The Freeloaders’ Philosophy

How the Most Subsidized Generation in American History Learned to Love the Free Market

There is a particular kind of intellectual dishonesty that requires real institutional resources to sustain. The casual lie can be told by anyone. The systematic lie, the lie that requires coordinated methodology, that must be rebuilt every time the data is updated, that must be defended in academic journals and congressional testimony and op-ed pages simultaneously, that lie requires funding. The Cato Institute and its satellite operations in the libertarian think tank complex have that funding, and they have deployed it with discipline and consistency in service of a single conclusion: that the American economy, left largely to market forces, has delivered rising prosperity to most Americans, that inequality is manageable or falling, and that the principle threat to this happy arrangement is government overreach. Every piece of analysis they produce is in service of this conclusion. None of it survives contact with honest accounting.

The foundation of the case is the inflation measure, and the inflation measure is fraudulent. Not mistaken. Not imprecise. Fraudulent in the specific sense that every methodological choice made to the Consumer Price Index since the 1980s has cut in the same direction. The introduction of hedonic adjustment, the substitution of owners’ equivalent rent for actual housing costs, chain-weighting, geometric mean substitution, the systematic underweighting of healthcare, the complete omission of taxes: not one of these changes produced an upward revision to measured inflation. When a methodology contains no errors in one direction and a consistent accumulation of errors in the other, it is not a methodology. It is a conclusion wearing a methodology’s clothing.

The hedonic adjustment deserves particular contempt because its logical error is elementary. The argument runs as follows: a 2024 automobile does more than a 1994 automobile, therefore the real price has fallen even if the nominal price has risen, because the consumer is receiving more value per dollar. This conflates two entirely independent variables. Technological progress is a statement about what engineers have accomplished. The cost of living is a statement about what a household must spend. These have no necessary relationship. The consumer cannot purchase the 1994 automobile at the 1994 price. The relevant question for a cost of living index is what it costs to live, not how much better the product is than its predecessor. A cancer treatment that is twice as effective as the one available ten years ago but costs four times as much has, on hedonic logic, become cheaper in real terms. The patient bankrupted by it has a different view. The adjustment does not measure prosperity. It manufactures it.

Owners’ equivalent rent compounds the fraud. Rather than measuring what households actually pay for housing, the Bureau of Labor Statistics imputes a rent that the homeowner would theoretically charge himself, a figure that systematically lags actual market rents and actual ownership costs during periods of rising prices. The result is that the single largest expenditure in most household budgets is measured not at its market price but at a bureaucratic estimate that smooths away the very volatility it exists to capture. Chain-weighting and geometric substitution apply the same logic to the consumption basket as a whole: when something gets expensive, the methodology assumes consumers substitute away from it, which is plausible for luxuries and false for necessities, and housing, healthcare, and education are necessities. The substitution assumption is a device for converting the rising cost of essential goods into evidence that consumers are efficiently managing their budgets. It is, in plain English, a way of not counting what costs more.

When you correct for these choices, which is not a radical exercise but simply a matter of applying the methodological standards that prevailed before the revisions, real wage growth over the past forty years collapses toward zero for most of the income distribution and goes negative for significant portions of it. The libertarian prosperity story requires the corrupted deflator. Without it, there is no story.

The GDP accounting is equally unreliable, and for a reason that the national accounts have never adequately addressed: they measure gross output. Gross. They do not deduct the consumption of the capital stock, the aging of infrastructure, the deterioration of the housing supply, the drawing down of natural resources. The Net Domestic Product figure exists but is ignored in virtually all policy discussion, and the reason it is ignored is that it tells a far less flattering story. The median American home is now forty-two years old. It was not forty-two years old in 1980. The physical stock of residential capital is aging, requiring more maintenance expenditure simply to sustain its existing condition, and none of this expenditure represents an improvement in living standards. It represents running in place. When it shows up in GDP as construction and renovation spending, it is counted as growth. When the house deteriorates faster than the renovation budget can address, the loss does not appear anywhere. The national accounts treat a forty-two year old house and a new one as equivalent contributors to household wealth if their market prices are equivalent, and their market prices are equivalent only because money creation has inflated both. The physical reality, the leaking roof, the outdated wiring, the inefficient heating system, the foundation that was poured in 1983, does not enter the calculation.

Healthcare is the reductio ad absurdum of the GDP-as-prosperity measure. The United States spends approximately twice what peer nations spend as a share of output on medical care, and it receives, by every available outcome measure, worse results. Life expectancy is lower. The incidence of preventable chronic disease is higher. This spending appears in GDP as output. It is not output in any meaningful sense. It is the cost of a cartelized delivery system extracting maximum rent from patients who have no choice and insurers who have every incentive to pass costs along. When libertarians point to rising nominal incomes without deducting the healthcare burden, they are hiding the single largest expansion of forced household expenditure in the postwar period. The hedonic adjustment, faithfully applied, would record this as deflation, since the treatments available today are superior to those available in 1970. The household whose insurance premium has tripled while its deductible has quintupled experiences this as something other than deflation.

Education follows the same template. Years of schooling have risen. Credential requirements for positions that did not previously require credentials have inflated. Student debt has reached levels that materially delay household formation, asset accumulation, and consumption for the cohort entering the labor force. Measurable skills, in numeracy, literacy, and vocational competence, have not improved. The resources consumed by the educational credentialing apparatus represent a transfer to an institutional sector that produces no marginal increase in human capital and appears in GDP as growth. It is not growth. It is extraction with extra steps.

Susan Houseman’s work on manufacturing productivity, largely ignored in the circles where libertarian triumphalism is produced, established the mechanism by which the technology sector inflated the productivity statistics of the entire economy. Measured productivity growth was concentrated so heavily in computers and semiconductors that, when that sector was isolated, the productivity performance of the remaining economy was far weaker than the aggregate suggested. The sector was, to a significant degree, measuring its own price deflation and presenting it as economywide efficiency gains. Strip it out and the American economy’s productivity record since 1980 is considerably less impressive than the standard account. This matters because the standard account is used to explain why wages should have risen, and when the explanation fails, the divergence between productivity and wages becomes a problem that cannot be explained away by pointing to bad workers or excessive regulation. The productivity gains were not as large as claimed, and the wages did not rise even in proportion to the overstated gains.

The debt picture is perhaps the most devastating single number available to anyone willing to look at it honestly. The Z.1 Flow of Funds accounts show that it now requires approximately five dollars of total debt creation to generate one dollar of GDP growth. Five dollars in. One dollar out. This is not the signature of a dynamic market economy allocating capital efficiently to its highest uses. It is the signature of an economy that has become almost entirely dependent on credit expansion to produce any measured output at all, an economy in which the GDP figure is largely the statistical residue of borrowed consumption rather than genuine productive activity. The federal government now pays more than a trillion dollars annually in interest on the national debt, which is to say that a growing share of tax revenue services the legacy cost of past consumption rather than funding present capacity. David Stockman’s meticulous documentation of the spending trajectories under administrations of both parties, including the current one, eliminates the last refuge of the ideological conservative who wishes to separate the free-market rhetoric from the fiscal reality. There is no fiscal conservative party. There is a party that spends on domestic transfer programs and a party that spends on military contracting and tax expenditures for asset holders, and both have presided over the largest expansion of government as a share of the economy in American history. Cato provides intellectual cover for both in alternating rotation.

The military budget illuminates the rent-seeking structure most clearly. The nominal figure is enormous, and the fraction of it that is spent on the actual defense of the American homeland against plausible threats is a small portion of the whole. The majority funds contractor profits, overseas commitments of contested strategic value, veterans’ benefits, pensions, healthcare legacy costs, and the overhead of a global imperial infrastructure that serves specific industrial and geopolitical interests. This spending appears as GDP. It is taxed from households and transferred to defense industry shareholders and the communities organized around military installations. It is not prosperity. It is tribute, laundered through an appropriations process and presented as national security.

John Hussman’s work on corporate profit margins completes the picture of financial sector mythology. Controlling for the interest rate environment and effective corporate tax rates, underlying operating profitability has not structurally improved over seventy years. What has improved is the financial engineering: lower taxes reduce the claim on earnings, lower interest costs on debt reduce another claim, and share buybacks funded by cheap credit mechanically inflate earnings per share without any corresponding improvement in the underlying business. The equity market’s multi-decade expansion in price-to-earnings multiples therefore does not reflect a judgment that American corporations have become more productive. It reflects the capitalization of government-provided financial conditions: the Federal Reserve’s suppression of interest rates, the tax preference for corporate debt, the implicit and explicit backstops that prevent the clearing of insolvent institutions. When those conditions normalize, which they are beginning to do, the wealth they appeared to create will be revealed as the accounting artifact it always was.

This brings the argument to the expanding upper middle class, which Cato and its colleagues point to with particular satisfaction as evidence that markets are producing broadly shared gains. The expansion is real in the sense that more households occupy the income range that defines the upper middle class. The explanation for it is not. The correct counterfactual for assessing the role of assortative mating in this expansion is not dual-earner households in 1975 compared to dual-earner households today. The correct counterfactual is households in which the female partner had zero labor market income, which was the norm for the majority of the income distribution within living memory. Assortative mating along educational and cognitive lines has always occurred. What changed is that the female partner in a high-education household now brings a substantial labor market income to a pairing that previously contributed only one. The household income of two professionals does not merely add a second income to an existing baseline. It multiplies the household’s position in the distribution, because the second income is itself well above median and it compounds with the first. The studies that purport to measure the effect of assortative mating on inequality systematically underestimate it because they use contemporary dual-earner baselines rather than the single-earner counterfactual that accurately measures the change. Correct for this and much of what appears to be market-generated prosperity for the upper quintile is revealed as the arithmetic consequence of a social and demographic shift, not a vindication of any economic policy.

The remainder of the inequality picture is sustained by the transfer apparatus that libertarians oppose in principle and depend on in their measurements. Pre-transfer income inequality in the United States is extreme, with a Gini coefficient approaching 0.6, reflecting the raw market distribution of wages, capital income, and entrepreneurial returns. Post-transfer inequality is substantially lower, reflecting the redistributive effect of Social Security, Medicare, Medicaid, unemployment insurance, food assistance, and the full range of programs that Cato’s donors and scholars spend considerable energy trying to reduce. The libertarian points to post-transfer inequality as evidence that markets are working. He simultaneously argues that the transfers suppressing that inequality should be eliminated. He does not reconcile these positions because reconciliation is not the purpose of the exercise. The purpose is to provide whatever argument is locally convenient for defending the status quo against whatever challenge is currently most threatening.

There is a further dimension to the GDP growth story that is almost never acknowledged in the libertarian prosperity literature, because acknowledging it would require dismantling the entire postwar growth narrative at its foundation. When women entered the paid labor force in large numbers across the second half of the twentieth century, GDP rose. It rose because their market wages were now counted. It rose again because the childcare they had previously provided was now purchased from someone else and counted. It rose a third time because the cooking, cleaning, elder care, household management, and community maintenance they had previously performed were now, to varying degrees, purchased as market services and counted. The national accounts faithfully recorded all of this as economic growth. It was not economic growth. It was the reclassification of production that was already occurring, performed by people who were already working, whose output was invisible to the accountants for the same reason that subsistence farming is invisible: not because it had no value but because no market transaction occurred that the measurement apparatus could record.

The magnitude of this reclassification is not a rounding error. Estimates of the value of unpaid household labor place it consistently between a quarter and forty percent of measured GDP, depending on the valuation method applied. If that stock of production is added to the baseline from which postwar growth is measured, a significant fraction of what the prosperity narrative presents as market expansion dissolves into accounting reclassification. The economy did not produce more. It began counting what it had always produced by different hands in a different institutional setting. The GDP figure went up. The total productive activity of the society did not increase by nearly the same amount.

This compounds with the failure to account for depreciation. The GDP accounts do not deduct the running down of the physical capital stock, the aging of the housing supply, the deterioration of infrastructure, or the depletion of natural resources. Net Domestic Product, which attempts this deduction, is ignored in virtually all policy discussion because the number it produces is less flattering. An economy that simultaneously reclassifies existing household production as market output, fails to deduct the depreciation of its capital stock, and applies an inflation deflator systematically biased downward is not measuring prosperity. It is constructing a narrative in which the direction of every methodological choice points toward the same conclusion, and the conclusion was determined before the measurement began. The libertarian looks at this number and calls it vindication. He should be asked, with some precision, what evidence would cause him to revise the conclusion. If no evidence could, the exercise is theology, not analysis.

The social costs of the transition are similarly absent from the accounts. The household production that preceded mass female labor force participation was not only economically valuable in the narrow sense. It was the material of social reproduction: the raising of children with sustained parental attention, the care of elderly relatives within family networks rather than in purchased facilities, the maintenance of neighborhood coherence and community association that full employment of both adults crowds out. Whether the transition is viewed as liberation, as economic necessity driven by the long decline of male real wages that made the single-earner household increasingly unviable, or as some combination of both, the social outputs of the previous arrangement do not appear anywhere in the GDP accounts as losses when they disappear. The childcare facility appears as a gain. The dissolution of the neighborhood during working hours does not appear as a loss. The accounts are not neutral between these arrangements. They are structurally biased toward the arrangement that generates market transactions, and the shift from one arrangement to the other was recorded as growth without any deduction for what was surrendered. To point at that recorded growth as evidence of market success is to mistake the ledger for the world it was supposed to describe.

The younger cohorts bear the cost of this intellectual production in the most concrete possible terms. Median tangible wealth for households under forty is lower today, adjusted for inflation by any honest deflator, than it was for the equivalent cohort a generation ago. Homeownership rates for this group have declined. Family formation has been delayed. The median age at first home purchase has risen. Student debt burdens are large enough to function as a tax on labor income for the first decade of a professional career. These are not the outcomes of a market delivering broad prosperity. They are the outcomes of a market in which the asset prices of the generation already holding assets have been inflated by monetary expansion, in which the housing stock those younger buyers must enter is forty-two years old and appreciating for reasons entirely disconnected from its physical condition, and in which the credential and healthcare and housing costs absorbing an increasing share of entry-level income have been inflated by exactly the cartelization and rent extraction that a genuine free market would have prevented and that the nominally free-market think tanks have not troubled themselves to address.

The cheap goods from China are, in this context, both the libertarian’s prize exhibit and his most revealing embarrassment. They are real. Consumer electronics, apparel, and household goods have become less expensive in ways that provide genuine relief to households squeezed on every other front. But they are not the product of American market dynamism. They are the product of Chinese state capitalism, authoritarian industrial policy, currency management, and a labor cost structure built on conditions that American regulatory frameworks would not permit. The libertarian points to falling prices on consumer goods produced by an authoritarian developmental state as vindication of the free market. This is not an argument. It is desperation dressed as analysis.

What Cato is defending, when the accounting is done honestly, is a rentier class. Not entrepreneurs. Not producers. Not the risk-taking, value-creating agents of libertarian mythology. It is defending shareholders in defense contractors who have never built anything. It is defending pharmaceutical patent holders who discovered nothing and purchased the right to charge what the dying will pay. It is defending financial sector participants who intermediate flows of money created by central bank expansion and extract fees from the process. It is defending real estate holders whose nominal wealth has been inflated by forty years of monetary policy and who have organized the political system to prevent the construction of housing that would lower their asset prices. It is defending the dual-income professional households whose apparent prosperity is the mechanical product of two educational credentials pairing in a labor market that rewards credentials independently of measurable skill. None of these people produce more than they take. The think tank that defends them has not made an error. It has done its job.

The most profitable lie in American intellectual life is the claim that the most intrusive, most indebted, most financially interventionist government in the history of this republic represents the natural outcome of market forces, and that the people whose wealth depends entirely on that intervention are the victims of it. Cato did not invent this lie. But it has been paid very well to maintain it, and it has done so with the diligence and attention to detail that the fee demands. The rest of us are invited to accept the conclusions and not examine the methods. Some of us decline the invitation.