Day: July 16, 2025

While Americans are typically diligent in protecting their political and religious freedom, economists Phil Gramm and Donald Boudreaux observe in The Triumph of Economic Freedom that they often show less concern for defending their economic freedom—“control over their own livelihoods”—despite its essential role in securing their other rights. This is so, the authors maintain, because they “understand it the least.” Lack of appreciation for how the free-market system works leaves citizens vulnerable to misleading claims by politicians, interest groups, and ambitious intellectuals that induce them to accept restrictions on economic freedom that are detrimental to their welfare.

Gramm (who authored Ronald Reagan’s first budget and later chaired the Senate Banking Committee) and Boudreaux (who teaches at George Mason University) debunk seven “myths” about American economic history that have been used to support those false claims. These include, successively, the myths that the Industrial Revolution impoverished workers; that the growth of large corporations generated the need for Progressive Era regulations; that the Great Depression was caused by “a failure of capitalism”; that free international trade “hollowed out” American manufacturing; that the 2008 financial crisis was caused by deregulation; and that America’s free-market system causes both poverty and excessive income inequality.

The authors begin by exposing the mythical character of the claim, first adumbrated by socialists like Friedrich Engels (followed by a multitude of twentieth-century historians, but made most memorably by literary authors like Charles Dickens) that the industrial revolution had “catastrophic” consequences for working people. While mid-nineteenth-century factory working conditions undoubtedly looked unpleasant, the irony of the anti-industrial argument is that it was put forth at the beginning of “a golden age of material well-being—especially for workers.” What economic historian Deirdre McCloskey called “the Great Enrichment,” starting just over two centuries ago, ultimately raised living standards in industrializing countries including Britain, Japan, and the US, by anywhere from 3,000 to 10,000 percent. Those who lament the substitution of factory labor for the supposedly more pleasant life of farmers lack awareness of how impoverished human life, in terms of life expectancy, housing, nutrition, and health, really was in the countryside. (It was precisely the higher incomes that factories offered that lured workers from the countryside.)

In the United States, as the authors note, over just the three decades from 1870 to 1900, “inflation-adjusted gross national product tripled, [a]gricultural production more than doubled, and mining and manufacturing [output] grew eightfold and sixfold, respectively, rates of economic growth never before experienced in recorded history.” But the so-called Progressives, arising during this period, objected that the growth was achieved by large corporations or “trusts” whose owners retained most of the gains while “exploiting” workers. The consequence was antitrust legislation aimed at breaking up the trusts, while initiating a broad national regulatory system.

But while leading history textbooks still propagate the progressive myth that the trusts used monopoly power to restrict output and thus generate higher prices, the late nineteenth century was actually an era of price deflation, owing to rising production, particularly in the industries dominated by large corporations, thanks to the economies of scale they enjoyed, and the incentives they possessed to introduce innovative technology. Nor were trusts able to use their power to stifle competition: as historian Gabriel Kolko observed, the distribution of economic power was constantly being altered thanks to the introduction of new products, production methods, markets, and supply sources. Government intervention did not promote competition but rather impeded it, serving the interests of politically influential firms. Notably, when socialist Upton Sinclair publicized false claims about unhealthful practices in Chicago’s slaughterhouses, progressives in Congress passed the 1906 Meat Packing Act, which large meatpacking firms supported because they could afford the cost of government inspection more easily than their smaller rivals. Competition was similarly squelched by government tariffs on sugar, and by Interstate Commerce Commission regulations that fixed prices in rail transport, trucking, and shipping.

Not until the 1970s, under the Carter administration, was this regulatory system partly disassembled, with the abandonment of anti-consumer federal price setting and the adoption of a new antitrust policy based on “consumer welfare.” Yet forty years later, the Biden administration sought to reimpose Progressive policies through executive orders and the appointment of regulators who were hostile to the free-market system.

The authors also tackle persistent myths about the causes of the Great Depression. According to “conventional wisdom,” it resulted from the stock-market “greed” that culminated in the Crash of 1929, combined with a supposed problem of “underconsumption” that Franklin Roosevelt endeavored to remedy through the “New Deal.” This myth begins with demonstrably false claims about the prosperity of the 1920s, to the effect that its benefits were (as Roosevelt hagiographer Arthur Schlesinger Jr. maintained) unequally distributed, owing to tax policies that favored millionaires, while businessmen refused to share profits with their workers, leading to a “relative decline of mass purchasing power.”

In reality, however, the 1920s witnessed an unprecedented gain in the average standard of living. (In his book Modern Times, historian Paul Johnson lists the widespread increase in the goods that ordinary people were suddenly able to enjoy, from automobiles and radios to life insurance policies.) Nor did the crash of 1929 have to produce anything like the lengthy depression that followed: it was preceded by what economist James Grant calls the “forgotten depression” of 1920–21, which lasted only some 18 months and ended without any application of the government spending policies adopted by Herbert Hoover and FDR starting in 1929.

As Gramm and Boudreaux observe, Roosevelt and his progressive advisers used the charges of underconsumption and maldistribution to justify policies they had favored long before the economic crisis: higher government spending and increased, more progressive taxation. Nor did Roosevelt’s policies do anything to curb the Depression; by 1939, his treasury secretary, Henry Morgenthau, admitted that the administration had “never made good” on its promises, with unemployment remaining as high as it had been six years earlier, even while incurring “an enormous debt.”

Gramm and Boudreaux join monetarist economists Milton Friedman and Anna Schwartz in blaming the Depression’s origins on the “blunders” of the Federal Reserve, which fueled a market “frenzy” in the late 1920s by keeping interest rates too low, then “overcompensated” by raising them too high, “making it harder for business people to borrow and invest” and thus add employees. But Roosevelt then prolonged the Depression, first by emulating his predecessor’s policies of increased (and more progressive) taxation, running large budget deficits, and trying to prevent prices and wages from falling; then by creating a hostile business environment, boasting of the enmity his policies had earned him; raising taxes still higher, and adopting wacky schemes like paying farmers to kill and bury their animals, at a time when the cities were filled with bread lines.

Contrary to the belief that the Depression ended only thanks to America’s entry into World War II (which solved the unemployment problem), leading economists like Paul Samuelson to urge the immediate restoration of “astronomical deficits” once peace returned (advice that was fortunately ignored), Gramm and Boudreaux attribute the country’s long postwar boom to “the restoration of a largely free market and an end to the extreme uncertainty regarding the sanctity of property and contract rights” that FDR’s policies had engendered. Though Harry Truman favored policies like national health insurance and opposed the Taft Hartley Act’s limitations on union power, polls showed that businessmen and professionals “felt much less threatened” by him than they had been by FDR.

Of more immediate relevance, given our current president’s professed “love” for tariffs, is that the authors also address the myth that international trade “hollow[s] out American manufacturing.” That myth rests on a longing (shared by presidents of both parties) to restore the “golden age” of the three decades following the end of World War II, when America ran a consistent trade surplus, unemployment stayed low, and wage growth was high. But the trade surplus was a product of the superior economic position with which the US emerged from the war, a position that was bound to end as Europe and Japan rebuilt and other countries like Taiwan and South Korea industrialized. Yet, the authors note, the end of the surplus did not entail any stagnation in the incomes of working Americans: “In real purchasing power dollars, 66.3 percent of all American households currently have incomes that would have put them in the top 20 percent of income recipients in 1967.” Nor has American manufacturing output declined, even as its share of global manufacturing decreased. But the recent slowing in the growth of industrial capacity is a worldwide phenomenon, which “coincided with the rise of the tech industry,” generating increased labor productivity.

Contrary to President Trump, the authors note, it isn’t true that when “foreigners are net investors” in the United States, causing us to have a trade deficit, they are draining our “lifeblood.” America “ran trade surpluses,” they point out, “in 102 of the 120 months of the 1930s,” the era of the Depression that began with the prohibitive Smoot-Hawley tariffs that devastated global commerce. By contrast, postwar America “has been a magnet for talent and capital,” fueling job creation and increases in household wealth. Raising tariffs can only damage our prosperity, even as it favors certain limited groups. One recent example: The tariffs Trump imposed on steel and aluminum in his first term “created” 1,000 and 1,200 jobs, respectively, while costing 75,000 manufacturing jobs overall because of the higher prices companies had to pay for the metals—and retaliatory tariffs imposed by other countries caused American farmers $22 billion in lost sales.

The authors go on to refute the myth, espoused by everyone from Barack Obama to Time magazine, that the 2008–09 recession was caused by the deregulation of mortgage bankers, who “concocted complex mortgage loans … to fool unsuspecting homebuyers” into borrowing more than they could afford to pay. In reality, it was the Clinton administration’s pressure on banks, under the 1977 Community Reinvestment Act, that compelled them steadily to lower their lending standards, in the name of promoting “affordable housing,” while pretending that subprime mortgage-based securities were “as creditworthy as US government debt,” that led to the market crash. (Clinton ally Barney Frank, then-chair of the House Banking Committee, openly professed his wish to “roll the dice” with the housing market. He got his wish, but the country lost his bet.)

Turning their attention to economic inequality, Gramm and Boudreaux refute the related myths, espoused by everyone from Pope Francis to French socialist economist Thomas Piketty to Disney heiress Abigail Disney, that economic inequality in America is steadily growing, causing the impoverishment of millions. The greatest flaw in these arguments (elaborated in Gramm’s previous co-authored book The Myth of American Inequality) is their reliance on Census Bureau figures that omit two-thirds of all transfer payments (e.g., food stamps, Medicaid, “tax credits”) from the definition of “income,” while also failing to adjust household income for the amount of taxes paid. When the necessary adjustments are made, the Bureau’s claim that members of the top income quintile receive on average 16.7 times as much as members of the bottom quintile is replaced by a ratio of 4 to 1. Additionally, so flat is the adjusted income distribution among the bottom three out of five quintiles that in 2017, those in the bottom quintile received an average of $49,613, compared to $53,924 for the second quintile and $65,631 for the middle. And after adjusting for household size, it turns out that “individuals living in the bottom 60 percent of American households all have roughly the same level of income … even though only 36 percent of prime working-age persons in the bottom quintile actually work, compared to 85 percent in the second quintile and 92 percent in the middle quintile.” In sum, the current combination of taxes and transfers serves to disincentivize work for many, leading to the social and moral problems documented by AEI economist Nicholas Eberstadt in his monograph Men Without Work.

While citing evidence of considerable economic mobility (that is, increases in income over time) among those born into the lowest quintile, the authors properly take collectivists such as Piketty to task for describing the incomes of higher earners as “what they ‘take,’ ‘claim,’ or ‘absorb’” from others rather than “what they earn or create.” While Bill Gates, for instance, “owns 0.53 percent of Microsoft,” they write, “his products enrich our lives, he created hundreds of thousands of jobs, and our pension funds are more valuable because we own many times more shares of Microsoft than he does.”

While Gramm and Boudreaux conclude that following proper adjustments to income, the rate of real poverty in America is only 2.5 percent, they add that far from that poverty being caused by “capitalism,” “poverty and dependence” are rather “the great failures” of federal policies, specifically the “War on Poverty” initiated by Lyndon Johnson—along with failing American public schools. Hence, they urge a reform of welfare programs to include “work incentives and mandatory work requirements for able-bodied working-age adults,” along with reform of our educational system, which might include adding charter schools, school choice, and—I add—breaking the power of teachers’ unions to block improvement.

As Gramm and Boudreaux remind us, although “in the richest countries in history’s most prosperous age, it is poverty, not affluence, that looks unnatural,” prosperity isn’t natural, but must be “continuously produced” by work, innovation, and investment. Yet currently, “the explosive growth of means-tested social welfare spending … absorbs 57.4 percent of general revenues in the U.S.,” putting at risk not only America’s fiscal soundness, but vital services such as defense, along with adequate capital investment in the nation’s future.

I wish that every American college and high school teacher of politics, economics, and history could be persuaded to read this invaluable book and to share its lessons with their students.

Social Security, a bedrock of American retirement security, is in deep trouble. Born during the Great Depression as a way to prevent poverty in old age, the program now consumes 22 percent of the entire federal budget. Social Security’s promises now far exceed its means. 

Without serious reform, this prior pillar of security will continue to transform into a weight holding back future generations from comfortable golden years. If we are to save Social Security—and the American ideals of personal responsibility and limited government—we must act now, and we must act boldly.

The Coming Impasse

Today, Social Security payroll taxes total 12.4 percent, split evenly between employer and employee on income up to $176,100 (as of 2025). The vast majority (close to 75 percent) of this tax funds “old age insurance”; the remainder provides financial support for people with disabilities. For decades, the program took in more than it paid out, with the surplus “saved” in government bonds. But since 2009, that cushion began to disappear, and it has continued to shrink as the population ages and the ratio of current workers to beneficiaries declines. As a result, the “trust fund” is shrinking as the government cashes in the bonds to make up the growing difference between benefits paid and revenue collected. When this trust fund is fully drained, which could happen as soon as 2034, the program will no longer have the resources to provide benefits at current levels. 

At that point, Congress will face grim choices: substantially raise taxes, slash benefits to the bone, or borrow trillions to cover the shortfall. None of these are good options, but unless we act soon, all will become necessary.

When the trust fund is depleted, benefits will have to be cut by roughly 21 percent immediately to bring outlays in line with revenues. Alternatively, payroll taxes could be raised by close to 4 percentage points. In today’s dollars, this could mean a $14,000 annual tax hike for dual-income upper-middle-class families. Benefit cuts or tax hikes are politically difficult. As such, Congress may choose the path of least resistance: even more deficit spending to finance the shortfall between promised benefits and payroll tax revenue. As James Capretta points out in his recent essay, deficit spending is already harming families by “being a drag on economic growth,” even if the public does not yet broadly recognize this harm. Dramatically increasing deficit spending to plug the Social Security funding gap risks higher long-term inflation, lower capital investment, and stagnating economic growth. A once well-intentioned program designed to care for the elderly will have morphed into a monster that devours American prosperity. 

A System Out of Balance

The underlying problem is demographic. At its inception, there were over 150 workers per recipient. Today, that ratio has dropped to about 2.7 to 1—and it’s still falling. This may continue declining to just 1.5 workers per beneficiary in the coming decades. Fertility is down. Longevity is up. These trends appear to be here to stay. In addition, legal immigration of younger workers may mitigate these trends less than in years past. 

What this means in practice is stark: today’s retirees, particularly those who retired in recent decades, are receiving far more in benefits than they ever paid in taxes. But future generations—especially millennials and Gen Z—will almost certainly receive less than they contribute. 

This current generational wealth transfer is already robbing younger workers of the opportunity to build real retirement wealth for themselves. Capretta’s suggestions would help us avoid the future dilemma of choosing between far higher taxes, steep benefit cuts, or massive increases in deficit spending. However, workers will still be diverting a large chunk of every paycheck to a system that denies them the ability to take age-appropriate investment risks that can harness the power of compounded returns. Instead, they are forced to contribute to a system delivering far lower retirement payouts, even before accounting for potential future reductions. This violates American principles that conservatives have long held dear: individual freedom and personal responsibility.

The Chilean Model: A Vision for Reform

Thankfully, a better way demonstrably proven to work exists. 

In the early 1980s, Chile faced a crisis similar to ours: an aging population, an unsustainable pay-as-you-go system, and a future of mounting deficits. But unlike most countries, Chile took bold action. With the guidance of economists like Milton Friedman, they implemented a radical reform: privatization. 

Workers were given the option to leave the old system and invest 10 percent of their wages into individual retirement accounts. Licensed private firms managed these in accordance with government regulations to ensure prudent investment. An additional 3 percent went towards administrative costs and insurance. As a sidenote, the development of passively managed index funds with management fees of under 0.1 percent annually ($10 per $10,000 invested) would enable a reformed US system to avoid much of this overhead.

In Chile, workers owned their accounts and could track their balances. At retirement, they could purchase annuities or make programmed withdrawals. The government guaranteed a minimum benefit for those with insufficient savings, preserving a social safety net. However, for those who work most of their adult lives and must save 10 percent of their wages, sufficient savings are quite easy to achieve.

The results? Over 90 percent of eligible workers have opted into the new system. In the first 25 years, the average real (inflation-adjusted) annual rate of return on these accounts exceeded 10 percent. Over the past 20 years, the real returns averaged near 3.0 percent as restrictions on investing in foreign markets held back returns at a time of slowing Chilean economic growth. Leftist parties rolled back free market policies of prior administrations. 

Chile’s reform involved serious challenges. Transition costs had to be managed, primarily through the issuance of “recognition bonds” and the sale of state assets. But Chile’s success proved the possibility of transforming a broken system into one based on ownership, choice, and fiscal responsibility.

What If Americans Could Opt Out?

Let us consider a hypothetical: Sally graduates from college at 22 and works until 67. She earns the median income for most of her career, about $72,000 annually in today’s dollars. Under current law, she will pay nearly $9,000 a year into Social Security (counting both her share and her employer’s). Her benefit at retirement? Around $2,489 a month.

But what if Sally had been allowed to invest that $9,000 annually in a moderate-risk, inflation-adjusted portfolio earning a very conservative 5 percent real returns? By age 62—seven years before the current full retirement age—she would have over $1 million in today’s dollars. That money could buy an annuity paying over $3,000 a month for life, or she could live off interest and leave the principal to her children. Either way, she retires earlier, earns more, owns her future, and gives the next generation an even better chance to live the American Dream.

This is not fantasy. It’s financial reality—if we just let people control their own money.

A US system modeled on Chile’s could allow younger workers (say, under age 45) to opt out of the current Social Security system. Those who opt out could be required to contribute to a mandatory savings account with automatic enrollment, automatic payroll deductions, and automatically managed investment plans to promote long-term growth. At retirement, part of the account could be annuitized to provide a minimum standard of living, with the remainder available for discretionary use.

Yes, such a reform would temporarily raise short-term deficits. More importantly, it would also halt the growth of unfunded liabilities, now totaling nearly $23 trillion and growing. This unfunded Social Security liability is more than $196,000 per current worker. Privatization would also result in capital accumulation, savings, and investment that fuel economic expansion and productivity growth.

Complementary Reforms

Privatization alone may not be enough. A more comprehensive approach might include additional reforms that reflect modern demographics and fiscal realities.

First, we could gradually raise the age of retirement. When Social Security was created, 65 was near the average life expectancy. In today’s America, 65 is no longer old. Today, Americans live almost two decades past retirement. The last major increase in the retirement age was in 1983. It’s time to raise it again, perhaps to 69, phased in over several years. This reform alone would significantly extend Social Security’s solvency.

Second, we might consider offering voluntary buyouts. A worker could accept a lump-sum payment in exchange for relinquishing future benefits. While this would increase near-term costs, it would drastically reduce long-term liabilities and give individuals the freedom to manage their own retirement savings. As an example, the federal government could offer a buyout of $50,000 to a current worker aged 38 with an attached unfunded liability of $150,000. Of course, safeguards would be needed to ensure that these funds aren’t squandered by the recipient, but the basic principle is sound.

What should we avoid? Several proposals circulating in Washington would move us in the wrong direction.

Means testing based on net worth penalizes responsible savers and undermines the incentive to prepare for retirement. A combination of two specific options suggested by Capretta would morph Social Security into a wealth redistribution program: Increasing the cap on income subject to Social Security taxes and tweaking the benefit calculation to lower the “rate of return” for the “highest tranche of earnings.” Social Security already subjects upper-middle-class workers to more than $21,800 in annual taxes. Those contributing more in Social Security taxes throughout a career already receive less of a “return” on those contributions than lower-income earners. These changes would further sever the historic link between contributions and benefits, morphing Social Security into more of a wealth-redistribution program.

Finally, we must not cut benefits for current retirees or those near retirement. These individuals played by the rules and planned their lives around promised benefits. Punishing them for Congress’s decades of neglect and procrastination is not only politically toxic—it is morally wrong.

The Time to Act Is Now

Delay is the silent enemy of reform. With each year we hesitate, the cost of fixing Social Security climbs higher, the burden on younger generations grows heavier, and the window to harness the miracle of compound growth narrows.

Yet the opportunity remains if we have the courage to seize it. We can still fix Social Security, but only by anchoring reform in enduring American principles: personal responsibility, fiscal stewardship, and the power of individual liberty. We must pivot from dependence to ownership, from bureaucracy to choice, from looming insolvency to lasting sustainability.

The earlier we act, the more we preserve—not just economic solvency, but the promise we make to the future. Delay invites draconian choices: higher taxes, spiraling inflation, diminished opportunity. But timely reform lights the path to greater freedom, broader prosperity, and a government that once again serves rather than smothers.

In 1981, Chile summoned the courage to lead. Four decades later, the United States must rediscover its own resolve. We must reform Social Security not merely to balance ledgers, but to renew the principles at the heart of the American experiment: that the fruits of one’s labor belong not to the state, but to the citizen, and that liberty, not dependency, is the birthright of every American.