Book Reviews

National Development Council chairman Sam Beard proposes to create "100 million millionaires" through "the magic of com pound interest." He would retain Social Security's mandatory tax-based character, but bifurcate the payroll tax. "Tier 1" would contain "most of your Social Security tax es," and pay benefits to current retirees. "Tier 2" would be set aside in personal investment and retirement accounts. Amer icans earning $10,000 or more will pay $1,240 per year into Social Security-and can become millionaires. Investing $30 weekly from payroll taxes, at 8 percent compound interest, will in 45 years amass $1,291,433for retirement. Problem solved. Or is it? Beard's plan is flawed at the core by double-counting these taxes. Putting $30 weekly into Tier 2 comes to $1 ,560-all the taxes on $12,580.Indeed, Beard repeatedly writes as ifalltaxes would go into Tier 2. But to pay current retirees present-law benefits, which Beard, kowtowing to the American Association of Retired Persons myth of Social Security as a "sacred contract,"

insists on doing, "most of your Social Se curity taxes" would indeed have to remain in Tier 1, and hence be unavailable for investment. So much for payroll taxes and "the magic of compound interest" creating 100 million millionaires-who are only nominal any way. Adjusted for inflation, the magician's rabbit turns mangy; $1,291,433 shrinks, Beard admits, to $229,935. Then, too, he wants mandatory participation through taxes, which he deems "exciting." Any body excited about being coerced? More positively, Beard furnishes handy descriptions of Chile's privatized retirement insurance and the Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) plan, and .makes a good case for turning defined benefit pensions into immediately vested, portable, defined-contribution plans a la TIAA-CREF. Texas businessman Edwin J. Myers has a similar plan. His chatty, digressive, and repetitive book narrates how Social Secu rity metastasized from the modest supple mental pension that Franklin Roosevelt originally intended into a vast demographi cally doomed entitlement, which the elderly now look to for primary retirement income.

He also explains how private defined-benefit pension plans developed; the widespread underfunding of pension plans; the reneging on pension promises following takeovers and buyouts; the Pension Benefit Guaranty Corporation; and federal and state govern ment pension plans. While students of So cial Security and pensions will learn little from Myers's exposition, its accessible level and informal style make it useful for ordi nary Americans. Drawing on the successful pension plan set up for county employees of Galveston, Texas, when they opted out of Social Se curity, Myers proposes Individual Security Retirement Accounts (ISRAs), financed with the worker's share of payroll taxes. Pooled into a huge mutual fund, these ac counts would, through compound interest, generate huge (nominal-dollar) nest eggs yielding far better payouts than Social Se curity. Allworkers under 37 years old would participate. Workers aged 37-45 could ei ther opt for an ISRA or stay in Social Security.

To finance current Social Security, Myers would use the employer's share of the pay roll tax, plus the payroll taxes of workers aged 37-45 who choose to remain in Social Security. To balance outlays and revenues, Myers proposes either means testing cur rent retirees' benefits or using the interest payments to the trust funds to pay benefits. Unfortunately, Myers, like Beard, ig nores the implications of his proposals. If ISRAs so greatly outperform Social Secu rity, leaving Social Security will be 37-45 year-old workers' rational choice-which would create a huge revenue shortfall. This in turn would make payment of current retiree benefits problematic. He evidently assumes that these workers will be ignorant or fatuous enough to stay in a system offering them far worse returns than they could get elsewhere. Like Beard, he over promises and leans on weak reeds. He also shares Beard's inattentive boos terism. Shortly after proposing means test ingwhereby current retirees with retirement incomes of $60,000-$69,000would lose 40 percent of benefits, and those making over $99,999 would lose 80 percent, Myers as serts that "no one, from the young to the elderly, will be penalized.... No one will lose a cent." How's that again?

These books helpfully highlight the need for Social Security reform (its abolition would be best), but their untenable prom ised "win-win" solutions are very danger ous. They appeal mightily to Americans' weakness for wishful thinking and painless solutions. Worth a look? Yes-but remem ber the saying, "If something sounds too good to be true, it probably is." 0 Dr. Attarian is a/reelance writer in Ann Arbor, Michigan. BOOKS 643 Founding Father: Rediscovering George Washington by Richard Brookhiser The Free Press. 1996 • 230 pages. $25.00 Reviewed by Clarence B. Carson N ear the close of this book, the author quotes John Marshall speaking to the House of Representatives shortly after Washington's death as saying: "Our WASHINGTON is no more! the hero ... lives now only in his own great actions, and in the hearts of an affectionate and afflicted people." Richard Brookhiser is concerned that Washington no longer lives in our hearts and our affections. "He is in our textbooks and our wallets," Brookhiser writes, "but not our hearts." This book is an effort to correct that situation, not by "humanizing"

him down to the Oprah level, say, but by drawing our conception up to the level of his remarkable achievements. In the main, he has done a good job of that. This is not a full-fledged biography, but more nearly a series of essays on the general subject of George Washington. It focuses upon Washington's career, his character, and his place in the minds and hearts of, Americans. Some of his emphases I espe cially liked and some I had not heard or thought of before. For example, his liking for the theater had never been brought out to me before, nor that he subscribed to ten newspapers. Washington was strong, cou rageous, brave, a good listener, a leader, had great dignity, was conscious of doing the honorable thing, and a patriot. Many of the events of his life I had known before reading this book but it was good to read of them again, told, as they are, with zest and flair. For instance, Brookhiser gives the account of how insistent Washing ton was on secrecy at the Constitutional Convention. Someone had dropped a copy of some resolutions being considered where outsiders could have taken it. Washington retrieved the copy, lectured the Convention on the necessity for secrecy, then threw the paper down on the table, and invited who644 THE FREEMAN • SEPTEMBER 1996 ever owned it to take it. The delegate was apparently so in awe of Washington that he never dared to claim it.

It is good to emphasize, too, as Brook hiser does, that Washington was a man of ideas as well as of action. I remember how impressed I was when I noticed Washing ton's library. He had nearly a thousand volumes-not in Jefferson's league, but then whose was? Not only was he familiar with the well-traveled ideas of his time, he was given to asking those about him for their opinions and understanding, such as the need to restrain government lest it trample individual rights. He listened and learned much. There was a balance to his ideas that set him apart from most thinkers. The weakest section of the book is the one dealing with "The Founding Father. " That Washington was father of his country is a metaphor which captures some of the truth and much of my feelings about the matter. He did indeed tenaciously lead the country through the war which effected our separa tion from Britain and independence of her.

He chaired the Constitutional Convention that produced the document on which our union stands. And he piloted us safely through the perilous and tenuous early years of the Republic. But the metaphor will not bear close and extensive analysis; it falls from so much weight. But the whole is a worthy testament to the greatness of Washington. Anyone who is inclined with so many in this misbegotten age to believe that Washington isjust a dead white male who kept slaves should read of his principled refusal to sell any of his slaves "down the river," and the provisions he made for freeing those who were able to earn their own keep, and providing a fund to take care of those too old or infirm to provide for themselves. He was a man of his time, as all of us tend to be even in ways of which we are not aware, but he was much better than many of his contemporaries. D Dr. Carson, a contributing editor of The Free man, has written and taught extensively, special izing in American intellectual history. America in Gridlock, 1985-1995, the sixth volume in his Basic History of the United States, will be pub lished later this year.

The Flat Tax: Freedom, Fairness, Jobs, and Growth by Daniel Mitchell Regnery Publishing, Inc.•1996.62 pages. $3.95 paperback Reviewed by William H. Peterson M ounting taxes push the Tax Founda tion's "Tax Freedom Day" out to May 6, a day when presumably John Q. Taxpayer stops working for government federal, state, and local-and at last starts working for himself. But fiscal expert Grover Norquist and his Washington-based Americans for Tax Reform figure the truer Cost of Government Day occurs on July 3 by taking into account hidden taxes via deficit spending and regulatory burdens. Thus the estimated total cost of government in 1995 came to almost $3.3 trillion, includ ing $720 billion in federal regulatory costs. This means working Americans have to toil 52 percent of the year for government. If this strikes you as a sign of trouble on the tax front, you're right. Beyond the flat taxers are those who would bravely dump the income tax for a national sales tax. These advocates see solid advantages; no Withholding deductions; no more tedious bookkeeping, including filing away receipts and canceled checks; no more IRS audits, penalties, interest charges, lev ies, liens, threats, and seizures; no more deadly April 15 and quarterly tax deadlines; no more hits on savings and investment on capital formation, the very sinew of economic growth and job creation. And, hear this, no IRS, period.

In his hard-hitting brief for a flat tax, Heritage Foundation analyst Daniel Mitch ell takes note that 12,609 special interests are officially registered to lobby in Wash ington. Assume three support persons be hind each lobbyist, and you have an army of 50,000pulling strings and making dealsmany seeking special loopholes in the 14,OOO-page u.s. Internal Tax Code and rulings. So understandably members of the tax-writing House Ways and Means Com mittee get big PAC contributions, and Ways and Means and Senate Finance member ships are seen as plum assignments. Dan Mitchell sees the flat tax as a way to end such "soft" political corruption and favoritism-simply cut out myriad tax de ductions, preferences, loopholes, credits, and exemptions altogether. That proposed cut takes guts and a lot of flak. Take the scare tactic used against the flat tax because it would eliminate deduc tions on home mortgages, supposedly forc ing middle-income taxes up and house prices down. But this is static analysis, argues Mr. Mitchell. He holds the flat tax wipe-out of capital gains taxes, death taxes, and double taxation of corporate income will spur economic growth, cut interest rates, and boost housing prices by some 50 percent in five years after passage of a flat tax.

Another scare tactic is the alleged hit of flat-tax nondeductibility on contributions to churches, charities, universities, and think tanks (such as FEE), cutting off their life line. Mitchell rebuts again with economic growth, noting that when people make more they give more. His chart shows how closely individual giving and personal income track each other over the years. Says Jack Kemp in the preface: "Only a pro-growth tax code can restore America's confidence at home and her greatness abroad." Fine words to be sure but the catch here in this otherwise sharp Mitchell minibook is the paucity of argument for privatization, disentitilization, and deregulation of the economy-for greatly chopping down the size of the federal behemoth. Taxes are a drag on growth but the killer is the huge bite-around 42 percent-that government takes out of national income, let alone out of our civil liberties. D Dr. Peterson, an adjunct scholarfor the Heritage Foundation, is Distinguished Lundy Professor Emeritus of Business Philosophy at Campbell University in North Carolina.

BOOKS 645 The Anatomyof an International MonetaryRegime: The Classical Gold Standard 1880-1914 by Giulio M. Gallarotti Oxford University Press. 1995 • 347 pages. $49.95 Reviewed by Raymond J. Keating M onetary policy today is guided by little more than government fiat-by the calculations, often mistaken economic the ories, and whims of central bankers or, even worse, pOliticians. Under such a regime, inflation of three or four percent annually has come to be viewed as a stellar mone tary performance. However, under a more sound monetary system-Le., a gold stan dard-such increases in the general price level would be seen as wildly inflationary. Over the years, the operations and impact of the gold standard have been subject to a variety of gross misconceptions and mis representations. With The Anatomy of an International Monetary Regime: The Clas sical Gold Standard 1880-1914, Giulio M.

Gallarotti makes a valuable contribution to the understanding of the impact and opera tions of the gold standard. Gallarotti debunks numerous myths. Among them, contrary to much of the pre vailing literature on the classical gold stan dard, one government or central bank did not come to dominate international mone tary relations during the classical gold era. Close monetary cooperation between na tional governments turned out to be the rare exception rather than the rule. In addition, contrary to the long-accepted gold model, the transfer of gold to clear international payments was actually a last resort. The author shows the gold standard, in reality, to be diffuse and market driven. At the outset, Gallarotti observes: "Outcomes under the classical gold standard were prin cipally conditioned by market processes throughout the period: Le., outcomes were primarily the resultants of private transac tions in the markets for goods and money.

Unlike the international monetary regimes 646 THE FREEMAN • SEPTEMBER 1996 that would follow World War I, very little in the·prewar regime was conditioned by the actions of public authorities at the interna tionallevel. " Indeed, international stability was not a result ofintense cooperation among national governments or central banks. Gallarotti painstakingly documents the failure of each of the great international monetary confer ences of the era that were held with the purpose of establishing formal cooperation among nations and central banks. Instead, as the author notes, "the various domestic regimes crystallized into a greater interna tional monetary regime." Gallarotti accurately identifies the intel lectual roots of the gold standard as well: "At the very heart of the metallist ortho doxy lay a strong laissez-faire ethic, and this was embodied in the central injunctions calling for the preservation of the purchas ing power of the national monetary unit through some rule dictating monetary cre ation. It was this metallist injunction, by which inflation was to be controlled, that gave preference for stable money a liberal character. The alternative to a metallist rule was a discretionary manipulation of the money supply. This made the purchas ing power of money subject to the idiosyn crasies and whims of public authorities. . . .

Metallist rules essentially effected a funda mental liberal objective: removing eco nomic processes from central, public, dis cretionary manipulation." Gallarotti concludes that the "success of the gold standard was ultimately and inex tricably tied to the success of classical liberalism." Classical liberalism's case for freedom of movement (for individuals, factors of production, goods, and money), fiscalprudence, smallgovernment, and anti inflation bias, all strongly buttressed the gold standard. In the end, few economists objectively can find fault with the overall track record of the economy under the gold standard. The author summarizes the period as fol lows: Among that group of nations that eventually gravitated to gold standards in the latter third of the 19th century . . . , abnormal capital movements ... , were uncommon, competi tive manipulation of exchange rates was rare, international trade showed record growth rates, balance-of-payments problems were few, capital mobilitywas high(as was mobility of factors and people), few nations that ever adopted gold standards ever suspended con vertibility (and of those that did, the most important returned), exchange rates stayed within their respective gold points (i.e., were extremely stable), there were few policy con flicts among nations, speculation was stabiliz ing ... , adjustment was quick, liquidity was abundant, public and private confidence in the international monetary system remained high, nations experienced long-term price stability (i.e., predictability)·at low levels of inflation, long-term trends in industrial pro duction and income growth were favorable, and unemployment remained fairly low.

What else could one possibly want from a monetary regime? The Anatomy of an International Mone tary Regime occasionally falls into the type of sloggingacademic writing style that jus tifies the impression that economists cannot write well. However, it is worth the reader's time to mine through some of this coarse writing because the historical and economic gems eventually discovered truly shine. Our friends in Europe particularly may find this book of interest as they continue struggling to form a European Monetary Union. Gallarotti cites Ludwig Bamberger, German monetary authority during the late nineteenth century who made the simple point that "a world monetary union would be superfluous if ail countries based their currencies on gold." Gallarotti's book should be read by any one with an interest in how the gold standard worked in the past and could once again. Indeed, this reviewer sees only huge bene fits being derived from a return to classical liberalism and the gold standard. 0 Mr. Keating is chief economist with the Small Business Survival Foundation.

The Future of Capitalism by Lester C. Thurow William Morrow and Company, Inc.•1996 • 336 pages. $25.00 Reviewed by Don Bellante T he late Austrian economist Ludwig Lachmann was fond of saying that the future is not knowable, but it is imaginable. In The Future ofCapita lism , Lester Thurow has put his imagination to work. His method is to use an analogy to the shifting of the earth's tectonic plates in order to describe the frictions he sees as building··up in the United States and the world. The "shifting plates" are (1) the end of communism and the need to absorb its released labor; (2) technological shifts that make the location of markets, resources, and capital irrelevant to the location of production; (3) an aging population that will put enormous stress on the welfare state; (4) economic globalization, which ren ders governments impotent; and (5) the development of a "multipolar" world where the United States can no longer exert its will upon the post-communist world order because the rest of the world doesn't accept United States leadership, as it no longer needs U.S. protection.

In the very first sentence of the book, Thurow admits that nothing but capitalism seems to work, in terms of providing goods, services, and (at least until now) increasing standards of living. Despite this grudging admission, the author still cannot accept individualism as a basis for organizing so ciety. Chapter 13, Democracy Versus the Market, is where the book's usually sophis ticated rhetoric gives way to all of the simpleminded anti-market cliches of the 1960s. There is the usual resentment of wealth and the attribution of capitalism's staying power only to the ameliorating effects of government interventions. Other wise, contends Thurow, unbridled capital ism would generate ever-increasing inequal ities that would collapse the system. As compared to. the democratic state, capitalBOOKS 647 ism is seen as biased toward consumption and against saving and investment, toward the short run and against the future.

Amazingly, the author seems really to believe that elected officials have a longer time horizon that makes up for the supposed shortsightedness of capitalists and consum ers. And he seems oblivious to the fact that it is the redistributive and regulatory activ ities of the democratic welfare states of Western Europe that have prevented any job growth in the last 15 years, and that have relentlessly shifted the composition of out put toward present consumption. In this chapter and elsewhere the author adds more recent standard liberal concerns to the 1960scliches. These include the myth that the standard of living of working Amer icans has been declining since 1973. In a chapter on religion and ethnicity, the author seems to connect terrorism with religious fundamentalists using a very broad brush. Readers willbe surprised to find (p. 267)that a fundamentalist Christian group is given ,'credit" for blowing up the federal building in Oklahoma City.

In the final chapter, the author explicitly declines to make a list of policy recommen dations. That's not what is important: to Lester Thurow, what is important is "per suading ourselves that the world has changed and that we must change with it." (p. 314) Because this volume thus leads nowhere in particular, it will disappoint even those readers who share the author's philosophical and diagnostic perspective on capitalism. D Dr. Bellante is a professor of economics at the University of South Florida in Tampa.

648 THE FREEMAN • SEPTEMBER 1996 It's No Gamble: The Economic and Social Benefits of Stock Markets by Lewis D. Johnson and Bohumir Pazderka The Fraser Institute • 1995 • 173 pages • $19.95 paperback Reviewed by Robert Batemarco T heodore Roosevelt once quipped, "There is no moral difference between gambling at cards or in lotteries or on the race track and gambling in the stock mar ket." John Maynard Keynes echoed this view: "When the capital development of a country becomes the byproduct of the ac tivities of a casino, the job is likely to be ill-done." Every time a new market innovation arises, a similar chorus of catcalls waits in the wings to greet it. Fortunately for all of us who benefit from the capitalist system, financial markets are not without their de fenders. Lewis Johnson and Bohumir Paz derka, professors at Canada's Queens Uni versity School of Business, boldly take on the critics and deftly demolish most of their arguments. It's No Gamble successfully balances recent scholarship (including the authors' own) with a lively discussion that is accessible to those without formal training in finance and economics.

For starters, Johnson and Pazderka ex plain why a market economy without a stock market is like a ship without a rudder. They detail how the stock market pools funds, spreads risks, and gives owners some mo dicum of control over management. They also show how much maligned "derivative" securities such as options and futures strengthen the stock market by enhancing liquidity by permitting the management of risk. Myths about the stock market sprout like weeds. Among the hardiest this work seeks to uproot is that the stock market is a zero-sum paper-shuffiing game that breeds instability and infects managers with a dan gerously short time horizon. Johnson and Pazderka draw from one of their own studies to make the point that the efforts of man agement to maximize the value of their company's stock does not force them to eschew long-term considerations. Unfortu nately, the authors' data are not quite up to the task. They do, however, provide more persuasive evidence that potential future earnings do play their appropriate role in valuing share prices. They point out, for instance, that stock in companies with no current earnings will still sell for a positive price on the basis of their future prospects.

The finding that high R&D spending does not render a firm more subject to hostile takeovers, as it would if market myopia systematically undervalued its shares, also helps to prove their point. In their discussion of regulation, the au thors rightly reject the notion that the gov ernment must step in to counteract stock markets' supposed inability to direct enough capital to "socially desirable investments. " Their argument, couched largely in terms of cost-benefit analysis, would have benefited from some allusion to the violation of the property rights of shareholders involved in such schemes, not to mention questioning the presumption that the government should decide what is "socially desirable." It's No Gamble provides an enlightening discussion of the role stock markets have been playing in the efforts of the various Eastern European countries to privatize. In the following chapter, the authors furnish a clear-headed discussion of the ethical issues involved in such practices as hostile take overs and·insider trading, which takes into account both efficiency and property-rights considerations.

In the final analysis, Johnson and Paz derka succeed in shedding light on an area in which misunderstanding can have serious consequences. Some have said that financial markets are feared because they are misun derstood. To the extent they are correct, It's No Gamble, should pull the fear factor down a notch or two. 0 Dr. Batemarco, book review editor of The Free man, is director of analytics at a marketing firm in New York City and teaches economics at Marymount College in Tarrytown, New York.