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Treating Wall Street Like the Mafia

anthony.randazzo@reason.org (Anthony Randazzo) — Fri, 20 Nov 2009 13:53:00 EST

Perhaps Senate Banking Committee Chairman Chris Dodd (D-Conn.) thinks of himself as a modern day John Sherman. In 1890, Ohio Sen. Sherman set out on a mission to establish “just competition” laws and level the economic playing field. His quest culminated in the dismantling of monopolies—such as American Tobacco and Standard Oil—and the passage of new laws prohibiting malicious competitive practices. In a similar way, Dodd now seeks the power to tear apart any company he considers a risk to the national economy. But unlike Sherman, Dodd isn’t out to create the best possible conditions for competition to thrive. He’s out for blood.

Dodd’s plan for overhauling Wall Street regulations, released last week, includes a proposed new organization: the Agency for Financial Stability (AFS). This new regulator would be tasked with identifying and addressing “systemic risks posed by large, complex companies as well as products and activities that can spread risk across firms.” This represents one piece of the most extensive proposal to reform financial services regulation—topping even the ridiculousness of the Obama plan and Barney Frank plan. Which is saying a lot.

The financial crisis has made off with nearly $30 trillion in global wealth. Dodd believes Wall Street banks and other financial institutions are the chief culprits in this dubious economic caper. And to exact revenge, he will push for some of the toughest, most expansive regulatory powers to date.

To do this, Dodd plans to go Elliot Ness on Wall Street, using economists and accountants as if they were FBI agents. Only instead of targeting Al Capone and Big Angelo Lonardo, these number-crunchers would be given nearly limitless power to hunt down systemic risks inside America’s financial institutions.

Here’s one of the biggest problems with this (and with the Obama and Frank plans, too): the government offers only a dangerously vague definition of what constitutes a financial institution. So not only would Goldman Sachs and JP Morgan Chase qualify, but firms like Wal-Mart, Ford, and Texas Instruments—not exactly the companies you think of when discussing Wall Street regulation—might be subject to higher compliance standards as well. It all depends on the subjective whims of the Agency for Financial Stability.

As outlined in the Dodd plan, AFS would be an independent agency, one whose chairman was appointed by the president and confirmed by the Senate. It would also have a 9-member board comprised of federal financial regulators and an independent expert.

The structure is similar to President Obama’s proposed Financial Services Oversight Council. Both of these proposed overseers would monitor the market for systemic risks, and would possess the authority to collect information from financial institutions as needed. The major difference is that where the Obama council would only have the power to designate firms as “Tier 1” companies, a category that would require stricter regulation, Dodd’s agency would actually have the power to break-up those companies considered too big to fail.

In other words, an Agency for Financial Stability would enjoy unprecedented power over the private sector. Presently, if the government wants to take a large firm apart, it must first take its case to court, proving that the company is either a monopoly or that it is maliciously attacking its competitors.

Yet not only would Dodd’s AFS write rules for capital requirements, leverage limiting, and risk management compliance, it would also have the authority to treat Wells Fargo or UBS like the Bonanno crime family.

Which means that the risk of undue political influence is palpable. Let say’s enough people come to believe that Goldman Sachs is secretly controlling the Treasury Department, as Rolling Stone’s Matt Taibbi so viciously claimed. All those people need to do is pressure the government into taking the company apart on the grounds that it’s size has become too critical to the economic health of the nation. There are certainly enough anti-Goldman Sachs staffers on Capitol Hill to make that happen. And it doesn’t take a follower of Ayn Rand to imagine a scenario where flimsy justifications like “to expand competition” and “create a fair playing field” start rolling off the tongues of aggressive AFS agents.

Nor is the Agency for Financial Stability the only part of the Dodd plan worth worrying about. His regulatory overhaul proposal also includes a Consumer Financial Protection Agency, similar to the one currently being considered in the House. Even more aggressive than Rep. Frank’s version, this consumer agency would also ultimately protect the market to death.

The Wall Street Journal pointed out last week that the Dodd overhaul plan would open up anyone who associates with someone accused of fraud to civil suits, even if prosecutors have no proof or are just on a fishing expedition. The Dodd proposal also repeats the errors of the Obama plan on issues like derivative reform, hedge funds, and executive compensation.

There are a few good ideas in the proposal. Consolidating federal banking rules into a single regulator could do a lot to simplify and refocus banking rules. Though that reform shouldn’t be kept separate from consumer protection concerns, and it would be inappropriate for the regulator to force the various charters under its supervision into one-size-fits-all regulations.

The Dodd plan also requires large firms to provide “funeral plans” outlining how they could be quickly and effectively shutdown in the case of an emergency. In theory, this is just a part of responsible risk management. But the Dodd plan treads into dangerous waters by giving AFS the authority to approve or reject such plans.

In the end, the Dodd plan is on the highest order of hubris. Politicians in Washington honestly believe they can fix the economy and prevent future calamity. Sure, they weren’t quite right when they “fixed” the system after Enron, or when they “reformed” the rules under Clinton, or when they “fixed” everything after the Savings and Loan Crisis. But this time will be different! At least Elliot Ness knew enough to change tactics after several initial failures to capture Al Capone.

The current financial crisis was largely brought about by well-intentioned regulations that just got it wrong. We thought that 8 percent was enough capital for banks to hold onto in case they ran into trouble. We thought that subprime mortgage-backed securities were decreasing risk. We were wrong on both counts. We can’t anticipate every risk. Under the Dodd plan—like the Obama and Frank plans before it— we’ll be proven wrong once again.

Anthony Randazzo is a policy analyst for Reason Foundation. This column first appeared at Reason.com.

The Packets Must Get Through

steven.titch@reason.org (Steven Titch) — Thu, 19 Nov 2009 15:21:00 EST

The Consequences of Net Neutrality Regulations on Broadband Investment and Consumer Welfare

This essay originally appeared in "The Consequences of Net Neutrality Regulations on Broadband Investment and Consumer Welfare" published by the American Consumer Institute.

To the ears of the American consumer, a rule that would require phone, cable and wireless companies to treat all Internet and Web applications the same way—with no favoritism shown—might sound like a fair deal.

From its start, open access is what the Internet has been all about. Indeed, consumers should be able to access the Internet and Web applications they wish. Any individual, business or organization who wants to set up a web presence, from a personal blog to a major e-commerce site, should face no barrier to reaching users.

No one wants to take the Internet’s resources or utility away. Yet the proposal by the Federal Communications Commission (FCC) to create a “non-discrimination” rule, which would come under the general heading of network neutrality, although intended to preserve robust, open and quality access to all Internet applications, stands to have the opposite effect.

The non-discrimination rule, if enacted, would prohibit telephone companies, cable companies, wireless companies and other Internet service providers (ISPs)—the companies that built and own the local and long distance networks that carry Internet traffic—from applying any technology, technique or software that would prioritize, organize or otherwise structure Internet traffic so that it is delivered faster, has a guaranteed level of quality, or is partitioned in such a way that it does not slow or impede other traffic. While the FCC’s Notice of Proposed Rulemaking on network neutrality, released October 22, 2009, would allow vaguely defined “reasonable” network management, the NPRM also stated “that a bright-line rule against discrimination… may better fit the unique characteristics of the Internet.”^₅₆

To support his point, FCC Chairman Julius Genachowski says the non-discrimination rule was a founding principle of the Internet.57 To call it a “principle” is somewhat misleading. It is true that when network engineers developed the Internet Protocol (IP), it was designed to use the intelligence in the computers and routers at each end of the connection. That was because at the time, the late 1960s and 1970s, there was no intelligence in the telephone network to perform even the most basic of quality and prioritization functions. Non-discrimination was a necessary condition of the early Internet, not a prescribed rule as to how Internet transmission would always work.

The Internet: Then and Now

Today, 40 years since the first Internet connection was set up, network transmission technology is far different. The public communications network does hold the intelligence to improve, enhance and prioritize Internet traffic. In private networks, it already does. In wireless, the entire history of technology evolution is about finding ways to fit more data into a radio channel of fixed space. Some of these techniques, because they grant transmission priority to certain applications over others, allowing data applications on devices like iPhones and BlackBerrys to work, would likely be considered discrimination under the FCC’s new rule.

Second, and perhaps more important, today’s Internet applications are a far cry from the simple text characters transmitted at 300 bits-per-second (b/s) over those first connections.

Think of the ways you’ve used the Internet today. You’ve probably sent email, maybe with photos or lengthy documents attached. Perhaps you’ve made a clothing purchase, or paid your credit card bill. Maybe you’ve downloaded some music, or watched a video from YouTube, Netflix or Hulu.

Did you use your wireless phone to send a text message on your way to work? To update your picture on Facebook? To check up your fantasy football team? Your cell phone uses the Internet, too.

When you badged into your office, your building’s security system likely used the Internet to verify your employment status and let you in. In fact, your company’s entire security network, from video surveillance to fire alarms, probably uses the Internet, especially if it is spread over several buildings and locations.

Then there are all the unseen transactions that occur within the network itself. Search engines constantly crawl the Web collecting keyword data from Websites worldwide. When you perform a Web search, data from thousand of servers are instantly correlated, packaged and delivered to your desktop, with ad links that correspond to your search parameters. The Web-based financial transaction that occurs in seconds involve multiple links and data exchange between you, the retailer, your bank, the retailer’s bank, a credit verification database and any other party with a stake in the transaction.

As you might imagine, all this adds up to an enormous amount of data moving across the network. Indeed, Bart Swanson and George Gilder have been tracking the growth of Internet traffic since early this decade. In January 2008, using data from Cisco Systems, the world’s leading supplier of Internet switches and routers, Swenson and Gilder reported that monthly Internet traffic in 2007 had reached 2.5 exabytes, or 2.5 quintillion bytes (2.5 x 1019), up from approximately 1 exabyte in 2005. Cisco projected monthly Internet traffic would reach 5.5 exabytes by 2009 and 9 exabytes by 2011.58

While there is vast amount of bandwidth capacity in the public network, vast does not mean unlimited. And while investment in infrastructure continues, the costly deployment of more physical facilities—fiber optics and cell antennas—should not be legally locked in as the only solution growing bandwidth consumption.

Besides, construction of more physical facilities only addresses the congestion problem. You may indeed speed traffic by building more lanes, but the expanding diversity of Internet and Web applications creates quality requirements that can’t be solved by the addition physical facilities alone.

This is where the non-discrimination principle of network neutrality would create massive problems for users and applications providers. In order for some applications to function correctly, their data may require special treatment as it crosses the network. This is especially true with video, which is both data-intensive (a 10-minute, low-resolution YouTube video can be 100 megabytes) and error-sensitive. In fact, enterprises which put a lot of video on their networks, such as in the building security example above, use techniques such as bandwidth management, partitioning and packet prioritization to make sure video is transmitted effectively yet does not interfere with the flow of mission-critical enterprise data. It’s troublesome that the FCC would prohibit in the public sphere techniques that are indispensible to smooth operation of business networks.

Packets and Prioritization

Since it is key to understanding the unintended consequences network neutrality presents, let’s examine what we mean by data packets and packet prioritization.

The way the Internet Protocol is engineered, data—all those ones and zeros—travels the network in packets. The term is apropos. Think about the way you send a letter. You write your message on a piece of stationary and place it in an envelope, which you then address and mail. The post office uses the information on the envelope to route your letter to the intended recipient. If there is a problem, the letter is returned to sender, using the return address, also written on the envelope.

Data packets work the same way. A string of data is bundled into an electronic packet. The packet’s envelope, or header, contains the destination information, in the form of an IP address. The network routers read this information and send the packet to its destination. If something goes wrong and the packet can’t be delivered, the network signals the transmitting end, akin to a “return to sender.” The transmitting computer or router sends the packet again and continues to do so until the machine at the other end acknowledges receipt.

The only difference is that on the Internet, an application, be it an email, image or video, contains thousands, if not millions, of packets. When we mail a letter, we can send the whole message in one envelope. On the Internet, it is more akin to sending your letter one word at a time, leaving it up to your recipient to wait for all the envelopes to arrive, then to assemble the message. And, as with the post office, on the Internet packets may not arrive in the order they were sent. As a sender, you will have to rely on the intelligence of your recipient to reorder the packets and reconstruct your message. If one packet is lost or damaged on the way, your recipient may have to deduce the missing information. This, of course, adds time to the ultimately delivery and communication of your message. In Internet lingo, this delay is called latency.

This is why the Internet transmission is often referred to as “best effort.” It is practically the same principle as first-class mail. Computers send out data packets, they are transmitted across the network and arrive at their destination essentially when they get there.

Best effort is not as big a problem for email, documents and small files which can be assembled quickly. These applications can better tolerate latency and errors.

Other applications are far more sensitive to errors and latency. Take video streaming, for example. Video not only consists of much more data than most files, it also has to be delivered in the right order and needs to be assembled quickly.

Almost everyone has experienced freeze-ups while watching Internet video. These can be annoying with free services such as YouTube and Hulu. Imaging paying $10 to $20 for a streaming video only to have it fail partway through.

Latency is a major issue in gaming. If you’ve played Resident Evil online you know how frustrating it is to be killed by an oncoming zombie while you’re firing away with your mouse yet seeing no result on screen.

Fortunately, the post office does not employ the non-discrimination principle. In mail or shipping, senders can pay more for one- or two-day delivery. They can request a return receipt. They can insure valuable items against loss. All of these come at an extra cost, but they are not seen as unfair to individuals who use regular mail, nor do “fast lane” services interfere with standard delivery.

Under the FCC’s non-discriminatory rule, there would be no ability for providers of sophisticated applications to pay a premium to guarantee a higher level of performance. Nor could service providers charge the companies that use immense amounts of bandwidth—search engines, studios, media companies, peer-to-peer services—fees that would reflect the cost of the added management strain they place on the network. While the motivation is preservation of an open Internet, the outcome would be the opposite. The rules would demand ISPs follow 40-year-old data communications architectures that have already been surpassed. The result would be an expensive, slow, poorly performing Internet that would be unable to support bandwidth-rich applications.

On the other hand, there is every sign that foregoing Internet regulation would lead to the development of business models and market-based solutions that would create an environment where all types of applications could be supported and delivered; getting the network management support they need while avoiding interference with applications that work just fine with best effort.

The FCC argues that the market alone cannot manage competing interests when it comes to applications management on the Internet. Yet there has been no pattern of abuse. The non-discrimination rule comes in response to a single incident where a service provider used network technology to manage the way a third-party application worked. In October 2008, Comcast, the nation’s largest cable company, confirmed reports that it was intentionally slowing down the rate of voluminous video files that were being transferred via BitTorrent.com, one of many so-called peer-to-peer (P2P) sites that allow users to search for and exchange movies and TV shows between and among their own PCs. BitTorrent software is designed to set up as many simultaneous connections as possible between the user’s PC and BitTorrent’s file sharing site (the more connections, the faster the transmission). To keep BitTorrent users from flooding the network, especially at peak times, Comcast introduced software that limited the number of simultaneous connections the BitTorrent software could set up. BitTorrent users could still reach the site, but the rate of transfer was slowed. Comcast argued this network management decision was made to ensure service quality for the vast majority of Comcast Internet customers whose high-speed connections would be slowed by the amount of bandwidth P2P applications were gobbling up. Even cable industry critics such as George Ou, writing on ZDNet, conceded Comcast was within its rights to do so:

We can think of it as a freeway onramp that has lights on it to rate limit the number of cars that may enter a freeway… If you didn’t have the lights and everyone tries to pile on to the freeway at the same time, everyone ends up with worse traffic.^₅₉

What’s more, Comcast and BitTorrent negotiated an amicable solution that respected each other’s interest. Government handwringing over network neutrality has gone on for at least four years, yet the one instance of a dispute between a service provider and an applications provider over applications prioritization was resolved by market forces within weeks._⁶⁰

The necessity of the FCC’s network neutrality rules is questionable in general, but its Non-discrimination mandate is downright counterproductive. Consumers will be better off without it. In summary, here are some reasons why:

Regulation will increase consumer costs

The cost of the management required to support sophisticated applications should be borne by the companies that produce, market and profit from these applications. Network neutrality, especially the non-discrimination principle, will force service providers to shift those costs onto the public in the form of higher broadband fees. Even network neutrality proponents, such as Computerworld’s Mark Gibbs, admit this. “Now the downside: We’re going to have to pay more. There’s little doubt that regulated Internet service will probably be more expensive but that’s the consequence of doing what’s right for our society.”_⁶¹

Gibbs worries that if phone and cable companies can charge applications providers for prioritization and management, it will stifle innovation. That is not true. Fee-based network management services would, however, force entrepreneurs to develop business plans that account for the full cost of delivering service, a disciplined approach that is much more likely to yield long-run success all around. The network neutrality alternative sets up a dubious scheme that permits a business to privatize its gains from Internet commerce, while socializing its costs. It’s hard to see what’s “right for our society” about this.

There will be no cost check on commercial bandwidth consumption

When commercial bandwidth costs are socialized—that is transferred to consumers—businesses have no incentive to limit their exploitation of Internet capacity. The exaflood will only get worse as the largest users, immune from paying the cost of their consumption, grab as much bandwidth as they can. So in addition to paying more, as net neutrality enthusiast Gibbs states, consumers will find the Internet a slow, frustrating experience. Wealthier consumers may have the option of purchasing higher bandwidth options, such as fiber to the home, but with no check on the supply side, even that capacity stands to be consumed.

Smaller players will be hurt, not helped

The final irony is that non-discrimination is supposed to protect the proverbial “little guy.” Yet, with no partitioning or prioritization available for deep-pocketed companies, the smaller operations will be run off the road first. It would make sense for Fox or Universal to purchase a “fast lane” for its video feeds that are routinely downloaded by millions of users. The quality of this video might be better than what a local blogger can afford, but then again Fox and Universal can afford many things the lone blogger can’t. The point of the open Internet isn’t what the small Web site can afford; it’s whether the small Web site can be heard. When heavy traffic can be prioritized and partitioned, the small site gets through.

Many innovative applications will never be developed

Policymakers argue that non-discrimination on network management is needed to ensure the Internet remains an incubator for innovation. To counter this, let’s return to the post office analogy. Those who have visited Seattle may have come across the Pikes Place Fish Market, where each morning you can buy Alaskan king salmon that had been swimming the icy Pacific waters just hours before. At one time, if you wanted the best fish in the Northwest, you had to live in the Emerald City. Today, because of overnight shipping, Pikes Place Fish Market can deliver anywhere in the U.S.

For Pikes Place Fish Market, normal shipping (i.e., “best effort”), which can take three to seven days, was never an option, for obvious reasons. Its access to the national market, and the chance for consumers in Texas to buy superior seafood fresh from the catch would not have been possible without a premium choice for delivery.

The Internet works the same way. We already can name many existing services, like video and gaming, which would benefit from a fast lane. What we don’t yet know are the applications and services that will be created because there is a fast lane. Regulation closes these opportunities off.

For all the talk about preserving a free and open Internet, network neutrality’s non-discrimination rule would do neither. As bandwidth consumption increases almost geometrically, today’s Internet needs commercial options that include prioritization, bandwidth optimization, applications partitioning and packet prioritization. If the Internet’s going to work, the packets must get through.

Notes:
_⁵⁶ Federal Communications Commission, “Notice of Proposed Rulemaking: In the Matter of Preserving the Open Internet Broadband Industry Practices,” GN Docket No. 09-191, WC Docket No. 07-52, Oct. 22, 2009.
_⁵⁷ Julius Genachowski, “Preserving a Free and Open Internet: A Platform for Innovation, Opportunity, and Prosperity,” speech to Brookings Institution, Sept. 21, 2009.
^₅₈George Gilder and Bret Swanson, Estimating the Exaflood, Discovery Institute, January 2008. Available at http://www.discovery.org/scripts/viewDB/filesDB-download.php?command=download&id=1475.
_⁵⁹ George Ou, “A Rational Debate on Comcast Network Management,” ZDNet, Nov. 6, 2007, available at http://blogs.zdnet.com/Ou/?p=852.
_⁶⁰The Comcast-BitTorrent example, along with the two other cases on which the FCC is building its case for Internet regulation, as discussed in depth in my policy study “The Internet is Not Neutral (and No Law Can Make It So),” Reason Foundation, May 2009.
_⁶¹Mark Gibbs, “Network Neutrality: Doing the Right Things” Computerworld, Oct. 1, 2009. Available at http://www.computerworld.com/s/article/9138792/Network_neutrality_Doing_the_right_things?taxono myId=16&pageNumber=2.

Steven Titch is a policy analyst at Reason Foundation.This essay originally appeared in "The Consequences of Net Neutrality Regulations on Broadband Investment and Consumer Welfare" published by the American Consumer Institute.

Worse Than Taxes

info@reason.org (John Stossel) — Thu, 19 Nov 2009 13:49:00 EST

Bill O'Reilly is mad at me because I'm not mad enough about taxes.

Last week on The O'Reilly Factor, we talked about California's and New York's enormous budget deficits and planned tax increases. Those states would have big surpluses had they just grown their governments in pace with inflation. But of course they didn't. Now the politicians act like their current deficits are something imposed on them by the recession.

But that's nonsense. They created the problem with their reckless spending.

Let's look at the particulars. Had the government of New York state grown at the rate of population and inflation over the past 10 years, it would have a $14 billion surplus today. Instead, spending grew at twice the rate of inflation. So New York has a $3 billion deficit.

To dent California's deficit, bureaucrats will withhold an extra 10 percent from every taxpayer—at least from those who don't flee the state. New York planned to raise the price of new license plates, but then backed off. The visible tax was unpopular. But the hidden taxes grow.

Hidden taxes are more pernicious because they disguise what we pay for government. We blame merchants, not our legislators, for the high price of gasoline, liquor, cigarettes, and phone calls, but the money goes to the political thieves.

New York imposes a gas tax of 61 cents a gallon—almost a quarter of the cost of the gas. New York City taxes cigarettes at $4.25 a pack. Washington state collects $26 per gallon of hard liquor. Illinois politicians take a sneaky cut when you buy junk food: They add 6.25 percent to the cost of soda and candy.

My phone bill lists seven different taxes—unintelligible stuff like a "Public Safety Commission Surcharge" and an "MCTD tax." The payroll tax is one of the biggest hidden taxes. You assume that you know what you pay because it's listed on your paycheck, but that's actually only half of it. Employers must pay an equal amount—money that otherwise would have been part your salary.

O'Reilly was most indignant about the visible taxes. "You, Stossel, are going to be paying 45 percent of your money to the government!" he said. I replied that I already pay more than that, since I live in New York City.

But I apparently was not indignant enough, because later in his show he told comedian Dennis Miller, "Stossel doesn't get it."

O'Reilly is right about my not being furious. It's not that taxes don't anger me. They do. But I'm more angry about the arrogance of the ruling class. It reminds me of Walter Williams' riff: "Politicians are worse than thieves. At least when thieves take your money, they don't expect you to thank them for it."

Taxes, even counting hidden taxes, are not the real measure of what the thieves take. The true burden of government, the late Milton Friedman said, is the spending level. Taxation is just one way government gets money. The other ways—borrowing and inflation—are equally burdens on the people. (State governments can't inflate, but they sure can borrow.)

O'Reilly told me that America is ready for a tax revolt. I hope he's right. But I don't think it will happen until more people see the ruling elite for what it is: a gang of arrogant bullies that has the audacity to believe that they know how to direct our lives better than we do.

That's why, bad as the taxes are, I'm more upset about ObamaCare, Medicare, the "stimulus," the auto bailout, the bank bailouts, the Fannie/Freddie bailouts, the trillions in guarantees, and on and on.

The politicians' spending schemes represent presumptuous interference in our lives. They are an assault on our autonomy.

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.

My Body, Their Choice

peter.suderman@reason.org (Peter Suderman) — Wed, 18 Nov 2009 15:39:00 EST

"My body, my choice" has long been a rallying cry for abortion-rights advocates on the left, many of whom have recently been vocal supporters of the Democratic health care reform agenda. But as abortion advocates are now discovering, abortion rights aren't as easily compatible with health care reform as they might have once thought. Turns out the more government gets involved in health care, the more difficult it becomes to truly retain choices about one's body.

When House Speaker Nancy Pelosi (D-Calif.) first scheduled the vote on health care reform, it remained unclear whether she had enough support to pass the bill. Even amongst Democrats, there were still concerns, arguably the most important of which was whether or not the bill would allow federal money to fund abortions. At the last minute, Pelosi, working with Catholic bishops and pro-life Democrats, allowed a vote on an amendment sponsored by Rep. Bart Stupak (D-Mich.).

The text of the three-page amendment was straightforward: "No funds authorized or appropriated by this Act...may be used to pay for any abortion or to cover any part of the costs of any health plan that includes coverage of abortion." The amendment allowed exceptions for medical emergencies that put a woman at risk of death, and maintained that nothing in the amendment's language would prohibit a non-federal entity—whether a person or a state or local government—from purchasing supplemental coverage for abortions, provided that any such purchase isn't made using federal subsidies.

The amendment passed, and may have been the deciding factor in House passage of the bill. But now the amendment is causing trouble for Democrats in the Senate. And indeed, many liberals who support both health care reform and abortion rights now find themselves in a quandary, supporting health care reform while decrying an amendment that was likely the key to its passage.

That's because, given the scope of congressional health care reform proposals, the relatively straightforward prohibition on using federal funds to pay for abortions could have far-reaching consequences.

Most analyses of the amendment agree that the most significant effects will be in the individual insurance market. Under the reform bills now being considered, anyone who did get health insurance through his or her provider would be required to purchase it from an exchange—a government-managed marketplace of highly regulated insurers. The vast majority—an estimated 86 percent—of those who purchase their insurance this way would receive government subsidies, and thus would be barred from spending that money on any plan that covers abortion. These individuals could still purchase a separate abortion rider with their own funds, but the requirement that this be an additional (and unsubsidized) step almost certainly means that fewer individuals will end up with abortion coverage than would have otherwise.

Outside the exchange, there's some debate about whether the amendment would technically bar abortion coverage from some private, employer-provided insurance plans, though it appears less than likely. At The New Republic, Jeffrey Rosen writes that Stupak's amendment "wouldn’t immediately impinge on the roughly 60 million women ages 18-64 who presently get health insurance through their jobs or their spouses’ jobs." And Brian Buetler, a Talking Points Memo reporter who has written about the Stupak amendment, says that "the least-impacted women will be those whose employers (or whose spouses' employers) provide them insurance," but also notes that "over time, the reform packages under consideration allow ever larger employers to participate in the exchange."

Still, although it's not clear what the limits of Stupak's reach might be, some of the stronger warnings about its effects are clearly mistaken. At The American Prospect, for example, Ann Friedman wrote that "Stupak would actually prevent employer-based plans—ones that are not supported by your tax dollars—from covering abortion." But the analysis she links to argues that employer-provided plans could be affected because they are touched by federal funds used to pay for reinsurance and small-business wellness programs—in other words, that they would be barred from offering abortion coverage because they make use of those pesky taxpayer dollars.

For pro-choice, pro-reform liberals, this is exactly the problem: On the one hand, they support a massive expansion of government funding and bureaucratic control into nearly every corner of the health care system. On the other hand, they're incensed that the government would make rules about how that funding can be used.

It's grimly ironic: After spending much of the year ridiculing opponents of health care reform for insisting that reform would put government in between doctors and patients, they're now up in arms that government has gotten involved in decisions they believe should only be made by women and their doctors.

But if the history of bureaucracy teaches us anything, it's that what the government funds is what the government controls. Or, to put it another way: When the government gets involved in making everyone's health care decisions, it may be your body, but it won't be your choice.

Peter Suderman is an associate editor at Reason magazine. This column first appeared at Reason.com.

Menu Mandate's Missing Math

jsullum@reason.com (Jacob Sullum) — Wed, 18 Nov 2009 14:49:00 EST

The most conspicuous effect you will see from President Obama’s health care overhaul won’t be at your doctor’s office or the hospital. It will be at your local Burger King.

That’s assuming the Senate goes along with a provision, already approved by the House, that requires restaurant chains with 20 or more locations to display calorie counts on their menus. Although supporters claim such mandates have the power to make people thinner and prevent obesity-related disease, New York City’s experience suggests they have little or no impact, possibly because customers who are interested in nutritional information can already obtain it.

New York began requiring calorie counts on restaurant chains’ menu boards in July 2008. The first study to examine the regulation’s impact, reported in the American Economic Review last May, found that average calorie intake (measured by receipts showing what a sample of customers had bought) remained basically the same at a Manhattan coffee shop and at a Manhattan location of a hamburger chain while falling by 77 calories at a Brooklyn location of the same chain.

Another study of New York’s menu mandate, reported in Health Affairs last month, was even less encouraging. The researchers found that the average calorie count for meals at four fast food restaurants in poor neighborhoods (McDonald’s, Burger King, Wendy’s, and KFC) rose by 2.5 percent after the rule took effect.

Comparing interview responses to diners’ receipts, the researchers found that what people said did not correspond very well to what they ate. The share of diners who said they noticed calorie counts rose dramatically after the menu mandate kicked in, from less than 20 percent to 54 percent. But less than a quarter of those who reported seeing calorie information said it led them to consume fewer calories, and “even those who indicated that the calorie information influenced their food choices,” the researchers noted, “did not actually purchase fewer calories.”

The New York City Department of Health and Mental Hygiene prefers to cite its own, unpublished data, but even these numbers do not live up to the hype that preceded the menu mandate. Surveying 275 locations, the department found statistically significant drops in calorie consumption at just four out of 13 chains (McDonald’s, KFC, Au Bon Pain, and Starbucks).

It appears that all of these decreases were modest. The one highlighted by the health department was a 23-calorie drop at Starbucks, 9 percent of the pre-regulation average.

“We were not expecting to see miracles,” a health department official told The New York Times. But it’s hard to see how such weak results—which may not even represent net reductions, since people could easily make up for fewer calories at Starbucks by eating more elsewhere—can possibly stop 150,000 people from becoming obese and prevent 30,000 cases of diabetes over five years, as the health department predicted last year. Nor are they likely to translate into an average weight loss of three pounds a year, as the California Center for Public Health Advocacy claimed in pushing that state’s menu mandate.

Press coverage of the health department’s study emphasized a seemingly more impressive finding: Diners who said they saw calorie information and used it in deciding what to eat—15 percent of all customers—consumed 106 fewer calories than the other diners. But that difference cannot be attributed to the menu mandate, since diners who use nutritional information are apt to be the ones who were most calorie-conscious to begin with.

Such customers had this information even before New York decreed that it appear on menu boards, since fast food chains were already providing calorie counts on their websites and on posters, tray mats, and flyers in their restaurants. The impact of making the numbers more conspicuous was therefore limited to the customers who were least inclined to use them, and the same will be true if a similar menu mandate is imposed nationwide.

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

Globalization With a Human Face

shikha.dalmia@reason.org (Shikha Dalmia) — Wed, 18 Nov 2009 13:41:00 EST

Free trade is never more necessary—or vulnerable—than in times of economic distress. The current global downturn is no exception. Protectionist barriers have shot up all over the world, including the United States. Earlier this year, Congress killed a pilot program allowing Mexican trucks to transport goods across America and included “Buy America” provisions in the stimulus bill banning foreign steel and iron from infrastructure projects funded by the legislation. More disturbingly, President Barack Obama, after chiding Congress for flirting with protectionism, initiated his own ill-advised affair by imposing a 35 percent tariff on cheap Chinese tires.

If the world manages to avoid an all-out trade war of the kind that helped trigger the Great Depression after the U.S. imposed the Smoot-Hawley tariffs in 1930, it will be in no small part due to the efforts of one man: Jagdish N. Bhagwati, an ebullient and irreverent 76-year-old professor of economics at Columbia University. Bhagwati has done more than perhaps any other person alive to advance the cause of unfettered global trade.

A native of India, Bhagwati immigrated to the United States in the late ’60s after a brief stint on the Indian Planning Commission, where he learned first-hand the insanity of an economic approach that tried to modernize a country by cutting it off from world trade. Since then, he has devoted his efforts, both in academia and in the popular press, to showing that there is no better way of improving the lot of both advanced countries and the developing world than through free trade. His path-breaking contributions to trade theory have put him on the short list for a Nobel Prize in economics.

Though a dogged trade advocate, Bhagwati is anything but dogmatic. He is a free spirit who draws intellectual inspiration from many disparate ideological camps. A self-avowed liberal, he is also something of a Gandhian social progressive, though Gandhi himself supported economic autarky. Bhagwati works with numerous Third World NGOs on a host of human rights issues. Yet he has no problem taking on these groups—or his famous student, Nobel laureate Paul Krugman—when they question the benefits of trade. In fact, he devoted his 2004 magnum opus, In Defense of Globalization, to a point-by-point rebuttal of these critics. Although he doesn’t vote Republican because he dislikes the party’s nationalistic jingoism, he readily declares that Democrats pose a far bigger threat to international exchange than Republicans.

This summer Shikha Dalmia, a senior analyst at the Reason Foundation, interviewed Bhagwati in his New York office.

reason: You have been on the short list for a Nobel Prize in economics for your contribution to trade theory. Could you explain what your main contribution is?

Jagdish Bhagwati: My breakthrough in trade theory was very simple, as all breakthroughs are. Back in the 1950s, when the case for free trade was widely regarded as less compelling analytically than today, protectionists had one very powerful argument on their side. They noted that a country necessarily benefits from free trade only when markets are perfect—that is to say, only when market prices reflect true social costs can we expect these prices to guide allocation correctly. Take pollution. Say your production process makes you spew things into the air and water but you do not have to pay for this pollution. Then the social cost of harming others is not being taken into account by you and hence your production costs are less than the “correct” social costs.

So you could take two points of view. The time-honored view was that when there is such “market failure,” or what might be better called a “missing market,” the case for free trade was compromised and any form of protectionism was justified. I argued that if you had a market failure, fix that, and you are back to perfect markets and the legitimacy of free trade. So, for example, you can have a polluter-pay principle on the environment. If you do that, then there’s no damaging spillover which has not been taken into account.

The proper policy response then is not to abandon free trade but rather to fix the market failure and then to embrace free trade. This was a revolutionary thought. For 200 years, serious economists had abandoned free trade in the presence of market failures of one kind or another.

reason: In Defense of Globalization was addressed to non-academic critics of free trade and globalization who claim that globalization does not have a human face. What was your argument?

Bhagwati: When I was in Seattle in 1999, when everything went haywire as far as trying to get a new round of trade negotiations, I realized that the young people who were agitating, and some of the older folks also, were not interested in whether trade was good for national income and prosperity. They were claiming that globalization has an adverse impact on a whole lot of social issues—gender equity issues, environmental issues, the effects of globalization on the polity and democratic rights. In short, to use the fetching phrase, they were concerned that economic globalization lacked a human face.

My book addressed precisely such issues. I found that, contrary to the fears of the critics, most social agendas were advanced rather than handicapped by globalization. Globalization, I concluded, had a human face.

Take women’s issues, for example: If you look at what happens to the gender gap on pay inequality, it turns out that you can make a perfectly solid argument that in fact it’s narrowed rather than widened as a result of international trade. The reason is very simple: If a man is paid twice as much as a woman, when they are both equally competent, that is inefficient. So when you are engaged in international competition, you’re really not going to be able to indulge your prejudice in this way. This will lead to more demand for women and less for men, bringing pressure to bear on their relative wages in the direction of greater pay equality.

Two brilliant young women, Sandra Black and Elizabeth Brainerd, did their dissertation at Harvard on this hypothesis. They found that in two decades in internationally traded industries in the United States, the gender wage gap narrowed faster than in non-traded industries. Trade had thus been good for an important social objective, not a drag on it.

reason: You still hear the argument—President Obama made it during his campaign—that we want fair trade, not free trade.

Bhagwati: In the United States the phrase “fair trade” holds a lot of sway, because fairness is an important issue here. In the United States it’s the equality of opportunity, not of outcome, that matters. We have a fairness-oriented culture. The Europeans, who are actually more stratified—they’re more into equality of outcome. The social mobility of people is much less, so they want the state to intervene and redistribute. They’re more into justice and we’re more into fairness.

So if you want to be a protectionist in the U.S., you’ve got to say that these Japanese or these Indians are trading unfairly. People will much more readily give you protection if they think the other guy is a wicked unfair trader.

President Obama hasn’t really understood the case for free trade because I don’t think he’s been too interested in trade. His background is as an activist working with the poor people, so he hasn’t thought about these issues. So he ends up listening to other people, and a lot of people who are protectionist are around him, particularly the unions, who are afraid of international competition. But they dress up the fair trade argument in altruism, that they’re doing it to raise the labor standards and wages of workers in India and Brazil and so on and so forth, when in fact, they’re doing it to protect their own workers from competition. The president doesn’t seem to realize that this is something which other people, whom you pretend you’re trying to help, actually see as a naked, cynical ploy.

Instead of pandering to union fear, Obama has got to engage them. You have got to help these doubting Thomases confront their fears. He’s got to say that trade with the poor countries is actually helping, not hurting, you. The unions’ main fear is that unskilled jobs are disappearing. They see these jobs being taken up elsewhere where the labor is cheap. But they can’t hold onto these jobs anyway. What they get in return from trade are cheap products that they need as consumers. So free trade moderates the downward pressure on their real wages.

Big portions of the wages of poor workers go toward low quality textiles, for instance. That is well-established. But if you look at the structure of protectionism, if you go and buy something from Anne Klein that’s going to be expensive, but it carries no tariff at all because these high-end designers compete on variety. Tariffs matter where the competition is on prices. So the low-quality items which poor people buy end up carrying higher tariffs than high-end items that rich people buy.

reason: So free trade’s harm to union workers as producers is minimal, but the harm to them as consumers would be very great if we didn’t have free trade?

Bhagwati: Yes. So what President Obama has to do is basically change the ethos in this country so that it understands that the United States has profited enormously from free trade. Free trade has rescued India and China from poverty, yes. But the U.S. working class has also profited from international trade.

He’s got to make an eloquent case like that. He’s got to see that this is something that needs as much attention and as much of his eloquence as the speech he made on race after he got into trouble over his pastor.

But then to move the case of free trade forward, the Obama administration has to show global leadership, because the U.S. is the biggest trading country. He has got to make sure that the stimulus package and everything that he does is completely consistent with openness. I think he’s got to understand this is not something he can keep postponing and postponing.

When President Clinton came in the first year, he was into Japan bashing and he hadn’t made up his mind on whether he wanted trade or not, because he had advisors on both sides. So his first year was extremely tentative. Then he made up his mind and was fiercely pro-trade after that. President Bush, the junior, he too gave into steel tariffs when he first came in, but after the first year, when he found his feet, he was very pro-trade.

President Obama doesn’t have that luxury because the weaknesses are showing in the way the stimulus is being designed and played out. So someone has to tell him very clearly that he doesn’t have the luxury of most presidents, which is to use a first year to find your feet on trade. He’s got to be out there and he’s got to provide the leadership. He’s got to bring in the people who waiver and dither, the AFL-CIO, the Democrats who are indebted to the AFL-CIO, and say: “Look, you’re wrong. Here, let’s have a debate.” There are lots of Democratic economists who’d be able to engage these guys in a proper debate.

reason: In recent years, the opposition to free trade hasn’t just come from left-wing unions, but also people on the right who fear that outsourcing will cause the U.S. to lose its economic edge as it imports high-value-added products and exports low-value-added ones. How do you respond to that?

Bhagwati: It’s an irrelevant argument. To say that the United States should be exporting high-value items rather than low-value items is itself a fallacy. But America’s great comparative advantage lies in innovation. For someone like me who has come from India it is very obvious that this country is full of innovators. When I was a student I read about Britain’s Industrial Revolution. And it was powered by all kinds of people, inventing the spinning jenny and so on. They were like little Americans, you know, thinking of new ways of doing things and making a buck. Almost every other American I know is thinking about something, some way to do something. We are a highly inventive people, and technology therefore is our driving force. It’s not savings and investments which are driving our productivity. It’s technology and innovation and immigrants like me—not me in particular—lots of people who come here and by the second generation go through the mill and become Colin Powell or Orlando Patterson at Harvard.

Nobody can compete with us in the long run, in my view, because these are not advantages which people in traditional societies can reproduce. So we’re always going to be doing high value. We’ll lose the high value we generate to others quickly because now technology diffuses very fast. But then we’ll have new ideas, new technologies.

reason: Which side poses the bigger threat to free trade, conservatives on sovereignty, neo-mercantilist grounds, or liberals on equity and environmental grounds?

Bhagwati: In the U.S., I think the Democrats are the biggest threat to free trade. I don’t see the right-wing threat to globalization in terms of sovereignty as being a major one, frankly.

Conservatives are principled people, so they have Edmund Burke type of reservations about continuous change and so on. But they are not people who are going to undermine the rule of law when it comes to trade. Even their arguments against immigration are rule-of-law arguments. Anti-globalization noises saying we’ve lost our sovereignty and so on and so forth, it’s not going to get very far in the U.S. system.

The threat from the left, on the other hand, is much more serious because they oppose free trade on equity grounds. I love America. I have settled in it. But there is a tendency, particularly on the part of the Democrats, to become totally self-righteous on everything and this is the way it has to be and if you disagree, then you’re a Republican. I mean, that’s the way they argue it. It’s unbelievable. They don’t want to argue the merits of the case.

reason: Why do you think Republicans are better on free trade than Democrats?

Bhagwati: Both the last Bush and Ronald Reagan believed in America. They thought that their own people could win. That made them more prone to accept international competition and trade.

They carried that attitude over into politics, of course. For instance, President Reagan won the Cold War by pushing Gorbachev to the limit. But he was lucky. President Bush went into Iraq with the same attitude, and that was unfortunate.

But since they both believed that Americans would win, they were good on international trade, although maybe for the wrong reasons. Democrats don’t believe that America can remain number one, and hence they cannot bring themselves to be completely in favor of open markets.

reason: You are a big believer in multilateral trade agreements over bilateral trade agreements. What’s wrong with bilateral trade agreements?

Bhagwati: Free trade agreements and protectionism are two sides of the same coin. When I have free trade just with you, I’m freeing trade with you but I handicap those who are not members of our free trade area. They have to keep paying the duties to get into our markets. So that becomes a de facto way of increasing protection against outsiders. Multilateral free trade would be a closer thing to pure free trade.

But there are two additional worries about bilateral trade agreements: One, we don’t just have two or three free trade agreements. Today there are close to 500, and every week there’s another new one being constructed. As a result, you’re getting all kinds of special tariffs, rules of origin, and other things multiplying in the system, something which I’ve called the spaghetti bowl. Exporters rightly get upset by the large numbers of tariffs they face depending on where you’re coming from.

Two, how do you enforce these agreements in a globalized world? It’s very chaotic. Parts are coming from everywhere. For a country to have to then decide which product is my partner country’s product rather than an outside country’s product becomes completely arbitrary. A car produced in Canada with Japanese steel and German chemicals, where 80 or 90 percent of the parts may come from elsewhere—is that a Canadian car or is it really something else? Does it qualify for the zero tariff under the North American Free Trade Agreement or not?

reason: Was NAFTA a mistake?

Bhagwati: I think in retrospect, yes. It’s not a slam dunk argument because it did bring in Mexico. Otherwise, they were talking about CAFTA which included just Canada and the U.S. But when you brought in Mexico, it made it a much bigger thing.

President Clinton was carrying on the multilateral negotiations in tandem with NAFTA. But NAFTA created worries on the part of the unions here, because this is a poor country and they were worried that Mexican competition would really hurt their wages. So even though the multilateral talks would’ve gone through without any difficulty, President Clinton ended up having to fight very hard for NAFTA, which survived by a very narrow majority. In order to win NAFTA, he had to give in on things like labor standards and so on. That’s when all these social things became part of trade deals. From there, it never looked back.

So in retrospect, I would say, because of the concessions they had to make, Clinton started us down a road which really has been counterproductive.

There is another thing to worry about. When you look at a trade agreement like NAFTA, it’s about that thick (holds his hands about two feet apart). When I debate people like Lori Wallach of Public Citizen, she arrives with a lot of books, and among them is this NAFTA treaty she carries for effect. I hope she gets a hernia from doing this often enough, because it looks pretty heavy to me. I wouldn’t be carrying it around. Anyway, she shows this book and asks, “Is this free trade?” And mad as she is, she’s right to raise that issue. You should be able to say maybe in 10 pages that in these sectors we are going to liberalize and so on. But nine-tenths of what’s in these agreements are things which have nothing to do with trade. Labor standards, environmental standards, intellectual property rights. If I were Jane Fonda, in order to sell more workout tapes, I could put into the agreement a clause that the president of Mexico has to do his exercise to my tapes. And it would go in, because ours is a lobbying culture and nobody really would know that it’s there. Because who opens these things except the lobbyists?

So many developing countries are now waking up to the fact that they’re being sold a bill of goods in the form of trade agreements.

reason: Do you think a global externality problem like global warming poses a fundamental threat to free trade?

Bhagwati: I think it depends on the way you do it. First, you’ve got to decide whether there is a problem of an externality. I have doubts about these scientists who claim to have a consensus on global warming because, you know, Freeman Dyson, a great scientific figure, says these guys are really low-level scientists and I’m told by many that they, in fact, are. And if they reach a consensus, I don’t care. I mean, that’s the consensus of incompetents.

But so long as only the scientists were talking about global warming, nobody paid the slightest attention. Remember, not a single senator voted for the Kyoto resolution back in the ’90s. Even Al Gore and Clinton had to walk away from Kyoto. But then the polar bears were threatened, the glaciers began to melt, and then that great French film about the penguins which touched all our hearts came out. So these were three whammies. Even if you live in Peoria you will understand, wrongly maybe, that global warming is a problem. I tell all my students: If they think of something like that for free trade, please let me know.

What countries like India and China are saying is that if the CO2 was accumulating and it’s going to create a disaster, then that took a lot of time to establish. So they want the West to bear primary responsibility for the damage it has caused in the past. If America applies some kind of a carbon tax and it says that if India and China don’t impose a similar tax, it’s going to use what is called border tax adjustment, then that is protectionism. And there’s no reason why Indians and Chinese have to accept this. Just as America was not willing to accept it when it didn’t sign onto Kyoto and Europe started threatening a countervailing duty on American exports. But everybody reacted to that talk and said this is a cockeyed thing to do. Peter Mandelson, who was the EU Commissioner, said it was very unwise because the United States will retaliate.

It’s ironic that we are now using exactly that kind of threat on India and China. But America’s fuel tax is so much lower than that of most other countries, except the Middle East. So India and China are going to hit us because we had a low gas tax for a long time. And all hell would break loose. India and China are big guys. They can get legal [World Trade Organization] retaliation against the U.S. Or India could take away contracts from Boeing and give them to Air France. It can have nuclear reactors go to France rather than to G.E. Caterpillar would be shut out.

So I suggest a different way. If in our own U.S. system you’re going to get your companies to clean up under the Superfund Act, that’s a tort principle which we accept. Then we ought to be willing to pay in some form to other poor countries for the past damages. The West has completely ignored this suggestion so far. It has provided maybe a few million dollars in assistance to Third World countries for this purpose. But if the West seriously starts contributing to this fund, Third World countries could get anywhere from $150 million to $1 billion to mitigate global warming.

reason: This is a political non-starter, you know.

Bhagwati: Yes. But the president actually has made some remarks about border tax adjustments not being such a good idea. He’s got to do more than that. He’s got to say this is a crazy thing to do. He’s still very cool—he needs to lose his temper once in a while. Because it’s too important. The U.S. is one of the biggest trading nations in the world. We want the rule of law. We don’t want retaliation, which would be massive. India and China are not Zaire or Zimbabwe. They’re not little countries you can push around. We don’t want to unleash that kind of trade war, because it would be very hard to control, I’m afraid.

Shikha Dalmia is a senior analyst at Reason Foundation. This interview first appeared at Reason.com.

That Darn Mandate

shikha.dalmia@reason.org (Shikha Dalmia) — Wed, 18 Nov 2009 11:17:00 EST

ObamaCare has nothing going for it anymore. With unemployment touching double digits, its economic timing is bad; with polls showing tanking support in every group outside of the narrow sliver of die-hard liberal reformers, its political timing is bad; and with the Center for Medicare and Medicaid Services last week saying that it'll add billions to the already out-of-control deficit, its fiscal timing has gone from bad to awful.

So how are Comrades Pelosi, Reid and Obama able to march ahead with their grand designs undeterred? One reason is that Republicans have done precious little to seize the moral high ground from them. By insisting on the removal of the public option—instead of the individual mandate—as the price of doing business, Republicans have missed a major opportunity to put Democrats on the defensive and change the terms of the debate.

Republicans threw down the gauntlet on the public option—a government-funded, Medicare-style insurance plan that will compete with private insurance—in a June letter to Obama. "Washington-run programs undermine market-based competition through their ability to impose price controls and shift costs to other purchasers," they said. "The end result would be a federal government takeover of our health care system, taking decisions out of the hands of doctors and patients and placing them in the hands of a Washington bureaucracy."

True. But the problem is that Democrats don't need the public option to engineer a "federal takeover of our health care system." All they need is the power to force Americans to purchase insurance.

A mandate will fundamentally alter the relationship between Americans and their government. Instead of the government being accountable to them, they will become accountable to their government. No less than the Congressional Budget Office—a non-partisan government agency—once admitted as much. "A mandate requiring all individuals to purchase health insurance would be an unprecedented form of federal action," it noted. "The government has never required people to buy any good or service as a condition of lawful residence in the United States."

If the government can force Americans to buy coverage on the threat of fines or even imprisonment—an option that Nancy Pelosi has pointedly refused to rule out—every other government diktat becomes small potatoes by contrast. In fact, it becomes necessary. If uninsured Americans must buy coverage, why shouldn't other Americans be taxed to subsidize them? Why shouldn't the insurance industry be required to sell them coverage? Why shouldn't government set insurance prices to ensure affordability? Why shouldn't doctors and hospitals be asked to charge only "reasonable" rates—or offer only government-sanctioned treatments? Nothing about ObamaCare fundamentally changes so long as the individual mandate remains intact.

Therefore, instead of wonkishly droning about the public option, Republicans should counter Democrats' grand appeals for "universal coverage for all" with equally grand appeals for "medical freedom for all." They should stand together on the Capitol steps and issue the health care equivalent of Reagan's Berlin Wall ultimatum: "Mr. President: Tear up this mandate."

During the campaign, Obama himself successfully stopped poor Hillary dead in her tracks by reminding voters at every turn of her tyrannical plans to force them to purchase coverage. So why aren't Republicans doing the same to Obama?

The main reason is that they themselves are deeply conflicted about the mandate. On the one hand, every Republican on the Senate Finance Committee voted against it—except, of course, for Maine's Sen. Olympia Wavering-Heart Snowe. On the other hand, many Republicans, led by their intellectual lights at the conservative Heritage Foundation, among others, have long accepted—no, championed—the notion that unless people are forced to carry insurance, freeloaders who land in emergency rooms will cripple the health care system. Legislate personal responsibility, in other words. It was a Heritage plan for forced coverage that formed the blueprint for the Massachusetts universal care debacle that the then Republican Gov. Mitt Romney enacted.

Thus Republicans have no leg to stand on now that Obama, pulling one of his many switcheroos, has embraced the individual mandate. Heritage folks are trying to pull their own switcheroo by opposing Obama's mandate, saying what they had originally proposed for Massachusetts was not really a mandate but actually a self-insurance scheme under which an uninsured person would have to post a personal bond before being treated in an emergency room.

But countering mandates with bonds doesn't exactly make for a rousing rallying cry. Indeed, both ideas are based on the mistaken diagnosis that the central cause of our health care woes is the cost of uncompensated care that the uninsured get. The fact of the matter is that this care accounts for no more than $40 billion of the country's $2.26 trillion health care bill—or less than 3% of total health care spending. This is less than what department stores lose to shoplifting every year. Several private hospitals that I visited in India last month make a fraction of the profits that American hospitals do but still reported treating up to 10% of their patients for free.

The mandate barring American hospitals from denying treatment to anyone who lands in emergency—the root of the supposed freeloader problem—certainly imposes a heavy burden on some hospitals, especially in inner cities. But it is far from clear that it forces American hospitals as a whole to provide more charitable care to the uninsured than what they would have without it. It would certainly be worthwhile at some point to consider policy options to replace this mandate with mechanisms to strengthen voluntary charity by hospitals and others. In the meantime, however, there is zero evidence to suggest that this mandate is imposing a crippling enough burden on hospitals to warrant mandates on everyone else as well.

The Republican strategy for defeating ObamaCare consists of notifying: seniors that they will face rationing and loss of private Medicare options; the uninsured that they will face fines and possibly jail; the young and healthy that they will have to subsidize the old and sick, etc. Alerting Americans to the personal dangers they will confront under ObamaCare is certainly a legitimate part of the political process.

However, the downside of a strategy based entirely on fear is that even if it succeeds now, it won't help to define the proper terms for a genuine solution in the future. For that, Republicans have to offer a principled critique of ObamaCare that delineates the sharp moral choices that Americans face. The current health care battle is the domestic policy equivalent of the Cold War. Democrats are on the side of command-and-control mandates that deprive individuals of choice. Republicans should position themselves on the side of market-based solutions that empower--not enchain--patients.

Shikha Dalmia is a senior analyst at Reason Foundation and a bi-weekly Forbes columnist. This column first appeared at Forbes.com.

Bernanke's Philosopher

info@reason.org (Penn Bullock) — Tue, 17 Nov 2009 15:17:00 EST

When Ben Bernanke took charge of the Federal Reserve in 2006, the media made a few passing references that suggested he secretly subscribed to libertarianism. “I worked with him for years before I even knew he was a libertarian-leaning Republican,” the former Fed vice chairman Alan Blinder told CNN. The Wall Street Journal reported that Bernanke, “though a libertarian Republican …displays few partisan leanings.”

Last summer President Barack Obama re-nominated Bernanke to another four-year term atop the central bank, a reward for allegedly saving the world from a second Great Depression. Bernanke will arrive at his Senate confirmation hearings this January with an unbeatable recommendation. “As an expert on the causes of the Great Depression,” Obama raved in August, “I’m sure Ben never imagined that he would be part of a team responsible for preventing another. But because of his background, his temperament, his courage and his creativity, that’s exactly what he has helped to achieve.”

“Mission Accomplished,” the banner might have read.

Missing from Obama’s speech was any mention of Bernanke’s economic philosophy. These days, the media have taken to calling him a Keynesian—a believer in fiscal stimulus and the mixed economy. “We are all Keynesians again,” the liberal Washington Monthly headlined a January 2009 feature on the Fed chief.

In reality, Bernanke is following a monetarist depression-prevention model laid out by Nobel laureate and libertarian patron saint Milton Friedman. The Fed chairman has invoked the late economist in support of lowering interest rates to zero and bailing out banks. Trillions of dollars have been staked on the insights of “monetarism,” the economic theory of central banking and inflation-management associated with Friedman and Anna Schwartz. Though Schwartz now distances herself from Bernanke, opposing his reappointment on the grounds that he’s gone too far, the irony remains that a series of Fed policies many libertarians find repugnant are being championed by a man claiming to take his chief inspiration from the most influential libertarian economist of the 20th century.

A Monetary History of Ben Bernanke

The story begins in 1963, when Friedman and co-author Anna Schwartz published A Monetary History of the United States, an opening salvo in what Friedman called a “counterrevolution” against Keynesian theory. Their chapter on the Great Depression was spun off into a stand-alone book, The Great Contraction: 1929–1933, an epic revisionist history that changed America’s understanding of the causes of the Depression. Friedman and Schwartz contended that the Federal Reserve—not capitalism or Wall Street—was to blame for the dismal ’30s.

“The fact of the matter is that it was the [Fed’s] decision to tighten credit policy in 1928 that produced the Great Contraction,” the 93-year-old Schwartz says by phone from her office at the National Bureau of Economic Research in New York City. The Fed hiked interest rates in 1928 to curb what it saw as rampant speculation on Wall Street—a conflagration of leverage, margin buying, and outright Ponzi scheming fueled in the first instance by cheap credit from the Federal Reserve. (Goldman Sachs’ various pyramid schemes from that era, after they collapsed in 1929, generated losses of $475 billion in today’s dollars.)

Friedman and Schwartz rejected the widely held theory that speculation had been a major problem, or that there had even been a credit bubble in the 1920s. Bad loans and reckless banking practices were a “minor factor,” at most, in the Great Depression, they said. In this narrative, a Federal Reserve paranoid about speculation had needlessly constricted the money supply, imploding an otherwise sound economy.

After the Great Crash of 1929, the Federal Reserve drastically cut interest rates from a brief high of 6 percent to 1.5 percent by mid-1931. But during the first few years of the crisis, the Fed occasionally felt forced to abruptly raise rates again in complicated maneuvers to stem outflows of gold into Europe. Friedman and Schwartz blamed these sporadic interest rate hikes for smothering incipient recoveries, opening a vortex of deflation, and transforming a recession into the Great Depression.

“What the Fed had to do was increase the money supply,” Schwartz tells me. “By taking that action, it would have revived the economy. That’s the lesson of the Great Depression.” In The Great Contraction, she and Friedman argued that the Fed squandered its ample latitude to combat deflation. “The monetary authorities,” they wrote, “could have prevented the decline in the stock of money—indeed, could have produced almost any desired increase in the money stock.”

When it comes to his academic specialty, Bernanke is a disciple of Friedman and Schwartz. In 2002, at Friedman’s 90th birthday party at the University of Chicago, Bernanke was effusive. “Among economic scholars,” he began, “Friedman has no peers.” He developed the “leading and most persuasive” explanation of the Depression, whose impact on economics and the popular mind “cannot be overstated.”

At the end of his encomium, Bernanke made a soon-to-be-famous apology on behalf of the Federal Reserve, where he was then president of the powerful New York branch: “I would like to say to Milton and Anna…regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” (The speech was published as the afterword to the latest edition of The Great Contraction.)

Schwartz was present at the birthday party. “I’m sure he was sincere when he said that,” she says. And Bernanke stayed true to his word. In 2006 he replaced Alan Greenspan as chairman of the Federal Reserve. Greenspan, a self-described “libertarian Republican” who had once been part of Ayn Rand’s inner circle, had engineered an era of low-inflation growth that won Friedman’s endorsement. “There is no other period of comparable length in which the Federal Reserve System has performed so well,” Friedman declared in The Wall Street Journal on January 31, 2006.

Monetarism and Freedom

When the economy collapsed two years into Bernanke’s watch because of a massive credit bubble, he slashed interest rates to zero and ordered the money-printing presses to full steam. He also embarked on a course of “quantitative easing,” where a central bank convolutedly buys its own government’s bonds with printed money so as to sink interest rates even further.

This approach was not new. Friedman had prescribed quantitative easing, combined with “easy money” and inflation, as a cure for Japan’s 1990s economic slump, which he described as an “eerie, if less dramatic, replay of the Great Contraction.” As he did with the Depression-era Fed, Friedman emphasized that “there is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so.” In 1998, a year after Friedman penned his advice in The Wall Street Journal, Japan introduced monetary stimulus: a cocktail of zero interest rates and quantitative easing. But deflation continued. Today Japan’s exports are down an unthinkable 36 percent from just last year, and prices are plummeting at an all-time record pace.

Stateside, in the shadow of the Fed’s multi-trillion-dollar balance sheet, it has been all too easy to categorize Bernanke simply as a Keynesian supporter of public works projects, socialistic safety nets, and profligate, government-led consumption. While it’s true that the Obama ad-ministration is pursuing Keynesian fiscal stimulus, the Federal Reserve under Bernanke has consciously acted on the Friedman/Schwartz insight that loosening central bank credit is a fundamental tool in forestalling deflation and depression. Understanding that monetarism can mean both the management of low inflation in good times, and the creation of inflation in bad times, has proven too difficult for most of the media.

The New York Times, for instance, has identified Bernanke as “a student if not necessarily a devotee of the British economist John Maynard Keynes.” Actually, Bernanke spent most of his academic career elaborating on Friedman’s Keynes-refuting interpretation of the Great Depression. Athough his research sometimes strayed into nonmonetary subjects, it was always, as he said at Friedman’s birthday party, “an embellishment of the Friedman-Schwartz story…and in no way contradict[ed] the basic logic of their analysis.” In 2003, at a conference honoring Friedman’s Free to Choose, Bernanke said, “Friedman’s monetary framework has been so influential that, in its broad outlines at least, it has nearly become identical with modern monetary theory and practice.” So great was Friedman’s influence that Bernanke compared it with Shakespeare’s contributions to English literature.

Even Bernanke’s nickname “Helicopter Ben” derives directly from Milton Friedman. It came about during a 2002 speech entitled “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” in which he quoted Friedman on the importance of conjoining fiscal and monetary policies. The ideal fiscal stimulus, Bernanke said, was a shower of tax cuts “equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.” Friedman had originally used the phrase to counter Keynes’ idea of the “liquidity trap,” in which setting interest rates at zero leads to bank hoarding and leaves the Federal Reserve no room to maneuver. Friedman suggested that countries could escape the liquidity trap by handing out money to consumers, and he explained his argument in a tale about a helicopter unloading cash on a town. Likewise, Bernanke’s Federal Reserve has created special “vehicles” to disburse consumer credit from on high.

In February, Bloomberg News added to the philosophical confusion by reporting that “Federal Reserve Chairman Ben S. Bernanke is siding with John Maynard Keynes against Milton Friedman by flooding the financial system with money.” Of course, Bernanke has said precisely the opposite. He’s flooding the financial system with money during a deflationary crisis, he says, because that’s what Friedman would have him do.

On February 10, Bernanke further underscored his allegiance to Friedman in an overlooked Capitol Hill question-and-answer session with Rep. Ron Paul (R-Texas). Their exchange is worth quoting at length.

“Chairman,” Paul began, “you have written a lot about the Depression. There was a famous quote you made once to Milton Friedman, apologizing for the Federal Reserve bringing on the Depression. But you assured him it wouldn’t happen again.…But the key to this discussion has to be: Was it too much credit in the ’20s that created the conditions that demanded a recession/depression, or was it lack of credit in the Depression that caused the prolongation?…Here we’re working frantically to keep prices up. What’s wrong with allowing the market to dictate this…and prices to go down quickly so we can all go back to work again?”

In response, Bernanke repeated the lesson of The Great Contraction: “Milton Friedman’s view was that the cause of the Great Depression was the failure of the Federal Reserve to avoid excessively tight monetary policy in the early ’30s. That was Friedman and Schwartz’s famous book. With that lesson in mind, the Federal Reserve has reacted very aggressively to cut interest rates in this current crisis. Moreover, we’ve tried to avoid the collapse of the banking system.”

For her part, Schwartz is critical of Bernanke’s application of her and Friedman’s theories. “You don’t have to lower the interest rates to the extent that he has in order to increase the money supply,” she says. “The essential action should be increasing the money supply. That’s the lesson of the Great Depression.” She adds, “There’s nothing contradictory in The Great Contraction with reference to what the Fed should be doing currently.”

Schwartz is alarmed by the enthusiasm with which Bernanke has put “monetary expansion” into practice. She berates the Fed for going too far and predicts that it will have to raise interest rates “in the near future” to arrest inflation. Asked if she sees hyperinflation on the horizon, she exclaims, “Oh, yes!”

In a New York Times op-ed last July, Schwartz criticized Bernanke as a “man without a plan,” warning that his “easy monetary policy is a sin.” She concluded, “He does not deserve reappointment.”

Schwartz also seems to have undergone a late-life conversion to at least some part of Keynesian theory. Asked for her current solution to the crisis, she repeats the ultimate Keynesian maxim: The government should pick up slackening demand in the private sector.

“People are saving, not spending. In order to revive this economy,” she says, hesitating before continuing, “the government will have to resume spending. By spending, the government will require that the current inventory will be depleted and have to be replenished. And that will bring on additional production and jobs.”

Bernanke’s Money Mischief

Ron Paul, like Schwartz and Friedman, is a libertarian, but he embraces the “Austrian” school of economic theory that rejects the very concept of the Federal Reserve. He is critical of what he sees as the Fed’s ongoing monetarism. “In essence,” Paul says in a phone interview, “Bernanke is following Friedman’s advice. He’s a Friedmanite when it comes to massively inflating. Bernanke was able to justify [his policies] by using Friedman.”

Does Friedman’s enthusiasm for inflating the monetary supply in crises flout libertarianism? “Absolutely,” Paul answers. “The monetarists said that you could overcome a natural market correction of a collapsing system by inflation—print money faster! Which contradicts Friedman’s whole thesis. He wanted a steady, managed increase in the supply of money of about 3 percent.” Here Paul is alluding to Money Mischief, Friedman’s 1991 book in which he called on the Fed to grow the money supply at 3 percent annually, presumably forever. “Yet at the same time, Friedman said the Depression could have been prevented by massively inflating.” Paul has kind words for Friedman, whom he praises as a staunch defender of economic liberty, but his final summation is damning: “Friedman’s very, very libertarian—except on monetary issues.”

With Bernanke at the helm, the Federal Reserve has unleashed monetary expansion, the very definition of inflation—and Friedman’s blueprint for averting economic depression. According to Bernanke, Obama, and scores of economists, it’s working. “Prospects for a return to growth in the near term appear good,” Bernanke predicted in August.

But with lenders foreclosing on 358,000 homes that month, the commercial real estate market only beginning to collapse, a 20 percent annual fall in railroad freight, and unemployment projected to crack double digits any minute now, the much-vaunted recovery is no given. And if it isn’t working, we might still relapse into recession, or worse.

The total cost of the Fed’s monetarist-inspired program is mysterious. Paul, whose bill to audit the Fed is now co-sponsored by more than half of the House of Representatives, declares: “We don’t know for sure how much the Fed has spent—I’ve heard it could be $6 trillion. But we have no knowledge of what the Fed’s doing. All these dealings are very secret.” A Reuters estimate in late September pegged the Fed’s balance sheet around $2.1 trillion, with $111 billion doled out to banks every day through the Fed’s overnight discount window. Bloomberg News has sued the Federal Reserve for full disclosure, and we may soon find out the exact number. Manhattan Chief U.S. District Judge Loretta Preska has ordered the Federal Reserve to open its books, though the bank has filed an appeal.

Friedman and Schwartz, those champions of low inflation, have helped inspire the greatest monetary expansion in Federal Reserve history, a program of limitless market interventions and tireless money printing whose end game is likely to be a return to the bad old days of inflation that they fought for so long. For two libertarian champions of free markets and limited government, this unintended legacy has the ring of a world-historic irony.

Penn Bullock (penneth@gmail.com) is a freelance writer for Village Voice Media. He lives in Florida. This column first appeared at Reason.com.

Where's That Inflation?

vdereugy@gmu.edu (Veronique de Rugy) — Tue, 17 Nov 2009 14:54:00 EST

From September 2008 to September 2009, the Federal Reserve pumped an unprecedented $2 trillion into the financial system by buying Treasury bonds and assets from banks. According to most mainstream economists, such action should create a general increase in prices.

Inflation is the result of more dollars chasing the same number of (or fewer) goods. As the Nobel laureate Milton Friedman put it, in one of his main contributions to “monetarist” economics, inflation is always and everywhere a monetary phenomenon—that is, it’s caused by an expansion in the supply of money or credit. So why haven’t we seen inflation in 2009? Are we looking in the wrong places, or is it time to update monetarist theory?

The monetary base, which consists of currency in circulation plus bank reserves on deposit with the Federal Reserve, has exploded, as Figure 1 shows. Figure 2, by contrast, shows inflation as gauged by the consumer price index (CPI)—the cost of goods purchased by the average U.S. household—and by a measure called the median CPI. Standard CPI is the traditional measure for inflation, but a few extreme outliers (such as the price of fuel) can throw off the average; thus the median is a more robust statistic to estimate the central tendency in the data.

So while the standard CPI shows deflation over the past year, that stems from a few anomalous sectors, such as energy, where prices have dipped significantly since 2008. The median CPI, on the other hand, shows an inflation rate that does not look very unusual.

The standard explanation for the lack of inflation is that banks are sitting on all that new cash. As soon as the economy shows signs of recovery, goes the theory, banks will make more loans, and the broader monetary aggregates will shoot up rapidly. But that expectation ignores an important factor: Beginning in October 2008, for the first time in history, the Federal Reserve started paying interest on reserves held by banks. So even when the economy starts heating up, banks will have an incentive to hold money rather than lend it.

What’s more, should inflation rear its head anytime soon, the Fed could suck the newly created money out of the banking system by selling assets, such as some of the higher-quality mortgage-backed securities it bought from banks at the depth of the financial crisis. That would decrease the amount of money in the system and choke back inflation.

On top of that, the Georgetown University economist Donald Marron has argued, if investors really thought we were on the verge of inflation, we would see the 10-year Treasury or 30-year mortgage rates go through the roof. But that hasn’t happened.

Marron’s view reflects what might be called the monetarist consensus. It is embraced by economists across the political spectrum, including Obama’s economic adviser Larry Summers and the current and former Fed chairmen. It is a position that relies on the wisdom of politically independent (and hopefully monetarist) central bankers to manage both the economy and the threat of inflation.

Besides placing undue faith in the Fed’s ability to time perfectly any necessary anti-inflationary measures, the consensus suggests that the nation’s central bank now has the heretofore undiscovered ability to increase the money supply without creating inflation. If true, this would be an important new development, since inflation has long been rightly vilified for destroying entrepreneurship and long-term economic growth. But if false, this conceit could prove dangerous indeed. And it’s probably false.

On his blog Free Advice in September, the Pacific Research Institute economist Robert Murphy argued that inflation is already here but economists are missing the signs. “From [December 2008] until August 2009, the unadjusted CPI level has increased 2.7%, which translates to an annualized increase of just over 4%,” Murphy wrote. He acknowledged that “ten-year yields [on Treasury bonds] are…low” but added that the price of gold has increased enormously. “Why do we assume that TIPS [Treasury Inflation-Protected Securities] traders are genius forecasters, but gold traders are morons?” he asked.

In an email message, Murphy adds: “I believe we are currently witnessing a bubble in Treasury debt. I consider the current yields on 10-year U.S. government bonds to be absurdly low, just like the price of housing was absurdly high in early 2006. After this bubble bursts, investors will slap themselves on the forehead and say, ‘What were we thinking? Why did we rush into Treasurys even as the government told us it was planning to double the federal debt burden in a decade?’ ”

The St. Lawrence University economist Steven Horwitz agrees both that inflation is already happening and that it is widely misunderstood. Monetarists, he says, were “too focused on aggregates like ‘the’ price level, which led economists to ignore the way inflation could distort individual prices at the microeconomic level, causing resource misallocation in the process.” Virtually all economists now agree, for example, that the Fed’s low interest rates inflated housing prices earlier in the decade. Yet as the prices of houses went up, few economists worried about inflation because the CPI looked relatively stable, due in part to a decrease in energy prices. When housing started to crash in 2007, many economists thought the Fed should inject still more funds into the system to stave off further declines. They failed to see that the Fed had distorted relative prices in the first place.

As the George Mason University economist Peter Boettke explains, “A problem with the current monetarists is that while they learned from Friedman the idea that we should fight inflation, in practice they learned from his writings on the Great Depression that central banks should fear deflation.” As a result, economists who are theoretically inflation-hating Friedmanites now want to meet every downturn by fighting deflation.

Because of this tendency, bursting government-created bubbles leads to the creation of new ones. The real lesson may be that inflation is not only a monetary phenomenon but also a political one. Which makes it that much more difficult to predict, much less control.

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.

Private Prisons a Smart Strategy for Arizona

leonard.gilroy@reason.org (Leonard Gilroy) — Tue, 17 Nov 2009 12:22:00 EST

Letter to the Editor at the Arizona Daily Star

Susan Maurer's fears of prison privatization ("Privatizing prisons: A shortsighted fix, a long-term nightmare," Nov. 10, 2009) are based on myths, not facts.

Private prisons are helping federal, state and local governments deliver quality correctional services and programming amid tightening budgets. A 2008 Vanderbilt University study showed significant cost savings through prison privatization, and a recent Harvard Law Review article found that private prisons outperform public prisons on most quality indicators.

Moreover, private prisons are subject to strong government oversight and are held accountable to the standards set by the public sector and independent accreditation agencies. Private prisons also have strong track records on safety, security and the development of innovative inmate education and treatment programs.

Taxpayers should not be misled. With prison capacity needs growing and budgets shrinking, a greater reliance on private prisons is a sensible strategy for Arizona.

Leonard C. Gilroy
Director of Government Reform, Reason Foundation

Louisiana Provides Model for Closing Budget Deficit

leonard.gilroy@reason.org (Leonard Gilroy) — Tue, 17 Nov 2009 10:22:00 EST

Goldwater Institute

Arizona policymakers need to accept the reality that there's no way to avoid government downsizing. The state is now second to only California in the severity of its fiscal crisis and faces over $5 billion in additional budget deficits through 2011. Yet, our officials remain distracted by Sacramento-style accounting gimmicks and a proposed sales tax hike that wouldn't come close to closing the gap. Worse, many policymakers seem more concerned with preserving agency largesse than trying to eliminate it.

Contrast this with Louisiana, the state taking the most thoughtful approach to solving its fiscal crisis. Pelican State policymakers, led by Governor Bobby Jindal, have embarked on a wide-ranging set of government reforms designed to reduce the size and cost of government.

They created a Commission on Streamlining Government this year to identify over $1.5 billion in cost savings through streamlining, consolidation, and elimination. They passed legislation granting more flexibility in cutting spending in protected "silos." Gov. Jindal has eliminated thousands of positions from the state budget and over 70 unnecessary or inactive state boards and commissions. The Louisiana Division of Administration is developing a range of privatization proposals within each of its departments, and it's also piloting a new budgeting approach designed to fund priorities and drive performance. And this is all just a start.

It's already paying off. Ratings agency Fitch upgraded Louisiana's bond rating last month, specifically citing the state's focus on spending control and streamlining as influencing factors. This alone will save taxpayers millions in avoided interest costs over time.

Arizona policymakers face a simple choice: remain lost in the fiscal forest with California or follow the lead of Louisiana, which is blazing a trail out.

Leonard Gilroy is the director of government reform at Reason Foundation (reason.org) and resides in Fountain Hills. This article was originally published by the Arizona-based Goldwater Institute.

Learn More:

Pew Center on the States: "Beyond California: States in Fiscal Peril"
Louisiana Commission on Streamlining Government

Kiss Your Freedoms Goodbye If Health Care Passes

info@reason.org (Andrew Napolitano) — Mon, 16 Nov 2009 14:59:00 EST

Congress recognizes no limits on its power. It doesn't care about the Constitution, it doesn't care about your inalienable rights. If this health care bill becomes law, America, life as you have known it, freedom as you have exercised it, and privacy as you have enjoyed it will cease to be.

Last week the House of Representatives voted on a 2,000 page bill to give the federal government the power to micromanage the health care of every single American. The bill will raise your taxes, steal your freedom, invade your privacy, and ration your health care. Even the Republicans have introduced their version of Obamacare Lite. It, too, if passed, will compel employers to provide coverage, bribe the states to change their court rules, and tell insurance companies whom to insure.

We do not have two political parties in this country, America. We have one party; called the Big Government Party. The Republican wing likes deficits, war, and assaults on civil liberties. The Democratic wing likes wealth transfer, taxes, and assaults on commercial liberties. Both parties like power; and neither is interested in your freedoms.

Think about it. Government is the negation of freedom. Freedom is your power and ability to follow your own free will and your own conscience. The government wants you to follow the will of some faceless bureaucrat.

When I recently asked Congressman James Clyburn, the third ranking Democrat in the House, to tell me "Where in the Constitution the federal government is authorized to regulate everyone's healthcare," he replied that most of what Congress does is not authorized by the Constitution, but they do it anyway. There you have it. Congress recognizes no limits on its power. It doesn't care about the Constitution, it doesn't care about your inalienable rights, it doesn't care about the liberties protected by the Bill of Rights, it doesn't even read the laws it writes.

America, this is not an academic issue. If this health care bill becomes law, life as you have known it, freedom as you have exercised it, privacy as you have enjoyed it, will cease to be.

When Congress takes away our freedoms, they will be gone forever. What will you do to prevent this from happening?

We Can't Sit Back and Allow the Loss of Our Freedoms

We elect the government. It works for us. As we watch the Democrats' plans for health care take shape, we can only ask how did our government get so removed, so unbridled, so arrogant that it can tell us how to live our personal lives?

On Saturday November 7, at 11 o’clock in the evening, the House of Representatives voted by a five vote margin to have the federal government manage the health care of every American at a cost of $1 trillion dollars over the next ten years.

For the first time in American history, if this bill becomes law, the Feds will force you to buy insurance you might not want, or may not need, or cannot afford. If you don’t purchase what the government tells you to buy, if you don’t do so when they tell you to do it, and if you don’t buy just what they say is right for you, the government may fine you, prosecute you, and even put you in jail. Freedom of choice and control over your own body will be lost. The privacy of your communications and medical decision making with your physician will be gone. More of your hard earned dollars will be at the disposal of federal bureaucrats.

It was not supposed to be this way. We elect the government. It works for us. How did it get so removed, so unbridled, so arrogant that it can tell us how to live our personal lives? Evil rarely comes upon us all at once, and liberty is rarely lost in one stroke. It happens gradually, over the years and decades and even centuries. A little stretch here, a cave in there, powers are slowly taken from the states and the people and before you know it, we have one big monster government that recognizes no restraint on its ability to tell us how to live. It claims the power to regulate any activity, tax any behavior, and demand conformity to any standard it chooses.

The Founders did not give us a government like the one we have today. The government they gave us was strictly limited in its scope, guaranteed individual liberty, preserved the free market, and on matters that pertain to our private behavior was supposed to leave us alone.

In the Constitution, the Founders built in checks and balances. If the Congress got out of hand, the states would restrain it. If the states stole liberty or property, the Congress would cure it. If the president tried to become a king, the courts would prevent it.

In the next few weeks, I will be giving a public class on Constitutional Law here on the Fox News Channel, on the Fox Business Network, on Foxnews.com, and on Fox Nation. In anticipation of that, many of you have asked: What can we do now about the loss of freedom? For starters, we can vote the bums out of their cushy federal offices! We can persuade our state governments to defy the Feds in areas like health care—where the Constitution gives the Feds zero authority. We can petition our state legislatures to threaten to amend the Constitution to abolish the income tax, return the selection of U.S. senators to state legislatures, and nullify all the laws the Congress has written that are not based in the Constitution.

One thing we can’t do is just sit back and take it.

Judge Andrew Napolitano is Fox News' senior judicial analyst. This article originally appeared in two parts on FoxNews.com. This column previously appeared at Reason.com.

The U.S. House of Presumptuous Meddlers

info@reason.org (John Stossel) — Thu, 12 Nov 2009 15:08:00 EST

As an American, I am embarrassed that the U.S. House of Representatives has 220 members who actually believe the government can successfully centrally plan the medical and insurance industries.

I'm embarrassed that my representatives think that government can subsidize the consumption of medical care without increasing the budget deficit or interfering with free choice.

It's a triumph of mindless wishful thinking over logic and experience.

The 1,990-page bill is breathtaking in its bone-headed audacity. The notion that a small group of politicians can know enough to design something so complex and so personal is astounding. That they were advised by "experts" means nothing since no one is expert enough to do that. There are too many tradeoffs faced by unique individuals with infinitely varying needs.

Government cannot do simple things efficiently. The bureaucrats struggle to count votes correctly. They give subsidized loans to "homeowners" who turn out to be 4-year-olds. Yet congressmen want government to manage our medicine and insurance.

Competition is a "discovery procedure," Nobel-prize-winning economist F. A. Hayek taught. Through the competitive market process, we producers and consumers constantly learn things that force us to adjust our behavior if we are to succeed. Central planners fail for two reasons:

First, knowledge about supply, demand, individual preferences and resource availability is scattered—much of it never articulated—throughout society. It is not concentrated in a database where a group of planners can access it.

Second, this "data" is dynamic: It changes without notice.

No matter how honorable the central planners' intentions, they will fail because they cannot know the needs and wishes of 300 million different people. And if they somehow did know their needs, they wouldn't know them tomorrow.

Proponents of so-called reform—it's not really reform unless it makes things better—have shamefully avoided criticism of their proposals. Often they just dismiss their opponents as greedy corporate apologists or paranoid right-wing loonies. That's easier than answering questions like these:

1) How can the government subsidize the purchase of medical services without driving up prices? Econ 101 teaches—without controversy—that when demand goes up, if other things remain equal, price goes up. The politicians want to have their cake and eat it, too.

2) How can the government promise lower medical costs without restricting choices? Medicare already does that. Once the planners' mandatory insurance pushes prices to new heights, they must put even tougher limits on what we may buy—or their budget will be even deeper in the red than it already is. As economist Thomas Sowell points out, government cannot really reduce costs. All it can do is disguise and shift costs (through taxation) and refuse to pay for some services (rationing).

3) How does government "create choice" by imposing uniformity on insurers? Uniformity limits choice. Under House Speaker Nancy Pelosi's bill and the Senate versions, government would dictate to all insurers what their "minimum" coverage policy must include. Truly basic high-deductible, low-cost catastrophic policies tailored to individual needs would be forbidden.

4) How does it "create choice" by making insurance companies compete against a privileged government-sponsored program? The so-called government option, let's call it Fannie Med, would have implicit government backing and therefore little market discipline. The resulting environment of conformity and government power is not what I mean by choice and competition. Rep. Barney Frank is at least honest enough to say that the public option will bring us a government monopoly.

Advocates of government control want you to believe that the serious shortcomings of our medical and insurance system are failures of the free market. But that's impossible because our market is not free. Each state operates a cozy medical and insurance cartel that restricts competition through licensing and keeps prices higher than they would be in a genuine free market. But the planners won't talk about that. After all, if government is the problem in the first place, how can they justify a government takeover?

Many people are priced out of the medical and insurance markets for one reason: the politicians' refusal to give up power. Allowing them to seize another 16 percent of the economy won't solve our problems.

Freedom will.

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.

Getting Virginia Off the Sauce

kmw@reason.com (Katherine Mangu-Ward) — Thu, 12 Nov 2009 11:56:00 EST

Ask an immigrant to tell you about her first impressions of America—especially someone who hails from a communist or socialist state—and eventually she’ll get to the part about the grocery store. After a lifetime of empty shelves, poor selection, and unreliable hours, the cornucopia of an American Safeway or Kroger is a revelation. The colors, the music, the lights, the people! Massive stores crammed to the gills with three-dozen brands of cereal and 17 kinds of frozen potato products seem like something out of a dream.

This is how I felt the first time I bought booze outside my home state of Virginia.

Growing up in Virginia, the only liquor store I knew was the ABC "package store" in the local Bradlee Shopping Center. The linoleum was dingy, the adjustable industrial shelving a grimy grayish off-white. Unlike every other store on the strip there was no music, just the hum of the florescent lighting and the consumptive coughs of the other patrons. The clerks wore smocks over their clothes, a practice that had been abandoned by virtually all other retail establishments by my 1980s childhood. Every shelf was tidy and completely full of liquor—no problem there—but the selection was abysmal, with rows and rows of identical bottles lining the walls.

There was a Giant grocery store next door—a convenient place for revelations about the glories of the capitalist system—and a wine shop a few doors down. But neither of them sold booze. Only the state-owned, state-run ABC was authorized to vend hooch.

Virginia is one of 18 states where the government is the monopoly rumrunner. Supermarkets, gourmet shops, and corner stores are all forbidden to sell liquor. But Bob McDonnell, the newly-elected Republican governor, has promised to end the monopoly on liquor sales in the Old Dominion.

This bold gesture isn’t because McDonnell is an especially thoroughgoing libertarian; there are plenty of other areas where he’d like to see more state involvement in the private lives of citizens, not less. This isn’t a 12-step program to help the commonwealth go cold turkey on alcohol money either. McDonnell has no intention of letting Virginia’s bottle-based income fall below its current levels of more than $100 million a year. In fact, part of the reason McDonnell is considering privatization at all is that he is looking for cash to spend on transportation infrastructure. He predicts that selling off the state’s 334 liquor stores to private players and gathering licensing fees from more private sellers will bring in $500 million in the short run, while leaving long-run income intact. (The Washington Post remains unconvinced, noting that McDonnell’s figures may be too optimistic.)

But no matter what the political and budgetary machinations, Virginians are unlikely to wind up paying more for their rotgut, and they are very likely to wind up with a better selection and a relatively skeeze-free shopping experience. Commonwealth officials can focus on governing a large landmass without having to fuss with the details of running a liquor empire. And the move may even represent a net gain for the state budget in the future when the state sheds responsibility for ABC employee benefits and pensions, and starts bringing in real estate and other tax revenue from the privatized stores.

And assuming they’re not regulated within an inch of their lives and hemmed in by the continued existence of a state-dominated wholesale system, the privately-run stores are likely to be more profitable. In addition to being able to compete with D.C. on price, they can expand their stock—80 proof and otherwise. Right now, high-margin novelty rim salt and Jimmy Buffet-themed blenders aren’t sold alongside the tipple in Virginia because the only thing stupider than a state selling intoxicants is a state selling Margaritaville Mixers to go with them. The number of stores will likely increase under privatization, although the cautious McDonnell has promised "a limit placed on the number of authorized retail outlets to reflect community concern."

Virginians haven’t suffered alone with terrible state liquor retail establishments. But the number of states with public provision for gin gimlets mixins’ is shrinking. Iowa, West Virginia, and Alberta, Canada have all privatized their moonshine vendors. Each of those states adopted revenue neutral privatization policies—meaning that they pledged to set rates to keep the flow of cash into state coffers from liquor sales steady. As it happens, the booze biz boomed and the tax money started flowing in, which meant those states had to reduce wholesale markup rates in order to keep too much money from flowing in to the state coffers and violating the terms of the deal. Washington State, North Carolina, and Pennsylvania are considering similar plans.

Another citizen-improving side effect of privatization: An end to the petty crime encouraged by the deprivations of a restrictive state monopoly. Turns out, for instance, that a friend of my family—a Virginia lady and veteran party thrower—has been violating state law for decades by popping up to Calvert Woodley Fine Wines & Spirits in D.C. to stock up the Bloody Mary bar. Bringing a case of Capital City booze into Virginia risks a $2,500 fine, a year in jail, and confiscation of her trusty Model A. But who can blame her? When I moved to D.C. as an adult, the liquor stores were a revelation. For starters, there are so many! Can’t find Old Overholt for your Manhattans in Rosebud on 17th and R? No problem, they probably have it at Cairo on 17th and Q. Sure, most of the clerks are still surly, but you can always choose to hit a different store next time if the checker gives you guff about your fondness for Malibu rum.

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

Freedom to Confuse

info@reason.org (David Harsanyi) — Wed, 11 Nov 2009 15:32:00 EST

If liberals are so disturbed by Congress' dictating whether abortion is a legitimate health care issue or not, it only makes sense that they should be equally troubled by government management of other health care decisions.

Undoubtedly, this is zealously naive thinking on my part. Reaching such a conclusion demands a modicum of consistency. And as we've seen, health care "reform" is an ideological crusade immune from logic.

Take the torrent of hypocrisy that spilled from the jilted pro-choice wing of the Democratic Party after a House amendment to the health care reform bill that would tighten a ban on federal funds for abortions passed by a vote of 240-194—a more substantial mandate against abortion funding, incidentally, than for health care reform.

Rep. Diana DeGette (D-Colo.), immediately began collecting signatures to oppose what she called "an unprecedented and unacceptable restriction on women's ability to access the full range of reproductive health services to which they are lawfully entitled."

Rep. Rosa DeLauro (D-Conn.), went further, adding that the amendment "attempts an unprecedented overreach into women's basic rights and freedoms in this country."

Overreach? Unprecedented? Basic rights? Freedoms?

Right words, wrong issue.

I have no doubt that members of the progressive wing of Congress—folks who generally support a single-payer plan that would eradicate choice and freedom in health care—believe that government's failing to give you something is indistinguishable from government's taking something away from you.

Yet even though no one would be stripped of her right to have an abortion under this legislation, the vast majority of citizens would have to deal with a cluster of new mandates and more than 100 new government bureaucracies to enforce them.

Citizens would be ordered to buy insurance or face jail time. Americans would answer to a "commissioner of health choices" and pay extra taxes for having the gall to buy top-of-the-line insurance plans. They no longer would have the right to choose health savings accounts or high-deductible plans or, in most cases, flexible spending accounts.

That's just for starters.

Accordingly, DeGette, DeLauro, and all who voted for America's Affordable Health Choices Act (sic) should refrain, for credibility's sake, from evoking "choice" or "freedom," as they voted against those principles this past week.

President Barack Obama attempted to quell this mounting problem when he told ABC News that Congress should alter the language on abortion because he had "laid out a very simple principle, which is this is a health care bill, not an abortion bill."

Candidate Obama, on the other hand, clearly stated in a speech in front of a Planned Parenthood Action Fund meeting in 2007 that "reproductive care is essential care" and "basic care, and so it is at the center and at the heart of the plan that" he proposed.

So abortion not only is essential care but also was at "the heart" of what the president had in mind for reform. (A courageous reporter might ask the president where he stands on reproductive care today. Is it essential? If not, why should federal funding be banned?)

When DeGette tells The Washington Post that 40 Democrats will vote against a final bill unless the abortion amendment is removed, she is only holding the president to his word—however rickety his word and her logic may be.

I must concede, then, that there is a bright spot within this debate. If reform were to die on DeGette's selective "choice" and "freedom," it would save, ironically enough, many genuine choices and freedoms in our health care system.

It would be a splendid irony, indeed.

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.

Dave Bing's Last-Second Shot

shikha.dalmia@reason.org (Shikha Dalmia) — Tue, 10 Nov 2009 16:16:00 EST

The Wall Street Journal

On Tuesday, voters in Detroit trudged to the polls and re-elected 65-year-old Mayor Dave Bing, giving him five new city council members to accomplish a mission impossible: bring Michigan's biggest city back from near death. There's no clear prescription that will work, and Detroit's recalcitrant public-employee unions will resist the fiscal therapy that will necessarily be a part of any recovery.

Last year, Mayor Kwame Kilpatrick headed off to prison for using city funds to cover up an affair with a staffer. After a few months of an interim mayor, Mr. Bing stepped in to finish Kilpatrick's remaining time in office neither out of political ambition (he's announced he won't seek two terms) nor to get rich (he is donating his salary to the police department). The former Detroit Piston basketball legend who later made a fortune as an auto supplier genuinely wants to use his business acumen to save the city. But Detroit is much closer to the brink than many people acknowledge.

Detroit has been in trouble for decades. It has the highest taxes in Michigan, the highest murder rate in the country, and a dreadful public school system. Only 25% of high school students graduate each year. Its tens of thousands of abandoned homes offer safe haven to drug dealers and criminals. All of this has produced an exodus of businesses—there is no longer a single major department store in the city—and residents. Detroit's population is less than half of its peak of two million in the 1960s.

With the collapse of the auto industry over the past year and a half, things have gotten a lot worse. Unemployment is now touching Depression levels of around 30%—three times the national rate. Businesses that depend on the auto industry are shutting down and more residents are hitting the exits. This is accelerating the erosion of the city's tax base, producing a fiscal crisis that seems impossible to escape. The city's accumulated deficit is currently somewhere between $300 million and $400 million. No one knows for sure because the city has yet to submit its 2008 audit; its annual budget is about $3 billion.

Joe Harris, a former chief financial officer of Detroit, notes that when Mr. Bing took office this summer, the city had enough cash on hand to make payroll, pay vendors and meet other day-to-day needs for about 11 days. To make ends meet, Mr. Bing is planning to issue "tax anticipation" notes to lenders to raise $94 million against expected tax revenues. This money, along with the biannual property taxes that the city collected in August, might keep Detroit running through the end of the fiscal year next June.

But that won't address the underlying fiscal imbalances. For that problem, Mr. Bing wants to squeeze $5 million in savings every month by asking the city's roughly 13,000 workers to take a 10% pay cut, a 10% benefit cut, and a 10% staff cut. He also wants to privatize or outsource many city services and consolidate various departments. "Our people [city workers] need to understand that entitlement is gone," Mr. Bing told the Detroit News in August. "There are people who think we are job providers. We're service providers."

Mr. Bing is going to have a very hard time making the city's entrenched unions play ball. John Reihl, president of the American Federation of State, Council and Municipal Employees (AFSCME) Local 207, regards Mr. Bing's talk of cuts as a personal insult. "It is just a way to mess with the unions," he told the Detroit News in July. "It's not our role to give anymore concessions."

So far Mr. Bing has shown little indication that he'll stand up to the unions. For the third time on Friday, Mr. Bing backed off on his threat to lay off more workers if unions don't accept a wage cut. Yet a recent study by the Mackinac Center for Public Policy found that if state and local government employee benefit packages in Michigan were limited to what is typical for Midwestern private sector workers—including those in unions—taxpayers would save as much as $5.7 billion annually.

The fiscal mess puts Mr. Bing in a Catch-22. He can't cut the city's taxes because the short-term hit to cash flow would leave the city unable to pay its bills. But without tax reform the city can't lure businesses back.

Detroit may simply not be viable in its current form. Political and economic leaders need to rethink the notion that the city can regain its former status as a major American metropolis capable of luring large companies with tax breaks—which was Mr. Kilpatrick's failed strategy.

Detroit now more closely resembles a frontier town that needs not flashy stadiums and art institutes but basic services: police, firemen and good schools. Mr. Bing needs to confront the hard reality that the city needs to pare back its liabilities, identify infrastructure it can no longer afford to maintain, and (though this is anathema to Detroit's political class) perhaps auction off portions of its 140 square miles to neighboring counties, shrinking to a size that its diminished population base can support.

Short term, Detroit's best hope may be to go bankrupt. However, given Michigan law, which has never been tested because no city has ever filed for bankruptcy, it's unclear if even bankruptcy will fully release Detroit from the clutches of its unions and allow it to start over. The only thing certain is that fate is not kind to a city that allows unions to run amok.

Shikha Dalmia is a Senior Analyst at Reason Foundation. This column first appeared in The Wall Street Journal.

How Green Are Your Nukes?

rbailey@reason.com (Ronald Bailey) — Tue, 10 Nov 2009 13:56:00 EST

The role that nuclear power might play in addressing the problem of man-made global warming is fiercely disputed among environmentalists. Two new books by big names in the movement stake out the boundaries of that debate. On the pro-nuclear side stands Whole Earth Discipline: An Ecopragmatist Manifesto, by Stewart Brand. And parked in the (more or less) anti-nuclear corner is Our Choice: A Plan to Solve the Climate Crisis, by Al Gore. A self-described “green,” Stewart Brand founded and edited the counterculture Whole Earth Catalog back in 1968. In his first book, Earth in the Balance (1992), then-Sen. Al Gore argued, “We must make the rescue of the environment the central organizing principle for civilization.”

Once an opponent of nuclear power, Stewart Brand is now a big backer. With regard to the safety, cost, waste handling, and weapons potential of nuclear power, Brand writes, “I’ve learned to disbelieve much of what I’ve been told by my fellow environmentalists.” On safety, Brand notes, “year after year, the industry has had no significant accidents” in the operation of the world’s 443 civilian nuclear plants. “Radiation from nuclear energy has not killed a single American,” asserts Brand. He does look at the after-effects of the 1986 explosion at the Chernobyl nuclear plant which released a lot of radiation over swathes of northern Europe. He finds that the dire predictions that hundreds of thousands would die of radiation induced cancers turned out to be false. Weighing the safety tradeoffs between nuclear power and man-made global warming, Brand cites this observation from environmentalist Bill McKibben: “Nuclear power is a potential safety threat, if something goes wrong. Coal-fired power is guaranteed destruction, filling the atmosphere with planet-heating carbon when it operates the way it’s supposed to.”

Brand is also fairly sanguine about how to handle the radioactive wastes produced by nuclear power plants. He regards efforts to somehow isolate nuclear wastes for thousands of years as not just absurdly costly, but also wrongheaded, arguing instead that we should figure out how to store it for a couple of hundred years and leave to future generations the choice of what to do with the used fuel. “If we and our technology prosper, humanity by then will be unimaginably capable compared to now, with far more interesting things to worry about than some easily detected and treated stray radioactivity somewhere in the landscape,” writes Brand. “If we crash back to the stone age, odd doses of radioactivity will be the least of our problems. Extrapolate to two thousand years, ten thousand years. The problem doesn’t get worse over time, it vanishes over time.”

But what about the problem of nuclear weapons proliferation? Brand points out that Israel, India, South Africa, and North Korea secretly developed their bombs using research reactors, not power reactors. To reduce the chance of fuel being diverted to produce weapons, he suggests developing an international fuel bank from which nations would basically rent their fuel and to which it would be returned for reprocessing once it was exhausted. President Barack Obama endorsed such a proposal in a speech in Prague in April 2009.

Brand bases his support for nuclear power on four considerations: baseload, footprint, portfolio, and government-scale. Brand enthusiastically hails the fact that in the 21st century most of humanity will dwell in cities and cities need a steady supply of lots of electricity. Baseload power is the minimum amount of consistent power that utilities must supply to their customers. Brand points out that there are currently only three sources for baseload power: fossil fuels, hydro, and nuclear. Brand dismisses solar and wind as baseload power sources because of their intermittency—the sun doesn’t always shine and the wind doesn’t always blow.

Footprint? Nuclear power is compact and renewables occupy a lot of land. Brand quotes nuke booster Gwyneth Craven who notes, "A nuclear power plant producing 1,000 megawatts takes up a third of a square mile. A wind farm would have to cover over 200 square miles to obtain the same result, and a solar array over 50 square miles." Craven, a former opponent of the Shoreham nuclear power plant on Long Island, describes her change of mind in her book, The Power to Save the World: The Truth About Nuclear Energy (2007).

By "portfolio" Brand means that the problem of man-made global warming may be so bad, that humanity must simultaneously pursue all types of projects to cut its greenhouse gas emissions. Ruling nuclear out of that portfolio makes the task of reducing emissions that much harder to achieve. What Brand means by "government-scale" is that he thinks big energy infrastructure requires big government funding and regulatory intervention. Given the array of subsidies currently on offer, the Feds apparently agree.

But what about the costs? Brand breezily waves them aside. “We Greens are not economists,” writes Brand. “We don’t really care about money. Our agenda is to protect the natural environment, not taxpayers or ratepayers."

In the anti-nuke corner we have Al Gore, who pointedly cites "the grossly unacceptable economics of the present generation of reactors." He begins his chapter on the nuclear option: "In the world’s debate over how to produce electricity without generating massive quantities of greenhouse gas pollution, there is a radioactive white elephant in the middle of the room: nuclear power." A white elephant is generally an object that costs more to maintain than it is worth. And it turns out that nuclear energy’s excessive cost is one of two the chief arguments that Gore deploys against it. The second is the risk that nuclear fuel might be diverted to produce nuclear weapons. Gore quite rightly acknowledges that nuclear power is safe and that the issue of how to store nuclear waste could be solved.

Gore notes that in the 1960s, the old Atomic Energy Commission predicted that the United States would have 1,000 nuclear power plants operating by the year 2000. That didn’t happen. Instead only 104 plants are currently operating and they generate about 20 percent of the nation’s electricity. Construction costs for building a nuclear power plant have increased from $400 million in the 1970s to $4 billion by the 1990s and building times doubled. Gore highlights bottlenecks that could choke any nuclear renaissance, including the fact that critical components such as containment facilities to house reactors are currently being produced by only one Japanese company.

Somehow Gore’s cost consciousness gets lost when he considers solar power, however. In his solar power chapter, Gore does a lot of hand-waving about future photovoltaic cell breakthroughs and declining cost curves. Gore also decries lavish subsidies to nuclear power, but approvingly cites "the recent establishment by the U.S. government of new incentives for solar electricity," and state government requirements that utilities obtain a percentage of their power from high-cost renewable sources. As an example of the future of photovoltaic power, Gore points to a new solar plant opened by Florida Power and Light. President Obama dedicated the new 25-megawatt $150 million facility in October. Scaling that plant up to generate the amount of power equal to that a 1,000 megawatt nuclear plant would produce would now cost $18 billion. According the Electric Power Research Institute, constructing a comparable nuclear plant would cost $4 billion.

Gore declares, "Once the world chooses to set ambitious goals for scaling up solar electricity development and commits to the investments necessary to further improve the technologies involved, there is no question that solar energy will provide a major percentage of the world’s electricity." Brand would certainly argue that exactly the same thing can be said of nuclear energy.

Gore’s second big issue with nuclear power is the risk of nuclear weapons proliferation. Reactor-grade fissionable material cannot be used to make bombs; it must be further enriched. If the world went on a nuclear power plant building binge, Gore and others fear that some unsavory governments would covertly divert nuclear fuel to enrichment facilities where it could be turned into nuclear weapons. Gore believes that the international nuclear fuel bank idea is a non-starter. However, Brand notes that since 2006, 18 nations have signed up for something similar, the Global Nuclear Energy Partnership. GNEP has also been endorsed by the head of the International Atomic Energy Agency.

The federal government is now offering a host of new subsidies and guarantees to utilities to build new nuclear power plants. For example, the Energy Policy Act of 2005, supported by the majority of Republicans in Congress and signed by President George W. Bush, authorizes a production tax credit of 2.1 cents per kilowatt hour from the first 6,000 megawatts of new nuclear generation capacity; $2 billion to cover the costs of any regulatory delays; federal loan guarantees for advanced reactors up to 80 percent of the project cost; and a 20 year extension of law that limits the nuclear industry liability to $10 billion dollars. In 2008, the Department of Energy (DOE) invited applications for up $18.5 billion in nuclear construction loan guarantees. The DOE was flooded with applications seeking a total of $122 billion in loan guarantees. If the private sector is unwilling to put money into nuclear projects without an extensive federal safety net, perhaps nuclear is not the way to go?

Recently Center for American Progress blogger Matt Yglesias properly accused generally pro-nuclear power American conservatives of favoring "nuclear socialism." For example, Senate Republicans proposed legislation earlier this year aimed at building 100 nuclear power plants over the next two decades. It’s pretty clear that Brand falls into that camp. On the other hand, Gore can fairly be accused of solar socialism.In this debate among environmentalists, ecopragmatist Brand wins. If man-made climate change is a big problem, then it doesn’t make sense to rule out in advance energy technologies that could contribute to substantially reducing greenhouse gas emissions. Of course, costs matter. The best way to figure out which technologies are cheapest is to set a price on greenhouse gas emissions and let various energy sources compete among themselves. No subsidies needed.

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

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.

SuperFreaking Out Over Climate Engineering

rbailey@reason.com (Ronald Bailey) — Tue, 03 Nov 2009 14:10:00 EST

“What do Al Gore and Mount Pinatubo have in common?” ask the Freakonomics duo Steven Levitt and Stephen Dubner, in their new book SuperFreakonomics: Global Cooling, Patriotic Prostitutes, and Why Suicide Bombers Should Buy Life Insurance. Their answer: “Al Gore and Pinatubo both suggest a way to cool the planet, albeit with methods whose cost-effectiveness are a universe apart.” Al Gore wants to cool the planet by drastically cutting back the amount of heat-trapping carbon dioxide people are emitting into the atmosphere. In 1991, the Mount Pinatubo volcano in the Philippines cooled the planet when it blasted millions of tons of sulfur particles into the stratosphere where it formed a global haze that lowered average temperatures by about 0.5 degrees Celsius.

In their controversial chapter on global cooling, Levitt and Dubner describe how a bunch of researchers and entrepreneurs at Intellectual Ventures have devised a “garden hose to the sky” method for cooling the planet. The firm, founded by polymath and former Microsoft executive Nathan Myhrvold, proposes the use of an 18-mile hose with helium balloons and pumps every few hundred yards injecting liquefied sulfur dioxide into the stratosphere to mimic the cooling produced by the Pinatubo eruption. The group estimates that setting up five sulfur injection base stations would cost a mere $150 million and cost $100 million per year to operate.

Meanwhile, the costs of deep reductions in carbon dioxide emissions—the strategy currently in vogue—are highly disputed. Global warming alarmists tend to minimize the costs and global warming deniers maximize them (I use the derogatory terms each side calls the other with full malice aforethought). So let’s use as an approximation the latest estimates from British economist Nicholas Stern. Stern, admittedly, inhabits the alarmist camp. He recently asserted that it will take spending 2 percent of global GDP (currently about $64 trillion) to prevent catastrophic climate change. That would amount to spending about $1.2 trillion per year. The money would be spent on developing and deploying a variety of energy efficiency improvements and low carbon energy technologies. That’s the Gore way to cool the planet. Levitt and Dubner conclude by contrasting $250 million versus $1.2 trillion.

Despite their rather breathless presentation of the options for a technical quick fix, these climate engineering schemes are not all that innovative. In fact, similar schemes, including a sulfur sun screen, were outlined in a 1997 article in Reason by physicist and sci-fi writer Greg Benford. In September, the Royal Academy issued a study, Geoengineering the Climate [PDF], evaluating comparable proposals. On November 5, the Science and Technology Committee in the House of Representatives will hold a hearing on the feasibility and risks of climate engineering, including the stratospheric sulfur shield. Clearly, Levitt and Dubner are not making novel proposals, they are popularizing marginalized ideas that have been around for a long time—that's their stock in trade.

Levitt and Dubner acknowledge that the objections to the stratoshield project are “legion,” and indeed they are [PDF]. They note that Myhrvold is not recommending that the stratoshield or other climate engineering schemes be deployed immediately, but that they be “researched and tested so they are ready to use if the worst climate predictions were to come true.” If manmade warming is worse than currently projected, such a shield would also give humanity time to invent and deploy a new no-carbon energy infrastructure.

Yet despite a variety of caveats and cautions, Levitt and Dubner have provoked a firestorm of criticism among ideological environmentalists and their fellow travelers. Why? Because the global warming debate is politicized from top to bottom. Levitt and Dubner breezily stepped into the climate science and policy debate and violated the environmentalist taboo on discussing geoengineering proposals in public.

“The primary reason there has been so little debate about geoengineering amongst climate scientists is concern that such a debate would imply an alternative to reducing the human carbon footprint,” write British climate researchers, Peter Cox, professor of climate system dynamics at the University of Exeter, and Hazel Jeffrey, head of strategic management at the U.K.’s Natural Environment Research Council in Physics World. Or, as Levitt and Dubner acknowledge in their chapter, geoengineering might be seen as “an excuse to pollute,” luring the public into climate change complacency.

In this political fight, accusations of bad faith are the coin of the rhetorical realm. And it doesn’t help that Levitt and Dubner elided over or mischaracterized some research and policy prescriptions. For example, they note that carbon dioxide emissions are being absorbed by seas causing ocean acidification which threatens shellfish and corals, but do not mention that the Pinatubo cooling plans would do nothing to solve that problem. In the policy realm, they cite Harvard economist Martin Weitzman’s argument that the uncertainties surrounding future temperature projections suggest the possibility of catastrophic climate change. However, they fail to note that Weitzman concludes that the remote possibility of total climate disaster justifies spending a lot of money now on efforts to avoid it. And let’s not get into the argument over what recent global temperature trends portend.

In the end, it is not at all surprising that Joe Romm, one of the more apoplectic climate alarmists, who writes the ClimateProgress blog over at the liberal Center for American Progress, dug deep into his rhetorical coffers and accused Levitt and Dubner of bad faith. Stanford University climatologist Ken Caldeira was a participant in the discussions at Intellectual Ventures that Levitt and Dubner report. Caldeira has been seriously researching the implications of geoengineering as a backup plan for cooling the earth for many years. Blogger Romm, in his self-appointed role as enforcer of climate change policy taboos, was horrified that Levitt and Dubner were citing Caldeira in favor geoengineering proposals.

In high dudgeon, Romm apparently emailed Caldeira: “Lines about you like (page 184) 'Yet his research tells him carbon dioxide is not the right villain in this fight' seriously abuse your reputation and your extensive publications and warnings about the threat of ocean acidification.” Romm then solicited Caldeira’s help, explaining, “I want to trash them [Levitt and Dubner] for this insanity and ignorance.” Romm, self-importantly but accurately, added that “my blog is read by everyone in this area, including the media.” He outlined just the sort of thing that he wanted Caldeira to say: “I’d like a quote like ‘The authors of SuperFreakonomics have utterly misrepresented my work,’ plus whatever else you want to say.”

A rattled Caldeira emailed Romm back and complained: “So, yes, my representation in the Superfreakonomics book is damaging to me because it is an inaccurate portrayal of me. The problem is the inaccurate portrayal, not my actions or statements.” Caldeira especially objected that he would never have said carbon dioxide is “not the right villain in this fight.” Romm then published his attempt at debunking Levitt and Dubner. The headline alone reads:

Error-riddled ‘Superfreakonomics’: New book pushes global cooling myths, sheer illogic, and “patent nonsense” – and the primary climatologist it relies on, Ken Caldeira, says “it is an inaccurate portrayal of me” and “misleading” in “many” places.

Romm’s column provoked a flood of condemnations. Levitt and Dubner asked Caldeira what was going on and he responded, “I do think there are a bunch of things in the chapter that give misimpressions.” However, Caldeira also said to other journalists, “I believe the authors to have worked in good faith. They draw different conclusions than I draw from the same facts, but as authors of the book, that is their prerogative.” In any case, a somewhat rueful Caldeira explained, “I was drawn in by Romm and Al Gore’s assistant into critiquing other parts of the chapter. Rather than acting deliberately, I panicked and commented on things that I now wish I would have been silent on. It was obviously a mistake to let myself get drawn into this, and I learned a quick and hard lesson in public relations.” Indeed. Levitt and Dubner say that they will take out the offending “villain” quotation from subsequent editions.

Romm himself mischaracterizes Levitt and Dubner’s chapter as advocating a “geo-engineering-only solution.” Levitt and Dubner make it pretty clear throughout that their Pinatubo cooling proposal is a backup plan, just in case humanity can’t or won’t cut back on its carbon dioxide emissions. For example, Myhrvold notes, “It’s a bit like having fire sprinklers in the building. On the one hand, you should make every effort not to have a fire. But you also need something to fall back on in case the fire occurs.” Myhrvold adds, “It gives you breathing room to move to carbon-free energy sources.”

A year ago, in a roundtable on geoengineering in The Bulletin of the Atomic Scientists, Ken Caldeira argued, “Prudence demands that we consider what we might do if cuts in carbon dioxide emissions prove too little or too late to avoid unacceptable climate damage.” What should we do? “We need a climate engineering research and development plan.” Caldeira warned, “We cannot afford a new period of Lysenkoism and allow political correctness to pollute our scientific judgment. Scientific research and engineering development should be divorced from moral posturing and policy prescription.” He was right then and he’s right now.

Although flawed, in SuperFreakonomics, Levitt and Dubner have done citizens and policymakers a real service by breaking the taboo on discussing the feasibility and risks of climate engineering in public.

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.

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.