Book Reviews

460 BOOKS Bargaining with the State by Richard Epstein Princeton University Press, 1993 • 322 pages. $35.00 Reviewed by Jonathan H. Adler I n Takings: Private Property and the Power ofEminent Domain (Harvard Uni versity Press, 1985), University of Chicago law professor Richard Epstein challenged the constitutional legitimacy of nearly every federal government action since 1937. He could scarcely do it again: "Once the New Deal has been declared unconstitutional (as only an academic can do), it is hard to do it a second time." Therefore, with his newest book he has moved to a more limited but intricately related project to ensure "that useful projects go forward in a sensible fashion." Where Takings focused on con stitutionallimits to the power of government to regulate and "take" private property without giving compensation, Bargaining with the State assesses the lesser known doctrine of unconstitutional conditions which limits the government's power to "give. "

This doctrine holds that the state should not be permitted to condition the conferring of benefits "upon the individual waiver of constitutional rights." To protect freedom of speech, government must restrain privi leging certain forms of speech, through subsidies and the like, just as it must refrain from censorship. As Epstein notes, "The power to contract and to grant, when lodged in the hands of government, may well prove to be as dangerous as the power to take and to regulate." For instance, by controlling access to highways and selectively granting incorporation privileges the state can wield an inordinate amount of influence over the lives of individuals. Because of the potential for abuse, this doctrine "is the necessary counterweight to the federal government's exercise of monopoly power." When state power is increased through a Byzantine array of tax codes and regulatory strictures, the dangers posed by its improper use in crease exponentially. If the size of the state itself cannot be controlled, the doctrine of unconstitutional conditions can at least rein in its destructive power. Epstein describes this approach as "a 'second-best' approach to controlling government discretion."

To illustrate the doctrine of unconstitu tional conditions, consider the recent Su preme Court case Nollan v. California Coastal Commission. The Nollans owned beachfront property in Ventura County, California, upon which they wished to build a home. The California Coastal Commis sion, however, refused to issue a building permit unless the Nollans were willing to allow public access to a path along their property. The Nollans rightfully objected, claiming that the only grounds for attaching such a condition to a construction permit would be if the state could prove that the proposed house "would have a direct ad verse impact on public access to the [public] beach." In his majority opinion, Justice Antonin Scalia ruled that if the California Coastal Commission (CCC) needed land for a public pathway, it could use the power of eminent domain to take a portion of the NoUans' property and compensate them for their loss. However, the CCC was in no way entitled to hold hostage the Nollans' right to build a house on their own land to achieve its objective. Scalia ruled that "unless the permit condition serves the same govern mental purpose as the development ban, the building restriction is not a valid regulation of land use but 'an out-and-out plan of extortion. ' " The Court ruled that the only means that the CCC could use to obtain the desired path was to pay the Nollans for it.

Only then would the CCC be abiding by the Fifth Amendment dictum "nor shall private property be taken for public use without just compensation. " The N ollan decision was not nearly as sweeping as one might like, but it illustrates the general principles behind the doctrine of unconstitutional conditions. The court did not challenge the state's power to regulate land-use decisions, but it did proscribe how the state could exercise that power. This doctrine holds that even if the state is granted a particular power, that does not imbue the state with unlimited discretion in how that power is used. If the state is empowered to build and manage roads, for example, there are still limits to what con ditions the state can impose on those who use the roads. Reasonable limitations might include prohibitions against drunk driving, speed limits, and include generic guidelines, such as driving on the right side of the road.

However, the state is in no position to condition access to a "public" road on anything that does not promote the state's interest in maintaining a usable road. Con stitutional conditions require some "nexus" between the benefit provided or right pro tected and the condition imposed. "Some 'related' conditions may be improper," writes Epstein, "but the nexus requirement weeds out many 'unrelated' conditions that are manifestly improper." Even when the state owns, manages, or doles out a good, service, or privilege, it cannot act as would a private owner in at taching strings to various operations. This is because "unlike a private monopolist, its power cannot be eroded by the entry of new firms,but is perpetuated by a legalprohibition againstentry by new rivals." As in the N ollan case, ifthe state is the only entity empowered to issue building permits, landowners can not take their business elsewhere, so to speak, if the state attaches unreasonable conditions to the permit. If such permitting powers are to exist (hardly a forgone con clusion) the doctrine of unconstitutional conditions is necessary to limit their use.

While the argument put forward in Bar gaining is highly persuasive, some may be uncomfortable with its reliance on utilitarian analysis. Epstein wants to carve out as much space for the competitive marketplace as is possible in today's constrained political climate. His justification is that infringing upon the market' 'leads to suboptimal social results." In his view, "The goal of consti tutional law should be to maximize overall surplus by the maintenance of competitive 461 markets." Epstein's conclusion is sound, though some may question how he got there. Nonetheless, Richard Epstein has pro vided us with another immensely important work. Epstein's thought is a refreshing de parture from the mainstream of legal thought that preaches an extension of state power at the expense of the individual. Voices such as his should be heard more often. D Jonathan H. Adler is Associate Director of En vironmental Studies at the Competitive Enter prise Institute in Washington, D.C.

Public Education: An Autopsy by Myron Lieberman Harvard University Press. 1993 .400 pages. $27.95 Reviewed by George C. Leef A s chance would have it, I was reading Myron Lieberman's book Public Edu cation: An Autopsy at the same time the Michiganlegislature was strugglingwith the issues of educational finance and quality reform. Juxtaposing the two, the ultimate futility of the legislature's endeavors was obvious. If Lieberman's powerful analysis is correct-and I am convinced that it is changing the tax mix which funds public education and instituting marginal quality adjustments in the schools is the equivalent of rearranging the deck chairs on the Ti tanic. This ship is sinkingand nobody can do anything about it. At the outset, it is important to specify exactly what it is that Lieberman says has died, necessitating an autopsy. Notwith standing his title, he is not claiming that public education is dead. As any taxpayer can tell you, it is still alive and kicking.

Rather, Lieberman maintains, the rationale for public education is dead. The intellectual case that public provision of educational services is optimal or at least preferable to the market alternative has sustained such devastating rebuttals that it is, in the au thor's words, "beyond life-sustaining mea sures. "

462 THE FREEMAN • AUGUST 1994 Standing alone, Lieberman's book goes far toward proving his point. He examines the standard defenses for public education (the public goods argument, the contention that it is necessary to instill democratic values, and so on) and exposes their logical and factual defects. Of course, he is not the first to perform this task, and if read in conjunction with other hard-hitting critiques of public education which have been pub lished recently (books by Thomas Sowell, John Chubb and Terry Moe, Chester Finn, Charles Sykes, to name some of the more prominent), Lieberman's contention is, I believe, indisputably true. The notion that public education serves the nation well now stands on a par with the geocentric theory of the universe. Not only does Lieberman argue that the rationale for public education is dead, he also contends that demographic changes in the United States will so undermine its base of support that it will eventually give way to a market-oriented system. Low birth rates, the aging of the population, stronger inter national economic competition, rising juve nile crime, and a host of other factors will create an increasingly hostile environment for public education. He predicts that in the future, we will return to the three-sector educational industry we had during the nine teenth century: public schools, denomina tional and other nonprofit private schools, and schools for profit. (The inclusion of schools for profit is, in Lieberman's think ing, crucial. Competition from them is es sential if nonprofit schools, public and pri vate, are to function optimally.) On this point, I wish I could be as opti mistic as the author. The public education establishment has proven itself adept at using public relations and political muscle to expand over the last twenty years, despite the presence of undermining factors. As the Post Office demonstrates, governmental monopolies are very tough breeds, capable of surviving demographic and economic factors which would kill or cause major changes in any ordinary business. I hope that Lieberman is right, but I am skeptical.

The theme which recurs throughout the book is that public education is dominated by the producers-the teachers and admin istrators. Their funding comes directly from government rather than from satisfied cus tomers and when it comes to influencing the government, well-organized interest groups (such as the National ~ducational Association and its state chapters) have an enormous advantage over unorganized par ents. They employfull-timestaffsto lobby for the enactment ofnew lawsthat willmake their position more secure and comfortable and they spend lavishly on political action. Against that, the consumers have about as much chance as a glider against an F-15. The fact that public education is so dom inated by the producers enshrines an unsat isfactory status quo. Lieberman writes, "[T]he largest cost of producer domination is the impossibility of fundamental improve ment. The past few decades have witnessed significant improvements in health care, transportation, financial services, telecom munications-virtually every major service except education." What has led to im provements in those fields? Competition.

Competition is the great force which brings about progress, but competition is anathema to the education establishment. Any policy proposal which would bring about even a modicum of real competition will be op posed to the fullest by the forces of the NEA and its allies. How different would things be if we had a market system of education? On a host of educational issues, Lieberman shows how the competitive process of the market would give us far more satisfactory results than we get from the monopolistic status quo. For example, he argues that report cards do a poor job of communicating student perfor mance since there are so many disincentives to candor in the present system. But under competition, "effective schools would have strong incentives to expose the deficiencies of ineffective schools. Under these circum stances, schools would not be able to de ceive parents over a long period of time."

Thus, competition would minimize if not eliminate the problem of grade inflation. Indeed, perhaps the greatest of the book's virtues is that it shows non-economists how incredibly much better they are served by markets than by politics. Mter reading Au topsy, it would be nearly impossible for anyone to take the benefits of market com petition for granted or to remain oblivious to the inevitable waste and inefficiency which result from politicization. Lieberman is not an economist, but he has produced an ex cellent proof of what public-choice econo mists have been saying for years, namely that the incentives built into governmentally controlled systems are such that the results are certain to be poor-except for the pro ducers. Every book has its omissions. An omis sion in Lieberman's is the matter of teacher strikes. Strikes and the threat thereof, al though illegal, give teacher unions powerful leverage to obtain the terms and conditions they want. In a market system, strikes would be far more risky to the strikers, since customers driven away might never come back. In a market educational system, there still could be strikes, but they certainly would be less frequent and less devastating than are teacher strikes in a public education monopoly. Discussion of this issue would have made a strong book even stronger.

Public Education: An Autopsy is a care fully reasoned book by a man who has spent a lifetime in education. If you are really concerned about the future of American education, read this book. D George C. Lee/, an adjunct scholar with the Mackinac Center for Public Policy, has taught for more than ten years at Northwood Univer sity. The EndangeredAmericanDream by Edward N. Luttwak New York: Simon & Schuster. 1993 .365 pages. $24.00 Reviewed by Jeffrey Tucker E dward Luttwak, of the Center for Stra tegic and International Studies, is obvi ously a brilliant man. His prose is concrete. It packs a punch. He marshals enough facts and anecdotes to his side of the debate to provide the appearance of an infallible case. It is easy to see how his previous book, BOOKS 463 Pentagon and the Art of War, became a .bestseller. But at the heart of The Endangered Amer ican Dream lies a deception. For all Lutt wak's attacks on free trade, his frenzied warnings of Japanese "economic power,"

his aggressive call for centralized industrial planning, his desire for a global war for American economic supremacy, what he really seems to fear is a return to normalcy after the Cold War. In a very revealing passage, Luttwak writes that America "has only two modes: internal strife over ideas . . . or a marvelous cohesion in the presence of a threatening external enemy. The Soviet Union per formed that function very well for more than forty years, " but now that threat is gone. A "basic instinct of American society is to search for an external enemy that can assure its cohesion-and Japan is the only possible candidate. " This passage has marvelous explanatory power. If it were written to demonstrate what's really behind Japan-bashing-culmi nating in the Clinton administration's walk ing out of trade talks in February 1994-he makes a compelling point. But, instead the passage is troubling, since the author's pro tectionism is designed to unite the citizenry in loyalty to the central state.

He is far from the only one in Washington to fear our present lack of some grand international mission. The entire industry of big government would find itself in mortal danger in the absence of an ominous foreign threat. Rather than fret about foreigners, the public would be likely to ask some interest ing questions. The foremost is: What do we get in return for sending $1.5 trillion to Washington each year besides pork barrel ing, a permanent welfare class, and bureau cratic trouble? Frenetic fears of foreigners are powerful enough to drive such funda mental questions out of public debate. According to Luttwak, we are supposed to fear Japan's "investment" in high tech nology, its state-subsidized industries, its high levels of education, its long work hours, and its triballoyalties.·lf the United States doesn't match them trick for trick, Luttwak warns, especially by jettisoning 464 THE FREEMAN • AUGUST 1994 whatever free trade principles we have, we are going to be economically sunk.

In Luttwak's world, there is no peace or mutually beneficial trade. All economics is war. When foreign corporations invest in new technologies, they are not attempting to make a buck or satisfy consumers; they are trying to drive our companies into the ground, humiliate us, and rob us of our national pride. When American companies invest in foreign countries, they are not boosting profits, but invading the enemy territory and striking where they are most vulnerable~ Luttwak views every trade slight as a bomb lobbed at American shores. Hidden trade barriers are the "geo-economic equiv alents of the ambush," circumventing GATT rules amounts to "customs-house conspiracies, " subsidized technology is "the equivalent of weapons innovations," and state-guided capital investment is "fire power. " This is Cold War thinking gone mad: he has yet to make the psychological transition from war to peace, or the mental switch from geopolitics to plain economics.

There is no reason to fear Japan's Minis try of International Trade and Industry, or MITI, the way the CIA fears the KGB. It is a government bureaucracy, much like the Commerce Department, with the usual share of calculation errors. Government agencies are going to win sometimes and lose other times. Recall that MITI recom mended that Honda should stick to making motorcycles, a point which does not receive prominent notice in Luttwak's book. His tory demonstrates that in the long run, it's the "unpicked" industries that have done well in the marketplace. During economic decline, there's always a temptation to emulate any economy with a faster rising Gross Domestic Product. In the thirties, for example, the New Deal brain trust tried to copy the Soviet system under the mistaken impression that the Russian GNP was zooming. During the 1990 U.S. recession, moreover, hatred and envy of Japan was at its height. So was the Japanese stock market. Nowadays, the economic for tunes of the two nations have crisscrossed.

Mixed economies like the United States and Japan ebb and flow, depending on a whole variety of factors, including the rate at which the central bank expands money and credit, and the degree to which tax and regulatory police successfully interfere with economic decision-makers. It's best to stick to economic principles rather than hastily lunge from one central-planning fashion to another. Nonetheless, Luttwak is a compelling prophet of doom. If you're looking for bad news, this is the place to find it. As he points out, our savings rate is at historic lows, and this is causing harm to long-term prosperity. But Luttwak concludesfrom this that we need a new consumption tax to skew the benefits and penalties the other way. Like Clinton, he wants more "investment" in the private sector by the public sector (based again on the alleged Japanese model), though there is no evidence that this would help at all.

A more sustained attack on the present state of American public education hasn't been published anywhere. That is to be ap preciated. But in the end, Luttwak spoilseven this by his call for federal government stan dards and testing, two "solutions" that are somehow never connected to the problem. Throughout The Endangered American Dream, we are treated to masterful polem ics, stunning pieces of information, and a sweeping understanding of national trends and economic troubles. Missing is any co herent theory as to why the American dream is indeed endangered. The real reason has to do with the cost of government, but Lutt wak is not interested in discussing this. His supposed solutions actually present a greater danger than the status quo itself. If we adopt his prescriptions-and we seem to be doing so under the current administration-we'll never return to that normalcy Luttwak so fears. That's unfortu nate. A nation stuck in the mire of the mixed economy needs internal strife over ideas most of all. Only this kind of battle-not that kind that Luttwak longs for-will bring back liberty, which is the core of the American dream. D Mr. Tucker is editor at the Ludwig von Mises Institute in Auburn, Alabama.