chen was China’s topofficial in charge of economic affairs. Hewas the architect of China’s first Five YearPlan in 1953 and a strong believer in cen-tral planning. Since he grew up and appren-ticed in Shanghai before becoming a revo-lutionary, Chen also saw a limited but crit-ical role for the private sector and marketunder socialism. Chen lost his positionwhen Mao started the Great Leap Forwardin 1958, which Chen opposed. He cameback to power along with Deng at the endof 1978 and was handed the job of design-ing an economic reform program.Chen believed that the Chinese econo-

my had long suffered structural imbal-ance: too much investment in heavy indus-try relative to light industry and agricul-ture, and state sectors and planning beingemphasized at the exclusion of private sec-tors and markets. In his view, Hua’s eco-nomic program, which focused on heavyindustry, made the Chinese economy worse.That’s why Chen forcefully ended “theLeap Outward” against strong oppositionfrom the State Council and imposed hiseconomic policy. This marked the secondround of Beijing-led reform. This round of

state-led reform was two-fold: adjustmentat the macro level and state-enterprisereform at the micro level. Structural adjust-ment was imposed across the economy.For example, more investment was chan-neled from capital goods to consumer

goods production. More money was allo-cated to agriculture. The government raisedthe purchasing prices for agricultural prod-ucts by more than 20 percent in 1979 andsignificantly increased grain import. Bei-jing also took steps to decentralize foreigntrade and gave more fiscal autonomy toprovincial governments. At the micro lev-el, the emphasis was squarely placed onwhat was seen as the economic founda-tion of socialism, the state-owned enter-prises. The strategy was to devolve somerights to state enterprises and allow themto keep some profits. Beginning in 1979and throughout the 1980s, the Chinese

government was preoccupied with incen-tivizing state enterprises.

REFORM ON THE MARGINSThere is no doubt that the post-Mao

Chinese government pursued a series ofreforms. But today, with the benefit ofhindsight, we know that the economicforces that were really transforming theChinese economy in the first decade ofreform were private farming, township andvillage enterprises, private business in cities,and the Special Economic Zones. None ofthem was initiated from Beijing. They weremarginal players operating outside theboundary of socialism. For these marginalforces, the Chinese government was happyto leave them alone as long as they did not

threaten the state sector or challenge theParty’s political power. This created a roomfor what we called the “marginal revolu-tions” that brought entrepreneurship andmarket forces back to China during thefirst decade of reform.One such marginal revolution is private

farming. Private farming was certainly notnew in China. Before 1949, it had existedfor millenia. In the early 1950s, Mao triedruthlessly to collectivize farming. Somepeasants believed in Mao and hoped collec-tivization would offer them a way out ofpoverty. After 20 years of collective farmingand 40 million famine deaths, they knew

“The first part of the story is a tale of two reforms. Onewas designed byBeijing. The otherresulted from grass-roots initiatives.”

Continued from page 1

At a Cato Book Forum for How China Became Capitalist, NING WANG of Arizona State University spoke and wasjoined in a video presentation by coauthor RONALD COASE (left), a Nobel laureate from the University of Chicago.The two authors discussed China’s extraordinary journey in transforming itself into a powerful economic force.


better. Many went back to private farmingafter Mao died, even though Beijing wasstill trying to beef up the commune system.In September 1980 Beijing was forced toallow private farming in areas where “thepeople had lost their confidence in the col-lective.” But once the floodgates of privatefarming were opened, it could no longer becontrolled. By early 1982 it became a nation-al policy. Chinese agriculture was decollec-tivized. Later in the official account of reform,Beijing would credit itself for launchingagricultural reform. But the reform enactedby Beijing merely raised the purchasingprices of grain and increased grain import;private farming, which really transformedChinese agriculture and freed Chinese peas-ants, did not come from Beijing.Township and village enterprises were

industrial operations located in rural areas.During the first two decades of reform,they were the most dynamic sector in theChinese economy. Since they operated out-side the state plan, they did not have guar-anteed access to raw materials controlledby the state but had to purchase them fromthe black market at a higher price. Theywere also excluded from the state-con-trolled distribution system to sell theirproducts, but had to hire their own salesteams to travel all over China to find mar-kets for their products. In other words,they had to operate like real business firms.This is what they did. And it did not takelong for them to outperform state enter-prises, which had all the privileges andstate protections that they simply stoppedbeing enterprising.The first private businesses in Chinese

cities were started by people who did nothave a job in the state sector. Most were cityyouths recently returned from the country-side. During Mao’s era, 20 million middleschool graduates (ranging from 15 to 18years old) in cities were sent to the country-side partly because the government couldnot create enough jobs. After Mao died,they came back, but found no job in thestate sector. Young, jobless, and restless,they took to the streets and even blockedthe railway. This mounting pressure forcedthe government to open the door for self-

employment. Private shops started to emergein Chinese cities; they quickly ended statemonopoly of the urban economy. Among the four marginal revolutions,

the Special Economic Zones were the mostcontroversial. They were established to co-opt capitalism to save socialism. The ideawas to allow them to experiment with themarket economy, importing advanced tech-nology and managerial know-how, sellinggoods to the global markets, creating jobsand stimulating economic growth. But theexperiments were confined to a few enclavesand strictly controlled so that they wouldnot undermine socialism elsewhere, and ifthe experiments failed, their damage tosocialism would be negligible.

REGIONAL COMPETITIONThe presence of two reforms was a defin-

ing feature of China’s economic transition.The failure to separate the two is a mainsource of confusion in understanding Chi-na’s reform. The Chinese government hasunderstandably promulgated a state-cen-tered account of reform, projecting itself asan omniscient designer and instigator ofreform. The fact that the Chinese Commu-nist Party has survived market reform, stillmonopolizes political power, and remainsactive in the economy has helped to sell thestatist account of reform. But it was marginalrevolutions that brought entrepreneurshipand market forces back to China during thefirst decade of reform when the Chinese gov-

ernment was busy saving the state sector.The second part of our tale began in 1992

after Deng Xiaoping’s southern tour. Whilemarginal revolutions brought market forcesback to China in the previous decade, region-al competition became the main transforma-tive force in the second decade, turning Chi-na into a market economy at the end of thecentury. Regional competition was not new;it existed in the first decade of reform. Butthen it created trade barriers at provincialborders and fragmented the Chinese econo-my. China implemented price reform in 1992,tax reform in 1994, and began to privatizestate enterprises in the mid-1990s. Thesereform measures paved the way for the rise ofa common national market, which was ableto impose market discipline on all economicactors, turning regional competition into atransformative force.Here, our account differs from the one

presented by Huang Yasheng in his book,Capitalism with Chinese Characteristics. Acontroversial argument of Huang is that Chi-na was more capitalistic and entrepreneurialin the 1980s than in the 1990s. If the argu-ment means that private entrepreneurshipprevailed against the state in the 1980s, it is infull accord with our tale of “marginal revolu-tions.” But if it suggests that China movedaway from a free market economy in the sec-ond decade of reform, it misses a fundamen-tal change in the economy in the 1990s; theemergence of a common national market,which was a precondition for regional com-petition to work.Identified with repetitive investment,

regional competition is often faulted fordistorting comparative advantage and hin-dering economies of scale. A more nuancedpictured emerged in our account. Whatregional competition did was to translateChina’s advantage in space as a continentalcountry into the high speed of industrial-ization. How this happened can best beseen from a Hayekian perspective, whichstresses the growth of knowledge as theultimate force driving economic change. InMao’s time, education was under attackand knowledge became a political liability;China isolated itself from the West and cutitself off from its own traditions. Mao’s rad-

“The Chinese government hasunderstandably

promulgated a state-centered account ofreform, projectingitself as an omnis-cient designer and instigator of reform.”


ical ideology impoverished the Chinese econ-omy and, worse, closed Chinese minds. After Mao died, China re-embraced prag-

matism. “Seeking truth from facts” becamethe Party’s new guideline; getting rich becameglorious. Then the most restrictive constraintfor economic growth was the lack of knowl-edge. This included technical knowledge,knowledge about institutions—how variousmarket-supporting institutions work, andlocal knowledge—what Hayek called “knowl-edge of the particular circumstances of timeand place.” The solution to this problem wasfound in regional competition. When Chi-na’s 32 provinces, 282 municipalities, 2,862counties, 19,522 towns and 14,677 villagesthrew themselves into an open competitionfor investment and for good ideas of devel-oping the local economy, China became agigantic laboratory where many differenteconomic experiments were tried simultane-ously. Knowledge of all kinds was created,discovered, and diffused fast. Through thegrowth of knowledge, the enormous scale ofChinese industrialization made its rapidspeed possible.

CONCLUSION Given our account of how China became

capitalist, what can we say about the form ofcapitalism that has emerged in China? A per-sisting feature of China’s market transition isthe lack of political liberalization. This is notto say that the Chinese political system hasstood still over the past 35 years. The Partyhas distanced itself from radical ideology; it isno longer communist except in name. Inrecent years, the internet has increasinglyempowered the Chinese to exercise their polit-ical voice. Nonetheless, China remains ruledby a single political party. This continuity hides a fundamental change

in China’s political reality. With the death ofDeng Xiaoping, “strongman” politics wasbrought to a closure. Under Jiang Zemin andHu Jintao, China is no longer ruled by a charis-matic leader. In that sense, Chinese politicstoday is qualitatively different from the timeof Mao and Deng. But the Chinese govern-ment has not come to terms with this politi-cal change on the ground; there have beenfew efforts at institution-building to prepare

China for the new political reality. The combination of rapid economic lib-

eralization and seemingly unchanged poli-tics has led many to characterize China’smarket economy as state-led, authoritariancapitalism, which many people have rightlyrecognized as fragile and unsustainable.When and how China will embrace democ-racy, and whether the Party will survive democ-ratization, are the main questions askedabout China’s political future. In our book,a different perspective is offered. It providesa different diagnosis of the main flaw of theChinese market economy: China has devel-oped a robust market for goods, but it stilllacks a free market for ideas.The market for ideas points to an alterna-

tive way of thinking about China’s politicalfuture. Our reasoning is mainly based on thefollowing two considerations. First, multi-party competition does not work unless it iscultivated and disciplined by a free market forideas, without which democracy can be easilyhijacked by interest groups and underminedby the tyranny of the majority. The perform-ance of democracy critically depends on themarket for ideas, just like privatization dependson the market for capital assets. Second, mul-ti-party competition had virtually no prece-dent in Chinese history. Indeed, the Chineseword for the “party” (党) has a strong nega-tive connotation in traditional Chinese politi-cal thinking. “Forming a party and pursuingself-interest” (结党营私) has been consistent-ly denounced as undermining the politicalideal, which is “what is under heaven is for all”(天下为公). In contrast, the market for ideas

has a deep and revered root in traditional Chi-nese thinking; “let one hundred schools ofthought contend” has been respected as apolitical ideal since the time of Confucius. Inour view, the market for ideas promises amore gradual and viable approach to rebuild-ing Chinese politics on the principles of toler-ance, justice, and humility.Over the past 35 years, China has embraced

capitalism not just in the economy. The Theo-ry of Moral Sentimentshas more than a dozenChinese translations; the book has won theheart and mind of premier Wen Jiabao. Themessage of Adam Smith resonates stronglywith the Chinese, not least because of its strik-ing affinity with the traditional Chinese think-ing on economy and society. A surprisingoutcome of China’s transition to capitalismis that China has found a way back to its owncultural roots. “Seeking truth from facts” is a traditional

Chinese teaching, which Deng Xiaoping mis-takenly called the “essence of Marxism.” Butmany facts are still covered in China because afree market for ideas does not exist yet. We arecautiously optimistic that China may wellembrace a market for ideas in the decades tocome, just like the way it embraced the mar-ket for goods in the recent past. As our mod-ern economy becomes more and more knowl-edge-driven, the gains from free exchange ofideas are too great; the costs of suppressing itare too high.China’s embrace of both its history and

globalization leads us to believe that Chinesecapitalism, which just started its long jour-ney, will be different. This is desirable notjust for China, but for the West and everyoneelse as well. It is also desirable for the globalmarket economy. Today, biodiversity is rec-ognized as vital for sustaining our naturalenvironment. Institutional diversity plays asimilar role in keeping human society resilient.Capitalism will be much more robust if it’snot a monopoly of the West, but flourishesin societies with different cultures, religions,histories, and political systems. While tradein the global market for goods makes wartoo expensive to fight, a global market forideas can accommodate and thrive on theclash of ideas but steers us away from theclash of civilizations. n

“Our book provides a different diagnosis of the main flaw of the Chinese marketeconomy: China hasdeveloped a robustmarket for goods, but it still lacks a freemarket for ideas.”


L adies and gentlemen, I just lovebeing in New York City. The capitalof the free world. The Statue of

Liberty! Huddled masses! I lift my lampbeside the golden door! Yes, freedom iswhat New York is all about.Well, I was just out in the lobby drinking

a 32 oz. Big Gulp, smoking a cigar, sprin-kling salt on my extra large, triple cheese,meat lover’s pizza—and I have to ask: Whatis that yappy Miniature Schnauzer of amayor going to ban next? Why not just baneverything that’s bad for people—likewatching Bloomberg Business channel?That was pretty bad for me. I got right in onthat Facebook IPO . . . Or is it just our physical health that the

mayor is worried about? If that’s the case,he better ban voting for Democrats—other-wise Obamacare is going to kick in andhealth care will cost nothing. And whensomething costs nothing, trust me, it’sworth it.To hell with you, Mayor Bloomberg, and

to hell with politics. People have a tendencyto believe that the Cato Institute is a politi-cal think tank. It’s not. It’s an anti-politicalthink tank. We’re not here today to fix pol-itics—well, I take that back. We are here to“fix” politics—the way you fix a cat. The wayyou spay a dog. The way you castrate a dan-gerous bull. We mean to tame these politi-cal sons of bitches. We are going to teachthem not to beg at the table. We’re going toteach them not to bark at the moon.We’re going to teach them to heel and

come when they’re called. We’re going toteach them domestic policy: Stay off thefurniture! No politics in my bed! We’regoing to teach them foreign policy: Stopmaking messes in other people’s yards!

We’re going to teach them to roll over andplay dead, because we’re going to give thema lesson on term limits. When we toss ourpolitical power to a politician, he is going tobring that political power right back hereand drop it at our feet. Good boy! Nowback in the kennel.It isn’t going to be easy to housebreak

this political mess. The floors of both hous-es in Congress are going to have to be cov-ered with a lot of newspaper. (But not theeditorial section of the New York Times. Wedon’t want our political puppies readingthat stuff.)

Ladies and gentlemen, we are going towin this fight. It won’t be simple. It won’t bequick. And we’re going to lose a lot of bat-tles along the way. But eventually, voters goback to work—and they find that their pay-checks are being taxed to hell, their jobs andbusiness opportunities are being regulatedaway, and their hopes for the future arebeing tied to the millstone of the federaldeficit. Then they remember that govern-ment is all taking and no making. Andthat’s why we will win this fight. But only ifwe keep fighting.People know that politicians are thieves.

People know that politicians are liars. Butwe nevertheless have to continue leadingthe charge. We have to remind people howpoliticians are thieves and when politiciansare liars. We have to pass the ammunitionso that people can take aim at the theft andthe lies. Our duty is to help our fellow citi-zens realize in their minds what theyalready know in their guts. Take just oneexample. Everybody knows that the govern-ment costs too much. But thanks to two ofour patron saints, we’re able to explain whygovernment costs too much.More than 30 years ago, in their book

Free to Choose, Milton and Rose Friedmanused a very simple graph to show that,mathematically, there are only four ways inwhich money can be spent.First, your money can be spent on your-

self. Let’s take cars, for instance. Twentyyears ago, I bought a Porsche 911. It’s awonderful car—I still have it—and I got agreat deal at the time from a dentist whoscared himself with it and bought a Lexuscoupe instead. When you spend yourmoney on yourself, you get as nearly as youcan exactly what you want. More impor-tantly, you bargain hard to get it.Second, your money can be spent on

other people. Now, you may still bargainhard under these circumstances. But you’renot quite as concerned about getting exact-ly what you wanted—although I’m sure my

P O L I C Y F O R U M

The election is over—and regardless of the winner, America lost. BarackObama ran on a platform sitting atop a gigantic government that givesaway everything for free. Mitt Romney didn’t have the wit to point out

that the handouts are stolen—and worse yet, they’re stolen from you. So says P. J.O’Rourke, America’s leading political satirist and an H. L. Mencken research fel-low at the Cato Institute. In October, at a City Seminar in New York, O’Rourkediscussed the perils of “committee-brain,” how local government is like a hotshower, and his own plan for stimulating the economy.

America: Down the Drain and Caught in the Greece Trap

P. J. O’RourkeP. J. O’Rourke


wife is very fond of the GeoTracker that Igot for her and the kids.Third, other people’s money can be

spent on yourself. With those parameters,I’m on the fence between an Aston MartinDBS coupe that goes for $300,000 and aMaserati GranTurismo convertible, whichis a steal at $145,000.In the final scenario, you’re not involved

at all. You’re spending other people’smoney on other people. It’s not your dime,and there’s nothing in it for you. It mightas well be “Billions for Jack,” or as the gov-ernment called it, “Cash for Clunkers.” Bythe way, number four is the way all govern-ment programs work.Everybody knows government costs too

much and everybody knows governmentshouldn’t be given too much power. Butpeople forget why. Government should notbe given too much power because it has aspecial kind of power—a comic booksupervillain type of power. The politicalsystem has a monopoly on the use of dead-ly force. That deadly force can be broughtto bear upon you for any violation of eventhe most trivial, the most picayune govern-ment regulation. If you fall afoul of recy-cling rules, you’ll get a citation from thesanitation department. If you don’t pay thefine, you’ll be sent to jail. And if you escapefrom jail, they’ll shoot you. You could be executed for failing to sep-

arate the green plastic from the clear plasticin your trash. Now do you think we shouldgive more power to politicians who woulddo a thing like that? One of the core principles of libertarian-

ism is that the world is not zero-sum. Wecan make more things. We can make moremoney, more food, more energy, morebabies. The way I get things is by makingthem, not by President Obama takingthem from you to give to me.Politics, on the other hand, is zero-sum.

There’s a fixed amount of political powerbecause there’s a fixed amount of me. Andthe political power that you hold over me—because you’re holding me at gunpoint—isobviously power that I lose to you. Peopleknow they’re losing their power to thepolitical system and they don’t like it. Butit’s still a big temptation to give more

power to that government.Why? American government is a huge

tool—mighty in its operation, nearly irre-sistible in its movement. Never mind that itdoesn’t know where it’s going. It is tempt-ing to use a tool of this nature when some-thing needs fixing. But the problem is thatpeople don’t stop to ask whether the toolsuits the task. There is something in thehuman psyche—and, if I may say, particu-larly in the male psyche—that just loves big

tools. Possessed of a big tool, a man feels acompulsion to use it. We don’t need to getrude for examples. Give a man a high-pow-ered cordless electric drill, and you’ll getholes all over your house.In the 1940s, shortly after that enor-

mous tool—the atomic bomb—had beenemployed on the Japanese, there was a seri-ous proposal in Congress to use atomicbombs to blast a new sea-level canalthrough the Isthmus of Panama. Men aredangerous when they have big tools. Powerof any kind—government power in particu-lar—is dangerous. To put the case different-ly, the government is a Rottweiler ready tobe unleashed on your problems—andyou’ve stuffed raw meat down the front ofyour pants.One method of being careful with gov-

ernment power is to think about the gov-ernment the same way we think about ourmessy personal lives. There are furious ex-spouses and bitter former lovers and vari-ous outstanding child support judgments.And we don’t want too much of that in oneplace, which is why we’re moving to

Phoenix. The Founding Fathers knewenough about messy personal lives—Jefferson in particular—to make sure thatthe Constitution contained federalistdecentralization of power. They set up asystem in which each branch of the govern-ment would check and balance the otherbranches. After all, what if all the ex-spouses and

the former lovers and the kids whoseschool fees we’re supposed to be paying allbecame friends—and then got the samelawyer? Our Founding Fathers would haverather moved to Phoenix than let some-thing like that happen. It’s important for asmuch of government power as possible tobe distributed to the smallest possibleunits of government—the states, counties,cities, towns, and townships.John Sununu, the former governor of

New Hampshire, had a good way ofexplaining this concept. He’s an engi-neer—and he compares reliance on localgovernment to a goal of mechanical engi-neering known as “short control loops.”The hot and cold faucets on your showerare part of a short control loop. But,instead of them being located in the show-er stall, imagine if they were located downin the basement. That would be a longcontrol loop. It’s not that a short controlloop always works—you may be out of hotwater. But it’s better to stand there in theshower fiddling with a useless faucet thanto march naked and dripping through thehouse—amazing the children and shock-ing the cleaning lady—down two flights ofstairs and into the grungy basement tofiddle with a useless faucet down there.If our neighbor on the local sewer com-

mission votes to raise our sewer rates, wecan go next door and yell at him or stuff apotato up the tailpipe of his car. But stuff-ing a potato up the tailpipe of the limou-sine of the president of the United States,that’s a federal crime—or, at least, they’llmake it one if I try.Despite the common sense of the short

control loop argument, we’re often deaf toit. When something’s wrong, we don’tconsult the sewer commissioner nextdoor—even if the problem is backed upsewage. We go straight to Washington,

P O L I C Y F O R U M

“People have a tendency to believethat the Cato Instituteis a political thinktank. It’s not. It’s an anti-politicalthink tank.”


and we even bypass the House and theSenate. We expect the president himself totake time off from trying to get his limostarted and come over to our house with aplunger.The expense of politics, the surrender

of individual power to politics, the grossinefficiency of politics—it’s all bad. Butnothing is as bad as the brain of a politi-cian. Now, you might say, “What brain?”Alas, it’s worse than a joke. Taken one byone, politicians are of dull normal intelli-gence. But when you put politicianstogether in government you get “commit-tees”—and in Congress they even comeright out and call them “committees.”We’ve all been on committees. We knowwhat happens to intelligence and com-mon sense when a person becomes a com-mittee member. It’s “committee-brain.”Let’s say you live in a neighborhood

with a playground. The kids in the neigh-borhood would like to play tetherball, butthe playground has no pole. So a commit-tee is formed to raise funds for tetherball—the Committee to Raise Funds forTetherball, or CRFT. CRFT is started by a group of pleasant,

enthusiastic, public-spirited neighbors. Butthe minute any of these neighbors becomea member of CRFT, he or she will begin toexpress his or her pleasant, enthusiastic,public spirit by turning into one of the fol-lowing characters.The stickler: “We have to draw up a

charter and form a nonprofit corporationwith a chairman, a president, a vice presi-dent, a secretary, a treasurer, a develop-ment officer, and a human resources exec-utive. And the tetherball pole has to beexactly four meters high in accordancewith North American Amateur TetherballAssociation rules.”The dog in the manger: “We need to get

permission from the county zoning board,the city council, the parks department,and the adjacent landowners who mightcomplain about tetherball noise. Also, thatpart of the playground is too damp fortetherball—it might be federally protectedwetlands. We can’t do any fundraisingwithout advertising, and we can’t advertisewithout raising funds. By the way, the kids

would rather have a tennis court.”The worrier: “Padded pole. Breakaway

tether. Light-weight foam ball. Ban onplaying after dark, when visibility is poor,and when the sun is shining, to avoid skindamage. Kids should wear helmets, kneepads, and safety belts.”The person with ideas: “Let’s set up a

challenge grant to erect a second teth-erball pole in the inner city. Midnighttetherball could be an alternative to crimefor deprived youth! We could also pro-mote tetherball as a way to combat childobesity, which would make us eligible forfunding from the Gates Foundation.We’ll have a tetherball league—no three!—adults, juniors, and tether tots. This couldbe a great Title IX addition. If our daugh-ters are varsity level tetherball players,they’ll get into Yale.”The person with ideas, none of which

have to do with tetherball: “Is the tetherbiodegradable? Is the pole made fromrecycled materials? Many playgroundballs are manufactured in third worldcountries using exploitative child labor.Let’s be sure to utilize organic fertilizerand indigenous plant species when seed-ing the tetherball play area.”The bossy person—who says the same

thing as everybody else on the committeebut louder. Theperson who won’tshut up—whosays the samething as every-body else on thecommittee butmore often. Theperson who won’tshow up—unlesstheir vote is cru-cial in which casehe or she showsup and votes thewrong way. And,of course, you.You actually

do all of the work.You call 40 peopleand ask them todonate $10. Halfof them do and

you raise the $200 needed—only to find out that you actually need $200,000. As itturns out, the House of RepresentativesEconomic and Educational OpportunitiesCommittee, Select Committee onOpportunities in Physical Education,Subcommittee on Americans withDisabilities Act Compliance requires alltetherballs to be wheelchair accessible no matter how high the tetherballs fly inthe air.Given the complete dominance of

politics by committees, the wonder isthat anything gets done and the horror isthat it does. What the governmentaccomplishes is what you’d expect from acommittee. “A camel is a horse designedby a committee”—that’s a saying thatcouldn’t be more wrong. A camel is a see-ing-eye dog designed by a committee andavailable free with government grants topeople who can see perfectly well butcan’t walk.Let it be our mission to show people the

danger and the folly of letting their lives berun by committee. And let it be our mis-sion to show people the danger and thefolly of all the temptations and emptypromises of a government so big and pow-erful that it can give everyone everythingfor free. n

In their new book

Rome’s Last Citizen,

authors Rob Goodman

and Jimmy Soni deliver

the first modern

biography of Cato the

Younger—a Roman

senator and the last

man standing when

the republic fell to

tyranny. Goodman

and Soni traced the

life of this stirring

figure at a Cato Book

Forum in October.


C A T O E V E N T S

O

J

I

A

M

Cour

tesy

201

2 CO

MM

IT!F

orum


OCTOBER 9: Time to End AffirmativeAction? Fisher v. University of Texas

OCTOBER 9: Countervailing Calamity:How to Stop the Global Subsidies Race

OCTOBER 10: Europe’s Crisis and theWelfare State: Lessons for the UnitedStates

OCTOBER 11: Is IPAB Medicare Reform?Or Just Another Stop on the Road toSerfdom?

OCTOBER 12: Give Me Regulation:From Samuel Insull to James E.Rogers in the Electric Power Industry

OCTOBER 12: The Economic Effects ofMilitary Spending

OCTOBER 15: How China Became Capitalist

OCTOBER 16: The Libertarian Roots ofthe Tea Party

OCTOBER 17: The Case against the Davis-Bacon Act: 54 Reasons for Repeal

OCTOBER 17: Could Oklahoma’s NewLawsuit Strike a Fatal Blow toObamacare?

OCTOBER 18: The Real Effects ofSequestration

OCTOBER 18: Why Some Firms ThriveWhile Others Fail: Governance andManagement Lessons from the Crisis

OCTOBER 19: Rome’s Last Citizen: The Lifeand Legacy of Cato, Mortal Enemy ofCaesar

OCTOBER 23: Africa’s Third Liberation:The New Search for Prosperity and Jobs

OCTOBER 24: What Can LibertariansExpect from the 2012 Election?

OCTOBER 24: The Financial Crisis and theFree-Market Cure: Why Pure Capitalism Isthe World Economy’s Only Hope

OCTOBER 25: Human Capitalism: HowEconomic Growth Has Made Us Smarter—and More Unequal

OCTOBER 25: Millennials and theWelfare State: Burden or Blessing?

OCTOBER 26: Cato Institute PolicyPerspectives 2012, New York

NOVEMBER 1: Is Judicial Restraint theProper Response to Judicial Activism?

NOVEMBER 7: The Role of SocialMedia in the 2012 Election

NOVEMBER 8: Libertarianism: WhatEveryone Needs to Know

NOVEMBER 14: Cato Club Naples—Now What? The 2012 PresidentialElection and the Prospects for Liberty

NOVEMBER 14: The Fire Next Door:Mexico’s Drug Violence and the Danger to America

NOVEMBER 15: 30th Annual MonetaryConference

NOVEMBER 20: Wounds That Will NotHeal: Affirmative Action and OurContinuing Racial Divide

NOVEMBER 28: Cato Institute PolicyPerspectives 2012, Chicago

NOVEMBER 28: Obamacare Is StillVulnerable

NOVEMBER 29: What’s New in State Tax Policy? Pro-Growth Reforms vs. Special-Interest Breaks

NOVEMBER 29: War Generation: How Will a Culture of Permanent War Impact America’s Future?

Audio and video for all Cato events dating back to1999, and many events before that, can be found onthe Cato Institute website at www.cato.org/events.You can also find write-ups of Cato events in EdCrane’s bimonthly memo for Cato Sponsors.

CatoCalendar25TH ANNUAL BENEFACTOR SUMMITScottsdale, AZ l Four Seasons ResortFebruary 21–24, 2013Speakers include Vernon Smith, TuckerCarlson, and Sen. Jeff Flake.

CATO INSTITUTE POLICY PERSPECTIVES 2013New York l Waldorf AstoriaMarch 15, 2013

CATO CLUB 200 RETREATLaguna Beach, CAMontage Laguna BeachSeptember 26–29, 2013

A

“All those who wish to stop thedrift toward increased gov-ernment control should con-centrate their effort on mon-

etary policy,” F. A. Hayek once said. At notime since the founding of the FederalReserve nearly a century ago has it been moreimportant to reconsider the policy stepsneeded to avoid future financial crises. At theCato Institute’s 30th Annual Monetary Con-ference, experts came together to examinethe links between sound money, free mar-kets, and limited government—and focus inparticular on how those links might evolvein the years ahead.The conference, “Money, Markets, and

Government: The Next 30 Years,” was direct-ed by Cato vice president for academic affairsJames A. Dorn. In addressing the limits ofmonetary policy, scholars discussed how thechoice between alternative regimes will deter-mine whether economic harmony will spon-taneously emerge or government power willcontinue to grow.In his keynote address, Nobel laureate Ver-

non L. Smith discussed the history of bub-bles, focusing in particular on the similaritiesbetween those that preceded both the GreatRecession and the Great Depression in theUnited States. In both cases, “the imbalancewas fueled by outsized mortgage creditexpansion,” Smith argued, adding that thereare three fundamental responses to such bal-ance sheet crunches, each of which hedetailed in full.Thomas Hoenig, vice chairman of the

Federal Deposit Insurance Corporation,began his panel by asking whether we aresowing the seeds for the next financial crisis.This, he said, was likely. “Incentives matter,”Hoenig explained, “and the incentives towardrisk among the largest financial firms remainbasically unchanged from pre-crisis times.”Jeffrey A. Miron, senior fellow at the CatoInstitute and director of undergraduate stud-ies in economics at Harvard University, fol-lowed by asking a different question: Shouldwe try to avoid the next crisis?“If policymakers focus on this as their

goal, they’re going to adopt policies that typi-cally fail to avoid crises and are counterpro-ductive from a long-term perspective,” Mironargued. The treatment, he said, is almost cer-tainly worse than the disease.John B. Taylor, professor of economics at

Stanford University, focused on the past 30years of monetary policy and what that histo-ry indicates for the next several decades. “Themost important thing that we can do is finda way for monetary policy to get back to arules-based strategy,” he concluded.Other speakers included George S. Tavlas,

director of the Bank of Greece; Jürgen Stark,former chief economist of the European Cen-

tral Bank; Eswar S. Prasad of Cornell Univer-sity; and Gerald P. O’Driscoll Jr., senior fellowat the Cato Institute.In his closing address, Charles I. Plosser,

president of the Federal Reserve Bank ofPhiladelphia, unpacked the “extraordinaryactions” taken by the Fed as of late. He arguedin favor of pursuing a systematic approachinstead, centered on using “robust simplerules” as a guide to the Fed’s policy decision-making process. “Excessive focus on the shortterm can result in long-term problems,” hewarned. “Avoiding these risks is dependenton the Fed executing a graceful exit from thisperiod of extraordinary accommodation.” n

Leading academics join to discuss the steps needed to avoid future crises

Bubbles, Crashes, and Rules at the 30th Annual Monetary Conference

At the 30th Annual Monetary Conference, (1) Spanish economist PEDRO SCHWARTZ (at podium) joined (from left) German economist JÜRGEN STARK, GEORGE S. TAVLAS of the Bank of Greece, and MARY ANASTASIAO’GRADY of the Wall Street Journal; (2) Nobel laureate VERNON SMITH examined the history of bubbles in theUnited States; (3) ZHIWU CHEN, professor of finance at the Yale School of Management, discussed the growingtrend toward capital freedom in China; (4) WILLIAM POOLE (left), a senior fellow at the Cato Institute, chattedwith JÜRGEN STARK (center) and JOHN B. TAYLOR, former under secretary of the Treasury; (5) conferenceorganizer JAMES A. DORN (left), vice president for academic affairs at the Cato Institute, caught up with KEVIN WARSH, a member of the board of governors of the Federal Reserve System from 2006 to 2011; and (6) JOHN B. TAYLOR argued that monetary policymakers should favor a rules-based regime.


1. 2.

3. 4.

5. 6.


Europe has long been the model of themodern welfare state, with many coun-tries providing “cradle-to-grave” pro-tection against the vicissitudes of life.

But the economic crisis that started in Greeceand now pours through Europe has painful-ly revealed the true nature of the welfarestate—it is unaffordable, stifles economicgrowth, and has countries drowning in debt.As the Continent deals with the conse-

quences of its severe fiscal crisis, the UnitedStates has an opportunity to gain a widerange of invaluable perspectives. In Octo-ber, the Cato Institute held a conference—“Europe’s Crisis and the Welfare State: Les-sons for the United States”—in which lead-ing international experts came together toexamine the evolution of the European wel-fare state and discuss the steps that must betaken if America is to avoid arriving at thesame painful destination.In his keynote address, Josef Joffe, pub-

lisher and editor of Die Zeit, began by high-lighting the myth that the financial crisiswas caused by voracious market actorsdevouring easy credit. “The markets fat-tened themselves on a rich diet, but thetable was set by governments,” he said.Without “the inexhaustible cornucopia ofthe state,” Joffe concluded, the financial cri-sis as we know it would not have occurred.Juhan Parts, the minister of economic

affairs and communications for the Repub-lic of Estonia, described how his countrymanaged to reignite its economic perform-ance by reducing the burden of governmentspending. The strategy involved a balancedapproach that went beyond simple austeri-ty, he said. The “three basic pillars” of thisapproach were budget cuts, targeted stimu-lus plans, and reforms that focused on thelong-term competitiveness of the privatesector—all of which helped to restore publicconfidence in markets, Joffe added.In a panel detailing the lessons the Unit-

ed States must learn, Desmond Lachman,resident fellow at the American EnterpriseInstitute, explained what the country maybe facing by first offering a diagnosis of the

crisis in Europe. “The root of the problem,”he said, “is that Europe got itself into themost fixed of exchange rate arrangementsin 1999”—and then spent the next decadeevading the new rules of the game. MichaelTanner, senior fellow at the Cato Instituteand director of the conference, went on toilluminate the magnitude of the problemin the United States.“The real level of debt facing this coun-

try could potentially exceed 900 percent ofGDP,” he argued. “If it did, then we are actu-ally in a worse debt situation—less solvent,if you will—than Greece.”Other speakers throughout the day

included Mickey Levy, chief economist atBank of America; Bruce Stokes, director ofthe Global Economic Attitudes Project atthe Pew Research Center; Miroslav Beblavy,a member of the Slovak Parliament and asenior research fellow with the Centre for

European Policy Studies; and Mark Haller-berg, director of the Fiscal Governance Cen-ter at the Hertie School of Governance inGermany.In his closing address, Richard Fisher,

president of the Federal Reserve Bank of Dal-las, acknowledged the fiscal pathologies theUnited States is currently dealing with, whilealso offering reasons to be optimistic. “Oneis tempted to conclude that we are but thebest-looking horse in the glue factory of hap-less economies,” he said. But if the UnitedStates can free its economy from the uncer-tainty surrounding fiscal policy, he added, itwill be able to avoid the European trap.“The fix lies solely in the hands of a gov-

ernment that has the power to shape taxesand spending programs to incent business-es to go out and hire,” he concluded, “ratherthan ball up into a defensive crouch, orworse, go elsewhere in the world.” n

Experts discuss lessons from the Continent’s woes

Are Europe’s Welfare States Sustainable?

At a Cato Institute Conference, “Europe’s Crisis and the Welfare State,” (1) Spanish economist PEDROSCHWARTZ (at podium) suggested that Europe’s welfare states are fundamentally immoral. He was joined by (from left) ARISTIDES HATZIS of the University of Athens, JAGADEESH GOKHALE of the Cato Institute, andIAN VÁSQUEZ of the Cato Institute; (2) PASCAL SALIN, professor emeritus at the Université Paris-Dauphine,evaluated the effectiveness of austerity programs using the financial realities now facing Europe as a backdrop;(3) JOSEF JOFFE, publisher and editor of Die Zeit and a fellow at the Hoover Institution, discussed “the inex-haustible cornucopia of the state.”

1.

2. 3.


C A T O S T U D I E S

The 11th biennial fiscal report cardon the governors comes at a timewhen those leaders have struggledwith a sluggish recovery, resulting

budget deficits, unemployment, and oth-er economic problems in their states.Many reform-minded governors electedin 2010 have championed tax reforms andspending restraint to get their states backon track. Other governors have expandedgovernment with old-fashioned tax-and-spend policies. In “Fiscal Policy ReportCard on America’s Governors: 2012”(White Paper), Chris Edwards, director oftax policy studies at the Cato Institute,graded all of the states’ governors andawarded four of them A’s—Sam Brown-back of Kansas, Rick Scott of Florida, PaulLePage of Maine, and Tom Corbett ofPennsylvania. Five governors were award-ed F’s—Pat Quinn of Illinois, Dan Malloyof Connecticut, Mark Dayton of Min-nesota, Neil Abercrombie of Hawaii, andChris Gregoire of Washington. Edwards

offers short analyses of each governor’sperformance in addition to a letter grade.

Many states are fac-ing major fiscalproblems in comingyears. Rising debtand growing healthand pension coststhreaten tax increas-es down the road. At the same time,intense global eco-nomic competitionmakes it imperativethat states improvetheir investment cli-mates. To that end,some governors arepursuing broad-based tax reforms,such as cutting

income tax rates and reducing propertytaxes on businesses. This report discussesthose trends and examines the fiscal poli-

cy actions of each governor in an attemptto make their records more transparent.

Amtrak’s Insatiable Appetite forFederal FundsWhen Congress created Amtrak in 1970,passenger-rail advocates hoped that it wouldbecome an efficient and attractive mode oftravel. But, in “Stopping the RunawayTrain: The Case for Privatizing Amtrak”(Policy Analysis no. 712), Cato senior fellowRandal O’Toole shows that more than 40years of operations have disappointed.Amtrak has become the highest-cost modeof intercity travel and remains an insignifi-cant player in the nation's transportationsystem. Nationally, average Amtrak fares aremore than twice as much, per passengermile, as airfares. Despite these high fares, per-passenger-mile subsidies to Amtrak are near-ly 9 times as much as subsidies to airlines,and more than 20 times as much as those todriving. When fares and subsidies are com-bined, its costs per passenger mile are nearly

Grading the Governors from A to F

CATO POLICY REPORT is a bimonthly review published by the Cato Institute and sent to all contributors. It is indexed in PAIS Bulletin.Single issues are $2.00 a copy. ISSN: 0743-605X. ©2010 by the Cato

Institute. • Correspondence should be addressed to Cato Policy Report1000 Massachusetts Ave., N.W., Washington, D.C. 20001. • Website:

www.cato.org, call 202-842-0200, or fax 202-842-3490.

CATO POLICY REPORTDavid Boaz............................................................................EditorDavid Lampo.......................................................Managing EditorDan Jackson........................................................Assistant EditorJon Meyers.................................................................Art DirectorLauren Kessler, Sarah Gormley......................... PhotographersClaudia Ringel............................................................. CopyeditorMai Makled.......................................................Graphic Designer

CATO INSTITUTEJohn A. Allison................................................President and CEORobert A. Levy................................................................ChairmanDavid Boaz.............................................Executive Vice PresidentLesley Albanese....................................................Vice PresidentKhristine Brookes......................................V.P., CommunicationsJames A. Dorn ...........................................V.P., Academic AffairsWilliam Erickson.....................V.P., Finance and AdministrationGene Healy............................................................. Vice PresidentLinda Ah-Sue..................................V.P., Events and ConferencesRoger Pilon.........................................................V.P., Legal AffairsChristopher Preble..........V.P., Defense & Foreign Policy StudiesEdward H. Crane.............................................President Emeritus

Swaminathan Aiyar..........................................Research FellowVirginia Anderson................................Chief Information OfficerDoug Bandow..........................................................Senior FellowLouise Bennetts..........Assoc. Director, Financial Regulation StudiesTrevor Burrus........................................................Legal AssociateMark Calabria...................Director,Financial Regulation Studies

Michael F. Cannon........................Director, Health Policy StudiesTed Galen Carpenter..............................................Senior FellowAndrew Coulson.........Director,Center for Educational FreedomTad DeHaven .........................................................Budget AnalystChris Edwards................................Director, Fiscal Policy StudiesBenjamin H. Friedman......................................Research Fellow Robert Garber.................................................Director, MarketingKaren Garvin.................................................................CopyeditorJagadeesh Gokhale...............................................Senior FellowJim Harper............................Director, Information Policy StudiesNat Hentoff...............................................................Senior FellowJuan Carlos Hidalgo................Policy Analyst on Latin AmericaDaniel J. Ikenson.......................... Director, Trade Policy StudiesAndrei Illarionov.....................................................Senior FellowMalou Innocent.........................................Foreign Policy AnalystSallie James.................................................Trade Policy AnalystJason Kuznicki...................................................Research FellowDavid Lampo.................................................Publications DirectorSimon Lester.................................................Trade Policy AnalystTrisha Line.......................................................................ControllerJustin Logan................................Director, Foreign Policy StudiesTimothy Lynch......................................Director, Criminal JusticeAshley March...............................Director, Foundation RelationsNeal McCluskey...Assoc. Director, Center for Educational FreedomJon Meyers..................................................................Art DirectorDaniel J. Mitchell...................................................Senior FellowJohn Mueller...........................................................Senior FellowJohan Norberg........................................................Senior FellowAlex Nowrasteh................................Immigration Policy AnalystWalter Olson............................................................Senior FellowRandal O’Toole........................................................Senior FellowTom G. Palmer.........................................................Senior FellowAlan Peterson.......................................................Director of MISAaron Ross Powell..............................Editor, Libertarianism.orgAlan Reynolds..........................................................Senior FellowClaudia Ringel.................................. Manager, Editorial Services

David Rittgers ...............................................Legal Policy AnalystJohn Samples...................Director, Ctr. for Representative Govt.Julian Sanchez...................................................Research FellowAdam B. Schaeffer...............................Education Policy AnalystIlya Shapiro..............................................................Senior FellowMichael Tanner.................. .....................................Senior FellowJerry Taylor...............................................................Senior FellowMarian Tupy.............................................................Policy AnalystPeter Van Doren................................................Editor, RegulationIan Vásquez......Director, Ctr. for Global Liberty and ProsperityK. William Watson.......................................Trade Policy Analyst

James M. Buchanan......................Distinguished Senior FellowJosé Piñera......................................Distinguished Senior Fellow

Randy E. Barnett......................................................Senior FellowVladimir Bukovsky..................................................Senior FellowTucker Carlson.........................................................Senior FellowEmily Ekins...........................................................Research FellowLawrence Gasman.............Senior Fellow in TelecommunicationsSteve H. Hanke........................................................Senior FellowJohn Hasnas............................................................ Senior FellowPenn Jillette........................................Mencken Research FellowDavid B. Kopel.......................................Associate Policy AnalystDeepak Lal................................................................Senior FellowChristopher Layne.............Visiting Fellow, Foreign Policy StudiesPatrick J. Michaels.....Senior Fellow in Environmental StudiesJeffrey Miron............................................................Senior FellowP. J. O’Rourke .....................................Mencken Research FellowWilliam Poole...........................................................Senior FellowGerald P. O’Driscoll Jr............................................Senior FellowJim Powell...............................................................Senior FellowRichard W. Rahn..................................................... Senior FellowNicholas Quinn Rosenkranz................................Senior FellowTeller.....................................................Mencken Research FellowCathy Young....................................................Research Associate

Pat Quinn

Chris Gregoire


four times as great as airline costs. “A closelook at the data reveal that Amtrak has failedfor two primary reasons,” O’Toole notes.First, passenger trains simply aren’t competi-tive in most markets. Second, governmentcontrol of Amtrak has saddled it withnumerous inefficiencies, including unsus-tainably expensive labor contracts. “Noamount of reform will overcome the funda-mental problem that, so long as Amtrak ispolitically funded, it will extend service topolitically powerful states even if those statesprovide few riders,” O’Toole continues. Theonly real solution, he writes, is privatization.“Simple justice to Amtrak’s competitors aswell as to taxpayers demands an end to thosesubsidies,” he concludes.

The Transparency Problem“President Obama has committed to mak-ing his administration the most open andtransparent in history,” the Whitehouse.govwebsite declared just minutes after the newpresident took office on January 20, 2009.Yet, it is now clear that government trans-parency has not improved materially sincethe beginning of President Obama’s admin-istration. According to Jim Harper, Cato’sdirector of information policy studies, in“Grading the Government’s Data Publi-cation Practices” (Policy Analysis no. 711),this is not due to lack of interest or effort.“Along with meeting political forces greaterthan his promises,” Harper writes, “the Oba-ma transparency tailspin was a product offailure to apprehend what transparency isand how it is produced.” Starting from a low

transparency baseline, this administrationmade extravagant promises and put signifi-cant effort into the project of government

transparency. It hasnot been a success.House Republicans,who manage a farsmaller segment ofthe government,started from a high-er transparency base-line, made modestpromises, and have

taken limited steps to execute on thosepromises. President Obama lags behindHouse Republicans, but both have a longway to go. The solution, Harper argues, isto tackle the low-hanging fruit first. Estab-lishing an authoritative list of programsand projects within the basic units of gov-ernment, for instance, “is like creating a lan-guage, a simple but important languagecomputers can use to assist Americans intheir oversight of the federal government.”Harper goes on to lay out a variety of gooddata publication practices, which he insistscan help to produce a more accountable,efficient, and responsive government.

The Race for ProtectionThe world is awash in trade-distortingsubsidies. According to Scott Lincicome, aformer employee of Cato’s Center forTrade Policy Studies and now an interna-tional trade attorney at White & Case, gov-ernments have adopted massive “stimu-lus” packages since the financial crisis of

2008—handouts that have included tax-payer subsidies for various industriesincluding agriculture, alternative energy,and automobiles. In “CountervailingCalamity: How to Stop the GlobalSubsidies Race” (Policy Analysis no. 710),Lincicome argues that these subsidieshave, in turn, “distorted global markets,bred cronyism, and undermined freetrade.” They have also encouraged copycatsubsidization, which spawned an increasein litigation at the World TradeOrganization and led to the frequentimposition of protectionist duties. Tradereform is badly needed. “Unfortunately,”Lincicome writes, “the U.S. governmenthas little credibility on this issue: it is oneof the world’s largest subsidizers, funnel-ing billions of dollars annually to chosenindustries, causing economic uncertainty,and creating breeding grounds for corrup-tion.” Yet, ironically, with 59 currentlyactive or pending national countervailingduty (CVD) measures affecting over $11billion of imports, the U.S. government isalso one of the most frequent users of anti-subsidy disciplines. The only answer here,according to Lincicome, is true reform. Bycurtailing federal subsidies to favoredindustries and by changing CVD proce-dures to ensure that they serve the rule ofinternational trade law—rather than pro-tectionist objectives—“the U.S. govern-ment can reduce market distortions,restore some faith in free markets, andlead national and international subsidyreform initiatives,” he concludes.n

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BOY, NOBODY SAW THAT COMINGMost of the arms shipped at the behest ofSaudi Arabia and Qatar to supply Syrianrebel groups fighting the government ofBashar al-Assad are going to hard-lineIslamic jihadists, and not the more secu-lar opposition groups that the Westwants to bolster, according to Americanofficials and Middle Eastern diplomats.—New York Times,October 15, 2012

PARTY SCHOOL: IT MEANS SOMETHINGVERY DIFFERENT IN CHINAFor decades, professors at the CentralParty School have safeguarded the ideol-ogy of China’s Communist Party, indoc-trinating each generation of officials inthe teachings of Marx, Lenin and Mao.The school has persevered in its mis-

sion despite massive changes in societyand the economy. But in recent years, ithas faced a new and insidious threat: stu-dents intent on networking.The students—largely middle-age gov-

ernment officials looking for promo-tion—no longer see their mandatory timeat the school as a chance to immersethemselves in the wisdom of commu-nism. Instead, it’s become a prime placeto cultivate allies with whom they cantrade future favors and backdoor deals tofurther their careers and wealth. Thatmeans calculated friendships, luxury din-ners expensed to local governments andboozy nights on the town . . . .Besides the central school in Beijing,

there are more than 3,000 party schoolsthroughout China, and they trace theirroots to a program created byCommunist forces in 1933 at theirJiangxi mountain base during the coun-try’s long civil war.The most prestigious and influential

branch, however, is the Central PartySchool, which accepts roughly 3,000mid- to high-level officials as students

each year—many tapped by the party’spowerful Organization Department,which controls officials’ assignments andpromotions.The students are mostly in their early

40s to late 50s. And campus life some-times resembles a communist realityshow gone awry—middle-aged menshoved into campus dorms, largely con-fined to campus and forced to discusstheir ideological forebears.—Washington Post, October 12, 2012

THE INTENDED CONSEQUENCES OF GOVERNMENT ACTIONDemocrats had expected to make majorinroads in the Inland Empire [Riversideand San Bernardino counties] 10 yearsago. [Former State Senate Republicanleader Jim] Brulte said that was blunted bya deal cut by Republicans and Democratsin Sacramento to ensure that the 2001redistricting process protected incum-bents. (After that remapping, 264 of 265congressional elections in California werewon by the incumbent party.)—Los Angeles Times, November 11, 2012

DEPENDING ON WHETHER YOU IDENTIFYWITH THE TAXERS OR THE TAXPAYERSHere’s the thing about patching theAMT [Alternative Minimum Tax]—it’sexpensive, which is why Congress hasn’tmade the fix permanent.—Morning Edition, NPR,November 6, 2012

IS THE NANNY STATE PRO-LIFE?The most “pro-life” politician in Americais New York City Mayor MichaelBloomberg. While he supports awoman’s right to choose, he has alsoused his position to promote a whole setof policies that enhance everyone’s quali-ty of life—from his ban on smoking inbars and city parks to reduce cancer, tohis ban on the sale in New York City of

giant sugary drinks to combat obesityand diabetes, to his requirement for post-ing calorie counts on menus in chainrestaurants, to his push to reinstate theexpired federal ban on assault weaponsand other forms of common-sense guncontrol, to his support for early child-hood education, to his support for miti-gating disruptive climate change.—Thomas Friedman,New York Times,October 27, 2012

HOW TO FUND A POLITICAL PARTYTennessee Democrats, who’d watchedtheir conservative voters drift to theGOP, finally lost the state House in2010. That had been a financial lifelinefor Democrats, since the legislature hasbroad powers over patronage.“That pretty much was the end,”

said Cheek, the executive committeemember. “Because we have nothing left.In the other low points, we had theElection Commission, we had theBuilding Commission . . . . If you want-ed to get state deposits into your bank,those were all ours. And that’s whereyou’d raise your money.”Losing those powers “really kicked

the props out from under the financingof the party,” Cheek said.—Washington Post,October 22, 2012

IS THE CONSTITUTION IDEOLOGICAL?[Former Democratic National Chairmanand 2013 gubernatorial candidate Terry]McAuliffe is known as “a dealmaker,” saidJennifer Duffy, who analyzes gubernatori-al races for the nonpartisan Cook PoliticalReport, and [Virginia Attorney GeneralKen] Cuccinelli “is far more ideological ina lot of ways.”“I think [Cuccinelli] walks around

with a copy of the Constitution, andMcAuliffe doesn’t,” she said.—Washington Post, November 28, 2012

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