Continuing this essay series on free markets using Milton Friedman’s classic book, Free to Choose, in this essay we’ll explore Friedman’s discussion of the government’s performance in education and the environment, at least as of the writing of the book in 1979.
As Friedman writes:
We have always been proud, and with good reason, of the widespread availability of schooling to all and the role that public schooling has played in fostering the assimilation of newcomers into our society, preventing fragmentation and divisiveness, and enabling people from different cultural and religious backgrounds to live together in harmony. Unfortunately, in recent years our educational record has become tarnished. Parents complain about the declining quality of the schooling their children receive. Many are even more disturbed about the dangers to their children’s physical well-being. Teachers complain that the atmosphere in which they are required to teach is often not conducive to learning. Increasing numbers of teachers are fearful about their physical safety, even in the classroom. Taxpayers complain about growing costs. Hardly anyone maintains that our schools are giving the children the tools they need to meet the problems of life. Instead of fostering assimilation and harmony, our schools are increasingly a source of the very fragmentation that they earlier did so much to prevent … Power has instead gravitated to professional educators. The sickness has been aggravated by increasing centralization and bureaucratization of schools, especially in the big cities. Education is still another example, like Social Security, of the common element in authoritarian and socialist philosophies. Aristocratic and authoritarian Prussia and Imperial France were the pioneers in state control of education. Socialistically inclined intellectuals in the United States, Britain, and later Republican France were the major supporters of state control in their countries.
Friedman explains how bureaucrats often argue that falls in metrics of success should be met with increases, not decreases, in expenditures:
[W]e referred to the Theory of Bureaucratic Displacement that Dr. Max Gammon had developed after studying the British National Health Service: in his words, in “a bureaucratic system ... increase in expenditure will be matched by fall in production ... Such systems will act rather like ‘black holes’ in the economic universe, simultaneously sucking in resources, and shrinking in terms of ‘emitted’ production.” His theory applies in full force to the effect of the increasing bureaucratization and centralization of the public school system in the United States. In the five years from school year 1971–72 to school year 1976–77, total professional staff in all U.S. public schools went up 8 percent, cost per pupil went up 58 percent in dollars (11 percent after correction for inflation). Input clearly up. And we suspect that few readers will demur from the proposition that the quality of schooling went down even more drastically than the quantity. That is certainly the story told by the declining grades recorded on standardized examinations. Output clearly down. Is the decline in output per unit of input due to increasingly bureaucratic and centralized organization? As some evidence, the number of school districts went down by 17 percent in the seven-year period from 1970–71 to 1977–78—continuing the longer-term trend to greater centralization. As to bureaucratization, for a somewhat earlier five-year period for which data are available (1968–69 to 1973–74), when the number of students went up 1 percent, the total professional staff went up 15 percent, and teachers 14 percent, but supervisors went up 44 percent.
Government grows bureaucracies, which leads to diminishing or negative marginal returns on inputs. And in the area of education, the bureaucrats edge out parents, to students’ detriment:
In schooling, the parent and child are the consumers, the teacher and school administrator the producers. Centralization in schooling has meant larger size units, a reduction in the ability of consumers to choose, and an increase in the power of producers. Teachers, administrators, and union officials are no different from the rest of us. They may be parents, too, sincerely desiring a fine school system. However, their interests as teachers, as administrators, as union officials are different from their interests as parents and from the interests of the parents whose children they teach. Their interests may be served by greater centralization and bureaucratization even if the interests of the parents are not—indeed, one way in which those interests are served is precisely by reducing the power of parents. One way to achieve a major improvement, to bring learning back into the classroom, especially for the currently most disadvantaged, is to give all parents greater control over their children’s schooling, similar to that which those of us in the upper-income classes now have. Parents generally have both greater interest in their children’s schooling and more intimate knowledge of their capacities and needs than anyone else. Social reformers, and educational reformers in particular, often self-righteously take for granted that parents, especially those who are poor and have little education themselves, have little interest in their children’s education and no competence to choose for them. That is a gratuitous insult. Such parents have frequently had limited opportunity to choose. However, U.S. history has amply demonstrated that, given the opportunity, they have often been willing to sacrifice a great deal, and have done so wisely, for their children’s welfare. No doubt, some parents lack interest in their children’s schooling or the capacity and desire to choose wisely. However, they are in a small minority. In any event, our present system unfortunately does little to help their children. One simple and effective way to assure parents greater freedom to choose, while at the same time retaining present sources of finance, is a voucher plan. Suppose your child attends a public elementary or secondary school. On the average, countrywide, it cost the taxpayer—you and me—about $2,000 per year in 1978 for every child enrolled. If you withdraw your child from a public school and send him to a private school, you save taxpayers about $2,000 per year—but you get no part of that saving except as it is passed on to all taxpayers, in which case it would amount to at most a few cents off your tax bill. You have to pay private tuition in addition to taxes—a strong incentive to keep your child in a public school. Suppose, however, the government said to you: “If you relieve us of the expense of schooling your child, you will be given a voucher, a piece of paper redeemable for a designated sum of money, if, and only if, it is used to pay the cost of schooling your child at an approved school.” The sum of money might be $2,000, or it might be a lesser sum, say $1,500 or $1,000, in order to divide the saving between you and the other taxpayers. But whether the full amount or the lesser amount, it would remove at least a part of the financial penalty that now limits the freedom of parents to choose.14 The voucher plan embodies exactly the same principle as the GI bills that provide for educational benefits to military veterans. The veteran gets a voucher good only for educational expense and he is completely free to choose the school at which he uses it, provided that it satisfies certain standards. Parents could, and should, be permitted to use the vouchers not only at private schools but also at other public schools—and not only at schools in their own district, city, or state, but at any school that is willing to accept their child. That would both give every parent a greater opportunity to choose and at the same time require public schools to finance themselves by charging tuition (wholly, if the voucher corresponded to the full cost; at least partly, if it did not). The public schools would then have to compete both with one another and with private schools. This plan would relieve no one of the burden of taxation to pay for schooling. It would simply give parents a wider choice as to the form in which their children get the schooling that the community has obligated itself to provide. The plan would also not affect the present standards imposed on private schools in order for attendance at them to satisfy the compulsory attendance laws … Violence of the kind that has been rising in public schools is possible only because the victims are compelled to attend the schools that they do. Give them effective freedom to choose and students—black and white, poor and rich, North and South—would desert schools that could not maintain order … The National Education Association and the American Federation of Teachers claim that vouchers would destroy the public school system, which, according to them, has been the foundation and cornerstone of our democracy. Their claims are never accompanied by any evidence that the public school system today achieves the results claimed for it—whatever may have been true in earlier times. Nor do the spokesmen for these organizations ever explain why, if the public school system is doing such a splendid job, it needs to fear competition from nongovernmental, competitive schools or, if it isn’t, why anyone should object to its “destruction.” The threat to public schools arises from their defects, not their accomplishments. In small, closely knit communities where public schools, particularly elementary schools, are now reasonably satisfactory, not even the most comprehensive voucher plan would have much effect. The public schools would remain dominant, perhaps somewhat improved by the threat of potential competition. But elsewhere, and particularly in the urban slums where the public schools are doing such a poor job, most parents would undoubtedly try to send their children to nonpublic schools.
Friedman describes the increase in bureaucracy that occurred half a century ago, and has only gotten worse since then. The growth in bureaucracy slows the growth of just about everything else:
Government expenditures on both older and newer agencies skyrocketed—from less than $1 billion in 1970 to roughly $5 billion estimated for 1979. Prices in general roughly doubled, but these expenditures more than quintupled. The number of government bureaucrats employed in regulatory activities tripled, going from 28,000 in 1970 to 81,000 in 1979; the number of pages in the Federal Register, from 17,660 in 1970 to 36,487 in 1978, taking 127 inches of shelf space—a veritable ten-foot shelf. During the same decade, economic growth in the United States slowed drastically. From 1949 to 1969, output per man-hour of all persons employed in private business—a simple and comprehensive measure of productivity—rose more than 3 percent a year; in the next decade, less than half as fast; and by the end of the decade productivity was actually declining. Why link these two developments? One has to do with assuring our safety, protecting our health, preserving clean air and water; the other, with how effectively we organize our economy. Why should these two good things conflict? The answer is that whatever the announced objectives, all of the movements in the past two decades—the consumer movement, the ecology movement, the back-to-the-land movement, the hippie movement, the organic-food movement, the protect-the-wilderness movement, the zero-population-growth movement, the “small is beautiful” movement, the antinuclear movement—have had one thing in common. All have been antigrowth. They have been opposed to new developments, to industrial innovation, to the increased use of natural resources. Agencies established in response to these movements have imposed heavy costs on industry after industry to meet increasingly detailed and extensive government requirements. They have prevented some products from being produced or sold; they have required capital to be invested for nonproductive purposes in ways specified by government bureaucrats. The results have been far-reaching and threaten to be even more so. As Edward Teller, the great nuclear physicist, once put it, “It took us eighteen months to build the first nuclear power generator; it now takes twelve years; that’s progress.” The direct cost of regulation to the taxpayer is the least part of its total cost. The $5 billion a year spent by the government is swamped by the costs to industry and consumer of complying with the regulations. Conservative estimates put that cost at something like $100 billion a year. And that doesn’t count the cost to the consumer of restricted choice and higher prices for the products that are available. This revolution in the role of government has been accompanied, and largely produced, by an achievement in public persuasion that must have few rivals. Ask yourself what products are currently least satisfactory and have shown the least improvement over time. Postal service, elementary and secondary schooling, railroad passenger transport would surely be high on the list. Ask yourself which products are most satisfactory and have improved the most. Household appliances, television and radio sets, hi-fi equipment, computers, and, we would add, supermarkets and shopping centers would surely come high on that list. The shoddy products are all produced by government or government-regulated industries. The outstanding products are all produced by private enterprise with little or no government involvement. Yet the public—or a large part of it—has been persuaded that private enterprises produce shoddy products, that we need ever vigilant government employees to keep business from foisting off unsafe, meretricious products at outrageous prices on ignorant, unsuspecting, vulnerable customers. That public relations campaign has succeeded so well that we are in the process of turning over to the kind of people who bring us our postal service the far more critical task of producing and distributing energy.
When the government “stops bad things,” it also too often blocks good things as well:
Of course it is desirable that the public be protected from unsafe and useless drugs. However, it is also desirable that new drug development should be stimulated, and that new drugs should be made available to those who can benefit from them as soon as possible. As is so often the case, one good objective conflicts with other good objectives. Safety and caution in one direction can mean death in another … Granted all this, may these costs not be justified by the advantage of keeping dangerous drugs off the market, of preventing a series of thalidomide disasters? The most careful empirical study of this question that has been made, by Sam Peltzman, concludes that the evidence is unambiguous: that the harm done has greatly outweighed the good. He explains his conclusion partly by noting that “the penalties imposed by the marketplace on sellers of ineffective drugs before 1962 seems to have been sufficient to have left little room for improvement by a regulatory agency.” After all, the manufacturers of thalidomide ended up paying many tens of millions of dollars in damages—surely a strong incentive to avoid any similar episodes. Of course, mistakes will still happen—the thalidomide tragedy was one—but so will they under government regulation. The evidence confirms what general reasoning strongly suggests. It is no accident that the FDA, despite the best of intentions, operates to discourage the development and prevent the marketing of new and potentially useful drugs.
Friedman asks us to examine the pro-blocking incentives experienced by the bureaucrat in charge:
Put yourself in the position of an FDA official charged with approving or disapproving a new drug. You can make two very different mistakes: Approve a drug that turns out to have unanticipated side effects resulting in the death or serious impairment of a sizable number of persons. Refuse approval of a drug that is capable of saving many lives or relieving great distress and that has no untoward side effects. If you make the first mistake—approve a thalidomide—your name will be spread over the front page of every newspaper. You will be in deep disgrace. If you make the second mistake, who will know it? The pharmaceutical firm promoting the new drug, which will be dismissed as an example of greedy businessmen with hearts of stone, and a few disgruntled chemists and physicians involved in developing and testing the new product. The people whose lives might have been saved will not be around to protest. Their families will have no way of knowing that their loved ones lost their lives because of the “caution” of an unknown FDA official. With the best will in the world, you or I, if we were in that position, would be led to reject or postpone approval of many a good drug in order to avoid even a remote possibility of approving a drug that will have newsworthy side effects. This inevitable bias is reinforced by the reaction of the pharmaceutical industry. The bias leads to unduly stringent standards. Getting approval becomes more expensive, time-consuming, and risky. The harm done by the FDA does not result from defects in the people in charge—unless it be a defect to be human. Many have been able and devoted civil servants. However, social, political, and economic pressures determine the behavior of the people supposedly in charge of a government agency to a far greater extent than they determine its behavior. No doubt there are exceptions, but they are rare …
So, too, environmental protection has led to stalled energy and infrastructure projects that could have helped everyone:
The preservation of the environment and the avoidance of undue pollution are real problems and they are problems concerning which the government has an important role to play. When all the costs and benefits of any action, and the people hurt or benefited, are readily identifiable, the market provides an excellent means for assuring that only those actions are undertaken for which the benefits exceed the costs for all participants. But when the costs and benefits or the people affected cannot be identified, there is a market failure of the kind discussed in Chapter 1 as arising from “third-party” or neighborhood effects. Public discussion of the environmental issue is frequently characterized more by emotion than reason. Much of it proceeds as if the issue is pollution versus no pollution, as if it were desirable and possible to have a world without pollution. That is clearly nonsense. No one who contemplates the problem seriously will regard zero pollution as either a desirable or a possible state of affairs. We could have zero pollution from automobiles, for example, by simply abolishing all automobiles. That would also make the kind of agricultural and industrial productivity we now enjoy impossible, and so condemn most of us to a drastically lower standard of living, perhaps many even to death. One source of atmospheric pollution is the carbon dioxide that we all exhale. We could stop that very simply. But the cost would clearly exceed the gain.
Proponents of government blocking too often equate consumers with the bogeyman of “big business”:
The real problem is not “eliminating pollution,” but trying to establish arrangements that will yield the “right” amount of pollution: an amount such that the gain from reducing pollution a bit more just balances the sacrifice of the other good things—houses, shoes, coats, and so on—that would have to be given up in order to reduce the pollution. If we go farther than that, we sacrifice more than we gain. Another obstacle to rational analysis of the environmental issue is the tendency to pose it in terms of good or evil—to proceed as if bad, malicious people are pouring pollutants into the atmosphere out of the blackness of their hearts, that the problem is one of motives, that if only those of us who are noble would rise in our wrath to subdue the evil men, all would be well. It is always much easier to call other people names than to engage in hard intellectual analysis. In the case of pollution, the devil blamed is typically “business,” the enterprises that produce goods and services. In fact, the people responsible for pollution are consumers, not producers. They create, as it were, a demand for pollution. People who use electricity are responsible for the smoke that comes out of the stacks of the generating plants. If we want to have the electricity with less pollution, we shall have to pay, directly or indirectly, a high enough price for the electricity to cover the extra costs. Ultimately, the cost of getting cleaner air, water, and all the rest must be borne by the consumer. There is no one else to pay for it. Business is only an intermediary, a way of coordinating the activities of people as consumers and producers.
Friedman then turns to discuss inflation:
It remains as true now as it was then that a more rapid increase in the quantity of money than in the quantity of goods and services available for purchase will produce inflation, raising prices in terms of that money … Today, when the commonly accepted media of exchange have no relation to any commodity, the quantity of money is determined in every major country by government. Government and the government alone is responsible for any rapid increase in the quantity of money. That very fact has been the major source of confusion about the cause and the cure of inflation. No government is willing to accept responsibility for producing inflation, even in less virulent degree. Government officials always find some excuse—greedy businessmen, grasping trade unions, spendthrift consumers, Arab sheikhs, bad weather, or anything else that seems even remotely plausible … The recognition that substantial inflation is always and everywhere a monetary phenomenon is only the beginning of an understanding of the cause and cure of inflation. The more basic question is, why do modern governments increase the quantity of money too rapidly? Why do they produce inflation when they understand its potential for harm? If the quantity of goods and services available for purchase—output, for short—were to increase as rapidly as the quantity of money, prices would tend to be stable. Inflation occurs when the quantity of money rises appreciably more rapidly than output, and the more rapid the rise in the quantity of money per unit of output, the greater the rate of inflation. There is probably no other proposition in economics that is as well established as this one. Output is limited by the physical and human resources available and by the improvement in knowledge and capacity to use them. At best, output can grow only fairly slowly … [T]he deeper question is why excessive monetary growth occurs … Higher government spending will not lead to more rapid monetary growth and inflation if additional spending is financed either by taxes or by borrowing from the public. In that case, government has more to spend, the public has less. Higher government spending is matched by lower private spending for consumption and investment. However, taxing and borrowing from the public are politically unattractive ways to finance additional government spending. Many of us welcome the additional government spending; few of us welcome additional taxes. Government borrowing from the public diverts funds from private uses by raising interest rates, making it both more expensive and more difficult for individuals to get mortgages on new homes and for businesses to borrow money. The only other way to finance higher government spending is by increasing the quantity of money … [T]he U.S. government can do that by having the U.S. Treasury—- one branch of the government—sell bonds to the Federal Reserve System—another branch of the government. The Federal Reserve pays for the bonds either with freshly printed Federal Reserve Notes or by entering a deposit on its books to the credit of the U.S. Treasury. The Treasury can then pay its bills with either the cash or a check drawn on its account at the Fed. When the additional high-powered money is deposited in commercial banks by its initial recipients, it serves as reserves for them and as the basis for a much larger addition to the quantity of money. Financing government spending by increasing the quantity of money is often extremely attractive to both the President and members of Congress. It enables them to increase government spending, providing goodies for their constituents, without having to vote for taxes to pay for them, and without having to borrow from the public … Financing government spending by increasing the quantity of money looks like magic, like getting something for nothing. To take a simple example, government builds a road, paying for the expenses incurred with newly printed Federal Reserve Notes. It looks as if everybody is better off. The workers who build the road get their pay and can buy food, clothing, and housing with it. Nobody has paid higher taxes. Yet there is now a road where there was none before. Who has paid for it? The answer is that all holders of money have paid for the road. The extra money raises prices when it is used to induce the workers to build the road instead of engage in some other productive activity. Those higher prices are maintained as the extra money circulates in the spending stream from the workers to the sellers of what they buy, from those sellers to others, and so on. The higher prices mean that the money people previously held will now buy less than it would have before. In order to have on hand an amount of money that can buy as much as before, they will have to refrain from spending all of their income and use part of it to add to their money balances. The extra money printed is equivalent to a tax on money balances. If the extra money raises prices by 1 percent, then every holder of money has in effect paid a tax equal to 1 percent of his money holdings … Inflation also yields revenue indirectly by automatically raising effective tax rates. As people’s dollar incomes go up with inflation, the income is pushed into higher brackets and taxed at a higher rate. Corporate income is artificially inflated by inadequate allowance for depreciation and other costs. On the average, if income rises by 10 percent simply to match a 10 percent inflation, federal tax revenue tends to go up by more than 15 percent—so the taxpayer has to run faster and faster to stay in the same place … Five simple truths embody most of what we know about inflation: Inflation is a monetary phenomenon arising from a more rapid increase in the quantity of money than in output (though, of course, the reasons for the increase in money may be various). In today’s world government determines—or can determine—the quantity of money. There is only one cure for inflation: a slower rate of increase in the quantity of money. It takes time—measured in years, not months—for inflation to develop; it takes time for inflation to be cured. Unpleasant side effects of the cure are unavoidable.
In the next essay in this series, we’ll examine Friedman’s observation that no matter how unpopular government gets, its failed programs tend to linger on.
Paul, Wow, and this was 1979. Look how much worse it has gotten since. Depressing.