A Nation Like No Other (15 page)

The patriots at Lexington and Concord were farmers defending their land and their rights against the British invaders. Subsequent generations pushed ever westward into new lands. In 1787 the Founders agreed to incorporate the old North-West Territory—the land between the Allegheny Mountains and the Mississippi—into the new nation. Then in 1803 President Thomas Jefferson nearly doubled America's land mass by purchasing the Louisiana Territory, stretching roughly from the Mississippi to the Rocky Mountains, from Napoleon for $15 million. Thousands of adventurers, frontiersmen, and farmers followed Lewis and Clark into the territory, and eventually the country was settled all the way to the Pacific coast. Property was a tangible asset enabling men of the most modest means to achieve financial independence and secure a direct stake in their own futures and in America's as well.

It took nearly a century for American historians to realize that the process of exploring, settling, and developing all that territory had fundamentally impacted the character of the American people. In 1893, a young professor from the University of Wisconsin, Frederick Jackson Turner, delivered a short paper on American history at the World's Columbian Exposition in Chicago.

Turner stated his thesis in a single sentence: “The existence of an area of free land, its continuous recession, and the advance of American settlement westward explain American development.”
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He elaborated on the connection between the frontier and the American character:

Turner's “Frontier Thesis” became one of the most influential explanations of American Exceptionalism ever written, deeply affecting the teaching of history and spawning a popular genre—the Western—that would encompass literature, film, and television. Situating land, work, and property rights at the core of the American character, the thesis explained the unique circumstances and habits that still define our nation today.

The United States transformed from an agricultural country into the world's preeminent commercial and industrial power thanks to policies developed by Alexander Hamilton and embraced by George Washington. The two men worked together in a remarkable partnership from the end of the Revolution to the Constitutional Convention and then through Washington's two terms of office.

Washington and Hamilton had endured eight years of war with the British Empire. They knew that the lack of American industry and financial strength had lengthened the war and made Americans dependent on foreigners for the equipment and finances needed to win freedom. They also knew that national security required a national economy and national finances.

As chronicled in Ron Chernow's superb biography, Alexander Hamilton understood that a complex, efficient economy has to be underpinned by a specific set of rights: property rights (including protection for intellectual property through patents and copyrights), freedom of contract, and the rule of law (including an independent judiciary for settling disputes). When these rights are secure, producers can focus on areas where they have the greatest comparative advantage.
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According to
The Wealth of Nations
, Adam Smith's seminal work on free enterprise, such a division of labor is the foundation of modern prosperity.

Hamilton also identified other crucial ingredients for a nation's economic success: minimum taxation and minimum regulatory barriers (a condition that incentivizes increased production), and sound money tethered to real world values (which provides a stable medium of exchange and a stable medium for savings and investment). Overall, Hamilton understood that nations rise or fall over seemingly mundane issues like the rate of interest required to secure foreign loans, the availability of foreign capital, and implementing the policies that most effectively encourage work. As Daniel Defoe wrote, “It is not the longest sword that conquers, but the longest purse.”

In his
Report on Public Credit
, Hamilton presented a detailed blueprint of the government's fiscal machinery, wrapped in a broad political and economic vision. In this renowned study, Hamilton maintained that the government's debt, largely incurred from fighting the Revolutionary War, was the “price of liberty” and had to be paid off, both for economic reasons and as a matter of simple morality. Hamilton's advice, of course, has some resonance today, when the United States is burdened by a $14 trillion national debt—a figure the Founders surely would have regarded as not only economically harmful, but immoral.

Later, in his
Report on Manufactures
, Hamilton laid the policy foundation for the great American industrial boom. Arguing against advocates of the agrarian idyll like Thomas Jefferson, Hamilton claimed America's focus on agriculture was not a natural by-product of geography and culture, but the result of overt protectionism by European manufacturers who hoped to keep the American economy subservient to their industries. Hamilton cited the colonies' inability to manufacture essential goods during the Revolution to explain the importance of increasing America's manufacturing capability. He then correctly predicted that both manufacturers and industrial workers would flock to a country with rich natural resources, low taxes, and the rule of law.

The Constitution's ratification firmly implanted the rule of law in America, while the government's assumption of the states' war debts—a move advocated by Hamilton—increased investor confidence in the new country. But these events and policies merely created the framework for economic success. The actual transformation of America's agricultural
economy into the world's primary industrial powerhouse was enacted, first and foremost, through the hard work of the American people.

The United States had been essentially bankrupt as the Constitution took effect, but thanks to Hamilton's foresight and the American work ethic, just two years later George Washington was able to write, “The United States enjoy a scene of prosperity and tranquility under the new government that could hardly have been hoped for.… Our public credit stands on that [high] ground which three years ago it would have been considered as a species of madness to have foretold.”

In 2005,
Popular Mechanics
magazine conducted a survey to determine the world's top fifty inventions of the last half-century. The experts considered everything from the polio vaccine to ATMs to digital music as they weighed in on which innovations had the biggest impact on the world. When the results were released, thirty-seven of the top fifty—almost 75 percent—were developed by American scientists, American firms, or American universities.
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This is no coincidence.

The rights and freedoms guaranteed by our Constitution have provided the invaluable tools for America to become the most innovative and productive society in history. The government provides the framework, and curious and courageous Americans—sometimes from the least likely places—do the rest.

Recall that it was a pair of bicycle mechanics from Dayton, Ohio, the Wright brothers, who experimented on their own for years until they invented the airplane and revolutionized the way we travel. And it was a telegraph operator with a lifelong love of tinkering who became one of history's most prolific inventors—among other things, Thomas Edison made the first commercially viable light bulb, the first phonograph, and the first major electricity distribution network.

The Founders knew that for the United States to become the creative and technological center of the world, Americans would need the opportunity to innovate without fear of anyone, including government officials, stealing their discovery, idea, or invention. With the Constitution's property
protections, including the explicit protection of intellectual property, these guarantees are secure. The government has no right to confiscate a person's property without due process, and in fact the government is obligated to protect property against those who would encroach upon it.

At the core of American Exceptionalism is the notion that one does not need to be from a wealthy background, or possess a fancy degree, or have the support of the government, in order to develop and pursue a great idea. By creating a free-enterprise system that embodies this notion, America has not only cultivated its own great thinkers and innovators, but has attracted the best and brightest immigrants to lend their talents to the American project.

Alexander Graham Bell, the Scottish-born inventor of the telephone, and Nikola Tesla, the Austria-born father of electric power systems, both immigrated to America and eventually became U.S. citizens. Each was drawn by the strong property rights, free markets, and access to capital that only America provided. Later, in the 1930s, some of Europe's most brilliant minds, including Albert Einstein, fled tyrannical governments and settled in America, where they found personal and academic freedom. More recently, new Americans from East and South Asia have been crucial to the technological innovation in the Silicon Valley since the 1960s, and to this day, tens of thousands of gifted foreigners seek out the limited number of U.S. student and high-skilled visas.

What makes America so unique? Our markets and institutions reward talent and hard work. Our Constitution and rule of law guarantee one's right to the fruits of their labor. And our government plays a limited but critical role in ensuring that anyone can take risks, knowing their property and innovations will be well protected.

For the Founders, work was endowed with moral value. More than a necessity for physical survival, work contributed purpose and meaning to life.
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These values helped Americans to endure countless hardships and sacrifices during the Great Depression and World War II.

After the war, America's estimated poverty rate fell from 32 percent in 1950, to 22.4 percent in 1959, to 12.1 percent in 1969. But in 1965,
President Lyndon Johnson famously announced the War on Poverty. Robert Rector of the Heritage Foundation reports that from 1965 to 2008, total spending on this “war” reached nearly $16 trillion in 2008 dollars, more than twice the cost of all military conflicts from the American Revolution to today.
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And what did we get in return? Soon after the War on Poverty programs were adopted, the years-long decline in American poverty suddenly stopped.

From 1978 to 1982, the poverty rate rose by almost a third to 15 percent. By 2009 the poverty rate stood at 14.3 percent—about where it was when the War on Poverty began. As Peter Ferrara explains in
America's Ticking Bankruptcy Bomb,
after the War on Poverty commenced, work among low-income Americans collapsed.
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In 1960, nearly two-thirds of low-income households were headed by persons who worked,
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but by 1991, the proportion had fallen to one-third, with only 11 percent working full time, year round.
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With the government providing so much in free welfare, many people chose not to work.

Once caught in the web of the welfare state, the poor face grave difficulties in trying to break free, a problem Art Laffer has called the “poverty trap.” Simply put, welfare recipients who go to work lose their benefits as their income rises. This is effectively an extra tax on work that must be paid on top of the usual array of federal, state, and local taxes. Laffer and others have shown that the effective tax rate on those trying to work to get off of welfare can even exceed 100 percent.

Once free of welfare, those trying to remain productive face the burdens and disincentives of welfare state tax rates. Despite the popularity among politicians of one-time tax rebates, these are largely political gimmicks. With regard to work incentives, the most important metric is the tax rate—the lower the rate, the greater the incentive to work, save, invest, start businesses, expand businesses, create jobs, and produce, because the producer is free to keep a higher percentage of what he or she produces. The higher the tax rate, the bigger the disincentive to work.

In 1996, when I served as Speaker of the House of Representatives, the Republican majority enacted the most successful national welfare
reform in history, which restructured the failed New Deal-era Aid to Families with Dependent Children (AFDC) program. More than a legislative reform, it was a cultural reform that valued work and restored the dignity that welfare had destroyed for millions trapped in the system.

The reform returned the share of federal spending on the program to each state in the form of a “block grant” to be used in a new welfare program redesigned by the state based on mandatory work or education for the able-bodied. Federal funding for AFDC previously was based on a matching formula, with the federal government giving more to each state the more it spent on the program, effectively paying the states to expand welfare. The key to the 1996 reforms was that the new block grants to each state were finite, not matching, so federal funding did not vary with the amount the state spent. If a state's new program cost more, the state had to pay the extra costs itself. If the program cost less, the state could keep the savings.