Kat Posted May 27, 2006 Share Posted May 27, 2006 MYTHS, LIES AND DOWNRIGHT STUPIDITYGet Out the Shovel—Why Everything You Know Is Wrongby John Stossel - Book Excerpt -CHAPTER THREE: BASHING BUSINESS One reason I became a consumer reporter was that I assumed business was fraught with cheating and deceit. Many consumer reporters believe that. Legislators and lawyers believe it too. It's intuitive to despise business. Even the rich hate business. When the steel industry stood up to President Kennedy's efforts to dictate its prices in 1962, the President—the wealthy son of one of the wealthiest men in America—exclaimed, "My father always told me that all businessmen were sons of bitches, but I never believed it till now." MYTH: Businesses rip us off.TRUTH: Most don't. Okay, some do. Enron, WorldCom, and Tyco became famous for it. I won Emmy awards exposing cheaters, like milk producers who conspired to keep prices high, RJ Reynolds Tobacco when it handed out Camel cigarettes to kids, and vocational schools that promised jobs that did not exist. But I eventually noticed that most cheating is pretty trivial, that the vast majority of businesses don't cheat, and that the cheaters rarely get away with it for long. MYTH: Government must make rules to protect us from business.TRUTH: Competition protects us, if the government gets out of the way. It took me a long time to learn that regulations can't protect consumers better than open competition, and in fact, they often harm us. My learning curve was steep. After all, I worked in newsrooms where "consumer victimization" was a religion and government its messiah. But after fifteen years of watching government regulators make problems worse, I came to understand that we didn't need a battalion of bureaucrats and parasitic lawyers policing business. The competition of the market does that by itself. Word gets out. Angry customers complain to their family and friends; consumer reporters like me blow the whistle on inferior products and shoddy service. Companies with bad reputations lose customers. In a free society, cheaters don't thrive. Once I learned more about economics, I saw how foolish I'd been. Government uses force to achieve its ends. If you choose not to do what government dictates, men with guns can put you in jail. Businesses, by contrast, cannot use force, no matter how big they are. So all business transactions are voluntary—no trade is made unless both parties think they benefit. In 1776, economist Adam Smith brilliantly realized that the businessman's self-centered motivation gets strangers to cooperate in producing a multitude of good things: "He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention." Few of us appreciate the power of that invisible hand. I don't give my pencil a second thought, and yet I could spend years trying to produce one without turning out anything as good as the worst pencil available today. Leonard Read of the Foundation for Economic Education opened my mind to this idea when I read his essay "I, Pencil." Here is a shortened version: I, Pencil, simple though I appear to be, merit your wonder and awe... not a single person on the face of this earth knows how to make me. My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California. Contemplate all the saws and trucks and rope and the countless other gear used in carting the cedar logs to the railroad siding. Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods. Why, untold thousands of persons had a hand in every cup of coffee the loggers drink! The logs are shipped to a mill. Can you imagine the individuals who make flat cars and rails and railroad engines? These legions are among my antecedents. My "lead" [is] graphite mined in Ceylon. Consider these miners and those who make their many tools and the makers of the paper sacks in which the graphite is shipped and those who make the string that ties the sacks and those who put them aboard ships and those who make the ships. Millions of human beings have had a hand in my creation, no one of whom even knows more than a very few of the others. Neither the worker in the oil field nor the chemist nor the digger of graphite or clay nor any who mans or makes the ships or trains or trucks nor the president of the company performs his singular task because he wants me. Indeed, there are some among this vast multitude who never saw a pencil nor would they know how to use one. There is still a fact more astounding: the absence of a master mind, of anyone forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies—millions of tiny know-hows configurating naturally and spontaneously. People assume someone needs to be "in charge" to achieve those miracles, but no one is in charge. What philosopher Frederick Hayek called "spontaneous order" makes it happen. Without any central authority or master planner, the invisible hand quietly flips the switches that turn markets on. Competition brings us good stuff that keeps getting better—better cars, phones, shoes, medicines. Yet we take this for granted and demand more. We complain if the supermarket's 30,000 items don't include a flavor we want. In newsrooms where I've worked, it's trendy to sneer at people in business. "They're selfish, greedy, tacky. We are the artists, the thinkers, the people who care about others. We demand that government regulate business to keep the greedy bastards from ripping us off, hurting the poor, despoiling the earth..." In Hollywood, the villain is more likely to be a businessman than a terrorist. The media elite firmly believe: Business is bad. To be fair, antipathy toward business existed before the media amplified it. There's something instinctive about resenting the people who trade for profit. Workers hate their employers, who pay them, but love the government, even though it takes 40 percent of their money and squanders it. It's an idea as old as it is irrational. In feudal times, people hated the "bourgeoisie." It wasn't just because they envied their wealth, says economist Thomas Sowell. People revered royalty, no matter how absurdly rich they were, but resented middle-class merchants who sold them what they needed. Anger at the merchant's profit, suggests Sowell, is the grist for racial and ethnic hatred that has led to mass slaughters. Everywhere there is hatred of "middleman minorities": The Chinese in Southeast Asia, the Lebanese in the Middle East, the Jews in Eastern Europe, Indians and Pakistanis in Africa, and Koreans in America's Black ghettos. These groups improve their customers' lives in many ways, yet often their customers come to hate them for it. Some folks simply loathe profit and commerce. They want to "fix" it by making it "kinder." One way they think they can do that is by insisting that authorities guarantee "fair" prices. MYTH: Price controls protect consumers.TRUTH: Price controls create shortages and terrible hardship. Price controls make perfect sense to people who know little about economics: "Since business owners are greedy and quick to take advantage of their customers' ignorance or desperation to 'gouge' them, it would be fairer to limit what those selfish people can charge! The only losers would be those nasty capitalists who make 'excess' profit. Price controls would save everyone money! Why not impose them?" Because price controls don't work. They've been tried many, many times, but they've never worked, if by "worked" we mean made life better for consumers. Instead, price controls create shortages and cause all kinds of harm, from starvation in Communist countries to long gas lines in the United States. Yet this bad idea doesn't die. Even after starving Russian mothers sent their children into the fields to kill mice for food, and even after the Soviet Union collapsed under the weight of central planning and price controls, many of our leaders still insist that their central planning and price controls will work. I've covered their schemes, big and small. I'll start with the small: My former senator, Alfonse D'Amato, was upset about your friendly neighborhood robot, the ATM. I put ATMs up there with microwave popcorn on the list of great inventions. How did I ever survive without cash machines? I'm old enough to remember when getting cash meant standing in a long line and then convincing a teller that you were you. There was always a line. You could only withdraw money between nine a.m. and three p.m. at your own bank. Today I can wander out in my sweatpants at two a.m. and get cash on the corner. I like getting cash whenever I want it, and I'm willing to pay $1.50 for that convenience. But if D'Amato and other self-appointed do-gooders had their way, I wouldn't have that choice. D'Amato proclaimed ATM fees "wrong" and "immoral." At the time, he was not just another congressional blowhard, but chairman of the Senate Banking Committee, and he planned to outlaw the fees. He branded them "absolutely unacceptable—a great scam." D'Amato went on TV to denounce the "usury" of ATM fees. He claimed, "They cost the average consumer, some reports indicate, a hundred fifty dollars a year more." "A hundred fifty dollars?" I asked him. He stammered, "That's—well, begin to think of it. Think of how many transactions that would take." His staff got the figure from a newspaper article. The real cost was a third of that. But the senator decided to "solve" this nonexistent problem anyway. He was eager to pander to constituents who didn't like the fees. We had no trouble finding voters who agreed with D'Amato. They told us they shouldn't have to pay to withdraw their own money. As one ATM user said, "There wasn't a service charge to put it in, so why should there be one to take it out?" Why? Because ATM machines aren't free! We interviewed Barbara Stillman, a woman who started a cash-machine business. She owned one ATM and serviced four others. The machine she owned cost her fifteen thousand dollars (some cost fifty thousand). Her initial outlay of fifteen thousand dollars was just the beginning. She had to service the machines and put her own cash in them (the banks reimbursed her four days later). Stillman drove to some of her machines, but had to pay hundreds of dollars to fly to her busiest ATM; it was on Block Island, just off the coast of Rhode Island. Tourists there used her ATM, even though they hated paying Stillman's whopping fee of four dollars. One vacationer complained, "Four dollars is an excessive charge to get money. But we're on vacation, so we do it." Four dollars was the highest fee we found, and her service charge would certainly have become illegal if Senator D'Amato had his way. That would have taught the greedy Stillman a lesson. Of course, it also would have hurt her customers because it would have put her out of business. Why should the Barbara Stillmans of this world take risks if they can't take profits? Here's what she told us: "When I'm loading a machine, I could be robbed. If somebody stole the machine, that's a risk. I have no incentive at all to go over there and risk my life flying on an airplane, and why would I want to risk that for nothing?" In fact, a few years later, she decided "the risk wasn't worth even four dollars per customer." She quit the business. Most cash machines are owned by banks, but banks have costs too. Politicians can pretend that banks can afford to dispense cash for free, but it isn't so. We don't need "consumer advocates" like Al D'Amato to keep businesses from charging too much. In a free society, competition holds prices down, and in the cash business, there's plenty of competition. If Stillman's four-dollar fee earns her too fat a profit, competitors will swarm in. They'll court her customers by offering cash for less. On Block Island, in fact, competition has driven the price down to about $2.50. That's how capitalism works. If Stillman charged an "unfair" fee, the free market would correct it without any help from the United States Congress. When I confronted my senator about his plan, I didn't hide my exasperation. STOSSEL It's freedom! People are willingly paying this surcharge, and we're getting more machines. ALFONSE D'AMATO It's absolutely not freedom. They don't have a choice. What choice does a person have? STOSSEL You make it sound like ATMs are like heroin, and— ALFONSE D'AMATO That's true. STOSSEL [Heroin!?] Aren't you pandering here? ALFONSE D'AMATO No, I don't think so. Someone's got to stand up for the little guy.Get out the shovel! D'Amato was hurting the little guy. And eventually, the little guys voted him out. Bye, Al. D'Amato's proposal was the subject of my first "Give Me a Break" column for 20/20, and I hope I contributed to its defeat. Consumers don't need price controls. Controlling prices has repeatedly robbed us of convenience and of new products and services. At least inconvenience usually isn't fatal, but it will be fatal if the economically illiterate succeed in imposing price controls on the product they are most eager to regulate: prescription drugs. MYTH: Drug companies are evil price gougers.TRUTH: The higher the price of the drugs, the more good drugs we get. People hate drug companies. Seeing that Lipitor can cost fourteen hundred dollars a year, or that a medication for cancer patients costs four thousand dollars a month, people say that big drug companies are evil, and that "We need price controls!" Politicians respond reflexively: Drug companies are "the robber-barons of the American health care system," shouted Senator David Pryor of Arkansas on the floor of Congress. On the other side of the Capitol, Congressman Peter DeFazio of Oregon wagged a strident finger at his House colleagues. "You will be held to account at the next elections by the tens of millions of Americans who can't afford their pharmaceutical drugs!" Grab the shovel. That's the nauseating sound of politicians pandering. Do they ever think about how we get these wonderful drugs? Drugs don't just suddenly appear. Thousands of researchers work tirelessly to develop them. Most attempts fail. But the few successes repay the costs of the failures. Imagine what life was like before the polio vaccine: Thousands spent hours in iron lungs trying to breathe. People complain about the high cost of vaccinations. But treating polio costs billions more than preventing it. A lifetime vaccination against polio sets you back about twenty dollars. Compare that to the lifelong costs of iron lungs, medical care, and lost wages—to say nothing of the physical and emotional suffering. The drug companies keep bringing us new miracles. Tour de France winner Lance Armstrong says he's alive only because of his chemotherapy drugs. "If I had this illness twenty years ago/' he said, "I wouldn't have lived six months." Armstrong's testicular cancer treatment cost a lot—around fifteen thousand dollars. But it didn't just spring providentially from some laboratory beaker. It was the product of extensive, and very expensive, research by a pharmaceutical company—a kind of scientific crapshoot in which there are very few winners. Of every five thousand chemical compounds that researchers discover, only one reaches the pharmacist's shelf. My older, smarter brother Tom knows this firsthand. He's an example of drug company failure. (I love calling Tom a failure because he got better grades in school and was Mom's favorite.) His work illustrates the risks drug companies take. Tom is codirector of the Hematology Division at Boston's Brigham and Women's Hospital. For thirty years, he did basic research, some of which led to discoveries with practical applications. One was licensed to Biogen Idee, a biotech company, after he convinced them that it might help people with cystic fibrosis breathe more easily. Biogen Idee financed a regimen of tests that cost twenty million dollars. Unfortunately Tom's discovery didn't work against cystic fibrosis. Biogen's twenty million dollars was a complete loss. Tom thinks the drug might help people with another disease, so there will be new tests and millions more in expenses. Odds are that Tom's discovery will fail those tests too. Even if the drug does pass through the gamut of tests, it will cost his benefactor hundreds of millions more to get the drug to market. The Tufts Center for the Study of Drug Development says the average cost of developing a new drug is a staggering 802 million dollars. Then, even when a new drug is approved, odds are that it will never turn a profit. Less than a third of marketed drugs have enough commercial success to recover the cost of their research and development. The hated pharmaceutical companies make big profits, but I want them to make big profits because they have to make huge investments, suffer lots of failures, and go through ten to fifteen years of testing before they can bring me the drugs that might save my life or alleviate my pain. But if you talk to people waiting for their prescriptions at a pharmacy, you don't hear appreciation for all the dollars the drug companies invested; what you hear are complaints about prices. "It makes me mad," one lady told us, "doesn't it make you mad?" Drug companies do some things that ought to make us mad. Some spend millions on "drug-detail" men, salesmen who lavish doctors with gifts and vacations in order to get them to prescribe that company's drug. ABCs Brian Ross used hidden cameras to videotape them giving away steaks, neckties, flower arrangements, and rooms at the Waldorf-Astoria Hotel. Drug companies also spend a fortune on TV ads that over-promise. They pay their CEOs exorbitant salaries. But that's capitalism! Like free speech, it brings good and bad. I forgive the bad because it's far outweighed by the good. Pharmaceutical companies' critics jump all over them for spending about four billion dollars a year advertising to consumers. But that four billion dollars is dwarfed by the nearly fifty billion dollars that they spend developing new drugs. But most people just want those big, bad drug companies punished. Sixty-five percent of people surveyed want government regulation of drug prices. It's the same old story: People see high prices, assume they're being gouged, and foolishly believe that government can save the day. MYTH: The U.S., lacking price limits on drugs, cruelly harms the poor and sick.TRUTH: Price controls harm the poor and sick. It is true that the U.S. is the only industrialized country that does not impose price controls on drugs. But that is a good thing. If price controls were instituted for drugs in the U.S., far fewer drugs would be invented. When price controls were introduced in Canada in the late 1960s, drug research there dropped by more than half. If the United States—which makes up 45 percent of the world's pharmaceutical market—suddenly decided to institute price controls, amazing drugs would be lost. Do people consider that when they demand that the government set lower prices? Rarely. AIDS activist Mark Milano disrupted candidates' speeches during the 2000 political campaign by screaming about the cost of AIDS drugs. He said price controls were the only humane solution. So I invited him in to talk about it. MARK MILANO [He's hopping mad here, smug in the moral superiority of his position] We're the only country that is paying these exorbitant prices. STOSSEL [True, but it lets me bait the hook] What country has a good system? MARK MILANO [His face goes blank for a moment, then brightens as he says] I would say New Zealand has a great system. STOSSEL [Now I can reel him in] How many new drugs come out of New Zealand? MARK MILANO [Another pause, and now he looks uncomfortable] It's true that most researchers focus here in America and in—in Europe. Japan does a tremendous amount of drug research. STOSSEL Well, how many new drugs came out of Japan? MARK MILANO [Now he looks very uncomfortable] It's hard to pin down exactly where a new drug comes—but some do come from Japan and—and other countries. There have been drugs that have... STOSSEL But most come from America! Do you think that's an accident? MARK MILANO I don't think it has to do with the fact that we have no price controls, no. Anyway, most of the new drugs coming out come from the federal government. Again, Milano is talking nonsense. He's passionate about AIDS drugs, but of the fifty-six drugs that were available for AIDS when I interviewed Milano, the National Institutes of Health said it could take credit for only five. The vast majority of new drugs come from greedy private companies. The critics and politicians want it both ways. They never acknowledge that the investor-owned drug companies drive medical progress, and that taking away financial incentives takes away new medicines. If they succeed in protecting us by lowering drug prices, they'll "protect" us from the very innovation we need. Their ideas should be quarantined before they infect anyone else. MYTH: Price "gouging" is evil.TRUTH: "Gouging" saves lives. Politicians trot out price controls, and their aliases, anti-gouging and anti-profiteering laws, again and again. Every time there's a hurricane, you know that once the winds die down, a politician will rant about "gouging." You can also bet the media will cheer him on. After Hurricane Katrina devastated the Gulf Coast in 2005, there were shortages of water, batteries, gasoline, chain saws, etc. Some merchants quickly raised their prices, and politicians and the media raged about that. They wanted "profiteers" punished. If you're a politician trying to score points by cracking down on mean, greedy people, anti-gouging rules are good for your career. But if you're one of the consumers the law supposedly protects, you won't fare as well. George Mason University economist Donald J. Boudreaux says that price increases "perform the vital task of economic triage." Consider this scenario: You return home after a cataclysmic storm to find the power is out. You desperately need batteries. You find a store that's open. The owner thinks it's immoral to take advantage of your distress; he wouldn't dream of charging you a dime more than he charged last week. Unfortunately, you can't buy a battery from this compassionate guy because he sold out three days ago. Panicked families grabbed extras to stock up, leaving none for you. You continue on your quest and finally stumble across that dreaded monster, the price gouger. He now offers a pack of batteries that cost five dollars last week for the "outrageous" price of thirty dollars. You pay him in order to survive the disaster. You resent the gouger, but if he hadn't charged thirty dollars, he'd have been out of batteries too. His "exploitation" saved the day. It works that way because people look out for their own interests. Before you got to that dealer, other customers did. At five dollars, they stocked up on batteries. They bought more than they needed—they got extras for themselves and a relative, until the store ran out. Raising the price puts the brakes on their buying and makes sure batteries and chain saws go to those who really need them. That was not the seller's intention, but it's certainly the result. In addition, raising the price makes new batteries appear. Word gets out: "Big profits to be made on batteries!" Suppliers rush batteries to the scene of the disaster, and the price quickly drops back to five dollars, or less. Motives matter little. As Adam Smith wrote, "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest." Consider the store owner's perspective: If he won't make a big profit, why should he open his store at all? Staying in a disaster area is dangerous. It means leaving his family to wait on strangers. Without extra profit, why go to all that trouble and risk? It's the price gougers who supply the batteries and water, ship the gasoline, fix the roof, and rebuild the cities. Gouging saves lives. Right after Hurricane Katrina, I wrote a newspaper column about that simple truth. People got upset. "You, sir, are scum. Plain and simple, you are scum. How dare you say that the price gougers are saving lives." "...the single stupidest, most offensive thing I have ever read. I hope you lose your job over this, you soulless cretin." E-mail after e-mail from people who hate the very mechanism that makes their lives better: capitalism. After Hurricane Katrina, there was overwhelming demand for carpentry work. The area's own population of carpenters wasn't enough. If this were a totalitarian country, the government might just order a bunch of tradesmen to go to New Orleans. But in a free society, tradesmen from other areas must be persuaded to leave their homes and families, their employers and customers, and drive from, say, Chicago to New Orleans. If they can't earn more money in Louisiana than Illinois, why make the trip? Some carpenters may be motivated by a desire to be heroic, but we can't expect heroes to fill the need, week after week; most will travel there for the same reason most Americans go to work: to make money. Any tradesman who treks to a disaster area must get higher pay than he would get in his hometown, or he won't go. Limit him to what his New Orleans colleagues charged before the storm, and even a would-be hero may say, "The heck with it." On the other hand, if he charges enough to justify his venture, he's likely to be condemned morally or legally by the very people he's trying to help. They just don't understand basic economics. If price controls forbid prices to rise, tradesmen will be content to stay at home, and New Orleans will take years longer to rebuild. When Hurricane Andrew hit Florida in 1992, the state's attorney general, Bob Butterworth, was outraged by the "unconscionable" gouging. "I don't see any difference between the looters who go through the rubble in the trailer parks and the business people who cash in on this disaster by gouging customers," he said. Florida passed laws that punish price gougers with fines of up to twenty-five thousand dollars and made it a third-degree felony for out-of-state contractors to work without a license. Florida law dictates that penalties be increased if those contractors work during a disaster, which of course is when hurricane victims need them most. In 2004, Hurricanes Charley, Frances, Ivan, and Jeanne all hit Florida. The extensive damage required droves of tradesmen to do repairs, but because of all the consumer "protection" rules, Florida's recovery was slow and difficult. Florida became known as the "Blue Roof State" because of the thousands of blue plastic tarps that covered damaged roofs for close to a year. The demand for roofers was so severe that some hurricane victims had to wait up to five weeks just to get an estimate for a roof job. The recovery could have been much faster if only Florida had gotten rid of its ridiculous restrictions. Let the market work, and services that were in short supply become available. Some regulators say that's not fair to the poor "because poor people can't afford those sudden price spikes that you free-marketers so cavalierly support!" But such paternalism doesn't help the poor. Poor people need batteries too, and $30 batteries are better than no batteries at all. The poor may have to pool their resources and share the flashlight and radio with neighbors, but some supplies are always better than none. If the free market is allowed to work its magic, the opportunity to profit will bring so many new suppliers to the disaster site that prices will quickly return to pre-disaster levels. Or even lower. Sometimes the new competitors invent even cheaper ways to do things. Everyone benefits—the poor and the rich—when the politicians don't "protect" us with price controls. _____________________________________________ To go to our full review, or to go to purchase the book, CLICK HERE. __________________________________________________ Excerpted from MYTHS, LIES AND DOWNRIGHT STUPIDITY by John Stossel of 20/20. © 2006. JFS Productions, Inc., and American Broadcasting Companies, Inc. All rights reserved. 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