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Where Ayn Rand Went Wrong

shikha.dalmia@reason.org (Shikha Dalmia) — Wed, 04 Nov 2009 16:27:00 EST

Love her or hate her, you can't deny that Ayn Rand, the 20th century's most bellicose/eloquent (select adjective based on political persuasion) defender of laissez-faire capitalism, is experiencing a revival. Sales of her 50-year-old magnum opus, Atlas Shrugged, second only to the Bible in terms of influence according to some reader surveys, are soaring even more this year. Two major publishing houses have rushed to release new Rand biographies—by academics, no less—this fall. And there is nary a tea party protest that doesn't prominently splash banners alluding to John Galt, Atlas Shrugged's ubermensch hero.

The latest issue of Reason magazine, with which I am affiliated, has Rand on the cover with a headline proclaiming: "She's Back." GQ echoes the same thing with its own slant, "The Bitch is Back," not to mention a hilariously naughty picture depicting Rand in an S&M outfit standing astride her former devotee Alan Greenspan.

That over 25 years after her death, Rand's persona and ideas command so much attention is testimony to the abiding power of her ideas. Still the question remains, if she is so influential, why are we on the brink of socialized medicine today? Put another way, if Rand were alive, would she be reveling in the renewed attention she is receiving as a measure of her success? Or would she be tearing her hair out in despair at her failure to stop the advancing Big Government juggernaut?

The point is especially powerful if one considers the influence that some of the other great philosophical defenders of liberty have had in the past. John Locke set out to release the individual from the tyranny of religious authorities by enunciating the doctrine of the separation of church and state. Today, this doctrine is the cornerstone of every liberal democracy in the world. Likewise, Adam Smith penned his grand defense of free trade to beat back the mercantilist ideologies that held sway in 18th century Europe. Today, the cause of free trade—notwithstanding occasional bouts of protectionism—is gaining ground worldwide. But Rand's life-long crusade—defeating socialism—which appeared within grasp just two decades ago when the Soviet Union collapsed, now seems to have regressed to the 1930s, when FDR used the economic meltdown to massively intervene in private industry.

Rand's adherents blame this state of affairs on the faulty philosophical principles of society—especially on issues of morality. But replacing false ideas with true ones is precisely what transformative figures do, and certainly what Rand, who firmly believed in the power of reason and truth, was hoping to do. Surely, if she had witnessed the events of last year—the government bailout of banks, the takeover of auto companies, the looming socialization of health care—she'd be wondering where she went wrong. Or, to use her lingo, she'd be "checking her premises."

So where did she go wrong?

Rand's entire project involved liberating the individual from the yoke of collectivism and creating the social, moral and political conditions in which he could live a fully actualized life. Each individual's own happiness is his highest purpose, she said, and boldly declared selfishness to be a virtue—contrary to what various religious and non-religious (communist, fascist, communitarian) preachers of the ethics of self-sacrifice had been saying for ages.

For people like myself, laboring under the twin tyrannies of tradition and socialism when I first read Rand in my native India, this is heady, empowering stuff. It supplies you with the moral and intellectual ammunition to stand up to those claiming to own a piece of you—family, community and state—and take control of your own destiny.

But is self-actualization through productive work--the ultimate goal of this liberation for Rand—all there is to a happy life? Two centuries before Rand arrived on the scene, Adam Smith had already written The Wealth of Nations, a powerful treatise demonstrating why self-interest offers a more secure foundation for a rational society than a selfless dedication to the common good. But he also recognized in the very first sentence of the Theory of Moral Sentiments—his brilliantly nuanced, richly observed study of human morality—that: "How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it."

Smith spent his whole life examining and reconciling both the self-interested and the "other-interested" side of human nature. Rand, on the other hand, effectively put these two sides at war—limiting her usefulness in the fight to stop the growth of government in the bargain.

Rand sought to provide an individualistic and moral defense of capitalism—not a practical and collectivist one. She understood better than anybody that by unleashing the productive potential of individuals, capitalism delivers untold social benefits. But these benefits weren't the primary reason to defend capitalism, she insisted. Rather, it is that capitalism frees individuals—especially those with exceptional abilities, the Howard Roarks and the John Galts—to reach their highest potential.

By grounding capitalism and economic liberties in the psychic needs of individuals as opposed to, say, GDP growth, Rand avoided the collectivist trap under which individual rights are dependent for their legitimacy on serving some broader social purpose. However, this great virtue of her approach turns into a great vice in the context of her broader message, which seems to regard anything beyond a perfunctory interest in the well-being of others as vaguely illicit.

Unlike Smith, Rand failed to fully recognize that though human beings are not constituted for self-sacrifice, they have an innate need to see others prosper. Hence, there is something crabbed and withholding in her writings, as if she is going out of her way on principle to avoid giving any assurance that everyone in fact would be better off under capitalism. Other libertarian theorists—Friedrich Hayek and Ludwig von Mises—avoided this flaw. But Rand regarded their defense of capitalism as insufficiently pure. And to the extent that it is Rand's—not their—case for capitalism that sticks in the popular imagination, it might enhance—not diminish—the allure of government over free market solutions to social issues such as health coverage for the uninsured.

Most people read Rand when they are young and are deeply moved by her, only to outgrow her by mid-life. Her adherents like to blame this on the moral pusillanimity and irrationality of the readers. But the real problem is perhaps with Rand herself: Her ideology of self-actualization speaks much more to the concerns of the young than the mature—again, because she ignores the "other-interested" side of human nature.

Consider what she wrote in her essay "The Ethics of Emergency": "The proper method of judging when or whether one should help another person is by reference to one's own rational self-interest and one's own hierarchy of values: The time, money or effort one gives or the risk one takes should be proportionate to the value of the person in one's own happiness." This statement certainly doesn't preclude helping others so long as they are important to us. But it doesn't tell us whether we should make them important to us in the first place.

For example, under Rand's schema would a person who abandons some passion in order to look after an elderly parent have a higher or lower moral standing than someone who doesn't (assuming that the parents are equally worthy)? Will the former be happier? More at peace? Rand gives us no real reason to believe so. In fact, the distinct impression one gets from her work is that an individual's first duty is to cultivating his own passions rather than nurturing his interest in the flourishing of those around him (with the possible exception of one's romantic partner). No surprise then that the virtue of generosity or benevolence, though it has pride of place in the work of Aristotle—the only philosopher to whom Rand acknowledges any intellectual debt—occupies a second-class status in her own work.

The fact is that Rand gets harder to take as one grows older and concerns about those around us become more important than our own personal project of self development. The relentless, single-minded dedication to one's passions that Rand seems to favor requires a coldness of the soul, a narrowing of one's humanity—the natural interest in the fortune of others that Smith alludes to—that most people find is not exactly conducive to their happiness.

This has profound and unfortunate political consequences. On the practical level, it makes it difficult to build a strong and growing anti-government movement based solely on Rand's philosophy, because the older cohort of her followers is falling off on a regular basis. On the theoretical level, Rand's ideas offer no real possibility of developing robust civil society responses to address the needs of those down on their luck. It is difficult to imagine a Randian qua Randian, say, volunteering in a soup kitchen to feed the hungry, or even founding the Fraternal Order of Fellow Randians to provide free health coverage and housing to jobless and homeless Randians. Since misfortune and distress are a normal part of the human condition, a philosophy that offers no positive, private solutions to deal with them will just have a harder time making the case against government intervention stick.

Rand's resurgence is certainly a welcome antidote to the Big Government onslaught that the country is experiencing right now. In the age of bailouts, the world certainly needs to hear--loud and clear--her message of personal freedom as well as its corollary, personal responsibility. But if Rand is going to play a starring role in the long-term battle to defeat statist ideologies, rather than making episodic, cameo appearances, her work will require a radical overhaul. Ultimately, the best way to honor her is by making her cause succeed--even if that means jettisoning some of her intellectual baggage.

Shikha Dalmia is a senior analyst at Reason Foundation and a biweekly Forbes columnist. This column originally appeared at Forbes.com.

Obama's Hidden Fees

jsullum@reason.com (Jacob Sullum) — Wed, 04 Nov 2009 13:15:00 EST

President Obama’s promise to raise taxes only on the wealthy was easy to make and easy to break. He broke it barely two weeks after taking office, and he will break it again if Congress passes the health care legislation he wants. But Obama has come up with a strategy to avoid the fate of George H.W. Bush: Although he will raise your taxes, he will never admit he is raising your taxes.

Campaigning in Dover, New Hampshire, in September 2008, Obama declared: “I can make a firm pledge. Under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.”

Five months later, Obama signed a bill that more than doubled the federal cigarette tax, which falls especially heavily on the poor. White House Press Secretary Robert Gibbs argued that it didn’t really count, because “people make a decision to smoke.” Similarly, White House spokeswoman Linda Douglass says financial penalties for failing to obtain medical coverage are not taxes because “a fee would only be imposed on those few who could afford to purchase insurance but refuse to do so.”

Yet the fact that you can avoid a tax by changing your behavior does not mean it isn’t a tax. You don’t pay gasoline taxes if you don’t drive, you don’t pay property taxes if you don’t own real estate, and you don’t pay income taxes if you don’t earn income. In this case, people are subject to the “fee” simply by virtue of living in the United States and choosing not to buy something the government thinks they should.

Douglass likens the individual health insurance mandate to state requirements that drivers have liability insurance and that parents educate their children. But people who violate such laws are subject to criminal penalties. Neither the House nor the Senate health care bill would establish criminal penalties for refusing to buy health insurance, presumably because due process requirements would make it hard to impose them.

Instead the bills would establish a “tax on individuals without acceptable health care coverage” and an “individual responsibility excise tax,” respectively. “If you put something in the Internal Revenue Code and you tell the IRS to collect it,” a tax expert told the Associated Press in September, “I think that’s a tax.”

The president disagrees. “For us to say that you’ve got to take a responsibility to get health insurance is absolutely not a tax increase,” he insisted during a squirm-inducing September 20 exchange with ABC’s George Stephanopoulos. “You can’t just make up that language and decide that that’s called a tax increase.” Stephanopoulos responded by literally getting out the dictionary to demonstrate that “a charge…imposed by authority on persons or property for public purposes” is commonly considered a tax.

If Obama can deny that a charge is a tax even when it’s collected by the IRS and identified as a “tax” in the legislation creating it, he surely sees nothing tax-like in the money people are required to spend if they want to avoid that charge. Yet forcing people to buy insurance they do not want so their premiums can subsidize other people’s health care looks a lot like a tax-funded welfare program, even if the money does not flow through the public treasury.

Furthermore, when businesses buy government-required health insurance or pay a penalty for failing to do so, that money comes at the expense of employee compensation. “An employer mandate should therefore be labeled an employee mandate,” says the Cato Institute’s Michael Cannon.

“What we are saying,” House Majority Leader Steny Hoyer (D-Md.) explained last week, “is everybody will contribute…to making sure that health care options are available to all of our citizens.” So we're talking about a legally required contribution that will be used to provide a government-arranged benefit. If only there were a shorter way of expressing that concept.

Jacob Sullum is a senior editor at Reason and a nationally syndicated columnist. This column first appeared at Reason.com.

The Secret Message of Stimulus Spending

vdereugy@gmu.edu (Veronique de Rugy) — Tue, 03 Nov 2009 12:42:00 EST

The idea behind the $787 billion stimulus bill is that government can create jobs by spending money. For now, let’s ignore fact, history, and economic theory and assume that government spending can actually create jobs.

In that case, we should expect the government to invest relatively more money in the states that have the highest unemployment rates and less money in the states with lower unemployment rates. So let’s check the data.

Using numbers from President Obama’s website Recovery.org and the Bureau of Labor Statistics, this chart plots the amount of stimulus funds spent per person in each state and the corresponding unemployment rate in that state. The solid blue line shows what the allocation of funds should look like if the administration was allocating relatively more money to the states with higher unemployment rates.

Yet, with a few exceptions, the data show that this is not the case. Many higher-unemployment states are getting far fewer stimulus dollars than lower-unemployment states.

Take Michigan, for instance. Michigan’s 15.2 percent unemployment rate is the highest in the country. So far, it has received $403 per person in stimulus funds. That’s above the average stimulus per person across all states ($326). However, it’s lower than the $409 per person that the state of Vermont, a state with relatively low unemployment (6.8 percent), has received so far. Michigan's per-person take is also much lower than the $707 per person the District of Columbia received. D.C.'s unemployment rate is 9.9 percent.

Now look at the state with the lowest unemployment rate in the country: North Dakota. It’s getting $253 per person with a 4.3 percent unemployment rate. Many other states are receiving roughly the same amount of stimulus funds per person despite much higher rates of unemployment.

Which suggests that stimulus funds are being allocated without thought to the level of unemployment within states. If government spending could in fact create jobs, then the problem of unemployment could be mitigated by distributing funds to states based on their relative unemployment levels.

But that's not being done at all. Instead, funds are being distributed randomly, as quickly as possible, among the states. That in turn suggests something else: Even the federal government doesn't believe the myth that government spending can actually create jobs.

Veronique de Rugy is an economist at The Mercatus Center at George Mason University and a columnist for Reason. This column first appeared at Reason.com.

Masterfleece Theater

info@reason.org (David Harsanyi) — Fri, 30 Oct 2009 13:07:00 EDT

The King James version of the Bible runs more than 600 pages and is crammed with celestial regulations. Isaac Newton's Principia Mathematica distills many of the rules of physics in a mere 974 pages.

Neither of them has anything on Nancy Pelosi's new fiendishly entertaining health care opus, which tops 1,900 pages.

So curl up by a fire with a fifth of whiskey, and just dive in.

But drink quickly. In the new world, your insurance choices will be tethered to decisions made by people with Orwellian titles (1984 is only 268 pages!), such as the "Health Choices Commissioner" and "Inspector General for the Health Choices Administration."

You will, of course, need to be plastered to buy Pelosi's fantastical proposition that 450,000 words of new regulations, rules, mandates, penalties, price controls, taxes, and bureaucracy would have the transformative power to "provide affordable, quality health care for all Americans and reduce the growth in health care spending."

It's going to take some time to deconstruct this lengthy masterpiece, but as you flip through the pages of the House bill, you will notice the word "regulation" appears 181 times. "Tax" is there 214 times. "Fees," 103 times. As we all know, nothing says "affordability" like higher taxes and fees.

The word "shall"—as in "must" or "required to"—appears more than 3,000 times. The word, alas, never is preceded by the patriotic phrase "mind our own freaking business." Not once.

To vote for the bill, a legislator must believe a $1 trillion price tag is "revenue-neutral" or that it alleviates any of the pain higher costs bring to the average American. This would require alcohol.

Real competition, as far as anyone can tell, is antithetical to the authors of this bill. Remember, you can purchase oranges from Florida and whiskey from Kentucky, yet you're prohibited from buying health insurance from anywhere outside your state; so sayeth Nancy Pelosi.

Instead of the creation of a new market with interstate trade, what we would get is the institution of the pleasant-sounding "Health Insurance Exchange," which would exist, it seems, only to accommodate a noncompetitive, government-run insurance option.

Now, finding a name for a state-run program without offending the lingering capitalistic sensibilities of bourgeoisie has been problematic. So Pelosi went with the innocuous "consumer option"—known for a fleeting moment as the "competitive option" and popularly as the "public option." Whatever your preference is, it's the option that would lead to a single-payer insurance program.

Democrats say we could save billions by funding a plan that used billions of wasted tax dollars from another public plan that we already supplement with billions. Make sense?

In actuality, we would pay for all this by "cost sharing," or "sharing the cost" of insuring everyone through higher prices and taxes. But no fear. The legislation also would tax "the rich." The bill wouldn't index tax to inflation, so more of you would be on the hook as inflation rose because of the tragically irresponsible behavior of Congress and the White House. The rich—many of them small-business owners—are already set to see their federal rates go up in 2010.

Hey, who needs those jerks to create real jobs when we have Washington pretending to do it?

All of this, as Madame Speaker says, constitutes a "historic moment for our nation and families." True. No legislation in modern American history compares when in comes to injecting itself into the everyday decisions of the citizen.

And few can compete with its deception. The bill's intentions are cloaked in euphemisms, and it is teeming with ulterior motives, all cobbled together in closed-door meetings at which industry payoffs are offered using taxpayer dollars to facilitate a power grab of unprecedented cost.

All of it rolled right into a neat 1,900 pages.

David Harsanyi is a columnist at The Denver Post and the author of Nanny State. Visit his Web site at www.DavidHarsanyi.com. This column first appeared at Reason.com.

The Unhealthy 'Public Option'

schapman@tribune.com (Steve Chapman) — Thu, 29 Oct 2009 13:00:00 EDT

If Medicare were a bank, federal regulators would be closing its doors, selling its operations, and sacking its managers. Thanks to soaring costs, the program is fast running out of money—even though it pays such low fees that many doctors refuse to take Medicare patients. Meanwhile, Medicare fraud costs taxpayers some $60 billion a year, according to a report by CBS's 60 Minutes, making it among the most profitable fields for felons.

That's our experience with government-run health insurance for the elderly. So what do congressional Democrats propose to do? Offer government-run health insurance to everyone else.

Senate Majority Leader Harry Reid capitulated to his party's more liberal elements when he said he will insist that health care legislation include a "public option"—a government insurance plan—to bring "meaningful reform to our broken system." But deploying a version of Medicare to repair the status quo is like using a brick to improve a window.

President Obama says it would help consumers by giving private insurers some real competition. But the typical state has 27 companies competing in the small-group health insurance market. If there were insufficient competition, the health insurance sector wouldn't rank 86th among American industries in profitability.

Health care plans average profits of just 3.3 percent. In wireless communications, a vigorously contested market, profits are 11 percent. Does Obama think we need a government cell-phone company to compete with Verizon and AT&T?

The proponents also believe that, like Medicare, a new government plan could be run far more efficiently than private firms. Don't make me laugh. Medicare, keep in mind, is going broke. And its alleged efficiencies are illusory or nontransferable.

Health economists Regina Herzlinger of Harvard and Robert Book of the Heritage Foundation note that on a per-person basis, Medicare has higher administrative costs than private firms. They look smaller only because the average Medicare patient uses more services than the average private insurance patient. "Expressing them as a percentage makes Medicare's administrative costs appear lower because they are spread over a larger base of health care costs," write Book and Herzlinger.

A "public option" might duplicate one of Medicare's means of saving money: limiting reimbursements to doctors and hospitals to far less than what private insurers pay. But 19 health-care organizations that support reform, including the Mayo Clinic, explained the flaw in that approach.

"Under the current Medicare system, a majority of doctors and hospitals that care for Medicare patients are paid substantially less than it costs to treat them," they said in an open letter to Congress. "Many providers are therefore already approaching a point where they can not afford to see Medicare patients." Last year, the government's Medicare Payment Advisory Commission reported that 29 percent of recipients who were looking for a primary care physician had trouble finding one.

Skimpy reimbursements lower Medicare's costs. But if a new government-run plan tries the same trick, it will have trouble attracting providers and therefore patients. If it pays the same rates as private insurers, on the other hand, it will lose that big competitive edge.

Fortunately for disciples of government expansion, the "public option" insurance has other advantages. Obama insists it will have to cover all its costs. Oh, really? When Medicare Part B (which pays doctor bills) was set up in 1966, premiums paid by retirees were supposed to cover 50 percent of its outlays. Instead, Congress limited rate increases so that before long, premiums were covering just 25 percent of the bills, a practice later written into law.

If the Washington-run plan charges too little to pay its expenses, will it raise rates, thus antagonizing what could be a sizable group of voters? Or will Congress cough up the money to keep it going? You know the answer.

In the end, the key to the success of this program, writes Cato Institute analyst Michael Cannon, is that "government possesses both the power to hide its true costs (which keeps its premiums artificially low) and to impose costs on its competitors (which unnecessarily pushes private insurance premiums higher)." Private insurers will be "competing" against a team that gets to write the rules, run the draft and hire the referees.

With those artificial advantages, the public option could eventually become the only option. If that happens, a lot of Americans will be surprised. But I suspect Harry Reid and Barack Obama will not be among them.

This column first appeared at Reason.com.

A Hard Pill to Swallow

jsullum@reason.com (Jacob Sullum) — Thu, 29 Oct 2009 12:05:00 EDT

In August, Christina Romer, chairwoman of the White House Counsel of Economic Advisers, suggested that we think of the $787 billion American Recovery and Reinvestment Act as an extremely expensive course of antibiotics. “Suppose you go to your doctor for a strep throat,” Romer said in a speech to the Economic Club of Washington, “and he or she prescribes an antibiotic.” If your fever goes up after you take the first pill, just as unemployment rose after the stimulus bill was enacted, that doesn’t mean “the medicine is useless,” Romer noted. It could simply be that “the illness was more serious than you and the doctor thought.”

But it’s also possible that your sore throat and fever are caused by a virus, not a bacterium, in which case the antibiotic will not help. Eventually, though, you will recover on your own, and you may mistakenly conclude that your doctor’s prescription did the trick.

Such erroneous causal inferences are always a hazard when it comes to government spending aimed at alleviating a recession. Even if most or all of the money is disbursed after the recession has ended (which is typically the case), stimulus advocates can say the recovery would have been weaker without the spending. Since there’s no readily available parallel universe in which to test that counterfactual hypothesis, it can never be conclusively disproved.

Still, Romer seemed unreasonably sure that Dr. Obama’s medicine was already kicking in. Although she conceded that “the evidence from the path of the economy over time can’t settle the issue of what the effects of the Recovery Act have been,” her answer to the question posed in the title of her speech—“Is It Working?”—was “absolutely.”

I guess that depends on how you define “working.” No doubt spending billions of dollars in borrowed money has some impact on the economy. But the idea that the stimulus package had much to do with an incipient recovery that may have begun in June is belied by a couple of inconvenient facts.

First, since World War II the length of recessions has ranged from six to 16 months, with an average of 10. The current recession officially began in December 2007, so a recovery by the second half of 2009 is what you would expect.

Second, according to ProPublica, only $73 billion of the $580 billion in stimulus spending had been disbursed at the time of Romer’s speech. Another $37 billion or so had gone out in the form of tax cuts.

Romer conceded the latter portion of the stimulus did not seem to be very stimulating. She said “consumption fell slightly in the second quarter after rising slightly in the first quarter,” which “could be a sign that households are initially using the tax cut mainly to increase their saving and pay off debt.”

Is it plausible to suggest that $73 billion in stimulus spending over five months had a decisive impact on a $14 trillion economy? I say “decisive” because President Barack Obama, back in February, presented the stimulus package as the only alternative to a never-ending recession, and in August he claimed, “We’ve rescued our economy from catastrophe.”

Even if we accept the Obama administration’s numbers, taxpayers do not seem to be getting much employment bang for their buck. Romer estimated that “employment is now about 485,000 jobs above what it otherwise would have been.” That comes out to more than $200,000 per job, which seems pretty pricey, especially since many of these jobs are temporary.

Here is where the “reinvestment” part comes into play. Administration officials say the stimulus package is all about putting Americans back to work. When asked whether this is an efficient way to do that, they claim all the work needs to be done anyway. Conversely, when asked whether all the projects are really worth the money spent on them, they cite jobs “created or saved” as a backup justification. Stimulus means never having to admit you’re wasting money.

Senior Editor Jacob Sullum (jsullum@reason.com) is a syndicated columnist. This column first appeared at Reason.com.

Self-Governance Works

info@reason.org (John Stossel) — Thu, 29 Oct 2009 11:19:00 EDT

Much of what government does is based on the premise that people can't do things for themselves. So government must do it for them. More often than not, the result is a ham-handed, bumbling, one-size-fits-all approach that leaves the intended beneficiaries worse off. Of course, this resulting failure is never blamed on the political approach—on the contrary, failure is taken to mean the government solution was not extravagant enough.

We who have confidence in what free people can achieve have long believed that government should not venture beyond its narrow sphere of providing physical security. It should not attempt to cure every social ill. So it's good to learn that serious scholars have demonstrated that our intuitions are right. Free people, given the chance, solve what many "experts" think are problems that require state intervention.

For that reason, Elinor Ostrom's winning of the Nobel Memorial Prize in Economic Sciences ought to kindle a new interest in freedom. (See my earlier column here.)

Ostrom made her mark through field studies that show people solving one of the more vexing problems: efficient management of a common-pool resource (CPR), such as a pasture or fishery. With an unowned "commons," each individual has an incentive to get the most out of it without putting anything back.

If I take fish from a common fishing area, I benefit completely from those fish. But if I make an investment to increase the future number of fish, others benefit, too. So why should I risk making the investment? I'll wait for others to do it. But everyone else faces the same free-rider incentive. So we end up with a depleted resource and what Garrett Harden called "the tragedy of the commons."

Except, says Ostrom, we often don't. There is also an "opportunity of the commons." While most politicians conclude that, depending on the resource, efficient management requires either privatization or government ownership, Ostrom finds examples of a third way: "self-organizing forms of collective action," as she put it in an interview a few years ago. Her message is to be wary of government promises.

"Field studies in all parts of the world have found that local groups of resource users, sometimes by themselves and sometimes with the assistance of external actors, have created a wide diversity of institutional arrangements for cooperating with common-pool resources."

She has studied, for example, self-governing irrigation systems in Nepal and found successes never anticipated in the textbooks. "Irrigation systems built and governed by the farmers themselves are on average in better repair, deliver more water, and have higher agricultural productivity than those provided and managed by a government agency. ... (F)armers craft their own rules, which frequently offset the perverse incentives they face in their particular physical and cultural settings. These rules may be almost invisible to outsiders. ..."

In Governing the Commons, she writes about self-governed commons in Switzerland, Japan, the Philippines, and elsewhere that date back hundreds of years. For example, in the alpine village of Tobel, Switzerland, herdsmen "tend village cattle on communally owned alpine meadows" under rules of an association created in 1483. The rules govern who has access to the grazing lands and how many cows a herdsman can place there, preventing overgrazing. The cattle owners themselves run the association and handle the monitoring. Sanctions are imposed for violation of the rules, but compliance is high.

Don't mistake the association for government. Rather, it is a private co-op designed for a narrow purpose. "All of the Swiss institutions used to govern commonly owned alpine meadows have one obvious similarity—the appropriators themselves make all the major decisions about the use of the CPR."

She found something similar in Japanese villages, where residents use private property for some agricultural purposes and self-managed common forests for others.

Solutions imposed by external authority were not necessary—and usually self-defeating: "Academics, aid donors, international nongovernmental organizations, central governments, and local citizens need to learn and relearn that no government can develop the full array of knowledge, institutions and social capital needed to govern development efficiently and sustainably. ..."

How about that? Freedom works.

John Stossel will soon host Stossel on the Fox Business Network. He's the author of Give Me a Break and of Myth, Lies, and Downright Stupidity. This column first appeared at Reason.com.

Mandatory Savings?

jsullum@reason.com (Jacob Sullum) — Wed, 28 Oct 2009 12:53:00 EDT

The recently revived idea of creating a government-run health plan to compete with private insurers may reinforce the impression that President Obama and his allies in Congress are standing tall against those corporate fat cats who delight in denying lifesaving care to children and old ladies. But Obama and the insurers still see eye to eye on a central element of his health care agenda: the requirement that every American obtain medical coverage.

It’s obvious why the insurers like this idea. What industry wouldn’t welcome a law that forces everyone to buy its product? But the insurers also argue that a mandate will help control costs, and the president agrees. Judging from the experience in Massachusetts, which imposed its own insurance requirement in 2006, they’re both wrong.

Because he wants to show that an insurance mandate is fair as well as fiscally wise, Obama focuses on uninsured Americans who skip out on their medical bills, leaving policyholders and taxpayers with the tab. “Such irresponsible behavior costs all the rest of us money,” he said in a speech last month.

Perhaps so, but it’s not very much money. In a 2008 Health Affairs article, George Mason University economist Jack Hadley and three co-authors calculate that “uncompensated care represents 2.2 percent of health spending in 2008.”

Obama came closer to explaining the real motivation for the insurance mandate when he said that “unless everybody does their part, many of the insurance reforms we seek—especially requiring insurance companies to cover preexisting conditions—just can’t be achieved.” He worries that insuring older, sicker people will be prohibitively expensive unless the young and healthy are forced to subsidize them.

The insurers are more forthright on this point, warning that insufficient penalties for failing to buy insurance will result in “adverse selection,” fueling the rise in premiums. Yet the penalties in Massachusetts are faster and heftier than the ones proposed in the bills Congress is considering, and the state continues to experience rapid health care inflation.

Since 2006, Michael Tanner notes in a recent Cato Institute paper, health insurance premiums in Massachusetts have risen by 8 percent to 12 percent a year, almost double the national average. During the same period, total medical spending has increased by 28 percent. The cost of subsidizing coverage through the state’s Commonwealth Care program is expected to hit $880 million next year, 20 percent more than originally projected.

There are several reasons why mandatory insurance, contrary to Obama’s promises, has been accompanied by rapidly escalating costs. First, when you subsidize something, people tend to consume more of it. Total spending is therefore bound to be higher, whether it’s covered through direct taxes or through the indirect tax of forcing people to pay for insurance they don’t want.

Second, despite stricter penalties, Massachusetts seems to be experiencing adverse selection. Tanner notes that, while the share of residents without insurance has shrunk from about 10 percent to about 5 percent, the proportion of uninsured people in the 18-to-25 age group has increased from 30 percent to 35 percent, indicating that “the young (and presumably more healthy) are less likely to comply with the mandate.”

Third, requiring people to buy insurance entails defining the minimum level of coverage, which necessarily makes insurance more expensive than it would otherwise be. In effect, the government prohibits the cheapest insurance plans, the ones with the highest deductibles and the least generous benefits.

Defining one minimum medical package for the entire country, thereby inviting every health care interest to descend upon Capitol Hill and lobby for inclusion, will compound the inflation caused by state requirements. Cato's Michael Cannon warns that such a federal standard could force 100 million Americans into more expensive plans while effectively banning the money-saving combination of high-deductible insurance and health savings accounts.

The upshot is a phenomenon we have seen many times before: Instead of protecting us from big business, big government buys it off with our money.

Jacob Sullum is a senior editor at Reason and a nationally syndicated columnist. This column first appeared at Reason.com.

'The Last Gasp of the Dinosaurs'

matt.welch@reason.com (Matt Welch) — Wed, 28 Oct 2009 11:11:00 EDT

In the April 1996 edition of reason, then-Editor Virginia Postrel wrote a column arguing that “Steve Forbes is a serious candidate” for president. “Not because he’s a rousing speaker,” Postrel observed, “but because he believes in the open-ended future, in the creativity of free people, and in the importance of clear, simple, limited rules within which individuals can shape their own decisions.”

Of those “clear, simple, limited rules,” the most famous was a flat and reduced personal and corporate income tax, an idea that, while never coming close to adoption at the federal level, nonetheless propelled a long-shot magazine publisher with no political experience into a third-place finish in the Republican primaries, including wins in Arizona and Delaware. In 2000 a flat tax song and social conservative dance helped Forbes whisk into second-place at the Iowa caucus, but he quickly dropped out after finishing third in New Hampshire and Delaware. In 2008 Forbes was a strong backer of the doomed Rudolph Giuliani.

Malcolm Stevenson Forbes Jr., 62, is the third Forbes to publish the successful business title of the same name. Founded in 1917, Forbes has gleefully billed itself as the “Capitalist Tool,” lionizing the entrepreneurs who make the world a richer place. In addition to producing its signature lists of the country’s (and globe’s) richest capitalists and companies, the 900,000-circulation magazine has been a staunch opponent of antitrust enforcement, an aggressive supporter of anti-totalitarian movements abroad, and a stubborn purveyor of a sunny, market-based optimism. Last November, at the height of political panic over the financial crisis, Forbes put Forbes himself on the cover, explaining “How Capitalism Will Save Us.”

In July, Editor in Chief Matt Welch interviewed Steve Forbes at the annual FreedomFest conference in Las Vegas.

reason: People know you as Steve Forbes, flat taxer and presidential candidate, but you’re also publisher of Forbes magazine in an era when magazines are struggling. How is Forbes responding to the economic crisis, the publishing crisis, and the transformation of the print industry?

Steve Forbes: When you have a severe recession and you have something transformational as we now see un-folding with the Web, you have to do two things. One, you have to address the immediate circumstances, which means belt tightening, which we did—and we did after 2001, when the economy also went temporarily off of the cliff. But at the same time, you have to invest for the future. And thankfully, 12 years ago, when we went online as did everyone else, we did not make the mistake that many print publishers made, and that was to think you take the printed page, throw it online, and have your electronic publishing. When Thomas Edison invented movies, some people thought you’d film a stage play and that was a feature film. No. It’s an entirely different medium.

We’ve always focused on entrepreneurs, on investors—on capitalist people who want to get ahead, people who want to do things in business. So we saw the website as another platform to reach the same constituency. Our value added is information, insights, and analyses, plus our profound belief in the moral basis of capitalism, which is meeting the needs and wants of other people. If you have that, you don’t get hung up on what the particular platform is.

reason: David Carr had a piece about you guys in The New York Times—a little snarky, but it was interesting. One thing he posited is that in 2009 this whole “Capitalist Tool” stuff is out of fashion; it’s out of step with the times. What’s your broad response to the notion that your stance or ethos is out of step and anachronistic?

Forbes: Well, capitalism—entrepreneurial capitalism, democratic capitalism—always goes through phases where it’s, quote, “out of fashion.” And it’s usually because of catastrophic mistakes made by government. The victim is blamed for it.

But you don’t abandon your mission or your core values because a crisis has put capitalism under a cloud. We went through it in the ’30s, we went through it in the ’70s, the greedy decade of the ’80s. These things do happen. But I think what’s happening in Wash-ington is the last gasp of the dinosaurs of the 1930s. It’s Jurassic Park statism. Oh! Franklin Roosevelt again! Wow! But it’s not working. It didn’t work in the ’30s.

So here we are today, and what’s the response? More spending, more taxes, and the economy is not responding the way it should. But while we’re getting assaulted now, it’s also a chance to regroup and hit these people back, because they are going against human nature, they are going against the impulses that come out of true entrepreneurial capitalism. While they seem to have the commanding heights at the moment, it’s only temporary.

reason: Do you see, to borrow a phrase, some green shoots, not necessarily in the economy, but in the citizen response to Washington economics right now?

Forbes: You see it with the tea parties, and you saw it in the state of Illinois, where the governor proposed tax increases, but the Democratic legislature ended up defeating them. The most amazing thing is now unfolding in California, where they’re seriously considering a flat tax because they’re beginning to realize—the Democrats!—that a highly progressive system doesn’t produce the revenue they need for their progressive programs.

reason: Have you seen an uptick in interest in the flat tax idea? Have people been knocking on your door and saying, “Oh yeah, about that thing.…”

Forbes: It’s not so much knocking on the door as people asking, when you face a severe crisis, what do you do? That’s one contrast between the political world and the commercial world. In the commercial world, failure happens all the time. It’s part and parcel of the system. You try something; it works or doesn’t work. In politics, you often have to go to the cliff before something is done. California’s at the edge of a cliff. They can’t print money. IOUs are not quite the same as legal tender. And so that’s why they’re considering something like the flat tax. Both [Gov. Arnold] Schwarzenegger and now Democrats in the legislature are starting to brood about the idea in sort of sheer desperation. It’s a version of what Ronald Reagan said: You don’t change minds on Capitol Hill through sweet reason; you do it through the heat of public opinion.

reason: Do you see a reawakening of those values, a reawakening in the Republican Party specifically, after eight years of a presidency when government was expanded hysterically, regulation was expanded hysterically? Do you see Republicans rediscovering their limited-government roots?

Forbes: I think it’s beginning to happen. Certainly among the newer, younger members. Or ones such as Paul Ryan from Wisconsin, who gets it on monetary policy, gets it on what’s happening with entitlements. Because, clearly, trying to be a Democrat Lite is not the way to perpetual power. Power does corrupt, and the GOP began to believe that pork will buy you happiness. It didn’t. And in fact, it demoralized the base of the party.

So now we have pork squared with the Obama administration, and it’s an opportunity for the Republicans to quickly regroup and find their voice again. The Obama administration is making a classic mistake of leadership: They feel they have to do it now, but they’re trying to do too much too quickly. It’s going to blow back on them.

reason: Looking at the 2012 Republican presidential hopefuls, especially after Mark Sanford started flying to Argentina a bit too much, do you see any individuals out there who look promising? Are you still considering yourself a candidate? Will you run again?

Forbes: I’m an agitator now, so I’ll leave the running to others. I’ll watch them exercise. But I think in 2010 we’ll get a very clear picture of the field. Right now there’s just too much going on. Too much ferment. If you look at a poll, probably Mitt Romney would be at the top, just because of name recognition. But whoever would have thought three years ago that Barack Obama would beat the Clintons at their own game and win the presidency? So it’s idle speculation.

But there are some names out there—[Louisiana Gov. Bobby] Jindal, Romney, who knows what [Mike] Huckabee might do, maybe [Minnesota Gov. Tim] Pawlenty will get a little more conservative and make a move for it. So who knows, maybe Paul Ryan might emerge, maybe somebody else from the House might emerge.

The key thing is don’t depend on one person. Have many Reagans out there, doing it on the state level, on the local level, and we’ll be OK.

reason: Talking of the “Democrat Lite” characters out there, [New York Mayor Michael] Bloomberg is a favorite of mine. He just announced an eight-point proposal to create or save media jobs on the island of Manhattan. You see a lot of proposals to have the government become involved with bailing out or somehow giving new assistance to legacy print media companies on the theory that they are fundamental to our democracy. What do you think about these initiatives and the ideas behind them?

Forbes: To really survive, newspapers, each one in each city, have to figure out what is their true value added. And it’s not going to be one blueprint for all. They’re each going to have to do it differently. You mentioned David Carr, who wrote a piece a couple months ago about this crazy paper in Boston that is doing very well focusing totally on local events in an iconoclastic way. People read it, whereas traditional newspapers are withering. So you’re going to see not one-size-fits-all but each one trying to pick out the particularities that can enable it to survive.

But nostalgia is a very strong human emotion. And so, you know, canals are preserved, and they’re wonderful tourist things now, even though they’re not real arteries for commerce the way that the railroads became and then highways became or air travel became. So it’s a natural reaction, but at the end of the day, it ain’t gonna get very far, because the world’s not going to stand still. Museums are very nice, but they’re not the way to a vibrant economy.

reason: Someone made the argument that the moment any industry becomes politically engaged, and starts lobbying a lot and starts getting targeted legislation, is not the moment that it becomes powerful but the signal that it’s stopped being powerful.

Forbes: Well it’s a peculiarity of the United States that it’s a sign that you’ve become successful that the government and the politicos go after you. And it does far more harm than any possible good.

You see it time and time again—G.M. in the ’50s and ’60s deliberately kept their market share below 50 percent for fear they’d get an antitrust suit and have to spin off Chevrolet. IBM got an antitrust suit in ’68 and 20 years later was on the verge of bankruptcy. Microsoft is not the feared Darth Vader that it was 10 years ago when the government went after them. One of the things that this administration doesn’t get is that the best antitrust policy is a vibrant marketplace. When profit gives you a message that something is lucrative, others will enter into it. They’re not just going to let you—“Oh, Matt’s doing very well, making a billion dollars on this thing. Good old Matt.” They’re going to say, “How do I get that?” And they’ll plunge in.

reason: What’s your assessment of Obama’s health care package?

Forbes: Well, let’s take the president’s word that health care should be universal and affordable. How is it best achieved? We know government achieves it by rationing. And the markets achieve it by creating more of it, and finding cheaper and better ways to deliver it. What people don’t fully grasp is we don’t have free enterprise in health care today in the United States. It is a hybrid system, because it’s third party. So you have a disconnect between providers and consumers. And what kind of market is it where the consumer doesn’t know what the thing costs? Anything else, you do. What is my hamburger going to cost? What is my car going to cost? But if you go to a hospital and ask what a procedure’s going to cost, they assume either you’re a lunatic or you must not have insurance. Why else would you want to know what the price is? How weird. How unusual. Why? Somebody else is paying.

So the system doesn’t work. And you don’t get the kind of productivity you get everywhere else. We use phones and emails for everything now. Do you do consultation with your physician or nurse by phone or email? Rarely. Or hospitals giving warranties, like you have everywhere else, where if they don’t scope your knee right, you go back and don’t have to pay for it again. Why wouldn’t that be their dime? Because it’s not real competition. They know you’re not writing the checks, so therefore they don’t have to please you; they just have to make sure they get a bureaucratic insurance company to approve it.

But we see from Lasik what happens when you get a real market. It costs a third less than it did 10 years ago. Cosmetic surgery hasn’t had inflation, like you have in the rest of health care, even though demand has increased sixfold in the last 15 years and even though there have been enormous technological innovations. Why? Because you pay for it.

reason: So what do you do? This is such a labyrinthine complexity that creates the sort of mixed market which you describe. Are there simple things that can be done to break the logjam?

Forbes: Yes. Equalize tax treatment. You’re going to give employers a tax deduction, why not individuals? And how about allowing you to shop across state lines for health insurance? Illegal now. If you live in California, want to buy a policy in Seattle, illegal. Interstate Commerce Clause, hello! You don’t need a government insurance company. Just get cross-state competition.

Allowing businesses to pull together. Why not remove barriers to that?

In terms of health savings accounts, if you want a higher deductible than X, you can’t get it. I forget what the number is now for a family plan; you can only go up so high. Remove those limits or substantially raise the caps on those.

If you want to set up a clinic or hospital, in a lot of states you have to get a certificate of need. Well, do you need a certificate of need to open up a grocery store if you want to go against Wal-Mart or Whole Foods? No. You just go and do it. See what happens. But because it’s all third-party paying, well, this is inefficient; it’s sort of a cartel system. Get rid of those kinds of things.

reason: Are you surprised by President Obama since he’s come into office? Anything about his comportment, his policy, the reaction to it?

Forbes: I was hoping he would defy my expectations and turn out to be what a lot of people thought—he’s smart, he’s moderate, he’ll do the right thing—instead of being what he has been so far, which is very much an ideologue. On the left, it’s all 1930s. You spend, you tax, you have government running things because we can do it more efficiently.

reason: I find it interesting that he still gives lip service—and gets away with giving lip service—to limited-government principles, saying things like, “Of course we don’t want the government running automobile companies.” And then in the same paragraph, he’ll say “but they need to consolidate their brands” and get very hyper-specific. He still says, “We don’t want to be in the banking sector; I’d rather be doing X, Y, and Z.” It’s as if he senses these things are unpopular out there.

Forbes: That’s why they have to do this by stealth, or semi-stealth. They know the American people are not in a mood for France North America or Germany North America. So they want to use the crisis to ram this stuff through before anybody realizes. Then you’re dependent and therefore, “Oh, they want to take this away from you”; it’s a fait accompli, it’s a coup. But thankfully the Founders devised a system where this stuff just bloody takes time. They didn’t confuse efficiency in the commercial sector with efficiency in government. We don’t want an efficient government in terms of making laws.

They feared passion. They saw what the wars of religion did to Europe and the bloodshed that engendered. They wanted a system where things could cool off before you did something.

reason: You have a new book out about historical figures and lessons that can be learned from them. What are some historical figures or moments of note that can apply to present-day circumstances?

Forbes: Take Alexander the Great. When Aristotle taught him as a young man, one of the things Aristotle tried to hammer home was you must learn to conquer yourself, i.e., control your passions. Alexander did not. He seemed to think that he was actually a living god, and he destroyed himself. He was immensely talented, but it all collapsed when he died. And that’s what I think may be happening with President Obama today. Putting aside what you think of his policies, he may end up getting very little.

For example, he didn’t realize with the stimulus package that Nancy Pelosi may have run up the limit on one of his credit cards. That $800 billion would have been very helpful from their point of view on trying to finance health care. But no, they spent that. It was overreach. No sense of what the real world is like.

reason: There’s been a lot of talk about the scattered state of the modern GOP, and a lot of discussion specifically about the big tent of Ronald Reagan with evangelical Christians and limited-government people. Is that a marriage that has run its course?

Forbes: No. There are two kinds of big tents. One is when you have mush, and so people come in because there’s nothing there. Another one is recognizing that one of the peculiarities of American politics is, because we are a heterogeneous nation, you have to put together coalitions of people who may not like each other much, and they have their own particular agendas and priorities, but you have to keep this thing together and maybe you can get some things done.

And so you’re always going to have tensions; it’s never going to be smooth. One tendency for parties is to just soften everything to oblivion. Another is where you have priorities, as Reagan did, and use a coalition where there are some basic shared values, but there are always going to be fights and tensions. That’s normal.

What helps keep the country together is that you’re not going to succeed by just being a narrow-based candidate, either geographically or ideologically. You’re always going to have to persuade. Like with a family. Families never agree on anything. Well, we’re like a family. And we have those kinds of disagreements. So be it.

Fed Up

bdoherty@reason.com (Brian Doherty) — Tue, 27 Oct 2009 15:17:00 EDT

Rep. Ron Paul (R-Texas), the libertarian-leaning congressman and failed 2008 GOP presidential candidate, has been suspicious of the Federal Reserve since before first entering Congress in 1976. In a 1981 article that mentioned the then-obscure legislator, United Press International reported that Paul “has proposed abolishing the Federal Reserve, repealing laws which make the dollar legal tender, and switching to currency issued by banks, 100 percent backed by gold.”

That was the year Paul first proposed a bill to audit America’s central bank. He recruited 44 cosponsors, but the bill never made it out of committee. The congressman introduced another bill to audit the Fed in 1983 and got less than half as many colleagues to sign on.

On another six occasions, Paul introduced bills that would have abolished the Fed entirely. Those acts of legislative defiance accomplished nothing much besides giving the congressman a reputation as an eccentric gold obsessive, hectoring an institution that was seen by almost everyone, critics and supporters alike, as foundational to the functioning of the modern world. Roll Call, a newspaper covering Capitol Hill, chided Paul after he won reelection to Congress in 1996 for his “idee fixe” of “a return to the gold standard,” which it described as a “rallying cry that hasn’t been a real issue since 1971.”

What a difference an economic crisis makes. In 2007 and 2008, as Paul ran for president, the candidate found to his own surprise that his young-skewing crowds reacted to trash talk about the Federal Reserve more than any other element of his small-government, anti-war agenda. So in 2009, with many economists blaming the Federal Reserve at least partly for inflating a housing bubble whose crash continues to inflict the most economic damage seen in the U.S. for a quarter century, Paul started pushing another version of his “audit the Fed” bill, this one numbered H.R. 1207. And as of press time, the bill has attracted a remarkable 282 co-sponsors, more than a majority, giving it a nontrivial shot at passing through the House of Representatives.

H.R. 1207 would lift existing restrictions on what auditors from the Government Accountability Office are allowed to look into when examining the Fed’s books. Specifically, the bill would allow investigators to report on the Fed’s dealings with foreign banks and nations, its “actions on monetary policy matters,” and the operations of its Federal Open Market Committee, the wing whose decisions most directly affect the U.S. money supply. The legislation is cosponsored by every single Republican in the House as well as 105 Democrats.

For the first time in Paul’s long career of tilting at Alan Greenspan’s windmills, popular sentiment against the Federal Reserve has its chairman, currently Ben Bernanke, running scared. Last summer Bernanke launched an unprecedented public relations campaign, explaining himself in venues from 60 Minutes to town-hall-style meetings broadcast on PBS. In July testimony to the House Committee on Financial Services, Bernanke warned that H.R. 1207 would damage global trust in the Fed’s political independence and “could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability.”

Paul, after shepherding his idea from fringe to mainstream, is almost giddy. “Now the Federal Reserve is less popular than the IRS!” the congressman told a July gathering of Young Americans for Liberty in Washington, D.C. “This issue is never going to go away. Who would have thought a politician could talk about Austrian economics and get applause?”

The Austrian Opposition

With its power over interest rates and the supply of U.S. dollars, the Federal Reserve System is the most influential economic institution on the planet. That influence comes surrounded by an impenetrable aura of mystery. Hardly anyone, citizen or congressman, completely understands what the Fed does, how it operates, or what the effects of its actions will be.

Here is a highly simplified outline. The Fed is a set of 12 regional banks under the command of a seven-member board of governors appointed by the president and approved by the Senate. Its 12-member Federal Open Market Committee (FOMC)—the board of governors plus five regional bank chiefs—is responsible for adjusting the federal funds interest rate, which is the rate banks charge each other for loans. The FOMC does this through “open market operations,” buying and selling securities to affect the amount of money in the economy and thus the interest rate paid by banks to get more cash.

This process is hard enough to describe, let alone comprehend, and previous Fed chairmen have found it useful to keep their public pronouncements about the central bank’s operations maximally vague and obscure. A classic from Paul Volcker, chairman from 1979 to 1987: “We did what we did, we didn’t do what we didn’t do, and the result was what happened.” Volcker’s successor, Alan Greenspan, who enjoyed the longest stretch of low-inflation prosperity in Fed history (now widely seen as possibly laying the groundwork for the crash), helped reinforce both the central bank’s reputation for effectiveness and the expectation that its actions would remain inscrutable.

But these days the Federal Reserve faces challenges to both its power and its mystery, thanks to both hot public opinion and cold academic analysis. Politicians are demanding a peek behind the curtain, and holdovers from Paul’s 2008 presidential campaign have kick-started an “End the Fed” movement. Even within the central bank’s natural fanbase of economists and financiers, many are complaining about its appetite for regulatory power and its massive expansion of the money supply. During the last year the Fed has nearly doubled the monetary measure over which it has the most direct control, the “monetary base” (defined as circulating currency plus the reserves that commercial banks keep with Federal Reserve banks).

Signs abound that public sentiment is turning against the bank. Meltdown, an anti-Fed tract by the historian Thomas Woods, sat on the New York Times bestseller list for more than a month. Woods, like Paul, embraces the “Austrian” school of economic thought, which sees central banking as a recipe for endless inflation and constantly growing government. Paul has invited him to Capitol Hill to brief a growing unofficial caucus of Republicans attracted to Paul’s hardcore anti-statism. Fed bashing has been a prominent component of Tea Party gatherings nationwide. The largely Paulite movement Campaign for Liberty has organized “contact your congressman” campaigns to get H.R. 1207 on representatives’ radar screens, and the results are pouring in.

“The bill has received as many cosponsors as it has in part because Dr. Paul’s presidential campaign really brought the Fed into the spotlight, opened people’s eyes,” Paul Martin-Foss, a legislative aide for Paul, writes in an email. “There was also a lot of grassroots support, with numerous offices telling me that they had received a lot of mail about the bill and wanted more information.” Colorado Democrat Betsy Markey specifically credits Tea Party pressure for getting her interested in the bill, which she decided to cosponsor. “There’s a lot of anger from both sides of the aisle towards the Fed, not necessarily coming from the same position or working towards the same goals,” Martin-Ross writes. “But everyone wants to be seen as being in favor of transparency.”

Paul recognizes that the growing support for auditing the Fed does not indicate similar enthusiasm for his more radical goal of abolishing the central bank. He has introduced another bill to do just that, and it has yet to attract a single cosponsor. H.R. 1207 supporters, by contrast, “sign on because it doesn’t do” anything like that, Paul says. “It doesn’t direct policy changes. I did that on purpose.”

Paul’s beef with the central bank is a by-product of his longstanding interest in the works of Austrian school economists, most prominently Ludwig von Mises and Nobel laureate F.A. Hayek. Paul was a fan of Mises and Hayek before he entered politics in the mid-’70s, largely as a result of his reading the publications of the libertarian Foundation for Economic Education.

Paul, like the economists he admires, thought it a mistake to have a giant government-run institution trying to fix prices—in this case, interest rates, or the price of loaned money, which is the Fed’s main mechanism for pursuing its stated goals of economic growth, high employment, and relatively stable prices. As a critic of state power, Paul also worries that once a government has total control over paper money that it can create at will, it becomes too easy and too tempting for the state to spend at will. Cash unbacked by gold will flow to help the government out of its jams, pay for its wars, and appease its most powerful private constituents.

To Austrian-leaning libertarians like Paul, this danger makes the Federal Reserve, central banking, and “fiat” money the key libertarian issue. If the government can manufacture all the money it wants, the fight for limited government is over before it begins.

Central to this critique is the Austrian business cycle theory, which helped win Hayek his Nobel Prize for economics in 1974. Hayek, Mises, and contemporary economists such as Roger Garrison of Auburn University and Steve Horwitz of St. Lawrence University argue that low interest rates set by the Fed fool investors and builders into thinking that consumer demand for future goods is higher than it actually is. Cheap money makes producers more likely to launch long-term projects and take on long-term expenses. When low rates are a product of government intervention, rather than a market expression of people’s desire for long-term goods as reflected in their willingness to save now in order to consume more later, those long-term projects—for example, building and buying homes—will turn out to be unsustainable “malinvestments.” Prices in those areas will plunge. Everyone will start to realize that resources were funneled to unprofitable ends. An exaggerated boom will turn into a catastrophic bust.

Austrians believe increases in the money supply don’t always manifest in economy-wide rises in the consumer price index, the standard definition of inflation. The excess cash might instead flow into specific areas of the economy, depending on real-world factors that vary from case to case. In the housing boom and bust, those factors included mortgage lending standards, the actions of the government-created mortgage holders Fannie Mae and Freddie Mac, and reckless securitization of mortgages. In the Fed skeptics’ story about the last decade’s economic expansions and contractions, the housing bubble was a deliberate effort by the Fed to stave off economic troubles that began when the tech-stock bubble burst in 2000.

Who Else Is Afraid of the Federal Reserve?

A small but enthusiastic audience, largely connected with explicitly libertarian institutions, has kept the Austrian theory of Fed culpability alive in the decades since Mises and Hayek left the scene. (Mises died in 1973, Hayek in 1992.) But the Austrians aren’t the only opponents of the Fed’s practices. Although history tends to craft auras of inevitability around what exists, the Federal Reserve would have seemed an exotic and dangerous change in American monetary practice in the 19th century.

According to a popular Fed creation myth, the bank, established in 1913, brought an end to a chaotic, boom-and-bust environment of unregulated banking, replacing it with managed economic stability. This story is widely believed despite the fact that America’s most severe banking crisis and economic downturn, the Great Depression, occurred two decades after the Fed was created. As the popular historian (and no Austrian ideologue) Jack Weatherford wrote in his 1997 book The History of Money, “the final stripping of local banks of their power to control money came not because of financial failures but as a result of political movements to centralize power in Washington.”

Opposition to central banks and paper money runs strong through American history. Many of the Founding Fathers came to despise paper currency after their experience with the quickly worthless Revolutionary War “continental.” President Andrew Jackson crushed the Second Bank of the United States in 1832 in the name of the people. President James Buchanan noted after an 1857 bank panic that “our existing misfortunes have proceeded solely from our extravagant and vicious system of paper money.” The Civil War “greenback,” our first national government pure paper currency, was initially declared unconstitutional until a later Supreme Court bowed to political reality. And then there was the debate over establishing the Federal Reserve itself, in which opponents such as Sen. Elihu Root (R-N.Y.) noted the dangers of a potentially unlimited money supply.

In the postwar era of normality and economic centrism, noisy mistrust of the Fed was the province of gold fanatics, radical libertarians, and financial newsletter writers and readers who saw the bank as a machine the government used to debase the currency and steal from the thrifty. But the Fed also earned the ire of progressive leftists who saw it as the citadel of moneyed interests helping creditors at the expense of debtors by keeping inflation too low. The critique, which was especially audible from the Volcker era forward, is exemplified by the progressive journalist William Greider’s best-selling 1987 book on the Fed, Secrets of the Temple. It follows the grand tradition of the three-time Democratic presidential candidate William Jennings Bryan, who famously wanted to rescue indebted farmers through using cheaper and more abundant silver as money rather than crucifying them on a “cross of gold.”

During a time when the Fed actually lived up to its much-vaunted, often spurious “independence from political pressure”—when Paul Volcker was using the shock therapy of high interest rates and lower money supply growth to crush inflation in the early 1980s—the Fed came under political pressure from across the ideological spectrum. Its critics included Sen. Robert Byrd (D–W. Va.) and Rep. Jack Kemp (R-N.Y.) as well as many members of the Reagan administration. But for most of the tenure of Alan “Maestro” Greenspan, the Fed was broadly seen as doing little wrong.

Yet Paul discovered during his presidential bid that anti-Fed feeling had somehow morphed into a popular youth phenomenon. At an Iowa campus stop in 2007, the candidate and I expressed mutual wonder at the fact that his biggest applause line was not about ending the war but about reining in the Fed. At other Paul events, I’m told, kids burned Federal Reserve notes (dollar bills to you) to show their hostility toward the unrestricted and damaging flow of fiat currency.

As that flamboyant gesture indicates, anti-Fed feeling has long overlapped with powerful populist passions. Sometimes that attaches itself to misleading history and misaimed anger. Conspiracy theorists often cite the fact that the Fed is officially owned by its 12 private member banks as evidence that the whole system is a means for private bankers to mulct the public. But in its creation, purpose, and function, the Fed is a branch of government. Its board of governors is selected by the president and approved by the Senate, and most of its income ends up in the U.S. Treasury. And contrary to claims that the law creating the bank was pushed through Congress in the dead of night before Christmas 1913 solely as a result of a banker’s conspiracy forged on Jekyll Island, the Fed arose from long public and congressional debate.

Opposing something that has long been deemed as essential as air tends to attract eccentric people with eccentric beliefs. When I ask Ron Paul where this unexpected upsurge in youthful disdain for the Fed was coming from, he says the most important source was the website of the Mises Institute, an educational foundation for Austrian economics and libertarian political thought. But beyond the economic arguments against fiat currency, Paul says the biggest feeders of popular fear of the Fed are the conspiracy-minded documentary America: Freedom to Fascism and radio host Alex Jones, staunch opponent of the New World Order. In both cases Fed opposition is part of a general theory of sinister and subterranean forces struggling to keep Americans enslaved.

It certainly was no credit to the anti-Fed movement that Holocaust museum shooter James von Brunn had previously been arrested for attempting a “citizen’s arrest” of the Fed’s governors. And when the U.S. Army Reserve issued a “Force Projection Advisory” in November 2008 specifically targeting that month’s anti-Fed protests for “situational awareness and recommended mitigation measures,” it allowed those on the fringe to feel validation that they were not only right all along but a genuine threat to their enemies.

But the profound effects of the Fed’s avowed purpose—manipulating interest rates and making paper currency—are damaging enough, at least for those who see its fingerprints all over the current crisis, to make more baroque conspiracy theorizing superfluous. And when it comes to mistrusting the Fed, the Alex Jones crowd is not alone.

We’re All Austrians Now

Economists, pundits, and financial analysts are not exactly gathering by the hundreds in front of Federal Reserve buildings and chanting “End the Fed!” But it has become almost impossible to avoid respectable voices in respectable venues laying some of the blame for the economic crisis at the Fed’s discount window.

The Berkeley economist Brad DeLong, a popular blogger and former Clinton Treasury Department official who once dismissed Mises’ general monetary theory as “batshit insane,” still told this story in the October 2008 issue of the liberal American Prospect: “The current financial crisis has its roots in Greenspan’s decision to keep interest rates very low in 2002 and 2003 to head off the danger of a deflation-induced double-dip recession.…Six months ago, I would have said that his judgment was probably correct. Today… I can no longer state that Greenspan made the right calls with respect to the level of interest rates and the housing bubble in the 2000s.”

Fed bashing in a roughly Austrian style has gotten so popular that the theory’s opponents now feel embattled. Scott Sumner, a monetary economist at Bentley University who writes the much-cited blog The Money Illusion, thinks the Federal Reserve was and is too tight with interest rates and money for optimal economic performance. “As everyone knows by now,” Sumner complained in June, “the once kooky and discredited Austrian business cycle model has now become conventional wisdom.”

Blame-the-Fed sentiment now stretches across the spectrum of economic thought, from Keynesians such as DeLong to monetarists (who generally want the bank to maintain a fixed rate of money supply growth). In October 2008, the monetarist Anna Schwartz, co-author with Milton Friedman of one of the most important books of monetary economics, A Monetary History of the United States, told The Wall Street Journal: “If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset. The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it’s so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object.”

In February 2009 the Stanford economist John Taylor, a monetary whiz so influential that there is a rule for setting interest rates named after him, told The Wall Street Journal: “The Fed held its target interest rate, especially in 2003–2005, well below known monetary guidelines that say what good policy should be based on historical experience. Keeping interest rates on the track that worked well in the past two decades, rather than keeping rates so low, would have prevented the boom and the bust.”

Even the Obama administration has gotten into the act. “Monetary policy around the world was too loose too long,” Treasury Secretary Tim Geithner told PBS interviewer Charlie Rose in March. “And that created this just huge boom in asset prices, money chasing risk. People trying to get a higher return. That was just overwhelmingly powerful.”

As with any issue in political economy, there’s disagreement. There are a variety of arguments to parry or blunt the Austrian theory. Former Federal Reserve Board economist Arnold Kling, for instance, argues that the modern world of money and credit is so convoluted, with so many avenues for the creation of money-like instruments outside of direct Fed control, that the Fed shouldn’t be seen as the main villain in any credit-driven collapse. At worst, Kling thinks, it’s a hapless bungler pretending to power it can never have. Bryan Caplan, a libertarian economist at George Mason University, thinks people are generally too smart to be fooled enough by false interest rate signals that they precipitate an economic crisis.

And pinning even partial blame for the current economy on the Fed is different from questioning its legitimacy. By limiting his bill to the narrow question of transparency, Paul is making it possible to create a broad political coalition that can agree the Fed needs to be kept in check without necessarily agreeing on why, or on what the Fed ought to be doing.

The Fed Forever?

Despite the palpable momentum behind H.R. 1207, the idea of inconveniencing the Fed with anything more severe than an audit still seems like a far-off fantasy. Meltdown author Woods notes that, although many mainstream analysts are jumping on the Austrian bandwagon to explain the causes of the crisis, none of them are really embracing the Austrian solution of ending the Fed’s power to manipulate interest rates at will. They just call for the power to be used more prudently next boomtime.

The Fed was an ideological and institutional response to a convincingly told story of crisis and solution—basically, that the 19th-century system of mostly private banks issuing their own mostly gold-backed paper was leading to too many small economic crises of the sort that used to be called “bank panics.” Milton Friedman, a critic of central banking practice, at the same time dismissed attempts to return to a commodity standard such as gold. One of his reasons was that it was “not feasible because the mythology and beliefs required to make it effective do not exist.” But with best-selling books, activists in the street, members of Congress, and economists across the ideological spectrum casting aspersions on Fed practice, we may see the crafting of a new set of myths and beliefs.

In this time of political ferment, Stephen Axilrod, a longtime Federal Reserve staff director and monetary policy guru, has issued a memoir from MIT Press titled Inside the Fed. Axilrod admits that Fed interest rate actions precipitated the crisis without letting that fact dent either his admiration for the institution or his belief in its necessity. Still, Axilrod notes something that should encourage Fed skeptics of all varieties: that “a country’s monetary policy is almost necessarily limited by conditions generated from the political, philosophic, and social ethos of the time.”

We are now seeing attempts to move the ethos in an anti-Fed direction. While it’s hard to imagine an America without an institution that has become so central, it’s interesting to contemplate something former Rep. Eldridge Spaulding (R-N.Y.) said in 1868, in the midst of the legal controversy over Civil War greenbacks: “No one would now think of passing a legal tender act making the promises of the Government…a legal tender in payment of ‘all debts public and private.’ Such a law could not be sustained for one moment.”

What anyone would think can change dramatically. Ron Paul, through his Fed audit bill, is trying to get his colleagues, and the American people, to change what and how they think about the central bank. Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, told a Massachusetts town hall meeting in August that he believes the House will indeed pass H.R. 1207 in October.

All the anti-Fed agitation we’ve seen in the last couple of years may eventually feel like a footnote if the current binge of monetary expansion creates something Americans haven’t seen for a quarter century: substantial and painful inflation in the consumer price index. For now, Bernanke is trying to assure Congress and the public that the Fed governors are skilled and knowledgeable enough to know when they need to “neutralize” the new money by, for example, selling bonds to the market and essentially swallowing the money back up before prices spike.

But the Fed doesn’t have a stellar track record of timing monetary shifts with scientific precision, and any actions that rein in inflation, thereby cutting off the short-term stimulative effect that governments love, are bound to be politically dangerous both to the Fed and to the president who appoints its overseers. As Bernanke admitted at his televised town hall meeting in July, the Fed can maintain its independence only if it can “show that we are producing good results,” and while he added lip service to independence, the people he must show those results to are Congress and the administration. Though he was appointed to a new four-year term in August, if he flubs inflation, Bernanke will be facing a whole new wave of political attacks.

More generally, the Fed’s independence is threatened by a growing understanding that the Austrian interpretation of central banking’s risks might be correct: Keeping interest rates too low for too long can precipitate severe economic busts. “It’s hard to imagine the little spark that can make big change,” says Austrian business cycle theorist Steve Horwitz, “but it can happen if the drumbeat stays going. The Fed was created by Congress, so we won’t get major change until members of Congress perceive their constituents or people with political, cultural, and social power saying there’s something really seriously wrong here.”

Senior Editor Brian Doherty (bdoherty@reason.com) is the author of This is Burning Man (BenBella), Radicals for Capitalism (PublicAffairs), and Gun Control on Trial (Cato Institute). This column first appeared at Reason.com.

Financial Market Reform

miron@fas.harvard.edu (Jeffrey Miron) — Tue, 27 Oct 2009 10:57:00 EDT

In the coming weeks and months, Congress will be turning its attention to financial market reform, in hopes of avoiding future financial crises. According to perceived wisdom, the root cause of the 2008 financial crisis was excessive risk-taking, and proper regulation can detect and prevent such excess in the future.

This view is a pipe dream. Most new regulation will do nothing to limit crises because markets will innovate around it. Worse, some regulation being considered by Congress will guarantee bigger and more frequent crises.

Government-Induced Moral Hazard Caused the Crisis

The Financial Crisis of 2008 did not occur because of insufficient or ill-designed regulation. Rather, it resulted from two misguided government policies.

The first was the attempt to promote homeownership. Numerous policies have pursued this goal for decades, and over time they have focused mainly on homeownership for low-income households. These policies encouraged mortgage lending to borrowers with shaky credit characteristics, such as limited income or assets, and on terms that defied common sense, such as zero down payment.

The pressure to expand risky credit was especially problematic because of the second misguided policy, the long-standing practice of bailing out failures from private risk-taking. This practice meant that financial markets expected the government to cushion any losses from a crash in mortgage debt. Thus, the historical tendency to bail out creditors created an enormous moral hazard.

One crucial component of this moral hazard was the now infamous “Greenspan put,” the Fed’s practice under Chairman Alan Greenspan of lowering interest rates in response to financial disruptions that might otherwise cause a crash in asset prices. In the early to mid-2000s, in particular, the Fed made a conscious decision not to burst the housing bubble and instead to “fix things” if a crash occurred.

It was inevitable, however, that a crash would ensue; the expansion of mortgage credit made sense only so long as housing prices kept increasing, and at some point this had to stop. Once it did, the market had no option but to unwind the positions built on untenable assumptions about housing prices. Thus government pressure to take risk, combined with implicit insurance for this risk, were the crucial causes of the bubble and the crash. Inadequate financial regulation played no significant role.

New Regulation Must Avoid Moral Hazard

If government-induced moral hazard caused the crisis, then new regulation should avoid creating or exacerbating this perverse incentive. Yet two components of proposed regulation will increase, rather than decrease, the chances for moral hazard.

One proposed change in regulation would give the Federal Reserve increased power to supervise financial institutions, especially bank holding companies such as Citigroup or Bank of America. This approach is a triumph of hope over experience. Why should an expanded Fed role be beneficial when the Fed erred so badly in the previous instance?

Defenders of an expanded Fed role will claim that, in the lead up to the crisis, the Fed did not have explicit powers to supervise and monitor non-bank financial institutions, and that such powers could have avoided the crisis.

Yet during the years before the crisis, the Fed had more than ample power to recognize the unprecedented level of risk that was building in the economy and to issue stern warnings, whether or not it had explicit regulatory authority. In fact, far from cautioning the market to behave, the Fed promoted the notion that it could solve any problems that might result from a bursting of the housing bubble.

Regulators are fallible. Alan Greenspan, once thought to be the Maestro, got it fabulously wrong. Ben Bernanke, regardless of the merit’s of his stewardship, will not be Fed chairman forever. Centralized and expanded power to make things better is also centralized and expanded power to make things worse. In particular, any mistakes made by a powerful, centralized authority have a magnified impact because they distort the behavior of the entire market.

Just as problematic as granting the Fed additional powers is the proposal to allow the FDIC to resolve bank holding companies using taxpayer funds. Under the proposed arrangement, the FDIC rather than bankruptcy courts would be responsible for bank holding companies, and the FDIC would be authorized to make loans to failed institutions, to purchase their debts and other assets, to assume or guarantee their obligations, and to acquire equity interests. The funds would be borrowed from Treasury.

This means that FDIC resolution of bank holding companies would put taxpayer skin in the game, a radical departure from standard bankruptcy and an approach that mimics the actions of the U.S. Treasury under TARP. Thus, the new approach would institutionalize TARP.

The result will be that under the proposed system, bank holding companies would forever more regard themselves as explicitly, not just implicitly, backstopped by the full faith and credit of the U.S. Treasury. That is moral hazard in the extreme, and it will create an unprecedented incentive for excessive risk-taking by these institutions.

The Bankruptcy Approach

The only way to limit financial panics is to eliminate government-induced moral hazard, and that means letting failed institutions fail. Whether resolution is carried out by the FDIC or a bankruptcy court is not the crucial question; rather, it is whether that resolution process forces all the losses on the institution’s stakeholders rather than bailing them out with taxpayer funds.

The standard objection to allowing failures is that some financial institutions are allegedly so large or interconnected that their failure causes a breakdown of the credit mechanism, thereby harming the whole economy rather than just transmitting losses that have already occurred. According to this view, letting Lehman Brothers fail was a crucial mistake that initiated the meltdown, and bailing out other financial institutions was a necessary evil to prevent even further chaos. Nothing could be further from the truth.

Rather than being a cause, Lehman’s failure was merely the signal that time had come for the U.S. economy to pay the price for all the distortions caused by the misguided policies toward housing and risk. Given those distortions, a massive unwinding and restructuring was necessary to make the economy healthy again.

This restructuring required lower residential investment, declines in stock and housing prices, and shrinkage of the financial sector. All of this implied a recession, even without any impact of financial institution failures on the credit mechanism, and the recession meant that lending would contract, even without a credit crunch.

The bailout itself, moreover, caused much of the financial market turmoil. The announcement that the Treasury was considering a bailout scared markets and froze credit because bankers did not want to realize their losses if government was going to bail them out. The bailout introduced uncertainty because no one knew what the bailout meant. The bailout did little to make balance sheets transparent, yet the market’s inability to determine who was solvent was a key reason for the credit freeze.

Thus letting Lehman fail was the right decision; bailing out Bear Stearns, Fannie, and Freddie in advance of Lehman, and the rest of Wall Street afterwards, were the mistakes. For all its warts, bankruptcy rather than bailout is the right way to resolve non-bank financial institutions. Any regulation that formalizes bailouts creates an enormous moral hazard and a black hole for taxpayer funds.

The Future

To limit future financial crises, policy must first avoid the distortions inherent in the attempt to expand homeownership. This means eliminating the Federal Housing Administration, the Federal Home Loan Banks, Fannie Mae, Freddie Mac, the Community Reinvestment Act, the deductibility of mortgage interest, the homestead exclusion in the personal bankruptcy code, the tax-favored treatment of capital gains on housing, the HOPE for Homeowners Act, the Emergency Economic Stabilization Act (the bailout bill), and the Homeowners Affordability and Stability Plan. None of this is sensible policy.

In addition, policy must end its proclivity to bail out private risk-taking. This second task is difficult, since it requires policymakers to “tie their own hands.” Specific changes in policies and institutions can nevertheless support this goal. The first is avoiding new regulation that makes bailouts more likely. A second is repealing all existing financial regulation, since this would signal markets that they, and only they, can truly protect themselves from risk.

The third and perhaps most important way to reduce moral hazard is to eliminate the Federal Reserve. As long as the Fed exists, it will regard itself as, and be regarded as, the economic insurer of last resort. In a world with perfect information, appropriately humble central bankers, and an absence of political influence on monetary policy, such a protector might enhance the economy’s performance on average.

In the world we live in, none of these conditions will hold consistently, so the potential for policy-induced disasters is large. The U.S. economy prospered for its first 125 years without a central bank. It’s time to try that approach again.

Jeffrey A. Miron is Senior Lecturer and Director of Undergraduate Studies in the Department of Economics at Harvard University and a Senior Fellow at The Cato Institute. He blogs at http://jeffreymiron.blogspot.com. This column first appeared at Reason.com.

Health Care Delusions, Left and Right

schapman@tribune.com (Steve Chapman) — Mon, 26 Oct 2009 12:46:00 EDT

If you've been following the health care debate over the last couple of years, you may have heard the grim tale of Nataline Sarkisyan. Just 17 years old, afflicted with leukemia, she needed a liver transplant, but the insurance company Cigna refused to cover the surgery. After being picketed by nurses and the family, the insurer relented, but too late: She died that same day.

When he ran for president, John Edwards used the girl's experience as proof of the need for reform. Her parents went to Cigna headquarters to charge the company with killing their daughter to make money. Lately, a liberal group called Americans United for Change has used her in a TV spot to dramatize its claim that "if insurance companies win, we lose."

Her case is an excellent illustration of what is wrong with our approach to health care—but not how Cigna's critics mean. The insurer declined to pay for the transplant because, it said, "the treatment would be unproven and ineffective—and therefore experimental and not covered."

Nataline's surgeons disagreed, estimating she had a 65 percent chance of surviving six months with a new liver. But Dr. Goran Klintmalm, head of the Baylor Regional Transplant Institute in Dallas, told The Los Angeles Times the surgery was "very high-risk" and "on the margins." Even on the best prognosis, she stood a one-in-three chance of dying—after undergoing a very expensive operation and taking a liver that might otherwise have gone to someone with a better chance of survival.

Maybe Cigna was mistaken. Maybe not. The problem is that the critics seem to imagine that once we crack down on insurance companies or go to a single-payer government health insurance plan, future patients like Nataline will get anything their doctors recommend.

They won't. No matter how we "reform" health insurance, there will still be close calls, where it's not clear that a costly procedure will actually do any good. There will have to be someone, either in government or in the private sector, to decide which operations and treatments should be covered and which should not. And there will be patients who will die after being refused.

Health care "reform" won't eliminate such incidents and may produce more of them. Despite all those greedy private health insurers—or maybe because of them—Americans get far more liver transplants per capita than the residents of Canada, France, or Britain.

But liberals are not the only people who fantasize that our health care resources are unlimited. Republicans have accused the Obama administration of plotting to set up "death panels" to ration care for seniors. Former Lt. Gov. Betsy McCaughey of New York called the House Democratic health care bill "a vicious assault on elderly people" that will "cut your life short."

Republican National Committee Chairman Michael Steele has taken the same tack. After the administration proposed modest reductions in the growth of spending on Medicare, he did an impersonation of John Edwards.

"We want to make sure that we are not cutting the Medicare program," Steele said. "Anytime you get a body of individuals that go beyond me and my doctor who are going to make decisions about what kind of health care I get, that's rationing of health care." But as long as someone else has to pay for those decisions, someone other than doctors and patients is going to make decisions about what treatments are worth the cost.

As it happens, Washington is not about to get stingy with seniors. The cost constraints in the health care bills moving through Congress would trim total projected Medicare outlays by only 3 to 5 percent over the next decade. A cut of 5 percent in 2019 spending, however, would leave it 80 percent higher than this year.

Ten years from now, even with such "cuts," seniors will have more and better medical options than today. Yet Republicans act as though everyone over 65 will be herded onto an iceberg and pushed out to sea.

What left and right have in common is the delusion that when it comes to medicine, nothing succeeds like excess. But no health care measure can alter the fact that our resources are not unlimited. We may not want to hear it, but no matter what kind of insurance system you have, sometimes someone has to say "no."

This column first appeared at Reason.com.

Consumer Financial Protection Vagary

kmw@reason.com (Katherine Mangu-Ward) — Fri, 23 Oct 2009 12:43:00 EDT

Handing out small loans against future paychecks had absolutely nothing to do with last year's market meltdown, but federal regulators have been itching to get their hands on the the payday lending industry for years, and yesterday's committee vote on the creation of a new omnibus agency to control all financial products was the perfect opportunity.

The House Financial Services Committee voted 39 to 20 on Thursday to create a new Consumer Financial Protection Agency (CFPA). The stated goal of the proposed law, which will now move to a broader vote, is to consolidate regulation of financial products and use the resulting agency to monitor the use of sub-prime mortgages and other high-risk, complicated financial products.

In contrast to the complex instruments that helped bring about the financial crisis, payday loans are astonishingly low tech: Applicants bring in a stack of paper showing that they have a job and a bank account, write a paper check in a physical store for the amount they will owe when the loan comes due, and walk away with a handful of cash. These localized, low-key transactions are hardly the stuff of innovative high finance, but that hasn't stopped Congress and the president from purposefully conflating ordinary, everyday financial practices they deem unsavory with those that caused a global financial meltdown.

During his presidential campaign, Barack Obama promised to “work to empower more Americans in the fight against predatory lending” by capping “outlandish interest rates.” Obama also said he wants to extend the 2007 law imposing a 35 percent cap on interest rates for loans charged to members of the armed forces and their families to "all Americans." He's now well on his way, and if the CFPA becomes law, he'll be able to count it as a much-needed legislative victory. Payday lending has become a talking point for financial regulators, something that ordinary voters—who find derivatives confusing—can understand. The historical image of payday lenders as unsavory loan sharks and more recent stories of folks caught in debt spirals make the industry seem unsavory, ripe for regulation.

A press release on the committee's website is a study in the confused rhetoric of these new regulations, jumbling together several distinct types of financial products, crowing about "extend[ing] federal supervision to a host of financial industries, such as payday lenders and mortgage originators, which have long escaped oversight" and asserting that, "As last year’s crisis demonstrated, deceptive financial products—such as predatory mortgages and hidden credit card fees—not only damage the livelihoods of American families, but can destabilize the entire economy." The use and abuse of credit cards and payday loans may be indicators of the overall financial health of the country, bu they had nothing to do with the 2008 crash.

The press release also includes a quote from Rep. Brad Miller (D-NC): “The Committee vote today is a rifle shot at abusive financial practices, not a shotgun blast that would hit community banks making an honest living from fair lending practices. It’s no surprise that the lenders with the worst practices are still fighting tooth and nail against this bill. The last thing they want is to have to make an honest living.”

Small banks have managed to get out from under most of the harsh new regulations—probably because they call themselves "community banks." And who doesn't like community? Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, told The Wall Street Journal last week that community banks "were not the cause of this" and agreed to an exception for small banks that would allow them to continue dealing with their current regulators rather than the new consolidated federal agency. The same might be said of payday lenders, and yet Frank had harsh words indeed for them, singling out payday lenders and promising to "adopt a system of regulating the non-bank, non-regulating competitors who are frankly worse for both the consumer and the economy."

Naturally, the payday lending industry is freaking out. And when Congress and the president join forces to regulate an industry, there's only one thing for it: lobbyists. When ordinary people go to payday lenders, they get $100 or $200 in cash as an advance on their paychecks. When payday lenders go to Congress, they get considerably more. The industry spent $4.2 million on lobbying during the 110th Congress (which ended in January 2009), and gave $1.5 million in the 2008 election cycle. In the past, payday lenders have mostly concentrated their lobbying efforts at the state level, to mixed success. But the threat at the federal level is real this time around and the lobbying dollars reflect that. Stay tuned for part two of the debate, when would-be regulators cite the massive amount of lobbying dollars as further evidence of the industry's corruption.

Katherine Mangu-Ward is a senior editor at Reason magazine. This column first appeared at Reason.com.

A Nobel Prize for Showing That Freedom Works

info@reason.org (John Stossel) — Thu, 22 Oct 2009 12:42:00 EDT

Pundits and politicians act as if government can solve almost any problem. At the slightest hint of trouble, the ruling class reflexively assumes that knowledgeable, wise and public-spirited government regulators are capable of riding to the rescue. This certainly is the guiding philosophy of the Obama administration.

So how remarkable it is that this year's Nobel Memorial Prize in economics was shared by Elinor Ostrom, whose life's work demonstrates that politicians and bureaucrats are not nearly as good at solving problems as regular people. Ostrom, the first woman to win the prize (which she shared with Oliver Williamson of UC-Berkeley), is a political scientist at Indiana University. The selection committee said that she has "challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized. Based on numerous studies of user-managed fish stocks, pastures, woods, lakes and groundwater basins, Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories. She observes that resource-users frequently develop sophisticated mechanisms for decision-making and rule enforcement to handle conflicts" (emphasis added).

Ostrom's work concentrates on common-pool resources (CPR) like pastures and fisheries. Policymakers assume that such situations are plagued by free-rider problems, where all individuals have a strong incentive to use the resource to the fullest and no incentive to invest in order to enhance it. Analysts across the political spectrum theorize that only bureaucrats or owners of privatized units can efficiently manage such resources.

Few scholars actually venture into the field to see what people actually do when faced with free-rider problems. Ostrom did. It turns out that free people are not as helpless as the theorists believed.

She writes in her 1990 book, Governing the Commons: The Evolution of Institutions for Collective Action, that there is no shortage of real-world examples of "a self-governed common-property arrangement in which the rules have been devised and modified by the participants themselves and also are monitored and enforced by them."

In other words, free people work things out on their own.

Not only is government help often not needed, Ostrom says it usually screws things up because bureaucrats operate in an ivory tower ignorant of the local customs and the specific resource.

Political theorists assume away the problems of political control, but the problems are real. There is no reason to believe that bureaucrats and politicians, no matter how well meaning, are better at solving problems than the people on the spot, who have the strongest incentive to get the solution right. Unlike bureaucrats, they bear the costs of their mistakes. Moreover, as the prize committee pointed out, "Rules that are imposed from the outside or unilaterally dictated by powerful insiders have less legitimacy and are more likely to be violated."

Some of Ostrom's readers think that she is as critical of the free market as she is of government management. She writes, "(N)either the state nor the market is uniformly successful in enabling individuals to sustain long-term, productive use of natural resource systems." But what those readers miss is that the resource-management arrangements Ostrom documents are voluntary agreements that people themselves devise, monitor, and enforce. These agreements are part of the free market, even if the resource is not formally divided into privately owned units. Fundamental for advocates of freedom is not "the market" narrowly conceived, but the broader realm of consent and contract.

I was amused to see the lengths to which The New York Times went to spin Ostrom's (and Williamson's) selection in an anti-free-market direction. Reporter Louis Uchitelle wrote, "Neither Ms. Ostrom nor Mr. Williamson has argued against regulation. Quite the contrary, their work found that people in business adopt for themselves numerous forms of regulation and rules of behavior—called 'governance' in economic jargon—doing so independently of government. ..."

Please. Rules of behavior that are independent of government are not what anybody means by "regulation." Advocates of regulation say people can't devise methods of "governance" that leave politicians out of the picture, but Ostrom shows they are wrong.

We libertarians aren't against rules—we are against top-down rules imposed by out-of-touch bureaucrats. People generate better rules when the state leaves us alone.

John Stossel will soon host Stossel on the Fox Business Network. He's the author of Give Me a Break and of Myth, Lies, and Downright Stupidity. This column first appeared at Reason.com.

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In Health Care, Nobody Knows Anything

rbailey@reason.com (Ronald Bailey) — Tue, 20 Oct 2009 12:30:00 EDT

“Nobody knows anything,” is the famous dictum that screenwriter William Goldman once asserted about Hollywood movie-making. Goldman was saying that movie producers have no clue about whether or not a movie will sell until it hits the theaters. There is no formula for a hit movie.

Figuring out health care in America is only slightly more complicated and mysterious than making a hit movie. Fifty million Americans are unable to buy health insurance and premiums have doubled over the past decade. Health care spending in 2009 consumes about $2.5 trillion, more than 17 percent of our gross domestic product. And as spending has skyrocketed, improvements in health outcomes have been real, but modest. What’s going on?

On Saturday, President Barack Obama denounced two new studies, sponsored by the health insurance industry, which found that current health care reform bills in Congress will increase premium prices for consumers. One study, done for the lobbying group America’s Health Insurance Plans by the consultancy PriceWaterhouseCoopers, found that the provisions in the Senate bill sponsored by Sen. Max Baucus (D-Mont.) would add $1,700 a year to the cost of family coverage in 2013 and $600 for a single person. By 2019, family premiums could be $4,000 higher and individual premiums could be $1,500 higher. A weak individual coverage mandate, coupled with a guarantee issue requirement, no preexisting condition limits, and no rating based on health status would significantly boost insurance premiums.

The Blue Cross Blue Shield Association commissioned a new study by the Oliver Wyman consultancy which also found that guaranteed issue and community rating mandates coupled with a weak individual mandate would drive up premiums by 50 percent for individual policies and 19 percent for small group plans.

“Every time we get close to passing reform, the insurance companies produce these phony studies as a prescription and say, ‘Take one of these, and call us in a decade,’" declared the president. “Well, not this time.”

The president is right that we should always be skeptical of studies that find in favor of the groups that sponsor them. And these two insurance industry-sponsored studies do have their flaws. But the finding that guaranteed issue and community rating mandates increase insurance premium prices has been corroborated by other academic researchers. For example, researchers from MIT, the Brookings Institution, and Brigham Young University reported in a 2008 study published in Forum for Health Economics & Policy that community rating regulations increased premiums for high-deductible policies for individuals by as much as 17 percent and families by as much 33 percent in the nongroup market. In addition, the researchers found that the “guarantee issue regulations that accompany community rating regulations in New Jersey are associated with premium increases of well over 100 percent for individual and family policies.” And as my colleague Peter Suderman recently pointed out, Massachusetts, the one state that combines an individual mandate, community rating, and guaranteed issue, now has the highest premiums for family insurance plans in the country.

President Obama also denounced the insurance industry malefactors for “making this last-ditch effort to stop reform even as costs continue to rise and our health care dollars continue to be poured into their profits, bonuses, and administrative costs that do nothing to make us healthy—that often actually go toward figuring out how to avoid covering people.”

Obama is right that administration costs can be quite large. Why would health insurers spend so much money on administration? According to the New England Journal of Medicine, the director of the Office of Management and Budget, Peter Orszag, cites evidence that $830 billion is being spent this year on unnecessary care. That represents about 30 percent of all health care spending. Of course, insurers have a big interest in trying to reduce unnecessary spending, so they hire flocks of administrators to negotiate lower rates and to monitor medical spending charged by doctors and hospital administrators. Government health care programs like Medicare don’t have to negotiate; government agencies just fix prices, which means they fail to combat waste and fraud effectively.

What about those insurance company profits? Back in July, President Obama asserted that health insurance companies are making “record profits.” Not really. The Annenberg Public Policy Center’s FactCheck.org reported, “In general, the health insurance industry did poorly toward the end of 2008 and in the first quarter of 2009, so record profits weren’t likely in the second quarter.” Averaging profits of 3.3 percent, health insurers are the 86th most profitable industry in the U.S., well behind chain restaurants (7.7 percent), electric utilities (6.2 percent), and brewers (18 percent), but ahead of major auto manufacturers (-3.3 percent), resorts and casinos (-8.9 percent), and major airlines (-11 percent).

We’ll pass over the president’s naked attempt to provoke voter envy about the big paychecks of health insurance executives, since taxing them away entirely would not perceptibly lower the costs of health insurance.

So why have health costs, and especially health insurance premiums, skyrocketed since 2000? Let’s look at one plausible theory: market consolidation. In the past two decades, fewer and fewer competitors are exercising more and more monopoly control over health care spending. Case Western Reserve political scientist Joseph White looks at the last time a Democratic administration pushed for health reform. In 1993, recalls White, “costs were expected to quickly hit 14 percent of GDP and rise to 18 percent by the end of the decade.” But that didn’t happen. Why? One plausible story focuses on the rise of health maintenance organizations (HMOs).

The rise of HMOs was enabled by an earlier federal government attempt to rein in health care costs, the Health Maintenance Organization Act of 1973. The idea behind HMOs was that these insurers would control costs by offering a wide array of preventive care to their subscribers. That sounds like a plausible idea until one realizes that people, on average, change insurers every four years or so. An insurer that invested in preventive care was unlikely to reap the cost-saving benefits. Thanks to the spread of HMOs, the 1990s saw the rise in health care expenditures slow down. Why? Chiefly because HMOs fiercely negotiated lower prices from physicians and hospitals. But the era of modest premium price increases didn’t last long.

Hospitals and physicians struck back by beginning to consolidate themselves. As hospital mergers produced local monopolies, they were able to increase their prices substantially. “I find that hospitals increase price by roughly 40 percent following the merger of nearby rivals,” Leemore Dafny, an economist at the Kellogg School of Management at Northwestern University concluded in a 2008 study. Insurers with relatively few patients could not bargain effectively with the new local health monopolies, and so dropped out of those markets.

According to White, the result of the 1990s orgy of insurer and provider consolidation was that “there were half as many health plans in 2004 as in 1996.” In addition, “in thirty-eight states the largest firm controlled at least one-third of the insurance market; in sixteen states it controlled at least half.” In this analysis, insurers and hospitals have evolved into local oligopolies. One plausible story, it seems, is that an ever more monopolistic health care system has been fueling the recent double digit increases in health care costs.

But then you remember, nobody knows anything when it comes to health care. In 2003, the Federal Trade Commission issued a report that concluded that there was “no valid empirical basis” for the claim that consolidations among hospitals “have accounted for increases on hospital services.” But what about consolidation among insurers? “The insurance industry is congenitally weak in bargaining with supply side of the American health sector,” explained Princeton University health economist Uwe Reinhardt on a recent NPR Money Planet segment. Reinhardt believes that insurers largely dance to the fiscal tune whistled by hospitals and physicians.

Clearly there has been a drastic failure of market competition when it comes to the health care sector. The question is how can market forces of competition be brought to bear on escalating health care costs?

An essential player is absent from the competitive field: the actual consumer of health care services. So long as insurers can extract their premiums from employers and providers can extract payments from insurers, the health care industrial complex has very little incentive to rein in costs.

Recent efforts have been made to create so-called consumer-driven health care based on high deductible insurance policies. Because consumers are on the hook for the first several thousand dollars in health care costs, the idea is that savvy consumers will shop around for health care services and thus force insurers and providers to lower their prices. This cost-reducing dynamic works in most other areas of our economy, so why not in health care?

One of the chief problems is that consumers haven’t a clue about what their insurance and medical services cost. Hospital chargemasters (essentially comprehensive lists of all charges) typically contain prices for over 20,000 items and services. Sorting through those lists for the best prices would be impossible for consumers. But why should they have to? In markets, the proper dictum is that “nobody has to know everything.” Markets are superb at gathering widely dispersed information and resources from millions of people and firms and then distilling that information into prices.

When someone buys a car, they are not confronted with a bill listing separate prices for pistons, radiators, assembly line screw tightening, seats, gas tanks, windows, and so forth. Nor when they buy a hamburger are the prices for the beef, bun, wrapping paper, and special sauce listed and charged for individually. The market has bundled those separate items together into a single price. Competition sparked by consumer demand could unleash a similar simplifying dynamic in which prices for health insurance and medical services become bundled and more transparent.

So what kind of real reforms could increase health care competition? Congress should aim to break up the system of local monopolies into which our health care sector has devolved. In his Saturday attack on health insurers, President Obama noted that the industry enjoys “a privileged exception from our anti-trust laws, a matter that Congress is rightfully reviewing.” What he is talking about is the McCarran-Ferguson Act of 1945 that allows state governments to regulate the business of insurance without federal government interference. The Act is, in part, responsible for the evolution toward state insurance markets dominated by just a few large insurers. Consumers cannot purchase insurance policies that are not licensed by their state insurance commissions and which do not incorporate all the mandates imposed by those commissions. Congress and the states should open up competition between insurance companies by enabling “regulatory federalism” that would allow individuals and employers to purchase health insurance from other states. As a report from the free-market Cato Institute notes, regulatory federalism would force state insurance commissions to compete among themselves. The result would be that “states that impose unwanted regulatory costs on insurance purchasers would see their residents’ business—and their premium tax revenue—go elsewhere.”

Barriers to increased competition among health care providers must be removed too. For example, many states have certificate of need programs that forbid the construction of new health care facilities without prior regulatory approval. Passed by Congress in 1974 as a cost-cutting measure, the ostensible purpose of the programs is to keep health care costs low by requiring advance approval by state agencies for most hospital expansions and major equipment purchases. But regulations don’t really work that way. “Market incumbents can too easily use [certificate of need] procedures to forestall competitors from entering an incumbent’s market,” according to a 2004 Federal Trade Commission report. In fact, “programs can actually increase prices by fostering anti-competitive barriers to entry.” State enforced monopolies increase prices? Who knew?

There is one thing that everybody should know when it comes to health care: Competition in markets tends to lower prices and improve quality over time. It can do so in health care markets as well.

Ronald Bailey is Reason magazine's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books. This column first appeared at Reason.com.

In Praise of Doing Nothing

info@reason.org (David Harsanyi) — Tue, 20 Oct 2009 12:26:00 EDT

No. Normally used to express the negative of an alternative choice or possibility.

No. A super way to convey negation, dissent, denial, or refusal.

No. Republicans—the "Party of No"—should embrace the glory of the word.

It is always curious to hear irascible members of one political party accuse members of the opposing political party of "playing politics" as if it were a bad thing. Can you imagine? Politics. In Washington, no less.

As you know, Democrats claim to be above such petty, divisive and lowbrow behavior, especially on those days they are running both houses of Congress and the White House. What this country really needs, we are reminded incessantly, are more mavericks. Well, Republican mavericks. Folks who say "yes."

How starved is the White House to unearth some imaginary bipartisanship on the health care front?

Consider that for possibly the first time in American history, a vote in a Senate committee was the lead story for news organizations across the country, simply because the ideologically bewildered Sen. Olympia Snowe (R-Maine), used her inconsequential vote to move forward a government-run health care bill.

Judging from the coverage, you might have been under the impression that Snowe had nailed her 95 Theses to the door of the Republican National Committee's headquarters. In reality, she sits in a safe seat and habitually votes with Democrats.

"Forget Sarah Palin," remarked The Associated Press. "The female maverick of the Republican Party is Sen. Olympia Snowe." CNN's resident rational, reasonable, moderate Democrat, Paul Begala, called Snowe the "last rational, reasonable, moderate Republican."

Snowe even unleashed her own cringingly absurd self-congratulatory missive, claiming, "When history calls, history calls."

You know what? History always calls. You're in the United States Senate, for goodness' sake.

"The status quo approach has produced one glaring common denominator; that is that we have a problem that is growing worse, not better," Snowe added, in a glaringly obvious false dilemma. However ghastly the status quo might be, the alternative has the potential to be far worse. Saying "no" does not equate to a "yes" vote on the status quo.

In 2006, Snowe was listed by Time magazine as one of America's 10 best senators, in part for her ability to set aside partisanship. Which is funny because this year, Time magazine ran a hyper-adulatory story about the late Ted Kennedy, perhaps the most partisan force the Senate ever has known. Praise of bipartisanship, you see, is doled out selectively.

Now, as unlikely as it is, history also offers Republicans an unexpected opportunity to remake their party, to find an ideological center, to use politics to thwart a movement that is antithetical to every tenet they've been rhetorically peddling since Ronald Reagan.

Of course, Republicans will increasingly be accused of being ideologues. If only.

Is ideology something to be dismissed as a barrier to progress? Isn't ideology a framework of ideas that politicians should be using to inform their decisions?

Mavericks, well, they dismiss ideology because it would bind them to consistent and principled votes. John McCain often displays the muddled and mercurial thinking of a person with no political, intellectual, or economic philosophy guiding him.

There is plenty of room for dissent in political parties. But when it comes to health care reform, Republicans—powerless to stop meatloaf from being served in the Senate mess hall, much less a bill—do have a chance to embrace the ideals they've been pretending to champion for a decade with one straightforward, graceful and honorable word: "no."

They have no moral or civic or political obligation to embrace bipartisanship. History might even be telling them not to.

David Harsanyi is a columnist at The Denver Post and the author of Nanny State. Visit his Web site at www.DavidHarsanyi.com. This column first appeared at Reason.com.

Rising Pension Costs, Falling Revenues Lead to a $179 Million Budget Deficit in San Diego

adam.summers@reason.org (Adam Summers) — Mon, 19 Oct 2009 14:38:00 EDT

The City of San Diego has released its 5-year forecast—and the future is not pretty. The city is facing a record $179 million deficit this year, followed by additional projected annual deficits of at least $150 million for several years.
_

San Diego Mayor Jerry Sanders addressed the sobering news in a press release:

As we begin putting together a solution to close our budget gap, we will examine every responsible alternative to cutting services. But make no mistake about it, there will be cuts and the public will feel them.

As the San Diego Union-Tribune reported:

The city has generally closed recent budget gaps by eliminating vacant jobs, increasing fees and tapping reserves. Those decisions largely avoided controversial cuts such as laying off employees and closing libraries. That will no longer be possible, Sanders said.

A deficit this size is so significant that we can no longer shield the public from its impacts,” he said.

The city's budget deficits have been exacerbated by the economic recession but began when past leaders chose to increase employee pension benefits without identifying a way to pay for them.

While governments at all levels are experiencing falling revenues due to the recession, San Diego's outlook is particularly dire because of egregious missteps the city made regarding its pension system. San Diego's pension problems stem from pension deals reached in 1996 and again in 2002 which led to the city underfunding the system by increasing pension benefits without setting aside enough money to cover the additional costs. The city is still paying for its mistakes today. In addition to an extra $57 million that the city will have to pay from its general fund to cover pension investment losses—an increase in the city's pension contributions of approximately 34%—San Diego must pay $32 million as part of the McGuigan legal settlement to remedy its past pension underfunding.

If this picture is not bleak enough, consider that San Diego's fiscal situation is actually even worse than the 5-year projections because, as Councilman Carl DeMaio notes, the city did not include the costs of its retiree health-care benefits or deferred maintenance, such as street, sidewalk, and storm drain repairs that must be made, in its budget forecasts. The city is planning to pay $43 million next year for retiree health care—barely one-third of the estimated $120 million needed to adequately pay for the benefits. The city is already running a $1.3 billion unfunded liability for retiree health care.

In a speech given to the San Diego County Taxpayers Association last month, Sanders said, "We will make our full pension payment, to the penny. The Mayor and City Council do not determine the amount of the payment, nor should we. Nor should we repeat the mistakes of our predecessors and shortchange the retirement system so we can avoid making tough decisions." Yet, when it comes to San Diego's retiree health-care obligations, it appears that the city is set to repeat the same mistakes that got it into so much trouble with the pension system.

San Diego has implemented some pension reforms in recent years, but they were likely "too little, too late." In 2006, voters approved a measure to require voter approval of future city employee benefits increases. And beginning July 1, 2009, the city implemented a lower tier of benefits to new city employees. The new retirement plan is a hybrid plan that includes a 401(k)-style "defined-contribution" component to shift some of the risk of retirement investments from the city to the employees.

Nonetheless, lawsuits to undo the arguably illegal pension deals of 1996 and 2002 have proven unsuccessful, and the considerable debts that have already been racked up must be paid. The results will be severe negative impacts on city services, and only bold and significant reforms may prevent these service cuts from lingering for many years or keep the city from going bankrupt.

The city should switch to a pure defined-contribution retirement system for all new employees, with compensation levels comparable to those received in the private sector. Savings from this pension reform would be long-term, however, and the city needs some more immediate relief.

To that end, there are many government services that could be performed more cheaply and effectively by the private sector. Forcing the government to compete with the private sector to provide services could result in significant cost savings while maintaining or improving service quality. A 2007 study done by Reason Foundation and the San Diego Institute for Policy Research conservatively estimates that the city could save between $80 million and $200 million a year by implementing managed competition for services such as:

Water and wastewater treatment,
Trash and recycling collection,
Vehicle fleet maintenance,
Street maintenance,
Parks and recreation (including city-owned golf courses),
Library operations,
Permitting,
Facilities maintenance,
Information technology, and
Printing and copying.

Voters saw the wisdom in this "managed competition" approach, and overwhelmingly passed a measure in November 2006 to amend the city charter to allow the city to implement it. But city labor unions have tied up the process, and nearly three years after the voters passed Proposition C, the city is still without a managed competition program.

If labor unions continue to hold the city hostage, they will drive San Diego to the same fate as the City of Vallejo, California—into bankruptcy.

Other resources:

» Reason pension reform study: The Gathering Pension Storm: How Government Pension Plans Are Breaking the Bank and Strategies for Reform (see pages 33-40 for a case study on the City of San Diego)

» Reason-SDI study on managed competition in San Diego: Streamlining San Diego: Achieving Taxpayer Savings and Government Reforms Through Managed Competition

» Reason's privatization research and commentary

Adam Summers is a policy analyst at Reason Foundation.

The Myth of the Multiplier

vdereugy@gmu.edu (Veronique de Rugy) — Mon, 19 Oct 2009 12:19:00 EDT

Give us money, and we’ll give you jobs. That was the promise President Barack Obama made when he asked Congress for a $789 billion stimulus bill. The cash, he said, would create millions of jobs during the next two years. Without the stimulus, the administration warned in a January report by economic advisers Christina Romer and Jared Bernstein, unemployment by the end of 2010 would reach as high as 9 percent.

Well, Obama got his money. Since then, the economy has shed more than 2 million jobs and the unemployment rate has climbed to 9.4 percent. By May 2009, the Council of Economic Advisers (CEA) had changed its message. Now the stimulus would “save or create” 3.5 million jobs by the end of 2010.

Measuring total jobs “saved” by a piece of legislation is as difficult as measuring total crimes prevented by police patrols. That’s why no agency—not the Labor Department, not the Treasury, not the Bureau of Labor Statistics— actually calculates “jobs saved.” As the University of Chicago economist Steven J. Davis told the Associated Press, using saved jobs as a yardstick “was a clever political gimmick to make it even harder to determine whether this policy has any effect.”

A look at the CEA’s job creation model undercuts its promises even more. The model’s calculation of saved or created jobs is based on a macroeconomic estimate, not on actual data. According to the authors, the estimate rests on a “rough correspondence over history” that indicates a 1 percent increase in gross domestic product (GDP) represents an increase of 1 million jobs. They might as well have said the estimate was picked at random.

How did they come up with the 1 percent figure? Since government spending is increasing, and since such spending is a component of GDP, they assumed GDP would grow whether or not the spending produced real growth in the economy. This is akin to assuming I will have a baby in nine months whether or not I am pregnant.

The May report concedes that while the CEA will attempt to measure job creation through data collected from stimulus recipients, the results will contain errors and inconsistencies. “Because of these limitations,” it warns, “the reported jobs numbers will need to [be] used with caution and as part of a more complex estimation strategy.”

Since then, Romer has told CNBC she couldn’t say for sure how many jobs would be created, since we can’t know what would have happened without the stimulus. But didn’t her report pro-ject what would happen if the stimulus wasn’t passed? Wasn’t the 3.5 million number supposed to be the difference between employment with the stimulus and employment without it?

The confusion flows from the faulty theory underlying the stimulus bill. In Keynesian thought, a decline in demand causes a decline in spending; since one person’s spending is someone else’s income, a fall in demand makes a nation poorer. As a poorer nation cuts back on spending, it sets off another wave of declining income. So any big shock to consumer spending or business confidence can set off waves of job losses and layoffs, as fewer goods are demanded and more workers become useless.

Under this logic, one possible remedy is for public spending to take the place of private spending. As government increases its spending, the money creates new employment. That, in turn, spurs those new workers to consume more and prompts businesses to buy more machines and equipment to meet the government-induced demand. Economists call this increase in aggregate income the “multiplier” effect. One dollar of government spending, the theory goes, ends up creating more than a dollar of new income. It’s a rare free lunch.

As appealing as the Keynesian story sounds, many economists have long doubted it. In 1991, looking across 100 countries, Robert Barro of Harvard presented historical evidence that high government spending actually hurts economies in the long run by crowding out private spending and shifting resources to the uses preferred by politicians rather than consumers. For a dollar of government spending, we end up seeing less than a dollar of growth. Can long-term poison be short-term medicine?

Even in the short run, if there’s a big decline in the demand for workers, why should that alone cause mass unemployment? If all those workers really want to work, why won’t wages just fall until all the workers have jobs? That’s how markets end a glut, whether it’s a glut of employees or a glut of blue jeans: with lower prices. If recessions really are caused by a fall in demand (and nothing else), why don’t wages fall enough to keep people from losing their jobs?

It’s because wages are sticky, Keynesians argue. Wages and salaries don’t change on a daily basis the way stock prices and gas prices do, so if a company hits a sales slump, salespeople might earn fewer commissions, but the vast majority of workers don’t get a pay cut. There’s something about the market for workers that keeps businesses from cutting wages in a slump. As long as wages are sticky, in the wake of a nationwide collapse in sales, entrepreneurs will start firing people.

If a decline in demand means mass firing, a rise in demand can mean mass hiring. Even if government spending is inefficient, pork-laden, and financed by future tax increases, the theory goes, it can still create some real jobs, some real output, in both the public and private sectors.

So what do the data say? There aren’t many studies of the issue. But two stand out: Robert Barro’s work and research by Valerie Ramey, an economist at the University of California–San Diego, on how military spending influences GDP. Both studies found that government spending crowds out the private sector, at least a little. And both found multipliers close to one: Barro’s estimate is 0.8, while Ramey’s estimate is 1.2. This means that every dollar of government spending produces either less than a dollar of economic growth or just a little over a dollar. That’s quite different from the administration’s favored multiplier of four. What’s more, Ramey also found evidence that consumer and business spending actually decline after an increase in government purchases.

Why this crowding out of private spending? Government spending comes from three sources: debt, new money, or taxes. In other words, the government can’t inject money into the economy without first taking money out of the economy.

Take taxation: Taxes simply transfer resources from consumers to government, displacing private spending and investment. Families whose taxes have increased will have less money to spend on themselves. They are poorer and will consume less. They also save less money, which in turn reduces the resources available for lending.

In addition, higher taxation encourages people to change their behavior to avoid taxes. They might switch their efforts to nontaxed activities, such as household production, or to the untaxed underground economy. Economists call this a deadweight loss, because people give up the taxed activity or good they prefer.

There are high costs to the other options as well. If the government borrows money, that leaves less capital for the private sector to borrow for its own consumption. If the government prints new money, it will create inflation, which reduces the value of the money we own and decreases everyone’s purchasing power.

Overall, government spending doesn’t boost national income or standard of living. It merely redistributes it—minus the share it spends on the bureaucracy that collects and spends our tax dollars. The pie is sliced differently, but it’s not any bigger. In fact, it’s smaller.

Contributing Editor Veronique de Rugy (vderugy@gmu.edu) is a senior research fellow at the Mercatus Center at George Mason University. This column first appeared at Reason.com.

Treating the Elderly Like Spoiled Brats

schapman@tribune.com (Steve Chapman) — Mon, 19 Oct 2009 11:02:00 EDT

When inflation hits, every dollar in your bank account is worth less each day. Deflation is just the opposite: You put your feet up and watch your money grow in value. The latter is what is happening now to America's seniors. And politicians think they should not have to stand for it.

The other day, the federal government announced that for the first time since cost-of-living adjustments were begun in 1975, Social Security recipients will not get an annual raise in their monthly checks. This decision is not the result of a fit of fiscal austerity or a sadistic desire to punish old people. There won't be a raise to offset inflation for the simple reason that there has been no inflation to offset.

Last year, seniors got a big raise because consumer prices had jumped 5.8 percent in one year. In the following 12 months, though, the Consumer Price Index has dropped by 2.1 percent. So in the coming year, Social Security payments will stay the same and be worth more than they used to be.

But so what? Groups representing the elderly, like AARP, have come to regard the annual raise as a sacred birthright in good times as well as bad, and few in Washington want to argue with them. President Obama has proposed giving every Social Security recipient a tax-free $250 bonus in lieu of a cost-of-living adjustment. Congressional Democrats are all for it, and the Republican leadership sounds agreeable.

A consensus like that happens only when someone comes up with a simple, appealing, and thoroughly horrendous idea. As it is, the cost-of-living rules are a great deal for seniors. Retirees get more money when prices rise, but they don't have to give any of it back when prices fall. The ratchet works only in their favor.

It's not easy to make a case for enriching seniors at a time when working-age Americans are suffering, but Obama and his allies are trying. The president insisted that "we must act on behalf of those hardest hit by this recession."

Who is he kidding? His policy would help those with the most protection. The people hit hardest by the recession are those who have seen their earnings vanish along with their jobs. Social Security recipients are assured of a stable stream of income even when companies are cutting payroll with a chainsaw.

Obama also claimed the help is essential because "countless seniors and others have seen their retirement accounts and home values decline as a result of this economic crisis." What's his excuse for singling out seniors? Most everyone with a house or a 401(k) has gotten whacked, and the government can't afford to help them all.

What no one mentions is that Social Security beneficiaries already got a bonus in the original $787 billion stimulus package, which provided them with payments of $250 apiece. That's the rough equivalent of a 2 percent COLA. If the president gets his way, they will get a total of 4 percent. That, in combination with the drop in the CPI, means they'll have about 6 percent more in inflation-adjusted dollars this year than last. Not many other Americans can say that.

The final pretext is that the payouts will provide "a boost to our economy," in the words of House Speaker Nancy Pelosi—presumably because they will spur spending. Trouble is, giving people money doesn't mean they will head to Walmart. When the Bush administration sent out rebates, most of the cash apparently went to pay off debt or bolster savings, neither of which spurs the production of goods and services.

"Because of the low spending propensity, the rebates in 2008 provided low ‘bang for the buck,’” concluded a study by University of Michigan economists Matthew Shapiro and Joel Slemrod. "Given the further decline of wealth since the 2008 rebates were implemented, the impetus to save a windfall might be even stronger now."

The cost of this stimulus would be $13 billion, according to the White House. But if the $787 billion stimulus served its purpose, why is the additional boost necessary? If $787 billion didn't do the trick, what is $13 billion going to accomplish?

My suspicion is that most old people, given the facts, would be mature enough to understand that there is no good excuse for this windfall. It's the politicians who need to grow up.

The New Deal Made Them "Right"

info@reason.org (Damon W. Root) — Fri, 16 Oct 2009 13:09:00 EDT

Toward the end of a mostly sympathetic profile of the great journalist and critic H. L. Mencken, Christopher Hitchens once claimed that Mencken’s only “brilliance and verve” occurred during “the period between 1910 and the end of Prohibition.” Which is to say, before Franklin Roosevelt’s New Deal came along. It’s an all too common refrain. Biographer Terry Teachout characterized Mencken as “blinded partly by his hatred of Roosevelt.” Mencken scholar Charles A. Fecher—whom you’d expect to know better—declared Mencken’s opinion of Roosevelt to be “maniacal—there is no other word to use.”

Although it’s true that Mencken ended the 1930s as an enemy of what he called FDR’s “More Abundant Life,” he hardly started out the decade that way. A self-described “lifelong Democrat,” Mencken voted for Roosevelt in 1932 and voiced cautious support for the New Deal’s first stirrings, writing in March 1933, “I have the utmost confidence in his good intentions, and I believe further that he has carried on his dictatorship so far with courage, sense and due restraint.”

It wasn’t until Mencken realized the vast size and intrusive scope of that “dictatorship” that he went on the attack, lambasting the New Deal as a “puerile amalgam of exploded imbecilities, many of them in flat contradiction of the rest.” Indeed, in a passage that could be recycled and reused in our own troubled times, Mencken denounced Roosevelt for proposing “to lift the burden of debt by encouraging fools to incur more debt, and to husband the depleted capital of the nation by outlawing what is left of it.”

“That the rebel of the twenties should now become a spokesman of the conservatives of the thirties,” observed Mencken scholar Malcom Moos, “came as a shock to many of Mencken’s admirers.” But was it really so shocking? As America’s most famous political journalist for several decades, Mencken routinely championed the individual against the collective, siding with the imprisoned antiwar socialist Eugene V. Debs, with the embattled high school science teacher John Scopes, and with the thankless American taxpayer, the sort “who feels that he is being mulcted in an excessive amount for services that, in the main, are useless to him, and that, in substantial part, are downright inimical to him.” To put it differently, Mencken didn’t turn right, the country lurched wildly to the left.

And he wasn’t the only one to feel the shift. By the late 1930s, a handful of prominent liberals suddenly found themselves on the wrong side of the New Deal consensus. Much like Mencken, they joined the “right” almost by default. For the sin of holding fast to certain fundamental beliefs, including the quaint notion that big business and big government should be kept as far apart as possible, they were dubbed heartless reactionaries and “economic royalists.” Yet thanks to their principled opposition, some of the New Deal’s worst excesses were brought to light or kept at least partially in check.

Branded as a Tory and a Reactionary

Foremost among the members of this new “right” was the muckraking journalist John T. Flynn. Unlike Mencken, whose radical views had always centered on a rugged brand of individualism, Flynn qualified as a progressive liberal until the New Deal drove him away. A graduate of Georgetown Law School, Flynn made his name in the 1920s and early 1930s as a left-leaning financial columnist and author whose books bore such titles as Graft in Business and Trusts Gone Wrong! He enjoyed identifying and exposing the dirty deeds of big business and, as biographer John Moser writes, “in particular he saw abuses in the banking system and the New York Stock Exchange, and as early as February 1929 he was predicting that the value of corporate securities was about to plummet.” Flynn’s work earned him a prominent perch at the New Republic, then as now one of the country’s leading left-liberal publications, where he wrote a weekly economics column from 1933 until he was dropped in 1940 for his increasingly harsh attacks on FDR’s policies.

But like Mencken, Flynn started out as a Roosevelt supporter, referring to the New Deal as a “promising experiment.” It took the National Recovery Administration to cure him of that. The centerpiece of FDR’s first 100 days, the NRA represented the nightmare of central planning made real. Enacted as part of the National Industrial Recovery Act of 1933, which FDR hailed as “the most important and far-reaching legislation ever enacted by the American Congress,” the NRA sought to micromanage the economy through more than 500 wage-, hour-, and price-fixing “codes of fair competition,” mandating everything from the price of food to the cost of having a shirt hemmed. The NRA’s stated purpose was to increase efficiency via military-style organization, yet as historian Arthur Ekirch has pointed out: “Little attention was paid to the fact that it was industry itself that had largely prepared the regulations governing prices and production. Also ignored was the fact that the NRA meant the suspension of antitrust laws along with the whole theory of free competition and free enterprise.”

Flynn was among the few who noticed. As a member of the progressive movement, he had long worried about the growing power and influence of the big corporations. Now FDR and his so-called brain trust were climbing into bed with them! As Flynn put it, “Curiously, every American liberal who had fought monopoly, who had demanded the enforcement of the anti-trust laws, who had denied the right of organized business groups, combinations and trade associations to rule our economic life, was branded as a Tory and a reactionary if he continued to believe these things.” Thus Flynn found himself on the right.

Using the same muckraking approach that had made him a darling of the left, Flynn denounced the NRA as “probably the gravest attack upon the whole principle of the democratic society in our political history.” As for Roosevelt, Flynn argued that although the president proclaimed “his devotion to democracy, he adopted a plan borrowed from the corporative state of Italy and sold it to all the liberals as a great liberal revolutionary triumph.”

Nor did these scathing attacks go unnoticed. After reading an article of Flynn’s published by the Yale Review, FDR wrote privately to the editor, denouncing Flynn as “a destructive rather than a constructive force” who “should be barred hereafter from the columns of any presentable daily paper, monthly magazine, or national quarterly.”

The Banner of Jefferson, Jackson, or Cleveland

While Flynn’s words certainly stung, the attacks from Democratic hero Al Smith shook the New Deal coalition to its core. A legend among the reform-minded, Smith had long championed leftist causes ranging from minimum wage laws for women to government-built housing for the poor. A child of Manhattan’s Lower East Side, Smith rose from Tammany Hall to the state capitol at Albany, where he served four terms as New York governor. In 1928, he received the Democratic Party’s presidential nomination, though he suffered a disastrous electoral defeat at the hands of Republican Herbert Hoover. At the 1932 party convention, Smith lost the nomination to FDR.

So it came as a surprise when Smith began criticizing the New Deal. After all, hadn’t he supported the same sort of policies in New York? But like Flynn, Smith saw himself as a constructive critic, not as a partisan foe. As one of the country’s most famous opponents of alcohol prohibition, a group popularly known as the “wets,” Smith had been deeply troubled by the lessons of the Eighteenth Amendment. Prohibition, he wrote in 1933, “gave functions to the Federal government which that government could not possibly discharge, and the evils which came from the attempts at enforcement were infinitely worse than those which honest reformers attempted to abolish.” As biographer Christopher Finan put it, Smith “began to believe that the danger of giving new power to the federal government outweighed any good it might do. . . . He was putting himself on a collision course with the New Deal.”

That collision came on January 25, 1936, when Smith delivered a fiery anti–New Deal speech before the Liberty League, a mostly conservative group organized in opposition to Roosevelt’s policies. As Smith told the capacity crowd gathered at Washington’s Mayflower hotel, “this country was organized on the principles of representative democracy, and you can’t mix Socialism or Communism with that.” Deriding FDR and his brain trust for their “betrayal” of the Democratic party’s principles, Smith declared: “It is all right with me if they want to disguise themselves as Norman Thomas or Karl Marx, or Lenin, or any of the rest of that bunch, but what I won’t stand for is to let them march under the banner of Jefferson, Jackson, or Cleveland.”

Unfortunately for Smith, most Democrats saw things differently. Joseph Robinson, who had been Smith’s running mate on the 1928 presidential ticket, derided Smith for addressing the Liberty League’s “billion-dollar audience.” He “has turned away from the East Side with those little shops and fish markets,” Robinson sneered, “and now his gaze rests fondly upon the gilded towers and palaces of Park Avenue.”

Though Smith continued to enjoy hometown popularity in New York, he was basically excommunicated from the party. In 1936 he crossed the aisle to support Republican presidential candidate Alfred Landon, declaring, “I am an American before I am a Democrat.” Four years later he campaigned on behalf of Republican Wendell Wilkie. FDR trounced them both.

As Smith remarked of his harsh treatment at the hands of one-time friends and allies, “Unless you’re ready to subscribe to the New Deal 100 per cent and sign your life name on the dotted line, you’re a Tory, you’re a prince of privilege, you’re a reactionary, you’re an economic royalist.” It took his support for FDR during World War II to repair the damage.

The Switch in Time

A similar impatience with the New Deal’s critics would famously reappear in FDR’s war on the Supreme Court, culminating in his failed court-packing bill of 1937, which would have allowed Roosevelt to appoint as many as six new Supreme Court justices. Among other things, that conflict transformed the fiery progressive Sen. Burton K. Wheeler (D-MT) from a longtime friend into a deadly foe.

On February 5, 1937, FDR submitted his plan to reorganize the federal judiciary by allowing the president to appoint one new federal judge to match every sitting judge who had served at least 10 years and hadn’t retired or resigned within six months of turning 70. “A lower mental or physical vigor leads men to avoid an examination of complicated and changed conditions,” FDR argued. “Little by little, new facts become blurred through old glasses fitted, as it were, for the needs of another generation.” In other words, the Court’s commitment to such “horse and buggy” notions as property rights and limited constitutional government kept getting in the New Deal’s way. Most ominously, in Schechter Poultry Corp. v. United States (1935), the Court unanimously struck down FDR’s beloved NRA.

So Roosevelt bided his time, waiting until after his sweeping reelection in 1936 to strike against the “nine old men.” As historian William E. Leuchtenburg put it, the court-packing scheme “bore the mark of a sovereign who after suffering many provocations had just received a new confirmation of power.” Senator Wheeler would have agreed with that description, particularly the sovereign part. Wheeler thought the whole thing reeked of unbridled executive power.

And Wheeler, much more than Flynn or Smith, was a true-believing New Dealer with impeccable credentials. In 1924, he served as the running mate of Progressive Party presidential candidate Robert M. La Follette. As chairman of the Senate Interstate Commerce Committee, Wheeler played an indispensable role in the 1935 passage of FDR’s bill to regulate utility holding companies. And on a personal note, when the Supreme Court nullified the Agricultural Adjustment Act of 1933 in United States v. Butler (1936). Wheeler’s son-in-law, an economist at the Agricultural Adjustment Administration, was tossed out of work.

But none of that changed Wheeler’s low opinion of FDR’s court-packing plan. As Wheeler wrote in a letter to the socialist leader Norman Thomas, “It is an easy step from the control of a subservient Congress and the control of the Supreme Court to a modern democracy of a Hitler or a Mussolini.” Addressing a national radio audience less than two weeks after FDR introduced the plan in Congress, Wheeler moved in for the kill: “Every despot has usurped the power of the legislative and judicial branches in the name of the necessity for haste to promote the general welfare of the masses—and then proceeded to reduce them to servitude. I do not believe that President Roosevelt has any such thing in mind, but such has been the course of events throughout the world.”

Against Wheeler’s incendiary rhetoric and crafty legislative maneuverings, the court-packing bill failed to garner the necessary votes and died in the Senate by a final tally of 70-20. Wheeler’s “conservative” stand thus helped preserve some degree of judicial independence. (Though FDR did eventually get what he wanted. By the time of his death in 1945, he had “packed” the Court with eight New Deal–friendly justices. And the plan itself is widely credited with influencing swing vote Justice Owen Roberts, whose newfound support was called “the switch in time that saved nine.”) Today’s pro-Roosevelt liberals might take a moment to contemplate what George W. Bush would have done with those courtpacking powers.

Superfluous Men

But outside of the court-packing battle, did the fight against the New Deal really matter? As Smith discovered, the voters didn’t seem to have any problem with Roosevelt, and most historians still praise him today for ending the Depression and “saving capitalism.” Is there anything to learn from the principled liberals who stood athwart the New Deal yelling stop?

Albert Jay Nock thought there was. An acclaimed journalist, editor, and biographer, Nock remains one of FDR’s most intriguing opponents. Though he’s normally remembered as a founding father of the modern libertarian and conservative movements, Nock actually championed a unique brand of Jeffersonian anti-statism that has never fit comfortably on the political right. An advocate of free trade and minimal government, he also opposed the private ownership of land, taking his cue from Henry George’s 1879 bestseller Progress and Poverty, which argued that the government should be funded exclusively via a “single tax” on collectively owned land.

Indeed, Nock’s political and economic views owed as much to the progressive historian Charles A. Beard as they did to the libertarian theorist Herbert Spencer. In his best remembered book, Our Enemy, The State, Nock combined Spencer’s emphasis on free trade and social cooperation with Beard’s thesis that the U.S. Constitution represented an “unscrupulous and dishonourable” coup d’etat waged explicitly by “the speculating, industrial-commercial and creditor interests.” As historian Charles Hamilton observed about the Freeman, the political magazine Nock edited for its entire 1920–1924 run, readers “couldn’t decide if it was liberal, conservative, Bolshevik, revolutionary, anarchist, or Georgist.” Hamilton might as well have been writing about Nock himself.

And although Nock was never a New Deal supporter, he was nonetheless shoved to the right by the Rooseveltian juggernaut. As Brian Doherty observed in his definitive libertarian history, Radicals for Capitalism, “Nock had never stopped thinking of himself as a radical. He found it bitterly ironic that in the post-New Deal era, conservative businessmen became his primary audience.”

As far as Nock was concerned, it was the New Dealers who had forfeited their liberal status. He was the one keeping true liberalism alive so that future generations might bring it back into vogue. “Considering their professions of Liberalism,” Nock wrote in a 1934 introduction to Herbert Spencer’s The Man Versus the State, “it would be quite appropriate and by no means inurbane, to ask Mr. Roosevelt and his entourage whether they believe that the citizen has any rights which the State is bound to respect. Would they be willing . . . to subscribe to the fundamental doctrine of the Declaration? One would be unfeignedly surprised if they were.”

Today, a chorus of distinguished economists and legal scholars has joined Nock’s lonely voice of New Deal opposition, suggesting that his efforts to preserve classical liberalism paid off in the end—as did the efforts of Mencken, Flynn, Smith, and Wheeler. Though they didn’t defeat FDR or even inspire a particularly effective opposition movement at the time, their positions have since been rediscovered by generations of libertarians and conservatives seeking to rein in the post-New Deal state. With President Barack Obama now wielding a similar array of sweeping executive powers in the face of a growing economic crisis, their principled examples have become more important than ever.

Damon W. Root is an associate editor at Reason magazine. This article originally appeared in the September/October 2009 edition of Cato Policy Report. This column first appeared at Reason.com.

Mortgage Madness, Again

schapman@tribune.com (Steve Chapman) — Thu, 15 Oct 2009 13:04:00 EDT

Watching Washington policymakers in action, I sometimes think they make mistakes because of unrealistic goals, flawed thinking, blind obedience to party, or dubious information. And sometimes I think they make mistakes because they are—how to put this?—clinically insane.

There is no other way to explain what is going on at the Federal Housing Administration, which provides federal guarantees for home mortgages. Given the collapse in real estate prices, the weak economy, and the epidemic of foreclosures, banks are acting with more caution than before. They now commonly require home buyers to make down payments of 20 percent to qualify for a loan. But the FHA often requires only 3.5 percent.

That's the equivalent of playing pool with a guy named Snake, and it's had two predictable effects. The first is that the agency is insuring about four times as many home loans as it did just three years ago. The other is that the number of FHA-approved borrowers who are not repaying their loans is climbing. Since last year, the default rate has jumped by 76 percent.

Another likely consequence looms: you and I eating the losses. A former executive of mortgage giant Fannie Mae told a congressional subcommittee that the FHA "appears destined for a taxpayer bailout in the next 24 to 36 months." Commissioner David Stevens had to assure the subcommittee that it would not need help—well, unless there is a "catastrophic home price decline."

But who says there won't be? It's not as though anyone at the FHA foresaw the housing bubble or the housing bust. Yet now it feels confident betting its $30 billion cash reserve that prices won't fall.

Just a few years ago, after all, everyone assumed that U.S. home values were bound to keep rising. In fact, on average, they have dropped by a third since the peak of the market. If prices can drop by a third, they could certainly drop some more.

That's why many private lenders wouldn't touch a 96.5 percent loan with a 96-foot pole. One dip in the economy, and the house is worth less than the mortgage. That's an invitation for the owner to stop paying, drop the keys in the mailbox, and find a place to rent—an invitation hordes of people have already accepted.

What most foreclosures have in common is that the mortgage holder owes more than the property could sell for. "Not everybody who has negative equity goes into foreclosure, but nearly everybody who goes into foreclosure has negative equity," says Paul Willen, an economist at the Federal Reserve Bank of Boston.

But Stevens sees no reason the agency should raise its down payment requirement to 5 percent. "All that's going to do is retard recovery," he says, by making it harder for people to buy homes.

But guess what? It should be harder for people to buy homes. Making it too easy to buy homes is what caused the foreclosure epidemic, which led to the financial crisis, which helped crater the economy.

Right now, the real estate market is adjusting to the new environment, where Americans are not willing to pay as much because they perceive that when you buy a house, you cannot be certain of making money on the investment and, in fact, may lose your shirt. The FHA's easy-money policy is supposed to prevent that adjustment, and push up prices, by assuring that people who cannot afford the risks of home ownership will be able to buy.

If many of the loans turn into pumpkins, that's OK. House Financial Services Committee Chairman Barney Frank (D-Mass.), actually told The New York Times, "I don't think it's a bad thing that the bad loans occurred. It was an effort to keep prices from falling too fast." In other words, soaring defaults are not a bug. They're a feature.

But as Willen points out, prices didn't rise during the boom because there was reckless lending. There was reckless lending because everyone thought prices would rise. But the FHA imagines that it can cure the problems created by easy credit by promoting more easy credit.

Is it fair to call that approach shortsighted? Imprudent? Economically fallacious? Sure. But mainly, it's just plain crazy.

COPYRIGHT 2009 CREATORS.COM

IT Controversy Shouldn't Spoil Public-Private Partnerships in Virginia

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 14 Oct 2009 03:14:00 EDT

Bacon's Rebellion

Could the high-profile kerfuffle over the state's contract to consolidate and manage the state's information technology (IT) infrastructure diminish the state's appetite for outsourcing and public-private partnerships (PPPs)?

That's a question suggested in a recent Richmond Times-Dispatch article on the simmering controversy over the Virginia Information Technology Authority (VITA)'s handling of its ten year, $2.3 billion IT contract with Northrup Grumman.

The answer is, it shouldn't. Virginia's had a long history with successful PPPs and is widely recognized as a state leader. State officials recognize by now that PPPs come in all shapes and sizes. An IT modernization project is a lot different than a toll road partnership, which is in turn a lot different from a partnership to modernize a state psychiatric hospital. Virginia's undertaken these and many other types of PPPs over the last two decades.

Commonwealth policymakers should have a sophisticated enough understanding by now of the nuances and varieties of PPPs, recognizing that there is no cookie-cutter template. Each PPP is a unique vehicle structured to achieve a set of specific goals, and each type of contract has to be carefully constructed and monitored to ensure that both the state and their private sector partners deliver on their commitments. And if you run into a situation where one party or the other fails to deliver, then you remember that it's a partnership, where the parties work to resolve implementation issues.

Resolving challenges can take a variety of forms. It may necessitate, as in the case of Indiana's troubled welfare eligibility modernization project, requiring the contractor to implement a corrective action plan and allowing sufficient time to evaluate the results before considering a cancellation of the contract.

Similarly, when Florida ran into similar challenges with three major IT outsourcing initiatives a few years ago, they had to adjust contracts and project timelines when the projects bogged down in implementation. One of the main reasons was that end users-primarily state agencies-weren't ready to ditch the antiquated systems they had gotten accustomed to and inundated the contractors with hundreds of customization requests, which complicated the implementation significantly. However, as Florida's Council on Efficient Government detailed in an excellent post-implementation review of these projects, the state and its private partners ultimately were able to navigate the challenges and deliver on the projects.

With any large-scale privatization initiative, especially those involving complex system overhauls like an IT modernization, you have to expect upfront that there will be obstacles. This would also be the case if government was doing the exact same work in-house-large-scale projects are inherently tricky. It's all about how you deal with the inevitable challenges.

Unfortunately, as we're seeing in Virginia, some policymakers and officials have a tendency to turn expected implementation challenges into political footballs. It was no different in Indiana and Florida, but administration officials wisely tuned out the politics and focused on keeping their PPP projects moving forward.

We haven't seen that in Virginia with the IT initiative. Instead we've seen state officials fired, fingers pointed and a general lack of focus on getting the project back on track, as Reason Foundation colleague Steven Titch details here.

If there are legitimate implementation issues that have arisen thus far, the proper response for the state would be to sit down with its private partner, understand the challenges, and develop a plan to address them. The contractor doesn't want to lose the contract and the state doesn't want to stop a major overhaul midstream, so the incentives are aligned to work things out. And the state needs to perform the due diligence of closely monitoring the contractor's performance every step of the way-holding their feet to the fire with penalties if appropriate-while also ensuring that agency staff aren't presenting internal obstacles to successful implementation.

Virginia knows how to do PPPs well. The problem is that officials are simply not living up to their own standards in their handling of the IT contract and should quickly adjust course. And allowing what are likely resolvable outsourcing challenges to become heavily politicized unnecessarily exacerbates the situation.

Despite Virginia's reputation in the PPP industry as a state with broad-ranging experience, political flare-ups like the one we're seeing today can begin to change that perception. If contractors believe that their projects might be thrown to the political wolves, they may think twice about bidding on contracts in Virginia. Or at the very least they may factor political risk into their pricing, driving up costs.

Policymakers should see the forest through the trees and remember that PPPs have had a long and successful track record in Virginia and are a proven tool for doing more with less in state government.

With revenue shortfalls continuing to drive state fiscal woes for the next several years, Virginia officials will need to do more PPPs, not less. It's time for officials to turn down the politics and focus squarely on righting the IT project. In the long-run, fixing it will be much more productive than politicizing it.

Leonard Gilroy is Director of Government Reform at Reason Foundation and Senior Fellow for Government Reform at the Thomas Jefferson Institute for Public Policy. This column was originally published at Bacon's Rebellion

Max's Adventures in Wonderland

info@reason.org (David Harsanyi) — Tue, 13 Oct 2009 13:54:00 EDT

For Philistines like me, the mysteries of Washington can be both perplexing and wondrous. If you watched noted alchemist Sen. Max Baucus (D-Mont.), conjure up health care gold last week, you probably know what I mean.

Mercifully, House and Senate Democrats recently blocked amendments that would have required health care bills to be posted online for 72 hours before a committee vote, sparing us the needless irritation of grappling with fancy facts about the most consequential piece of legislation in recent memory.

No need to get into the weeds for you and me. No way. Just think of legislation as abstract art. The Congressional Budget Office does.

The CBO's new estimate, which magically meets every one of President Barack Obama's preconditions, is based on "conceptual" language provided by Baucus rather than on any of those maddeningly specific Arabic numerals.

That's because the estimate isn't rooted in an actual bill per se, nor does it incorporate hundreds of amendments that will be part of any final product—well, not exactly ... What we do have is a CBO that has been browbeaten long enough by the White House to finally summon the conviction to get a figure that so many wanted to hear.

It's also, believe it or not, free.

According to the CBO, the Senate plan—which actually would cost more than earlier estimates, rising from nearly $800 billion to $829 billion (or $904 billion, according to a number of economists)—has triggered many excited journalists and politicians to claim that the bill miraculously would "pay for itself."

The CBO says that not only would it pay for itself—and this part is really wonderful—but also the government's spending an additional $829 billion over the next 10 years would reduce the federal deficit by $81 billion.

How exactly does health care "reform" pay for itself in Wonderland? In this case, it pays for itself by charging taxpayers new "fees," delivering new mandates and penalties, adding pass-through costs, and cutting hundreds of billions of dollars from Medicare.

As you know, if there's anything old folks—already prone to irascibility from time to time—absolutely adore it's the prospect of cutting their Medicare benefits. Yet even those savings seem to defy reality.

One of the many assumptions in the Baucus plan is that there would be continual cuts in physician reimbursements, cuts that Congress never has allowed and precious few onlookers believe would be politically palatable. So without a major attitude adjustment in Washington, this savings is just fantasy, as well.

Not to worry, though, there are sure things. One of the most popular and cost-effective programs, Medicare Advantage, would take a hit of $117 billion through 2019.

That might seem somewhat mysterious to you. Then again, Medicare Advantage involves private insurance firms (a curse on their house!), which should be squashed like a cockroach.

CBO Director Douglas Elmendorf previously warned that Medicare Advantage payment cuts would have the potential to hurt seniors' private health plans, which, of course, is the point of "reform."

The most exhilarating aspect of this plan, however, isn't that it would do nothing to contain costs for average consumers; it's that average consumers would help pay for it long before they failed to receive any tangible benefits.

According to Democrats, health care reform must be passed this very moment even though it wouldn't kick in until 2013. Don't worry; it would start taxing Americans in 2010, three years before you got nothing.

All of this probably adds up to the most expensive dependency program yet devised.

Coming at a time when the nation has hit 9.8 percent unemployment, with no help from Washington in sight, the latest Pew Research Center survey on the health care issue claims that "more people now generally oppose the health care reform proposals in Congress (47 percent) than favor them (34 percent)."

That 47 percent just doesn't believe. They don't believe higher taxes would bring down costs. They don't believe that more spending could shrink the deficit. They can't believe that fees wouldn't be taxes. Or that an entitlement program, for the first time in history, would pay for itself.

What they do believe in is reality.

David Harsanyi is a columnist at The Denver Post and the author of Nanny State. Visit his Web site at www.DavidHarsanyi.com. This column first appeared at Reason.com.

Private Developers Have No Right to My Home

info@reason.org (Daniel Goldstein) — Tue, 13 Oct 2009 13:23:00 EDT

Over six years ago Bruce Ratner—a top political contributor and law school friend of then Gov. George Pataki—asked Pataki to use eminent domain to seize 22 acres of prime Brooklyn real estate and hand them over for his Atlantic Yards development plan. By way of comparison, the Ground Zero site is 16 acres. The taxpayer-subsidized project would be 16 skyscrapers and a professional basketball arena for the New Jersey Nets team Ratner bought as leverage for the land grab (and just conditionally sold to Russia's richest oligarch, Mikhail Prokhorov).

These 22 acres happened to include my home and my neighbors' homes and businesses—a slice of an ethnically, racially, and economically diverse, mixed-use neighborhood undergoing steady, healthy growth.

On October 14th our landmark case challenging this abuse of eminent domain to enrich and enormously benefit a powerful and politically connected developer will be argued at the Court of Appeals—New York's high court. The oral argument and eventual ruling will be historic.

"Public use,” required for eminent domain, has come to mean something other than construction of roads, parks, hospitals, schools, railways, etc. It has transmogrified into some amorphous, highly speculative "public benefit" or "public purpose," which could be anything a developer with government "partners" declares it to be.

The Supreme Court's infamous 2005 Kelo ruling alerted many Americans to this perversion of the Fifth Amendment of the U.S. Constitution.

Kelo also awakened many state legislatures and courts. Forty-three states have made post-Kelo eminent domain reforms in order to return eminent domain closer to its original intent, and give meaningful security to homeowners that they're more than temporary placeholders for wealthy, well-connected developers.

New York's legislature is one of the seven that has not acted. Though they did put on an act. Hearings were held in both houses. But proposals for legislation never made it out of committee and after the immediate national post-Kelo uproar subsided, the legislature moved on to its regular, and notable, dysfunction.

So everyday New Yorkers have been left unprotected and undefended by our elected officials. With such a non-responsive legislature, the only place to turn has been the courts, the great equalizer. Thankfully, we have this showdown with the state's most powerful and abusive condemning authority—the Empire State Development Corporation.

New York's Constitution says that property can be taken for a "public use." Not a "public benefit" or "public purpose." No New York State Constitutional Convention or legislature has ever seen fit to change this language or amend it. "Public use" means "public use." But again and again New York has approved eminent domain condemnation for projects, such as Atlantic Yards, that benefit private entities at the public's expense—so not only are they not for "public use," they are not even for the "public benefit." It's time for this to stop.

When eminent domain is used in service of building a school, a railway, or a hospital, we know what we'll get. But when "economic development" is the justification, we have no idea what we'll get except for false hopes, false dreams, and happy talk, along with a land grab windfall for the developer and theft of homes.

In the case of Atlantic Yards the so-called "benefits" are illusory at best. No attempt has been made by the condemning authority or the lower court to weigh the public versus private benefits; meaning there has been no cost-benefit analysis of the project and no analysis of the developer's benefit. But it doesn't take a degree to see who gets the very short end of the stick.

Thirty-one months after Atlantic Yards was unveiled we learned, for the first time, that the "public benefit" of the project was the removal of "blight." But the proposed takings area was not "blighted" in 2003 no matter how permissive a definition of "blight" one may apply. That said, what now passes for "blight" bears no relationship to the slum problem encountered by the City in the 1930s, when eminent domain was utilized for “slum clearance.”

In the 1930s the people of this state and the Court of Appeals understood that slums posed an "extraordinary threat to public health and safety," and "are the breeding place of disease" where the "public evils, social and economic, of such conditions, are unquestioned and unquestionable."

Prospect Heights, where the project is proposed, is the antithesis of that description, as is nearly any other neighborhood in New York state. But when the state deems a neighborhood "blighted", and then takes it, just because there are some weeds, or sidewalk cracks, or something called underutilization, then all of us in New York are vulnerable to eminent domain abuse.

Calling the Atlantic Yards site "blighted" was an obvious post-hoc justification to enable eminent domain in a state where "blight" has been erroneously interpreted to mean whatever the state determines it to be. And if all the state has to argue to justify seizing properties is some speculative public "benefit" or "purpose"—based on some contrived "blight" declaration—then what exactly isn't a "public use"?

My co-plaintiffs and I are not asking for much. We're simply asking for the state's constitutional Public Use Clause to be applied, which, despite the cries of the vested interests, will not stymie development in New York City. If it is not applied, then today our homes can be seized in an abusive manner, but tomorrow it will be your home just because some politically connected, backroom-dealing rich guy can get his cronies to determine that his enrichment is somehow for the public's use.

Daniel Goldstein is the lead plaintiff on Goldstein et al. v. NYS Urban Development Corp (d/b/a Empire State Development Corp.) and a co-founder of Develop Don't Destroy Brooklyn, Inc. This column first appeared at Reason.com.

Elinor Ostrom on the Market, the State, and the Third Sector

info@reason.org (Paul Dragos Aligica) — Mon, 12 Oct 2009 12:57:00 EDT

When economists show that market arrangements fail, they usually make the simple recommendation that “the” state should take care of these problems. Elinor Ostrom has demonstrated empirically that “the” state may not be “the” solution. Her work argues for the wisdom of institutional diversity, looking to individuals to solve problems rather than relying on top down, one-size-fits-all solutions. The conventional wisdom assumes that natural resources and environmental problems should be solved in a centralized—and if possible, global—manner. Through innovative analysis in the field, in the experimental laboratory, and in theory, Ostrom’s work has show that creative solutions to problems such as the depletion of common pool resources exist outside of the sphere of national governments. Hence today’s announcement that she had received the 2009 Nobel Memorial Prize in Economic Sciences.

But there is more to Elinor Ostrom’s work. In fact, one may say that, together with Vincent Ostrom, she has mounted a remarkable challenge to the mainstream views in economics and political science. As she described it herself, her work is a systematic attempt to transcend the basic dichotomy of modern political economy.

On the one hand, there is the tradition defined by Adam Smith's theory of social order. Smith and his intellectual descendants focused on the pattern of order and the positive consequences emerging out of the independent actions of individuals pursuing their own interests within a given system of rules. That was the “spontaneous order” tradition where the study of markets—the competition among producers and consumers of pure private goods leading to a better allocation of resources—occupied a preeminent place.

On the other hand, there is the tradition rooted in Thomas Hobbes’ theory of social order. From that perspective, individual actors pursuing their own interests and trying to maximize their welfare lead inevitably to chaos and conflict. From that is derived the necessity of a single center of power imposing order. In Hobbes’ view, social order is the creation of the unique “Leviathan,” which wields the monopoly power to make and enforce law. Self-organized and independent individuals thus have nothing to do with making order. Most modern theories of “The State" have their origins in Hobbes’ vision of Leviathan.

In Ostrom’s view, the theorists in both traditions managed to keep not only the theories of market and state alienated from each other, they also managed to keep the basic visions of the two separated. Smith's concept of market order was considered applicable for all private goods while Hobbes's conception of the single center of power and decision applied for all collective goods. But what if the domains of modern political-economic life could not be understood or organized by relying only on the concepts of markets or states? What if we need "a richer set of policy formulations" than just "the" market or "the" state? Answering that challenge is probably the best way to see Ostrom’s work on governance and common pool resources: It’s an empirically-based contribution to a larger and bolder attempt to build an alternative to the basic dichotomy of modern political economy, an effort to find an alternative to the conceptions derived from Smith and Hobbes.

“The presence of order in the world,” Ostrom writes, “is largely dependent upon the theories used to understand the world. We are not limited, however, to only the conceptions of order derived from the work of Smith and Hobbes.” We need a theory that “offers an alternative that can be used to analyze and prescribe a variety of institutional arrangements to match the extensive variety of collective goods in the world.” In response to that need, Ostrom has explored a new domain of the complex institutional reality of social life—the rich institutional arrangements that are neither states nor markets. These are for-profit or not-for-profit entities that produce collective goods for “collective consumption units.” Examples of such “consumption units” abound. They are small and large, multi-purpose or just focused on one good or service: suburban municipalities, neighborhood organizations, condominiums, churches, voluntary associations, or informal entities like those solving the common-pool resources dilemmas studied and documented by Ostrom around the world. Yet, once the functional principle behind them was the identified, the very diverse forms could be understood as part of a broader pattern, and the logic of the institutional process involved could be revealed with relative ease. They could be seen as a “third sector” related to but different from both “the state” and “the market”.

And thus Ostrom’s study of governance is not only a source of inspiration, it is also a challenge to libertarians. In study after study, she has shown that the principles of individual freedom, responsibility, entrepreneurial creativity, and resourcefulness apply not only to the production and distribution of private goods, they also apply to a large institutional domain outside the market order. This “third sector,” which is “neither state nor market,” may in fact be as important a battleground for the preservation of a free and prosperous social order as the market itself.

Paul Dragos Aligica is a Senior Research Fellow at the Mercatus Center. He is the co-author (with Peter Boettke) of Challenging Institutional Analysis and Development: The Bloomington School (Routlege, 2009). He studied with Elinor Ostrom at Indiana University, Bloomington. This column first appeared at Reason.com.