October 16, 2012

The New Yorker’s Closet Libertarian

James Surowiecki’s attack on “Corporate Welfare Queens” is like something out of Adam Smith’s The Wealth of Nations.

Is Mitt Romney a small-government hypocrite? James Surowiecki’s recent New Yorker piece, “Corporate Welfare Queens” takes Romney to task on just this point. The man who “now seems to fancy himself as a small-government zealot, who promises the end of the culture of entitlement” has had very little to say about “the many American companies whose profits rely, in one form or another, on government assistance,” Surowiecki argues.

  epstein  
  Illustration by Barbara Kelley

His clever title is an obvious riposte to the conservative demonization of Welfare Queens. These are people, usually women, who are charged with collecting excessive welfare benefits through fraud and manipulation. Surowiecki notes that while Mitt Romney, who unwisely attacked 47 percent of the American population for being the beneficiaries of the welfare state, has turned a blind eye toward the corporate welfare queens who snag untold billions in undeserved revenues from the United States government by an even broader range of dubious legal practices that have been sanctified by a corrupt political system.

It’s Time For a “Givings Clause”

Surowiecki’s argument is an unacknowledged tribute to the very libertarian doctrine that he mocks. The libertarian position demands that we examine all government action on a presumption of distrust. In particular, this means that great care should be taken to see that government assets should not be given away to private interests. Rather, they should be transferred through competitive actions that require private parties to pay just compensation to the public treasury for public assets that they buy or lease. In a 1987 article in the Cato Journal, I made the claim that a well-functioning constitution needs to have not only a Takings Clause but also a “Givings Clause.”’

The former, found in the Fifth Amendment, states: “nor shall private property be taken for public use, without just compensation.” The justification for this provision rests on two essential points. The first is that the government needs the power to take in order to overcome the intractable hold-out problems that can arise, for example, when it needs to assemble land for a highway or a key government facility. The second is that the government will exercise that power to take responsibly: It is required to pay fair value for the land or other assets it takes.

The unwritten Givings Clause, which today can be constitutionally justified under the public trust doctrine, would state the converse proposition: “nor shall public property be given to private use, without just compensation.” The government should act like a responsible officer of a corporation when it manages public assets. Accordingly, as a public fiduciary, its business judgments must be made in good faith to maximize the wealth in the public treasury. It cannot, therefore, give away any of those assets to any private party for less than market value. It does not matter one whit whether the beneficiary is a large and influential corporation, a religious organization, or some impoverished individual artisan.

Surowiecki’s Litany of Government Abuses

Surowiecki takes a page out of the libertarian playbook when he denounces corporate welfare queens. Indeed, all of his credible examples of government abuse are textbook violations of the exacting requirements of the hypothetical Givings Clause. He mentions, for instance, the tradition of high protective tariffs to safeguard established domestic businesses, rightly denounced in Adam Smith’s The Wealth of Nations.

Unfortunately, these tariffs have been championed all too often in the United States by partisans on all points of the political spectrum. Such tariffs offend libertarian principles because they necessarily put the government in a position of disrupting voluntary transactions between citizens and foreigners, by making them pay hostage money to a third party.

Tariffs are legitimate to the extent that the revenues collected are used to cover the cost of inspection of foreign shipments to see that they do not contain dangerous or contaminated goods. But they are not justified to protect domestic firms against foreign competition, which is why Smith denounced them. The same argument, it is worth adding, applies to the equally strenuous efforts of ordinary labor to prevent the entry of poor immigrants into the United States, who could break labor’s stranglehold in certain industries. But Surowiecki is too partisan to mention the dangers of a labor monopoly in the same breath as a business monopoly, even though these have received consistent government support and protection for close to 100 years.

Surowiecki next turns to the lamentable government practice whereby the United States issues leases to various businesses for government lands, be it for oil drilling or cattle grazing, on bargain-basement terms. This, again, is a per se violation of the Givings Clause because the government receives, on behalf of the public, far less than it gives away.

But by the same token, governments are experts at the extraction game, whereby they condition ordinary building permits on the willingness of private owners to pay hefty sums into the public treasury in order to fund the construction of new facilities. These fees should, on balance, be imposed on the public at large, not on one tiny segment of it. The new building on the block need not pay for the construction of a new subway that provides most of its benefits to current residents who have lived in the neighborhood for years.

Surowiecki is also correct to attack the efforts of traditional broadcast licensees to receive valuable swaths of spectrum at below market prices. Ronald Coase, in his classic 1959 article on The Federal Communications Commission, makes exactly that same point but from the point of view of a defender of property rights who follows in Smith’s footsteps. The correct solution is for the government to define property rights in the electromagnetic spectrum such that it can then auction them off to the highest bidder, not give them away to insiders.

By the same token, it is only the strong principles of limited government that offer the nation a chance to get rid of the many agricultural subsidies that have been put in place over the years. But to keep the historical record straight on this issue, the villain here is Franklin Delano Roosevelt’s administration, which introduced many of the worst features into the Agricultural Adjustment Acts. These features organized the industry-wide cartels that were duly sustained by the Roosevelt Supreme Court in the still notorious case of Wickard v. Filburn, which expanded federal power for the sole purpose of organizing and maintaining agricultural cartels. Ironically, it was that dreadful constitutional decision that paved the way for the current scandalous ethanol tax credit program that Surowiecki rightly denounces for distorting agricultural markets at home and abroad, but which commands the undying support of farm state Democrats and Republicans alike.

Surowiecki constructively denounces various forms of occupational licensing, which have long been opposed by the Institute for Justice, a libertarian organization with which I have worked since its inception in 1991. He is also correct in his denunciation of the expanded copyright terms, most notably in the Copyright Term Extension Act.

Where Surowiecki Goes Astray  

Most of the particulars in Surowiecki’s indictment are justified precisely because they fit in so well with general libertarian principles. Indeed, when he goes off track is when he departs from the libertarian framework. Consider his wild claim that the patent system confers hundreds of billions of dollars in illicit subsidies on the pharmaceutical industry. It takes around $1.3 billion to bring a new drug to market, and no firm can afford to expend that kind of money on research and clinical trials unless they are ensured exclusive rights.

It is ludicrous to compare these innovations to the cartels that have no productive advantage at all. I am not aware of anyone who thinks that, on average, the length or scope of pharmaceutical patents is too long, not even Judge Richard Posner, whose intemperate attacks on other aspects of the patent system, most notably business method and software patents, are over the top. Here, Surowiecki presents a one-sided presentation of a difficult issue.

At a more general level, his key conceptual confusion is to assume that all corporations are in cahoots, with each supporting the efforts of the other to be welfare queens. In truth, that position is not in any individual corporation’s own interest. The essence of corporate greed is to be protectionist with respect to your own interest, but to support free trade and open borders for everyone else who supplies you with needed goods and services. That position makes perfectly good sense because none of the programs that Surowiecki denounces works for the benefit of corporations as a class.

For example, the peculiar allocation of broadcast frequencies imposes heavy costs on telecommunication companies and others that need to transport huge volumes of data over the airways. They, of course, oppose the continued retention of these privileged broadcast licenses. The processors of candy have nothing but contempt for the powerful sugar lobby that manages to impose sharp limitations on the quantities of sugar that can be imported into the United States. Virtually all firms that manufacture agriculture and meat products are hurt by the long-term successes of the ethanol lobby.

The difficulty here is the standard public choice problem. Even wealthy but disorganized corporate groups find it difficult to oppose concentrated industry interests on matters closest to their economic core. Thus, those groups that hurt businesses and consumers alike all too often retain their protectionist stranglehold over the economy.

Corporate welfare queens also operate with a vengeance in connection with entitlements like social security, Medicare, and Medicaid—not that Surowiecki mentions the dangerous political dynamic that has driven these programs to the brink of ruin.  In the case of entitlements, an alliance of strange bedfellows has made the expansion of these programs inexorable.

On the one hand, these causes are championed by those who think that redistribution of wealth in the name of social equity is more important than overall economic efficiency. On the other, powerful corporations hope to receive lucrative contracts to run these programs. The unholy alliance between corporate welfare queens and entitlements cannot be dismissed with the blithe observation that Romney cares only about his corporate clients and nothing for the average Joe.

It is easy to take potshots at Romney by pointing out the dangers of corporate welfare. But it takes a bit more candor and courage to attack the entitlement system for the common man, given that this grotesque network of taxes, subsidies, boards, and formulas is in real tension with the very libertarian principles that lend credibility to attacks on corporate welfare queens. 


Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).


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