Sunday, September 19, 2010

You Are To Blame!

In the face of growing economic and fiscal ills, the American public's perception of politicians has grown increasingly unfavorable. With unsustainable debt levels and unemployment, this is understandable. But the more I read about the nature of republics and democracies, the more I am lead to believe that the public itself is largely responsible for the terrible politicians and policies that plague our nation. The public is not the victim, rather an actor that simultaneously shapes and in shaped by the political process.

In the work of Jefferson and many of the other founding fathers we encounter profound skepticism of politicians; it is presented as a given that they will lust for and if given the chance abuse greater power granted to them. Accordingly, it is essential to place careful constraints on the power of the state via a Republican Constitution. To Jefferson government is "like a fire: a dangerous servant and a fearful master;" necessary for a viable nation, but something that must be carefully controlled. A republic is clearly only possible with a virtuous public who resists the temptation of rescinding their sense of personal responsibility and falling prey to the seduction of politicians who promise them increased wealth and welfare through the machinations of a grandiose state. Why? Because such a state is made possible by the seizure of wealth from one segment of society, from one group, to give to another. This may satisfy the innate jealousy and covetous nature of men, but history shows that in a relatively short time it leads to diminished wealth and freedom for the whole of society, barring the political and administrative classes.

Nelson Hultberg presents a compelling argument about the perils of democracy. He correctly points out that the founding fathers created a republic which not only sought to protect individuals against abuses by the government, but also to protect individuals and the nation as a whole against the tyranny and folly of the majority. Being well versed in Greek and Roman history, Jefferson and his compatriots understand that a system of unbound majority rule inevitably leads to financial, political and social deterioration. Alexander Fraser Tytler, the 18th century historian and jurist put it best in the following verse:

"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largess from the public treasury. From that time on the majority always votes for the candidates promising the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship."

Reading this our current fiscal and political predicament comes to mind. Clearly the republican principles of a limited, clearly defined state has seriously declined among the political elite and the general populace. Alexander Fraser Tytler's prophetic words have come to fruition - American politics has increasingly become a contest to see which politician can promise the majority impossibly costly programs financed by the wealth of others. Those who promise less because of their commitment to fiscal restraint and constitutional rule very rarely will get elected. A mere mention of the possibility that it may be necessary to curb the growth of a bankrupt social security system will virtually ensure that a politician will not get elected among "progressives." And the mere suggestion of the need to raise taxes to roll back the deficit can be equally damning. In effect, large segments of the American Public are demanding the impossible, that politicians deliver more goods and services at a reduced cost.

Predictably the desire of the public has greatly outstripped the capacity of the government, resulting in a spiralling national debt. And predictably the appetite of the public has fed the belief that the will of the majority entitles the state to seize and redistribute as much of the wealth of productive minorities as it sees fit, as seen in recent debates on tax policy. While I do understand that the national debt has exacerbated the need to increase tax revenue, I am troubled when I hear pundits presenting tax cuts as the usurpation of wealth from the general public to privileged individuals. This implies that state (via the will of the majority) holds the primary right to (seize and dispose of) the fruits of an individuals labors and only through their magnanimity is the individual granted the privilege of retaining a portion of their wealth.

Contrary to the belief of Obama supporters, the answer to our fiscal and political ills was never a "wise leader and administrator," but leaders who submit to the limits on the size and scope put in place by the founding fathers via the Constitution. As history shows, virtually no leader will limit their access to wealth and power on their own volition, they must be forced to do so by a public who understands and embraces the virtues of a Republic.

To view the whole article, click on the following link:

America Is a Republic, Not a Democracy!

Saturday, March 27, 2010

by Nelson Hultberg

It is the view of most Americans today, that as long as all legislation in a country is democratically established by a majority vote of the people, then that country is politically free, and justice reigns. This modern view of course would be considered grievously naive by the Founding Fathers, who in their perusal of history had acquired a thorough grasp of the follies of ancient Greek democracies. In their minds, it would be ludicrous to consider freedom and justice to be determined merely by "democratic approval" of government laws.

This is an enormously important point for Americans to understand, for the fact that it is not being taught in our schools and clarified in the voters' minds is one of the main reasons why the philosophy of statism is spreading throughout the world.

If we consider freedom to be most prevalent where there is a minimum of coercion utilized among human beings, it should be clear to any man with a jot of common sense that we are no longer truly free in this country, that there is, and has been for some time now in the words of Robert Nisbet, a "new despotism" creeping over us.

If we were to ask an average citizen in the street today if he considers himself free and his goverment just (and if he were articulate), he would undoubtedly spew out a long list of unjustifiable policies forced upon him by Washington and his own local city hall, ranging from ever-increasing taxes and welfare boondoggles, to the ominous oppressions of the Patriot Act, to the special privileges of affirmative action and its despicable reverse racism.

How are we to account for such reactions? America doesn't have a personal dictator and is not visibly like the Chinese, South American, or Middle East tyrannies. How then can there be such widespread disenchantment with the amount of freedom and justice we have in this country? The answer, of course, is that America does have a dictator. It is difficult for many to recognize, for the dictator is not the President, or the Congress, or the Supreme Court. It is the people themselves. It is the majority will.

"[M]en of unusual intelligence and enterprise, men who regard their constitutional liberties seriously and are willing to go to some risk and expense to defend then....are inevitably unpopular under democracy, for their qualities are qualities that the mob wholly lacks, and is uneasily conscious of lacking." [2]

"Why should democracy rise against bribery? It is itself a form of wholesale bribery. In place of a government with a fixed purpose and a visible goal, it sets up a government that is a mere function of the mob's vagaries, and that maintains itself by constantly bargaining with those vagaries. Its security depends wholly upon providing satisfactory bribes for the prehensile minorities that constitute the mob, or that have managed to deceive and inflame the mob." [3]

"The democrat, leaping into the air to flap his wings and praise God, is for ever coming down with a thump. The seeds of his disaster...lie in his own stupidity: he can never get rid of the naive delusion...that happiness is something to be got by taking it away from the other fellow." [4]

What we are to make of it is that America was never meant to be a pure democracy with "absolute majority will" ruling the country under the bumptious guidance of unruly masses. She was meant to be a strictly limited Constitutional Republic governed by level headed, high-minded men of sagacity and self-discipline whose chief function is to preserve individual rights rather than render them senseless and non-existent.

In other words, the Founding Fathers recognized that, because of the nature of life itself, all men possessed a certain set of rights that were never to be put up for vote. One of the most important of these was a man's right to his property (which meant also his wages and his profits). This is the fundamental cornerstone of our system and precisely where it differs from the rapacious tumult of a democracy. The majority will is supposed to be severely limited and have no power to redistribute a man's earnings. America's Founding Fathers knew their history well, and had seen the ultimate result of democracies -- that they vote themselves into tyrannies marked by constant unrest and sedition.

James Madison gave us sage advice when he warned that, "democracies have ever been spectacles of turbulence and contention; have ever been found incompatible with personal security and the rights of property; and have been as short in their lives as they have been violent in their deaths." [5]

John Adams advised his fellow countrymen: "There never was a democracy yet that did not commit suicide." [6]

Thomas Jefferson, writing in relation to the Virginia legislature, stated, "One hundred and seventy-three despots" are "as oppressive as one," and that "an elective despotism was not the government we fought for." [7]

Even the intellectuals of Rome recognized that their empire's greatness and freedom were directly related to their republican form of government. In the words of historian, Will Durant, Cicero believed, that "without checks and balances...democracy becomes mob rule, chaos and dictatorship." Cicero went on to say that the man usually chosen as leader in a democracy is "someone bold and unscrupulous...who curries favor with the people by giving them other men's property." [8]

Are we in modern America any different? Are not our political leaders "bold and unscrupulous?" Do they not attempt to "curry our favor" by advocating the redistribution of more and more personal wealth for social services? Is this not the same as giving the people "other men's property?" Have not all our modern era administrations throughout the 20th century been possessed of the same dictatorial inclinations? Have they not all advocated that the productive people of the nation give up progressively more of their earnings every year for those who do not wish to be productive?

Here then is the evil of a democracy with the "majority will" ruling absolutely. It allows dictatorial control and confiscation to be utilized against the individual simply because the masses desire such control and confiscation to be utilized. The concept of individual sovereignty is thus destroyed, a dangerous cloud of confusion develops in the area of social ethics, and the might of numbers becomes our only guide as to what is right and wrong.

No businessman would ever think it right to walk in and rob the corner grocery store (at the point of a gun), to obtain money to help his faltering dry goods business. Yet most Americans today do not think it wrong in any way for the "majority will" to vote for the government in Washington to force the owner of that grocery store (under the threat of a prison sentence) to give up a substantial portion of his money (in the form of higher taxes) to subsidize corporations that are unprofitable, or to support able-bodied men and women until they decide they would like to go back to work, or to support pretentious mediocrities through the National Endowment for the Arts, or to pay highly profitable farmers to refrain from planting certain crops for a year.

What is the difference, though, ethically in the two acts? Both are violations of the individual store owner's right to the product of his labor. The democratic thievery is just so indirect that responsibility for the act is largely diffused, and thus not so noticeable to the perpetrators. But is it somehow right because fifty-one percent of the voters are advocating it? The philosophical democrat, awash in egalitarian adoration, answers yes; but that is because he allows his emotions to dictate his policies. He is capable of only thinking short range and then invariably blanks out on the evil incongruities that result. The stronger and more sagacious man of reason, steeped in the wisdom of history's morality tale, knows better. He knows that both acts -- the gunpoint robbery and the IRS performed robbery -- are acts of unjust coercion and destroy the individual store owner's rights. In both cases, the owner is forced against his will to give up money that he has earned with excruciating effort, to be used toward a goal that he neither approves of, nor cares about, nor is necessary to preserve a free domestic order.

By their very nature, an individual's rights are not to be abrogated by the mass. They are not to be subject to open assault by frenzied mobs in search of covetous gratification. Madison, Jefferson, Hamilton, Henry and Adams would be inflamed with outrage at the Constitutional violations taking place in America today -- violations that strike viciously at the heart of the very existence of the Republic itself.

As Constitutional scholar, Gottfried Dietz, points out, the Founders of this nation believed that "popular government, being as human as any other form of government ... was not immune from the corruption that tends to come with power. An expansion of popular power...could bring about despotism as much as had the expansion of monarchial power....In a word, the growth of democracy could conceivably reduce the protection of the individual. It could pervert free government into a sheer majority rule which considered democracy an end in itself.

"It testifies to the wisdom of the Founding Fathers that they recognized this danger. The oppressive acts of Parliament and of some state legislatures had brought home to them a democratic dilemma which was expressed by Elbridge Gerry's remark in the Federal Convention: 'The evils we experience flow from the excess of democracy.' The recognition that American government had to be democratic was accompanied by the realization that democracy could degenerate into a majoritarian despotism. To prevent this, democracy was bridled. While men were deemed worthy of self-government, they were not considered so perfect as to be trusted absolutely. They were not given free reign." [9]

Our primary fault today then is that we have misconstrued what the democratic process is really for by giving men the right to vote themselves special privileges and redistributed wealth from the pockets of their neighbors -- i.e., by making democracy "an end in itself." We now think the election process can be used to determine what the entire role of government should be. We now presume that indulgent throngs of voters, in collu- sion with Congressional opportunists, will somehow form through their devious ruminations a proper method of governing.

In other words, whatever fifty-one percent of the voting masses wish of their government, they have the right to have, which in baldest terms is mobocracy. It leads to what Alexis de Tocqueville warned it would -- the tyranny of the majority -- in which the power of government "covers the whole of social life with a network of petty, complicated rules that are both minute and uniform, through which even men of the greatest originality and the most vigorous temperament cannot force their heads above the crowd. It does not break men's will, but softens, bends, and guides it; it seldom enjoins, but often inhibits, action; it does not destroy anything, but prevents much being born; it is not at all tyrannical, but it hinders, restrains, enervates, stifles, and stultifies so much that in the end each nation is no more than a flock of timid and hardworking animals with the government as its shepherd." [10]

This is not what America's republican form of democracy was meant to be. The democratic process, in its republican form, was meant to be mainly the ability to remove politicians from office peacefully. It was meant to be a method to transfer power, not a method to define the scope and size of government. The task of defining the scope of government had already been accomplished through the centuries of reason and experience that went into the writing of the Constitution. Thus government was already defined, with its functions prescribed for it in that sacred document. The laws and services that citizens were to be allowed to vote for were strictly limited and were to always be provided for on the local or state level. Only in a few clearly designated areas, were the people to be allowed to vote for the Federal Government to provide them with laws and services. If it became overwhelmingly necessary to alter such functions, there was an amendment process provided that would require the electorate to operate deliberately and prudently. This was America's republican form of limited democracy.

Democracy's primary task then is to allow people to determine which citizens of their communities are sufficiently possessed of the necessary integrity, brains and skills to go to the seats of political power and implement government's pre-defined constitutional functions. It is basically a tool to avoid violence and coups d'etat in the transfer of power, to assure a peaceful and orderly governing process. But the overall philosophical role of government cannot be left up to the vote of the majority in the open ended, arbitrary manner that presently prevails. As the history of every ancient Greek democracy clearly demonstrates, such a system will self-destruct and tumble down the edifice of liberty, order and prosperity.

Most pundits, when confronted with the majority will dilemma, reply that such concern over the tyranny of the mass is paranoid; that the country has endured till now and will continue to do so; that the erosion of rights spoken of here could never happen. But it already has happened egregiously and continuously throughout the past eighty years, and to a lesser degree throughout the 19th century.

The progressive income tax (passed in 1913), which basically destroyed our right to the product of our labor and our right to equality under the law, was justified by the fact that the "majority of Americans" approved of it. In this case, three-fourths of the state governments eliminated the constitutional ban on direct taxation and then fifty-one percent of our Congressmen made it steeply progressive over the years.

Thus if fifty-one percent of the voting constituents of thirty-eight states can take away a man's fundamental rights, then we don't really have the iron clad guarantee against tyranny that we think, do we? In this way, it takes even less than fifty-one percent of the nation's voters to alter the structure of the Constitution itself, and abrogate all the freedoms we possess. Thus even our "deliberate process" of amending the Constitution is susceptible to exploitation at the hands of ill-informed masses.

There are numerous other examples of freedoms lost to majority passions this past century. For example: The rash of labor legislation enacted during the twenties, thirties and forties (the Clayton, Wagner and LaGuardia Acts, the NLRB, etc.), which destroyed the rights of workers and owners to trade and negotiate freely among themselves, was justified by the fact that the "majority of Americans" approved of it. The government's present obsessions with implementing racial-sexual quotas for company hiring and school enrolling, which violates men's rights to associate freely, are being justified by the fact that the "majority of Americans" approve of them.

Obtuse obedience to the "majority will" is thus the basis for all the present efforts to curtail free interaction, association, and trade in the United States. Supposedly the polls show that the "majority" approves of federal legislation in these areas. Yet the rights to trade openly and to associate freely are supposed to be clear-cut rights guaranteed to us as Americans. How long will they remain predominantly so? The Federal Government is so imperious now that it doesn't even bother to cajole the necessary fifty-one percent majorities of the required thirty-eight states into amending the Constitution to give it the power it wants. It merely grants itself sufficient bureaucratic power every few years to chip away at the right of citizens to dispose of their property, to trade, and to associate.

If the Federal Government can take away our right to our property (i.e., our income), our right to trade openly, and our right to associate freely because of "majority approval," then it can also at some later date take away our right to speak and write freely, our right to worship freely, our right to habeas corpus, or any other right we now possess. Yet are any of these usurpations proper or legal because the "majority will" rules them so? Or even three-fourths of the people? The answer is automatic to stalwart men of honor and principle: Might does not make right. The majority will must always be limited. And this is the reason why the Constitution should be interpreted literally, and why it should hold certain rights that transcend the electoral process.

This was the vision of America's revolutionaries in 1787. They gave us a REPUBLIC, not a DEMOCRACY. And though they fell short of achieving a perfect document of control over the government of their republic, they at least gave the world a spectacular start toward an understanding of the value of a written Constitution. They recognized that all humans have a basic set of rights that are essential for the living of life -- the chief of those being freedom of thought, association and trade, and the control and disposal of one's property -- rights that were not to be taken away by single dictators, oligarchic groups, or majority wills.

In end, the immediate and personal committing of an evil act clearly shows one its evil, such as the individual robbing of a store. This is easily seen as wrong. But the delay and diffusion of that same evil act (such as that which takes place in a democracy, when fifty-one percent of the people vote for their legislators to slowly confiscate the store owner's wealth over the years through higher and higher taxes), clouds the concepts of right and wrong and allows the evil to become entrenched. In such a covetous climate of ethical confusion, tyranny is not far away.

Allow unthinking masses to vote their whims, and we have signed a death warrant for the ideals of liberty and high culture, for Burke's "unbought graces" of life, for equality of rights and the dream that gave birth to our nation -- the dream that said a man is what he makes of himself through individual effort to produce new wealth, rather than through legislative coercion to redistribute his neighbor's wealth. Look around America today. Where is there true liberty and high culture? Where are there any of the "unbought graces" of life? Where is there equality of rights? Where is the American Dream of life built solely upon individual effort?

Few authorities are willing to discuss it, but here is the main impediment to freedom and justice in America today -- our blind worshiping of the majority will. We are making slaves out of those who are productive, and rulers out of those who gather together in bumptious mobs. We are allowing the destruction of individual rights to be justified by the might of numbers in pursuit of public handouts. The democratic majority, overwhelmed with corrosive envy, is stepping all over the individual; and we the people have lost the clarity of mind to recognize such a crime for what it is.

America is a Republic Not a Democracy

This clear, concise video is a must see exploration of why the founding fathers established a constitutional republic and not a democracy, a topic that holds great significance in our troubled times:

Thomas Jefferson on Immigration

The wise and prolific Jefferson offered insight into many issues that are just as relevant today as they were over 200 years ago, including immigration. Jefferson offered a nuanced, balanced vision that affirmed that the United States should welcome immigrants, while cautioning about the hazards of allowing the rapid, growth of migrant populations. If more politicians heeded Jefferson's advice we could fashion immigration policies that were wiser and more humane.

In the following verse Jefferson spoke about the right to immigrate to the United States provided that migrants respected the laws of the land:

"Born in other countries, yet believing you could be happy in this, our laws acknowledge, as they should do, your right to join us in society, conforming, as I doubt not you will do, to our established rules. That these rules shall be as equal as prudential considerations will admit, will certainly be the aim of our legislatures, general and particular."

--Thomas Jefferson to Hugh White, 1801. ME 10:258

Jefferson affirmed that we should be a refuge for the oppressed of the world:

"Shall we refuse the unhappy fugitives from distress that hospitality which the savages of the wilderness extended to our fathers arriving in this land? Shall oppressed humanity find no asylum on this globe?"

--Thomas Jefferson: 1st Annual Message, 1801. ME 3:338

Jefferson's welcoming sentiments were tempered by the understanding that:

"The first consideration in immigration is the welfare of the receiving nation. In a new government based on principles unfamiliar to the rest of the world and resting on the sentiments of the people themselves, the influx of a large number of new immigrants unaccustomed to the government of a free society could be detrimental to that society. Immigration, therefore, must be approached carefully and cautiously."

The aim of wise immigrations policies were to encourage the healthy linguistic, cultural, political and economic assimilation of immigrants:

"Although as to other foreigners it is thought better to discourage their settling together in large masses, wherein, as in our German settlements, they preserve for a long time their own languages, habits, and principles of government, and that they should distribute themselves sparsely among the natives for quicker amalgamation..."

--Thomas Jefferson to George Flower, 1817. ME 15:140

The risk of large scale immigration was that assimilation would be retarded, which would allow for the importation of customs that were at odds with America's unique republican culture and institutions. The end result being that the United States would be incoherent in its culture and values.

"[Is] rapid population [growth] by as great importations of foreigners as possible... founded in good policy?... They will bring with them the principles of the governments they leave, imbibed in their early youth; or, if able to throw them off, it will be in exchange for an unbounded licentiousness, passing, as is usual, from one extreme to another. It would be a miracle were they to stop precisely at the point of temperate liberty. These principles, with their language, they will transmit to their children. In proportion to their number, they will share with us the legislation. They will infuse into it their spirit, warp and bias its direction, and render it a heterogeneous, incoherent, distracted mass... If they come of themselves, they are entitled to all the rights of citizenship: but I doubt the expediency of inviting them by extraordinary encouragements."

--Thomas Jefferson: Notes on Virginia Q.VIII, 1782. ME 2:118

Thomas Jefferson's Message To Bush & Obama

Thomas Jefferson eloquently spoke about the dangers that occur when a government amasses excessive debt through reckless spending. If Bush, Obama and the majority of the senate had heeded Jefferson's advice, our nation would in much better economic, social and political shape.

In the following verses Jefferson wrote about the evil of burdening future generations with debt:

"I sincerely believe... that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale."

--Thomas Jefferson to John Taylor, 1816. ME 15:23

"It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world."

--Thomas Jefferson to A. L. C. Destutt de Tracy, 1820. FE 10:175

"We believe--or we act as if we believed--that although an individual father cannot alienate the labor of his son, the aggregate body of fathers may alienate the labor of all their sons, of their posterity, in the aggregate, and oblige them to pay for all the enterprises, just or unjust, profitable or ruinous, into which our vices, our passions or our personal interests may lead us. But I trust that this proposition needs only to be looked at by an American to be seen in its true point of view, and that we shall all consider ourselves unauthorized to saddle posterity with our debts, and morally bound to pay them ourselves; and consequently within what may be deemed the period of a generation, or the life of the majority."

--Thomas Jefferson to John Wayles Eppes, 1813. ME 13:357

In the following verses Jefferson wrote about the economic, political and moral ruin brought on when government spending burdens the nation with excessive debt:

"To preserve [the] independence [of the people,] we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude. If we run into such debts as that we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our callings and our creeds, as the people of England are, our people, like them, must come to labor sixteen hours in the twenty-four, give the earnings of fifteen of these to the government for their debts and daily expenses, and the sixteenth being insufficient to afford us bread, we must live, as they now do, on oatmeal and potatoes, have no time to think, no means of calling the mismanagers to account, but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers."

--Thomas Jefferson to Samuel Kercheval, 1816. ME 15:39

Jefferson repeatedly warned how engaging in needless warfare was the surest way to mire a nation in heavy debt and taxation. And in the face of crushing public debt the need to cut the size of the military was a painful, but inescapable necessity:
"Our distance from the wars of Europe, and our disposition to take no part in them, will, we hope, enable us to keep clear of the debts which they occasion to other powers."

--Thomas Jefferson to C. W. F. Dumas, 1790. ME 8:47

"There [is a measure] which if not taken we are undone...[It is] to cease borrowing money and to pay off the national debt. If this cannot be done without dismissing the army and putting the ships out of commission, haul them up high and dry and reduce the army to the lowest point at which it was ever established. There does not exist an engine so corruptive of the government and so demoralizing of the nation as a public debt. It will bring on us more ruin at home than all the enemies from abroad against whom this army and navy are to protect us."

--Thomas Jefferson to Nathaniel Macon, 1821. (*) FE 10:193

No earthly consideration could induce my consent to contract such a debt as England has by her wars for commerce, to reduce our citizens by taxes to such wretchedness, as that laboring sixteen of the twenty-four hours, they are still unable to afford themselves bread, or barely to earn as much oatmeal or potatoes as will keep soul and body together. And all this to feed the avidity of a few millionary merchants and to keep up one thousand ships of war for the protection of their commercial speculations."

--Thomas Jefferson to William H. Crawford, 1816. ME 15:29

Jefferson spoke about the wisdom of levying taxes at the same instant of borrowing moeny as a warning to the citizenry about the costs and hazards of borrowing money. Such a tax would surely dampen the zeal of those who demand more government services:

"It is a wise rule and should be fundamental in a government disposed to cherish its credit and at the same time to restrain the use of it within the limits of its faculties, "never to borrow a dollar without laying a tax in the same instant for paying the interest annually and the principal within a given term; and to consider that tax as pledged to the creditors on the public faith." On such a pledge as this, sacredly observed, a government may always command, on a reasonable interest, all the lendable money of their citizens, while the necessity of an equivalent tax is a salutary warning to them and their constituents against oppressions, bankruptcy, and its inevitable consequence, revolution."

--Thomas Jefferson to John Wayles Eppes, 1813. ME 13:269

"Our government has not as yet begun to act on the rule of loans and taxation going hand in hand. Had any loan taken place in my time, I should have strongly urged a redeeming tax."

--Thomas Jefferson to John Wayles Eppes, 1813. ME 13:273

Jefferson even spoke of the importance of maintaining good credit:

"I told... President [Washington] all that was ever necessary to establish our credit was an efficient government and an honest one, declaring it would sacredly pay our debts, laying taxes for this purpose and applying them to it."

--Thomas Jefferson: The Anas, 1792. ME 1:319

"I deem [this one of] the essential principles of our government and consequently [one] which ought to shape its administration:... The honest payment of our debts and sacred preservation of the public faith. " --Thomas Jefferson: 1st Inaugural, 1801. ME 3:322

"I once thought that in the event of a war we should be obliged to suspend paying the interest of the public debt. But a dozen years more of experience and observation on our people and government have satisfied me it will never be done. The sense of the necessity of public credit is so universal and so deeply rooted that no other necessity will prevail against it."

--Thomas Jefferson to William Short, 1814. ME 14:217

Israelis don't need lectures

Mr. Will is correct - the Israelis don't need lectures from anyone, least of all the American Government. Can you imagine the uproad if narco terrorists were to launch a barrage of missiles at Texas and California from Mexico? Not even the softest leftists would call for "restraint" and a "proportionate response." If the Mexican government was unable or unwilling to squash these terrorists, the US would invade and occupy Northern Mexico until the threat had been completely eliminated. No other nation in the history of the world has sacrificed as much for peace as Israel, yet many of these leftists routinely criticize Israel for defending itself.

Israelis don't need lectures

By George F. Will

Thursday, August 19, 2010

In the intifada that began in 2000, Palestinian terrorism killed more than 1,000 Israelis. As a portion of U.S. population, that would be 42,000. During the onslaught Israeli parents sending two children to a school would put them on separate buses to decrease the chance that neither would return for dinner. Surely most Americans can imagine, even if their tone-deaf leaders cannot, how grating it is when those leaders lecture Israel on the need to take "risks for peace."

During Prime Minister Benjamin Netanyahu's July visit to Washington, Barack Obama praised him as "willing to take risks for peace." There was a time when that meant swapping "land for peace" -- Israel sacrificing something tangible and irrecoverable, strategic depth, in exchange for something intangible and perishable, promises of diplomatic normality.

Strategic depth matters in a nation where almost everyone is a soldier, so society cannot function for long with the nation fully mobilized. Also, before the 1967 Six-Day War, Israel within the borders established by the 1949 armistice was in one place just nine miles wide. Israel exchanged a lot of land to achieve a chilly peace with Egypt, yielding the Sinai, which is almost three times larger than Israel and was 89 percent was 89 percent of the land captured in the process of repelling the 1967 aggression.

The intifada was launched by the late Yasser Arafat -- terrorist and Nobel Peace Prize winner -- after the July 2000 Camp David meeting, during which then-Prime Minister Ehud Barak offered to cede control of all of Gaza and more than 90 percent of the West Bank, with small swaps of land to accommodate the growth of Jerusalem suburbs just across the 1949 armistice line.

Israelis are famously fractious, but the intifada produced among them a consensus that the most any government of theirs could offer without forfeiting domestic support is less than any Palestinian interlocutor would demand. Furthermore, the intifada was part of a pattern. As in 1936 and 1947, talk about partition prompted Arab violence.

In 1936, when the British administered Palestine, the Peel Commission concluded that there was "an irrepressible conflict between two national communities within the narrow bounds of one small country." The commission recommended partition. What followed was the Arab Revolt of 1936-39.

On Nov. 29, 1947, the U.N. recommended a partition plan. Israel accepted the recommendation. On Nov. 30, Israel was attacked.

Palestine has a seemingly limitless capacity for eliciting nonsense from afar, as it did recently when Britain's Prime Minister David Cameron referred to Gaza as a "prison camp." His implication was that Israel is the cruel imprisoner. Gaza's actual misfortune is to be under the iron fist of Hamas, a terrorist organization.

The creation of Israel did not involve the destruction of a Palestinian state, there having been no such state since the Romans arrived. And if the Jewish percentage of the world's population were today what it was when the Romans ruled Palestine, there would be 200 million Jews. After a hazardous passage through two millennia without a homeland, there are 13 million Jews.

In the 62 years since this homeland was founded on one-sixth of 1 percent of the land of what is carelessly and inaccurately called "the Arab world," Israelis have never known an hour of real peace. Patronizing American lectures on the reality of risks and the desirableness of peace, which once were merely fatuous, are now obscene.

Sunday, September 12, 2010

Overview of Nullification

Thomas Woods presents a compelling argument why states are entitled to nullify unjust, unconstitutional federal mandates. I predict that the growing national debt and ideological divide across the land, will lead to one of two paths: an increasingly ugly conflict over the political, economic and cultural direction of the nation or a revitalized, tolerant federalism that respects the rights of states and communities to self governance.

Author's Corner: Tom Woods

Thursday, July 08, 2010

For those unclear on the concept, what is the basic principle of Nullification?

Nullification is Thomas Jefferson’s idea, articulated most clearly in his Kentucky Resolutions of 1798, that if the federal government passes a law that reaches beyond the powers delegated by the states, the states should refuse to enforce it. Jefferson believed that if the federal government is allowed to hold a monopoly on determining what its powers are, we have no right to be surprised when it keeps discovering new ones. If they violate the Constitution, we are “duty bound to resist,” to quote James Madison’s Virginia Resolutions of 1798.

What are some examples of states using nullification and the tenth amendment historically?

Virginia and Kentucky raised the prospect of nullification against legislation in 1798 that made it a crime to criticize the President or Congress. They did so at a time when most judges and most states thought this was just fine and perfectly constitutional. New England states refused to comply with the execution of Jefferson’s embargo. In 1814, Daniel Webster urged the states to resist if military conscription were enacted. On numerous occasions, northern states did their best to obstruct the enforcement of the Fugitive Slave Act of 1850, aspects of which they considered unconstitutional notwithstanding the Constitution’s fugitive-slave clause. Wisconsin’s legislature passed a resolution in 1859 defending their inaction, and quoting Jefferson’s Kentucky Resolutions of 1798 word for word.

Have states used nullification more recently?

Issues relating to health care, gun ownership, and medical marijuana are perhaps the most obvious, with states either defying or prepared to defy unconstitutional federal interference in these areas. Medical marijuana is a particularly good example, since the Supreme Court ruled against it, the Justice Department is against it, and yet it still goes on. More than a dozen states allow it in direct defiance of the federal will. If the people are determined to resist a law they believe violates the Constitution and are prepared to stand up against it, the federal government may well have to back down – as it did on medical marijuana and on the REAL ID Act of 2005.

What are the historic connections between the ideology of the founding fathers and Nullification?

The War for Independence was fought over the principle of local self-government, so of course it would make no sense for Americans to turn around and establish a strong central government that would trample on local self-government. Indeed they did no such thing.

The Virginia ratifying convention of 1788 is instructive. Skeptics of the Constitution feared that it would produce a government without limits. Supporters of the Constitution assured them that the federal government would possess only those powers “expressly delegated” to it. George Nicholas, who would become the first attorney general of Kentucky, assured Virginians that if the federal government attempted to impose “any supplementary condition” upon them – that is, if it tried exercising a power beyond those expressly delegated to it – then Virginia would be “exonerated” from that measure. With this assurance Virginia barely voted to ratify the Constitution.

How do you feel the federal government is overstepping its bounds?

The federal government has inverted the system bequeathed to us by the Framers of the Constitution, in which a central government whose powers were “few and defined” (to quote James Madison) provided for the common defense of states whose powers were “numerous and indefinite” (to quote Madison again). Absurd interpretations of the general welfare, commerce, and “necessary and proper” clauses have been advanced at the various steps along the path that has taken us here. We have forfeited the one unique feature of American political life, and transformed the U.S. into just another run-of-the-mill centralized state.

What sort of federal laws do you feel should be nullified?

From a strategic point of view, I would begin with laws whose injustice is widely acknowledged. The No Child Left Behind Act is despised by libertarians, traditional conservatives, and the teachers’ unions – a very unusual combination. It is an insult to the American population to imply that they are too stupid to run their own schools according to their own priorities.

Do you feel Nullification is connected to a particular ideology?

It needn’t be. Leftists like Kirkpatrick Sale believe deeply in local self-government, while neoconservatives like Bill Kristol, with their grotesque “national greatness conservatism,” would be appalled by serious assertions of power by the states. California is considering decriminalizing marijuana, which we would more readily associate with the Left than the Right. People on Left and Right worked together in two dozen states to nullify the REAL ID Act of 2005.

It should be obvious that we need the institutional ability to say no to the federal government. According to Richard Fisher of the Dallas Federal Reserve, the U.S. government faces $100 trillion in unfunded entitlement liabilities. The system must unravel at some point. Yet the federal government goes about its oblivious way, taking on ever more obligations and racking up larger and larger deficits. The states may as well get acclimated to fending for themselves, since the day when they will have no choice but to do so cannot be more than a generation away.

Monday, September 6, 2010

Nullification: Interview with a Zombie

A must see interview with the great writer Thomas Woods, discussing his book "Nullification: How to Resist Federal Tyranny in the 21st Century."

Sunday, September 5, 2010

Where's Jesse (and the Progressives)?

A few years ago when Kramer (Michael Richards) uttered a hateful racial epitath against African-Americans, his outburst was widely condemned by journalists and politicians. And of course Jesse Jackson thrust himself into the limelight, using this incident to highlight (I paraphrase) the ongoing racism against African-Americans that pervades American Society. So, when I read about racist attacks against Asian-Americans students in a Philadelphia high school that left 30 injured and 7 hospitalized, I was certain that Mr. Jackson and his progressive compatriots would rush to the scene and condemn the attackers. I was certain that a certifiable race riot would be avidly discussed on every major media outlet and used as a teachable moment to address the evils of racism. After all, we can be certain if 30 African-American students were injured in racially motivated attacks, President Obama would hold a solemn press conference and initiate a major federal initiative. But, it wasn't. At first I assumed this was because the perpetrators were not white, they were African-Americans and the victims were not part of an "oppressed group." And I assumed that the lack of widespread progressive indignation stemmed from the fact they implicitly conceive of African-Americans as being passive agents who are not responsible for their actions, but products of their environment. But, then I decided to give Jesse the benefit of the doubt; perhaps he has been too busy chatting with Kramer, George and Jerry over a cup of coffee and tuna sandwich to take notice of a race riot.

Racial violence changes student — and school


The Associated Press

updated 9/5/2010

PHILADELPHIA — Duong Nghe Ly can't wait to begin his senior year at South Philadelphia High School. A day of violence there last year changed his life, and he wants to learn if his school has been transformed as well.

Last Dec. 3, after years of attacks on Asian immigrant students, something finally snapped.

Fueled by rumors, a group of students roamed the halls searching for Asian victims until one was attacked in a classroom. Later, about 70 students stormed the cafeteria, where several Asians were beaten. About 35 students pushed past a police officer onto the so-called "Asian floor," but were turned back. After school, Asians being escorted home were attacked anyway by a mob of youths.

Almost all the attackers were black — but few observers believe the violence was due to racial hatred. Instead, they cite isolation of different groups within the school, certain students' warped "gangster" values, and for some, simmering resentments over perceived benefits for Asian students.

About 30 Asians were injured that day; seven went to hospitals. Past attacks had been reported to administrators and police, but students say nothing seemed to change.

..Ly (pronounced LEE) was in the lunchroom for what he calls "the riot." Days later, he was followed home from school and punched in the face on his front stoop.

He had arrived from Vietnam two years earlier, speaking nearly no English, the son of poor, uneducated parents. He thought America would be like the "Hannah Montana" TV episodes he had watched in Vietnam. What he found was closer to "The Wire." So he kept his head down, sought silent refuge among his countrymen and tried to make his way through the broken system.

Dec. 3 was a turning point. He realized the system must change — and that he and his fellow immigrants were the ones to make that happen.

Their method? Guided by local activists, and despite reservations from some parents, about 50 Asian students boycotted school for a week.

"Before, I was timid. I didn't really want to get myself into trouble," says Ly, 18. Then he realized, "If everybody's silent, nobody speaks up, the problem keeps going on without being resolved. I feel like I or my friends have to speak up and organize to tell people this is not right.

"We had to fight for it."


Duong Ly's parents, ethnic Chinese who grew up in Vietnam, worked 27 years to grasp the bottom rung of the ladder to American success.

His mother, Phung Mac, attended school through the second grade, when her family ran out of money to pay for more. His father, Tu Ly, made it through the sixth grade. In 1981, they submitted their first paperwork to immigrate to the United States.

"You had to have a certain background to go to school, be in the Communist Party," Tu Ly says in Cantonese as his son translates. "Your grandparents had to be a party member for you to get into good schools. Otherwise it cost a lot of money to get an education."

Ly's parents lived in Ho Chi Minh City, eking out a living selling "pho" noodle soup, rising at 5 a.m. and working in their shop until 9 or 10 at night. All extra money went toward school for Duong (pronounced YUHNG) and his older brother, and fees for immigration paperwork. At times they could not pay their rent and were forced to move, but they always made sure their boys stayed in school.

Ly's mother developed painful hip problems. Her younger brother, who had already moved to America, sent money to pay for an operation. It was unsuccessful — the doctor said it was "an experiment. If you want a better ... operation, you need to pay more money," she says in Cantonese.

In 2008, after spending about $20,000 on immigration fees, the family was approved and came to Philadelphia. "We finally achieved our wish: freedom," Tu Ly says. "We finally had a chance for a better education."

South Philadelphia High looms over an entire city block in a poor section of South Philadelphia long populated by descendants of voyagers from Italy, other European nations and the black American South. Asians and Latinos are now coming in greater numbers. Today, the school is about 70 percent black and 18 percent Asian.

During Duong Ly's first year, there were 45 reports of "dangerous incidents" such as weapons possession or assaults at the school of about 1,000 students, enough to earn a "persistently dangerous" label from the state. There also were 326 reports of lesser crimes such as fighting, threats or robberies. The graduation rate was 48 percent. Only 16 percent of students were proficient or better in reading and 8 percent in math, according to state test results.

Within weeks of starting school, Ly was robbed in the bathroom. His older brother was punched in the face. "Our friends told us, 'Just suffer it,'" Ly says.

They didn't report either incident.


Duong Ly speaks dispassionately, expressing no racial animosity, when asked to explain how fellow students could commit such vicious attacks.

"Because they live in a violent environment," he suggests. "Maybe their parents have problems and troubles, so they want to express their anger by violence."

His father also declines to condemn the attackers. "In Vietnam," he says, "the original Vietnamese people don't like us because we are a different ethnicity. People from the countryside who move to the city get discrimination from city people. It's the same here. They don't have an understanding about who we are. Discrimination happens in every society."

About a dozen black students were suspended or expelled after Dec. 3. Their names have been kept secret, and they have not commented publicly.

Some other black students show little sympathy for them. "They're just hating on other races. They don't have anything better to do with their lives," says Tyreke Williams, who graduated last June.

Wali Smith makes no excuses for the attacks, but understands where they come from. A community specialist who holds workshops on anger management and conflict resolution in various schools, he witnessed the Dec. 3 violence.

The South Philly native says blacks have always felt marginalized in the neighborhood dominated by Italians and Irish. Now, some students feel an almost unconscious resentment when they see their Asian counterparts studying on their special second-floor sanctuary, which was established to provide language programs and provide a more welcoming environment.

"Those (black) kids feel the majority of the staff there does not care about their education," Smith says. "They see these Asian kids come in and be nurtured, and they want that same kind of comfort."

Then there is a small group of troublemakers with a value system that says, "it's cool to be gangster," Smith says. "But really you're afraid, a scared coward. So you take advantage of weak people."

"It's not based on race, it's based on opportunity," Smith said of the history of violence against Asians. "If they go to the bathroom and take your money, and you don't report it, they'll just keep riding it until the wheels fall off."


The Asian students and activists reserve almost all of their criticism for administrators and the school district, which they say consistently failed to protect students.

A school district spokesman did not return a call for comment. Administrators have insisted that they responded to Asian students' complaints and tried their best to combat violence that has become part of the culture for some Philadelphia youths.

"These problems are long-standing and go beyond the school and into the community," district superintendent Arlene Ackerman said a week after the attacks.

A report by a retired judge, which was commissioned by the district, said there were confrontations between a small group of black and Asian students on Dec. 2 that led to the widespread Dec. 3 attacks on random Asians. The report was criticized by Asians who say it failed to account for years of documented violence and that investigators did not interview many student victims and witnesses.

Yet Duong Ly is still enthusiastic about his school. He says the English as a Second Language program is good, the teachers care, there are plenty of computers with Internet access — and it's all free.

"If I study hard I will get a lot of opportunities, scholarships, grants...," he says. "It's rewarding to work hard and study hard here, more than in Vietnam. I can go to a better school, go to college, get a career, then I can take care of my parents. So I like it more here."

He also likes his new home, a narrow, two-story row house bought from his uncle. They are the only Asians on the block.

The front door opens into the living room, where the family's bicycles (they have no car) share space with an old, fat television, couches and a folding table for meals. On the far wall is a handsome curio cabinet of polished wood, ornately carved, holding photographs of ancestors.

Tu Ly works as a cook in an Asian supermarket. His wife is unemployed. The family has permanent resident status and expects to become naturalized citizens within a few years. Recently, Medicaid paid for a hip replacement for Duong's mother.

"We owe this country a lot," Tu Ly says. "The government paid a lot of money for my wife's operation. We will work our best to contribute to society. My children can choose whatever job they like, as long as they do something to contribute to this country."

The boycott was not an easy step to take. Some students were afraid of being expelled. Many parents were against it, fearing their children would become even more conspicuous targets. Some said local activists were making the situation worse.

Once it started, though, attitudes changed. "After the boycott, I felt much more confident and powerful because our voices were heard by the people," Duong Ly says.

The district installed 126 security cameras. A "50-50 club" took Asian and black students on group outings. More bilingual staffers and diversity training were added. Principal LaGreta Brown was forced out on the eve of a faculty no-confidence vote after a local newspaper discovered her certification had lapsed.

All eyes are on the incoming principal. Otis Hackney III is 37, a black Philadelphia native, fresh from two years as principal of a mostly white suburban high school. He got the call from Philly one night when he was standing on the sidelines of his school stadium, watching a lacrosse game under the lights.

"My first thought was, you've got to be kidding me," Hackney says during an interview in his new office, the cinderblock walls bare except for a picture of the singing legend Marian Anderson, class of 1921.

Soon, though, Hackney accepted the challenge. His immediate agenda includes building a relationship with the Asian community and creating a group of school stakeholders who meet regularly to set goals.

Hackney says all students should feel comfortable approaching him: "I want to listen more than I speak. Students are often much more honest than adults." He bought a new conference table and spiffed up a room for community meetings: "The message is, this is an important place where we talk about important things." He's getting Asians out of their special floor and into the rest of the building. He's looking at United Nations-style translation headphones for immigrant parents.

He is the fifth principal in six years, and he wants to stick around.

There is much to heal. The Vietnamese embassy has complained to the U.S. State Department. The Asian American Legal Defense and Education Fund filed a complaint with the Justice Department, which on August 27 found merit in the claims and advised the district to settle the matter. An investigation by the state Human Rights Commission is pending. The dynamic that exploded on Dec. 3 has not disappeared.

"If you're that angry and frustrated about something that your behavior manifests itself that way, what are we not addressing as a school, as a community?" asks Hackney. "As African-Americans, we can't forget our own struggle to the point that we become what we fought so hard against."

"That's one side. The other side is, when you have an immigrant population that comes in, what are the skill sets they need to function in this society? It can be very difficult for that child and that family to function in schools. So how do you put all that together? That's my job.

"Part of it is getting people to see the human side in every person, identifying with their struggle. Once people begin to do that, you realize folks aren't as privileged as you think they are. They don't speak the language. They don't have that many advantages over you. You're just not taking advantage of the ones you have."

Duong Ly had a busy summer: An internship at the University of Pennsylvania on Asian health issues; a psychology class at a community college; trips to conferences in Houston and Boston to discuss his new activism; being photographed for a Philadelphia magazine story that labeled the boycotters "heroes." In between, he spent a little time working on his college essays and a lot of time on Facebook.

On Wednesday, he will walk through the battered metal doors of South Philadelphia High to start his senior year at what he hopes is a changed school.

"I'm really looking forward to it," he says.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Banu Qurayza & Peace In Muslim World

All religions and cultures have dark, violent moments in their history. The Christian world certainly has a long history of persecuting Jews and many other groups. However, after reading the New Testament, I did not encounter a passage in which Jesus uttered a word or acted in a manner that would encourage his present or future followers to engage in violence. Throughout the New Testament, Jesus exhorted his followers to "turn the other cheek" and refrain from the pursuit of worldly riches and powers. So, even in its darkest moments, Christianity
held the potential to become the largely peaceful and positive religion that it is today. And the positive elements of Christianity have become the most pronounced in nations like the United States were the church has been separated from the corrupting influence of state power.

In contrast, the more I research Islam, the more I am convinced that the violent, repressive behavior of a minority of Muslims reflects fundamental flaws in basic Islamic theology. Nowhere is this more apparent than in the history of the Banu Qurayza, a tribe of Arabian Jews who clashed with the army of Muhammad. After suffering defeat, 800 male members of the tribe were put to death and the women and children were distributed as war booty. If Muslim theologians viewed this as a crime or at least an error, this would be less troubling, but Muslim jurists affirm Muhammad's sentence against the Banu Qurazya. In fact, they are unanimous in viewing Muhammad as a figure to be emulated, whose action and sayings (along with the Koran) form the basis of Islamic Law. So, not only is the massacre justified by most believing Muslims, but anti-semites in the Muslim world frequently site the Banu Qurayza as proof that Jews are inherently perfidious. Until there is major reform in Islamic theology and culture, peace and prosperity in the Muslim World will not be possible.

Friday, September 3, 2010

More Victims of the War on Drugs (part I)

Whenever I watch the evening news in Spanish, I am bombarded with daily incidents of massacres and assassinations in Mexico, stemming from our jointly led war on drugs. In the last four years along nearly 30,000 individuals have been killed, They dead include traffickers, soldiers, policemen and countless civilians. The violence has escalated to the point were drug cartels are assassinating politicians and policemen who we presume are either opposed to them or back their rivals. The war on drugs has greatly exacerbated Mexico's issues of corruption and an anemic civil society.

I personally find drug use abhorrent and socially corrosive, however it has become clear that the cost of our endless war on drugs far outweigh any benefits. This is true in the United States, which has spent billions incarcerating drug users and even more true in Mexico, which is on the verge of becoming a failed state.

I believe the futility and immorality of the drug war are obvious to most politicians, so why do so few support even a modest decriminalization of marijuana? Like most forms of state intervention, the war on drugs imposes net economic and social costs for the nation, but benefit politicians and their corporate allies. Mass incarceration earns billions for those who own prisons. And clearly it has swollen the ranks of bureaucrats, policemen and prison guards. Although this may appear beneficial during a time of high unemployment, a bloated state imposes a heavy burden on the private sector and limits its capacity to provide employment. But, no matter how high the costs of government initiatives may be on the general population, few politicians are willing to rescind programs that expand their power and influence. I am hoping that more Americans and Mexicans will wake up and force their politicians to pursue more humane and effective drug policies or consider the most outspoken critic of the war on drugs, Dr. Ron Paul.

Thursday, September 2, 2010

Immigration & Entitlement

I have found that most government entitlements develop along common patterns. After analyzing recent debates on immigration, it appears that immigration fits these patterns.

First, the state intervenes to address a problem, such as addressing the needs of families who cannot afford medical care. At first this elicits appreciation from the recipients, because they previously did not believe that it was the responsibility of the state to care for them. And on a deeper level they and most of society recognized that the norm was for individuals to care for themselves and if they could not do so, the responsibility fell on their family and friends, followed by their church or community. Dependence on the state was a temporary exception, brought on by dire circumstances. As soon as possible, all parties recognized the need for the individual to return to the default setting of self sufficiency or at least mutual assistance with family, friends, churches, charities and local governments.

Even though state assistance may have been viewed as noble or even necessary, it was not widely regarded as a right or entitlement. Why? Because of the recognition that state funds spent on one individual or group has to be seized from another. And by definition, a rights cannot be contingent upon the fruits of labor of another. Not only does this pose philosophical problems, but also economic ones. The North Korean government can declare that all citizens of the "workers paradise" have a right to three square meals a day, but if its moribund economic system cannot produce sufficient food, that right is for nought. Or, if the only way to ensure a "right" is to infringe on the liberty of another group or individual, the ethical foundation of that right is questionable to say the least.

In the second stage, the noble state intervention begins to pose a moral hazard, in other words, these programs and policies increase the occurrence of the phenomena they were created to address. The majority of the initial recipients of state assistance were those who had no other option. But, as time goes on the program offers perverse incentives to engage in economic behavior that expands the number of dependent individuals. For example, a previous tenant of mine who received section-8 had a flat screen TV, an X-Box and an automobile. In other words, had section-8 not existed (or been more judicious in its requirements), this individual would have been able to pay her rent. While it is difficult to calculate what percentage of recipients are products of true need versus perverse incentives, there is no question that most examples of state intervention have increased the occurrence of unsustainable social and economic behaviors.

The next stage involves more of a cultural, rather than economic transformation. Rather than view dependency on state welfare as a temporary exception to the norm, it's viewed as an indispensable facet of life. Examples of programs and policies that once elicited gratitude are now taken for granted as basic rights and entitlements. Talk of limiting them or even questioning their sustainability, elicit anger and protests from their recipients. And the growth of dependent individuals has grown, so has their power as a voting block, making reform very challenging.

The systematic non-enforcement of immigration laws that has occurred in many cities and states over the last 30 years falls under similar patterns. Initially it was a given that under democracy and the rule of law, the internal enforcement of immigration laws must be the norm. But, over time lax control of the border and the lack of serious interior enforcement by the federal government allowed for the population of undocumented individuals to balloon in several key cities and states. Faced with these facts on the grounds, many of these localities chose to make an exception to the rule and ignore clear and widespread violations of the law. And out of goodwill, they decided to offer opportunities for free or subsidized health care, housing and educational services to undocumented immigrants and their children. We can assume that the majority of the recipients viewed this with gratitude, because in most cases the elites of their countries of origin were unwilling to share their wealth by offering basic government services to their poorer countrymen.

As with other examples of state intervention, these policies created perverse incentives that led to a rapid expansion of the very phenomena that they were created to address. In other words, the systematic non-enforcement of the law created a magnet for even more undocumented immigration and in the matter of 20 years their numbers grew five fold. And even those who view most undocumented immigrants as good, hard working individuals recognized that this was as an economically and socially unsustainable phenomena. This led more Americans to push for the enforcement of existing laws and limits to the use of government services for undocumented immigrants. Such actions prompted anger and protests, indicating that many individuals now view immunity from the enforcement of immigration laws as a fundamental right and a basic entitlement. This has lead to greater intransigence in individuals who fear than an amnesty would expand the voting power of this new entitlement group and its supporters, making future efforts at law enforcement even less politically feasible.

Who is Samantha Power?

During a 2008 interview interview, Samantha Power implied that the United States should send a military force to Israel and "Palestine" to force them to accept a peace plan and to protect the "Palestinians" against potential genocide.

In 2009, President Obama appointed Power to the National Security Council Staff, where she serves as a Special Assistant to the President and Senior Director for Multilateral Affairs.

Tell me who your friends are and I will tell you who you are.

On Individual & Group Rights

Fair Housing efforts reflected the spirit and goals of early civil rights efforts. It's focus was on expanding individual rights, equal opportunity, specifically the rights of individuals to have an equal opportunity toreside in the neighborhoods of their choice. Fair Housing proponents sought to overturn laws and covenants that restricted an individual's right to reside in the community of their choice. Such laws were also odious because they violated fundamental property rights by restricting the rights of an individual to sell or rent their property to the individual of their choosing. For these reasons, I consider the early fair housing crusaders as embodying the best of the American Way. As time went on the scope of these laws expanded to bar individual sellers, landlords and Realtors from discriminatory actions. This was more contentious because although it expanded opportunities for some, it did infringe on the property rights of others. But, most Americans view it as a net expansion of traditional American rights.

Over time, segments of the civil rights movement have shifted their focus towards group rights and equal outcomes. The vision that groups had the right to equal representation in neighborhoods or professions, represented a radical departure from the American Way. Unequal social and economic outcomes were viewed as a priori proofs of discrimination. This is seen in cases were the federal government intervened in local communities not to protect individuals from discrimination, but to ensure that selected racial and ethnic groups are "sufficiently represented." Such remedies often involve efforts to engineering demographic change. This is seen when the federal government mandated that Westchester County, NY spend $50 million in tax payer funds to build "affordable housing" in areas were Latinos and African-Americans were "underrepresented," even though no evidence of individual or systematic discrimination was present. Rather, the dominant factor was the economic self segregation that occurs more along economic and social lines. Favorable or unfavorable as this may be, it does not constitute the violation of individual civil rights. The collaboration of county with federal authorities prompted a backlash in which this historically liberal county threw out its its incumbent democratic county executive in favor of a Republican candidate, Rob Astorino.

On a broader level this represents a clash between those who view individuals and groups as passive agents and those who believe that individuals and groups determine the nature of their communities through the efforts that they undertake and the decisions that they make. The former envision positive social environments and community life as goods that are unfairly monopolized by some and should be redistributed to others. This implies that the means to address the social pathology and crime that are endemic in poor African-American and to a lesser extent Hispanic communities, is to have the government mandate their transfer to middle class and (predominantly) white communities. Although this improves the lives of some individuals, the overall rate of poverty, pathology and school performance of poor minorities placed by the state in stable communities does not significantly improve. Many critics of this approach point out that the state should focus its efforts and resources in improving the dismal schools and employment opportunities in low income communities. In addition, when a critical demographic mass is reached, the social pathology of the original communities are recreated and the flight of the original population ensues. This is seen when the gangs of Humboldt Park took root in large swaths of the previously safe and quiet Belmont-Cragin neighborhood.

But, on a positive note, the sociologist Herbert Gans documented that residential integration "can be achieved without problem when the two races are similar in socio-economic levels and in the visible cultural aspects of class." In other words when diverse middle and upper class families who share similar norms and values freely choose to live together, integration will proceed smoothly and community life will remain vibrant. Backwards bigots who fear change will always exist, but the reservations of most individuals will melt away when they are faced with the daily reality that their diverse neighbors share their commitment to maintaining a clean, quiet, safe and positive community for their families. Such positive integration can be strengthened by having the state protect the rights of individuals to live in the communities of their choosing. But, when the state engages in heavy handed social engineering and forces individuals with incompatible norms and behaviors to live together, it is a recipe for tension. These sentiments are even shared by some African-American residents of Westchester:

"As an African American, I am tired of the practice of placing government housing in otherwise middle class and affluent neighborhoods. . . . All it does is reinforce a stereotype that all African American are laggards when it comes to educating ourselves, rising socially and advancing economically."

Integration through the free movement of diverse individuals, through their own efforts and achievements should be strongly encouraged. To achieve this, equal opportunity for all individuals must be carefully guarded, but no where in the constitution are groups granted the right to equal outcomes. And no where in the constitution is the federal government granted the power to force social and demographic change on local communities.

Westchester Adds Housing to Desegregation Pact


Published: August 10, 2009

Westchester County entered into a landmark desegregation agreement on Monday that would compel it to create hundreds of houses and apartments for moderate-income people in overwhelmingly white communities and aggressively market them to nonwhites in Westchester and New York City.

The agreement, if ratified by the county’s Board of Legislators, would settle a lawsuit filed by an antidiscrimination group and could become a template for increased scrutiny of local governments’ housing policies by the Obama administration.

“This is consistent with the president’s desire to see a fully integrated society,” said Ron Sims, the deputy secretary of housing and urban development, which helped broker the settlement along with the Justice Department. “Until now, we tended to lay dormant. This is historic, because we are going to hold people’s feet to the fire.”

The agreement calls for the county to spend more than $50 million of its own money, in addition to other funds, to build or acquire 750 homes or apartments, 630 of which must be provided in towns and villages where black residents constitute 3 percent or less of the population and Hispanic residents make up less than 7 percent. The 120 other spaces must meet different criteria for cost and ethnic concentration.

The county, one of the nation’s wealthiest suburbs, has seven years to complete the construction or acquisition of the affordable housing.

Affordable housing is defined by a complex formula, but generally it is meant to help working families keep from spending more than a third of their gross income on housing. A family of four could make up to $53,000 as a tenant and up to $75,000 as an owner and still qualify.

There is no minimum income level, “but it’s not going to be no-income,” said Craig Gurian, executive director of the Anti-Discrimination Center, which filed the lawsuit. “This agreement is not focused on facilitating housing for the poorest of the poor.” The center is a nonprofit anti-bias advocacy and litigation group based in New York City.

Mr. Gurian said that while black and Hispanic residents have a disproportionate need for affordable housing, “this is an opportunity-creating agreement, not a guarantee” that the homes would go to minority members.

“Residential segregation underlies virtually every racial disparity in America, from education to jobs to the delivery of health care,” said Mr. Gurian.

No communities have been chosen to receive the homes, officials said. But according to the Anti-Discrimination Center, more than two dozen predominantly white towns or villages are eligible, including Bedford, Bronxville, Eastchester, Hastings-on-Hudson, Harrison, Larchmont, Mamaroneck, New Castle, Pelham Manor, Rye and Scarsdale.

A federal monitor, James E. Johnson, has been appointed to ensure that the county abides by the settlement. Given that 120,000 acres in the county meet the criteria, the monitor “should have no difficulty making sure that Westchester ends its policy of allowing affordable housing to be off-limits in the most highly white neighborhoods in the county,” Mr. Gurian said.

The lawsuit, filed under the federal False Claims Act, argued that when Westchester applied for federal Community Development Block Grants for affordable housing and other projects, county officials treated part of the application as boilerplate — lying when they claimed to have complied with mandates to encourage fair housing.

A Westchester official originally dismissed the suit as “garbage.” But the county was largely repudiated in February when Judge Denise L. Cote ruled in Federal District Court that between 2000 and 2006 it had misrepresented its efforts to desegregate overwhelmingly white communities when it applied for the federal housing funds.

Judge Cote concluded that Westchester had made little or no effort to find out where low-income housing was being placed, or to finance homes and apartments in communities that opposed affordable housing.

As part of Monday’s agreement, the county admitted that it has the authority to challenge zoning rules in villages and towns that in many cases implicitly discourage affordable housing by setting minimum lot sizes, discouraging higher-density developments or appropriating vacant property for other purposes. Westchester agreed to “take legal action to compel compliance if municipalities hinder or impede the county” in complying with the agreement.

It was unclear Monday to what extent localities could thwart the agreement, if any chose to do so. Mary Beth Murphy, the town supervisor of Somers, which is among the possible locales for new housing, said that while she was unaware of the agreement, “we certainly are committed to affordable housing and have amended our zoning legislation in recent years to create more opportunities.”

The agreement could spark challenges to suburban county governments across the country that have resisted pressure to undo decades of residential segregation.

Andrew J. Spano, the Westchester County executive, attributed the settlement to “a historic shift of philosophy” by federal housing officials. He said he had signed the agreement to avoid further litigation and possible penalties.

The county admitted no wrongdoing, attributed the judge’s ruling to a technicality and argued that since it had previously invested in affordable housing, “what is different is the locations where the housing must be built.”

“We are settling the lawsuit because we have no choice,” Mr. Spano said.

The suit by the Anti-Discrimination Center applied to towns and villages in Westchester. The federal government deals directly with the county’s larger cities, among them Yonkers, which nearly went bankrupt before capitulating in a housing segregation case that began in 1980 and dragged on for years. That city, which had concentrated public housing in its southwest, was forced to build on the east side, where more whites lived.

The agreement is subject to approval within 45 days by the county’s Board of Legislators, which is also required to approve a $32.9 million bond sale to help finance the housing. Without legislative approval, the litigation would resume and the county would be faced with having to prove at trial that it did not knowingly file false claims.

Most of the homes would be new construction, although some existing houses and apartments could qualify if the county made them permanently affordable.

The case was litigated by Mr. Gurian and the center’s lawyer, John Relman, and supported by testimony from Andrew A. Beveridge, a sociologist at Queens College of the City University of New York.

Dr. Beveridge found that “racial isolation is increasing for blacks, falling slightly for whites” and that “income level has very little impact on the degree of residential racial segregation experienced by African-Americans.”

Mr. Gurian said that the 750 homes called for by the agreement “represents only a small percentage of need,” but that “it’s designed to be practical.”

Why Health Care Costs Too Much

One of the centerpieces of the Obama Administration has been their efforts at health care reform. The vast majority of Americans are in agreement with President Obama's belief that rising health care costs are squeezing American families and eroding the competitiveness of American businesses. Where individuals sharply diverge is their belief in the cause of and solution to this incredibly complex phenomena. Implied in Obama's narrative is that greed and market forces are the primary causes of rising costs and accordingly the solution is greater federal intervention in the health care market. Over the last 50 years as the government presence in health care has steadily increased, so have costs. And perhaps of greater importance, the rise of the third party payment system (be it through Medicaid or employer provider insurance), which has been encouraged through tax policies, has been correlated with rising costs. While correlation does not necessarily equal causation, at the very least it merits a serious exploration of the possibility that state intervention (in its present form) has directly or at least indirectly exacerbated price inflation.

Examples of greed and corporate malfeasance abound, yet an explanation of rising costs centered on these factors are problematic and invite far more questions than answers. For example, there is no evidence that tech firms are any less "greedy" and "malevolent" than medical care providers, yet the cost of computers has steadily dropped, while quality and innovation have increased. This begs the question of why the "greed" of tech firms has been held in check, while that of medical firms has increased. Clearly the government presence in the tech sector has been far more limited than it has been in the medical sector, so this cannot be the primary factor. So, I am inclined to believe that the market forces that control costs and maintain quality in virtually ever sector of the American economy have been muted in the health care market.

While I do recognize that there are some qualitative differences between health care and other markets, general economic principles do apply. And clearly a major piece in the puzzle of how to control health care costs lies in finding a way to maximize largely beneficial market forces, while simultaneously providing for the segments of American society that are unable to do so themselves. This may involve a seemingly contradictory mix of decreasing federal involvement in some instances, while fine tuning and even increasing in other instances. G-d lives in the details, so the question of formulating such policies will be left to economic minds far greater than my own. Unfortunately I do not anticipate this task being granted to the best and brightest, but rather to politicians and the lobbyists that control them. And the only force that can hold them in check is an educated and involved public.

Before we can come up with cures, we must better diagnose the illness. I came across an article published 16 years ago that addresses the issue of Why Health Care Costs Too Much. While I do not expect my readers to agree with all of the points that the author presents, they are surely worth considering. And on a broader level, it's essential for the public to explore visions that question narratives sponsored by the government-media complex.

Cato Policy Analysis No. 211 June 23, 1994

Why Health Care Costs Too Much

by Stan Liebowitz

Stan Liebowitz is a professor of managerial economics in the Management School of the University of Texas at Dallas.


Executive Summary

Health care costs have increased dramatically over the last few decades and are now thought to be excessively high. That has caused the current political reevaluation of our health care system, including its funding and performance.

This study is an analysis of the causes of the increase in health care costs. The major culprit in the seemingly endless rise in health care costs is found to be the removal of the patient as a major participant in the financial and medical choices that are currently being made by others in the name of the patient.

The increasing share of medical bills paid by third-party payers (insurance companies and governments) and the disastrous consequences are documented. Patients overuse medical resources since those resources appear to be free or almost free. Producers of medical equipment create new and more expensive devices, even if they are of only marginal benefit, since third-party payers create a guaranteed market. Attempts to rein in those costs have led to a blizzard of paperwork but proven ineffective in controlling costs.

The cure for the present problems is straightforward: the patient must once again be made the central actor in the medical marketplace. Patients need to be given the same motivations to economize on medical care that they have to economize in other markets. Tax laws need to be rewritten. The use of medical savings accounts needs to be promoted. High-deductible health insurance should be encouraged.

Returning the patient, and normal market principles, to center stage is all that is necessary to bring the costs of health care under control.


One would practically have to be a modern Rip van Winkle not to be aware of the fact that the percentage of the gross national product devoted to health care has been rising for several decades. That fact figures prominently in the claim that health care is devouring too many of America's resources and that, therefore, the health system needs to be overhauled. The infamous growth of medical care relative to GNP is shown in Figure 1.

Source: Health Care Financing Administration

The focus on the share of GNP devoted to health care is somewhat unusual. For example, there does not seem to be any concern over the share of our wealth that is devoted to shoes, or automobiles, or housing. Moreover, there are many products, such as recreational activities, whose share of GNP rises as our wealth increases, yet there is no concomitant clamor to reduce our expenditure on them, as there is on health care.(1) The increasing share of GNP devoted to health care, by itself, is not evidence that the health care market is in need of repair.

More telling are attributes of the health care delivery system that make it inefficient, foremost among which is the

reliance on third parties (insurance companies and the government) to pay most medical costs. In 1990 third parties paid 77 cents of each dollar of medical expense. Because patients pay an average of only 23 cents on each dollar of medical expense, there is only a weak linkage between any consumer's use of medical resources and the payments made by that consumer. When the direct linkage between use of medical facilities and payment is broken, medical consumers lose their incentive to economize on their use of medical resources.

Another factor that usually portends inefficiency in any market is a high degree of government intervention in it, as the extensive literature examining government organizations has demonstrated.

Analysis indicates that our high medical costs are the result of various government policies that have removed patients as purchasers in the medical marketplace. While that state of affairs may be no more than the unlucky result of misguided policies, it is detrimental to the health of medical markets and, if improperly diagnosed, may eventually prove deadly to the literal health of many Americans.

Unfortunately, the proper diagnosis of our medical problems has been obscured by the demonizing of certain components of the medical industry. For example, the Clinton administration has at various times blamed the pharmaceutical industry, medical specialists, and health insurance companies for causing high prices and excessive medical expenditure. Such charges miss the underlying reasons for the current poor health of the medical delivery system, and diminish our ability to repair it. The failure to understand the causes of increased medical costs is apparent also in the Clinton proposal to revamp our health care system, which unabashedly increases our reliance on government and third-party payments.

Several competing proposals, however, have been suggested. Among them are some that adopt, at least in part, the medical savings accounts and tax-law changes proposed by John Goodman and Gerald Musgrave in Patient Power.(2) Central to the Patient Power approach is the weakening of third-party payment mechanisms and the reestablishment of the patient as both the consumer and the purchaser of medical services. By putting consumers back in control of their money, we can restore the vitality of the medical sector.

The Varieties of Excessive Costs

The excessive costs of our current medical system can be classified into three major categories:

• The first, and by far the largest excess cost, is due to the current overuse of medical resources by patients. Overuse is the rational response of consumers who do not have to pay the entire cost of the medical services they use. The causes of those excess costs are Medicaid, Medicare, and tax laws that provide incentives for individuals to have their employers purchase their medical care in the form of private health insurance.

• The second category of excess cost consists of administrative and paperwork costs that are unnecessary for the provision of health care, but that have come into existence because of the current patchwork of third-party payers and their attempts to control their increasing costs by closely monitoring the behavior of doctors and patients. Even worse is the fact that those cost-containment activities do not seem to have contained costs very well.

• The third excess cost is associated with the fear of malpractice suits. Administering medically unnecessary tests and procedures helps to insulate doctors and hospitals from the potential wrath of patients or their families when inevitable accidents occur in medical treatment or when treatments just do not work.

In some sense each of those costs has been brought about by the retreat from a market-based system of medical delivery. The first two of them could have been avoided if patients had been given incentives to make their own choices about medical care. The third cost could have been controlled if the courts had allowed patients and medical providers to use market contracts to detail liability in case of unforeseen accidents.

The Cost from Overusing Medical Resources

Largely ignored in much of the current debate over health care is the excessive use of medical resources by ordinary Americans. No politicians are giving speeches blaming the average citizens of the country for overusing medical care. There are no fireside chats with the president asking citizens to stop seeing doctors so often, asking parents to have their children "tough it out" and not see the doctor for every little scratch, asking the elderly to give up that extra year or two of life. Politicians are not so foolish.

But turning a blind eye to the consumption of medical resources by patients is a mistake. If the country is overusing medical resources, patients must bear responsibility for much of that overuse. We cannot cut our medical expenditures without reducing our consumption of medical resources. Fortunately, we know why patients overuse medical resources, and we know how to solve the problem. Unfortunately, the political will to enact correctives to the problem is not as easily come by, and the current administration in Washington seems to prefer to make empty promises to reduce costs while at the same time increasing medical services.

The concept of "excessive" medical use has a very precise meaning in economic analysis. When the marginal value of the resources used in a medical treatment is greater than the marginal value provided to the patient by the medical treatment, then the medical treatment is classified as "excessive." Note that the economic concept does not require that the medical treatment be without value altogether.

That definition needs to be contrasted with that of the medical community, which typically defines "excessive" treatment as a treatment that is not medically beneficial, as in the claim that cesarean sections are performed in many cases where they serve no positive medical purpose. The medical definition of "excessive" is similar to that of "fraudulent." Patients purportedly accept unneeded treat ment because they are misled by doctors. Yet the economic concept of "excessive" does not require any deceit or fraud at all. It merely requires that patients receive treatment that the patients themselves value at less than the cost of the treatment.

The economic concept of excess use of medical resources is illustrated in Figure 2, which is a version of a simple diagram that can be found in virtually any introductory economics textbook. In Figure 2 medical care is simplified into a single unidimensional concept for the purposes of illustration, but the ideas contained in the diagram are perfectly general and can apply to any particular medical procedure. The downward sloping line represents the value to patients of increasing amounts of medical care. Not all patients have the same value for a given procedure: some patients are not likely to live a useful or productive life, even with treatment; others expect to be able to live many productive years afterwards; still others prefer to preserve resources for their children and forgo treatment. Various persons, therefore, will have different values for identical medical procedures, since the impact of the procedure on their lives will be different. Their differing values for the medical service are arrayed in order, measured by dollars, from highest to lowest, in Figure 2. In the jargon of economics, it is a demand curve.

The upward sloping line represents the value of resources that are used when providing medical services. Doctors, nurses, hospitals, and the other resources currently used in providing medical care could be productively put to use in other activities. Thus, the provision of medical services is a cost to society, in the sense that resources that are used to provide medical care cannot then be used for something else. The measure of the value of lost resources is known as the opportunity cost of producing medical services.

In Figure 2, the cost of providing additional units of medical service is shown by the upward sloping line, which is usually called a supply curve. It is shown to slope upward because it is often (but not necessarily) thought that the resources used first in this market are best suited for medical uses relative to other uses, and those used last are poorly suited to medical uses.

It is a simple matter to determine the optimal quantity of medical services in a diagram such as Figure 2, and students in introductory economics classes have been doing so for decades. The quantity of medical services Q* is the optimal amount of medical service.

That can be understood by examining the implications of other quantities of medical service. For quantities of medical service greater than Q*, a unit of additional medical service is of lower value to patients than is the cost of providing it. In other words, patients would prefer cash equal to the value of the resources used to provide the medical services to receiving the medical services. Thus, it impoverishes patients and society to produce medical services when the recipient of the service would prefer those resources to be used for a different purpose. Similarly, for quantities less than Q*, patients value an additional unit of medical service more than they value the resources used to provide that unit of medical service. Producing the extra unit of medical service would enhance the well-being of patients and society. Thus, if the extra unit is not produced, society is deprived of a potential gain. Therefore, the quantity Q* is the efficient output. At Q*, the net value (value to consumers minus resources used up) of medical services is maximized.

Unfortunately, the current medical system does not induce patients to choose the efficient quantity Q*. Because patients largely have their medical bills paid by third parties, it is rational for them to consume medical services even when the value of those medical services is less than the value of the resources used to provide them.

Third-party payments are of two forms. First, most patients have private health insurance, usually provided by their employers.(3) A typical feature of such insurance is that when insured patients go to doctors, or hospitals, they pay only a small part of the actual cost of the visit, known as a copayment. Second, most patients without private health insurance are covered by government health insurance, either Medicare or Medicaid. Those patients also pay only a portion of the actual costs of the medical resources they use. As a result, there are very few persons who actually pay their entire health care bills out-of-pocket.

Figure 2 can be used to illustrate the situation in which patients pay zero out-of-pocket expense for medical procedures. Although zero out-of-pocket expense is something of an exaggeration (such expenditure is actually 23 percent), that assumption makes the issue easier to understand. In that case, patients have no reason to refuse any medical procedure, no matter how little the value of the procedure might be to the patient.(4) The quantity of medical services that patients will request will be Q1. The extent of the unnecessary medical services is given by the difference between Q1 and Q*. Those excess medical procedures have some value (given by area D), but their value is too low to justify the expense of the procedure.

The unshaded rectangle in Figure 2 represents the expenditures that society would make for medical care if it were provided in a fully functioning marketplace. It is merely the product of the price P* and the quantity Q*. The shaded region represents the excessively high expenditures that occur when third parties pay for all medical care. It is equal to the product of the excess quantity, Q1, and the higher price of medical care, P1, minus the product of P* and Q*.

Some of the excess expenditure goes to sellers of medical services, indicated by areas B and C. The extra revenue going to providers may explain why they have been willing participants in the movement away from consumer payment for medical care.(5) Some of the excess expenditure produces value to consumers, given by area D. But some of the excess expenditure is pure waste, known to economists as deadweight loss, and given by the triangular portion of the shaded area indicated as A.

The excess consumption at a point such as Q1 will likely take the form of excess quality since, in some sense, quality and quantity are interchangeable. Too many hospitals might contain expensive state-of-the-art equipment; too many patients might occupy singleor double-occupancy rooms rather than wards. Overall, the quality of care will be too high, even though there clearly is some value in the additional care. We have chosen a Cadillac of health care systems when a Chevrolet is more in line with our willingness to pay. It is understandable that some commentators are reluctant to characterize the problem of excess quality as a "crisis." Of course, it is not really the quality of health care that is in crisis; it is the financing. Making monthly payments on a Cadillac can seem like a crisis to someone making Chevrolet wages. Too much of an economic good can be as harmful as too little.

The Impact of Third-Party Payment on Medical Spending

Measuring excessive use of a product is a difficult and usually imprecise task. The best that can be hoped for is a crude estimate, and even that will require some rather broad generalizations, such as lumping many disparate medical resources into a single whole.

The analysis consists first of measuring the relationship between third-party payments and changes in the use of medical resources. Then the current use of medical resources is compared to the resources that would have been used if patients had paid for their own health care (Q* in Figure 2). The difference measures the excessive use of medical resources.

Third-party payment mechanisms are now very common, although before World War II individuals generally purchased medical services just like any other economic commodity and paid for them just like any other economic commodity--out of their own pockets. But during the war many companies began to offer medical benefits as a way to avoid price controls and to take advantage of the tax code. As shown in Figure 3, there was an explosion of private health care coverage shortly after World War II.(6)

Source: Based on data from Health Insurance Association of America, 1991 Source Book of Health Insurance Data.

In addition, 1965 was the year in which the government introduced Medicare and Medicaid, which pay for much of the medical care of the elderly and the poor. The combination of the increased use of private health insurance and in creased government payments in the last few decades has reduced the out-of-pocket expenses of consumers dramatically. Figure 4 shows the fall in out-of-pocket expenses since 1960.(7)

After 1960 the fall in out-of-pocket expense was mainly due to increases in government expenditure. Although not shown, there was a significant decrease in out-of-pocket expenses due to increases in private health insurance in the 1940s and 1950s. The overriding conclusion to be drawn from Figure 4 is clear, however. The role of third-party payment has increased significantly in the last few decades.

Some of the most compelling evidence that third-party payments alter the use of medical resources comes from a study performed under the auspices of the RAND Corporation in the late 1970s.(8) That study assigned families to four health insurance plans with differing coinsurance provisions and deductibles. Coinsurance is the percentage of medical bills paid out-of-pocket by the patient. The deductible measures the maximum total dollar amount that a family will pay out-of-pocket before the plan will drop the coinsurance requirement and pick up the entire medical bill. Some families had zero coinsurance, meaning that the plan paid all of their medical bills, while other families had to pay up to 95 percent of the cost of their medical bills, until their bills reached a total deductible level of $1,000 in 1973 dollars, which is the equivalent of approximately $2,850 in today's dollars.(9)

Source: Based on data form Health Insurance Association of America, 1991 Source Book of Health Insurance Data.

The RAND researchers observed how the different coinsurance rates influenced the use of medical resources by 2,500 families for three to five years. They found very pronounced changes in the use of medical resources, depending on the extent of third-party payments. In particular, families with no coinsurance (complete third-party payments) used 53 percent more hospital services (measured in dollars) and 63 percent more visits to doctors, drugs, and the like than did the group that paid 95 percent coinsurance. Overall, the total use of medical resources was 58 percent greater for the group with no coinsurance. Thus, there is clear indication that the use of medical resources by patients varies dramatically with the existence of third-party payment mechanisms.

Figure 5 shows the relative medical expenditures for each of four groups in the experiment. As the share that patients pay drops below 50 percent, the use of medical resources increases dramatically. It is interesting that this experiment did not find increased use of medical resources as the out-of-pocket share dropped from 95 percent to 50 percent. That may mean that consumers do not begin to overuse medical resources seriously until they pay less than half the cost, or it may just be a statistical anomaly, as the authors of the RAND study point out.

Source: Data from RAND health insurance experiment, cited in Joseph Newhouse et al., "Some Interim Results from a Controlled Trial of Cost Sharing in Health Insurance," New England Journal of Medicine, December 17, 1981.

The decrease in use of medical resources by families with high copayments might have been thought to decrease their health. One of the criticisms that has been made of high-deductible, high-copayment medical plans is that they discourage inexpensive preventative medicine, causing higher medical payments down the road. But the RAND study found no significant difference in health outcomes. In addition, a study by Robert Brook and others, reported in the New England Journal of Medicine, concluded that free medical care did not appear to improve the health of the participants.(10) Thus, it appears that the excessive costs associated with excessive use of medical resources do not materially improve the health of those receiving that care, a result that should not be surprising. Most persons are likely to be willing to pay for inexpensive medical services that provide enhanced future health. Moreover, the prevention of disease is most often associated with activities that individuals engage in for their own reasons, and that are not strongly related to visits to doctors (e.g., they stop smoking or they exercise).

It should also be noted that the RAND study was conducted in such a way as to underestimate the impact of third-party payments on total medical expenditures, because the impact of third-party payments in the experiment could not appreciably influence the price of medical resources, since the number of participants in the study was too small a percentage of the market to have influenced market prices. However, if the measured increase in use of medical resources found by the RAND researchers were duplicated throughout the country by millions of patients, as more and more of them switched to third-party payments, the price of medical resources could be expected to rise, and the increase in expenses could be expected to be larger than that found in the RAND experiment.

The RAND experiment is not the only estimate of the response of consumers to medical payments. A large number of other studies conclude that medical consumers do respond to price changes, and the degree of response found is often similar to that reported in the RAND study. There is virtual unanimity in the belief that higher levels of third-party payment will increase the use of medical facilities by patients.(11)

In the RAND study patients responded within a few years to changes in third-party payments. Yet it is likely that, for society as a whole, the complete reaction to changes in third-party payments might take a longer time to work through the system. Once third parties pay for a large share of total costs, technologies that might not have been cost effective when the patient was paying the full cost will be demanded by patients.

A simple analogy can be used to illustrate the impact of third-party payment on the growth rate of medical expenses. If the government told citizens that it would pay 80 percent of the cost of each automobile purchased, most citizens would march right out to their local dealerships and order very expensive cars. Automobile manufacturers, sensing profits in the air, would begin to offer far more standard equipment and would begin to offer more new types of equipment than they had previously. What was formerly a luxury car would become commonplace, and new, more luxurious automobiles would be produced. The newest technologies would be used (rather like those used in jet fighters), since the cost to the consumer would be only a fraction of the actual cost. Thus, the growth in automobile expenditures caused by the third-party payments could go on for many years.

A similar story can be told about the health care industry. Although the RAND experiment indicated that consumers responded quickly to third-party payments, the longer run consequences might continue for decades. It is possible to examine that hypothesis by comparing the growth in expenditures over several decades for various medical products that have considerable variation in the degree of third-party payment. As most persons who have experienced the choices available with different health insurance policies can testify, medical services related to dental and vision care (eyeglasses) and drugs or medical appliances tend to have much higher out-of-pocket expenses than hospital stays or visits to doctors. Figure 6 indicates that major differences exist in the share of out-of-pocket expenses borne by the patient for various categories of care.(12) In 1990 third parties paid virtually all hospital bills (95 percent), making hospitalization essentially a free good for most Americans, and only 20 percent of physicians' bills were paid by patients. On the other hand, 53 percent of dental bills, 74 percent of drug expenses, and 68 percent of eyeglasses bills were paid by patients.(13)

If third-party payments influence the growth of medical expenditures, then the increased use of medical resources in the past few decades should differ for the various types of medical services. That prediction is generally borne out, as shown in Figure 7, which shows the growth in each of the medical sectors, relative to their 1965 amounts, after controlling for the effects of inflation. Thus, the total costs of hospitalization increased more than 350 percent from 1965 to 1990, even after controlling for general inflation. During the same period, physician payments went up almost 250 percent, yet costs for dentists, drugs and appliances, and vision care went up only 150 to 200 percent. At the same time, real GNP went up by 94 percent.(14) It should be no surprise, then, that medical costs are gobbling up larger and larger shares of GNP.(15)

Source: Based on data from Health Insurance Association of America, 1991 Source Book of Health Insurance Data.

Source: Based on data from Health Insurance Association of America, 1991 Source Book of Health Insurance Data.

It is particularly ironic that drug manufacturers have been singled out by the Clinton administration as being responsible for the spiraling costs of health care in light of the fact that the growth in drug expenditures is far less than the growth in overall medical costs, particularly hospitalization. The relationship between growth in expenditure and out-of-pocket payment is more clearly seen in Figure 8. For five categories of medical care, the share of costs paid by patients is related to the growth in real expenditure over a 25-year period. The relationship is as expected: medical categories with low levels of third-party payments (high out-of-pocket expense) had the smallest increase in total expenditures. Although there are only five data points--and the small number of observations requires that we be cautious in trying to generalize the results--it is still noteworthy that the results indicate a powerful relationship between the level of coinsurance and the growth of medical expenditures.

The three medical categories having a relatively small third-party payments--dental services, drug products, and vision products--also show growth rates that are not a great deal higher than the overall growth of GNP (194 percent). The two categories with the greatest level of third-party payments experienced the greatest growth. The rank correlation between the growth of medical costs and the share of the medical bill paid out-of-pocket is perfect.

The line drawn through the points is a linear regression line.(16) It is almost a perfect fit through the points, and its interpretation is straightforward: the larger the share of medical expense paid by the patient, the smaller the growth in expenditure on that medical product.(17) Extrapolating the line to a point where patients pay completely for medical services would lead to the conclusion that medical services would grow at a rate only slightly greater than the overall growth in GNP.(18) Table 1 gives the expected share of GNP devoted to medical care in 1990 for various levels of third-party payments, based on the results shown in Figure 8.

Table 1
Medical Care's 1990 Share of GNP for Different
Third-Party Payments (1965 base)
If Patients Had Paid (%) Percentage of GNP in 1990 Would Have Been

100 6.8
75 8.7
50 10.6
25 12.6
0 14.5

Thus, the evidence indicates that if the effect of third-party payment had been eliminated, the growth in medical expense would have been much smaller than it actually has been. The reality is that medical expenditures have risen from 4.4 percent of GNP in 1950 to 12.2 percent in 1990 to over 14 percent today. That increase has occurred under a regime of increasing third-party payments. Yet without third-party payments, the growth rate of medical care would have been much smaller, and the "crisis" in health care would not have been a crisis at all.

But even the figures in Table 1 estimating the importance of medical care under regimes of low third-party payments will, to some extent, overestimate the importance of medical care as a percentage of GNP. That is because the base year, 1965, was already severely tainted by the influence of third-party payments, and thus the level of medical spending was already significantly higher than it would have been had third-party payments not been as high as they were.

Finally, it is disconcerting to note that two of the three categories that have experienced the smallest increase in total expenditure--dental and vision products--are going to be brought under the umbrella of third-party payments in the proposed Clinton health plan, a policy that will ensure that our current problems will get worse. Instead of trying to duplicate the relatively good performance of dentistry, eye care, and drugs in the relatively profligate categories of hospitalization and physician payments, the Clinton administration appears determined to impose the egregious performance of hospitalization and physician expenses on the few areas not currently suffering from an explosion in costs.

Evaluating Excessive Output

The historical evidence just examined indicates that with no third-party payments, the medical bill for the nation would be less than 7 percent of GNP instead of the current level of 14 percent. Stated another way, current spending is approximately double the level it would have been if third-party payments had not existed. However, since insurance for calamitous medical bills is valuable, so is some level of third-party payment. Assuming that the alternative to the current system will still leave thirdparty payments in the vicinity of 25 percent implies, based on Table 1, that the share of GNP devoted to medical care would be in the range of 8 to 9 percent. In dollar terms, that translates into a conclusion that for 1992, under a system with third-party payments in the vicinity of 25 percent, medical spending would have been approximately $300 billion less than the actual payments.(19) That is not to say that the excessive $300 billion provides no value, but that it provides less value than cost and would not have been spent if patients had been making the financial decisions.(20)

Although that estimate of excessive expenditure may seem like a fairly enormous sum, it is actually quite conservative. Other analyses in the literature provide a much larger estimate of the increased use of medical resources. Martin Feldstein estimates that for hospital care, the largest single component of health care, the increase in expense that would be caused by a change from complete out of-pocket expenses to complete third-party payments might be as high as 250 percent.(21)

Even the RAND study, which provided an underestimate of the impact of third-party payment, concluded that virtually complete third-party payments would increase medical costs by at least 60 percent relative to what they would have been with much lower third-party payments, a result not far from that found in the historical data.

Excessive Costs of Monitoring

Much of the public debate over health care centers on the amount of paperwork that is required. Hospitals and doctors fill out a plethora of forms for health insurance companies and for the government. But in fact the paperwork (administrative) costs of the current system are not the largest unnecessary costs in our medical system.

It is possible to gauge total administrative costs by focusing on the administrative costs of health insurance, the component of administrative costs that appears to be most precisely measured. Comparing those costs to the other costs of the health care system (Figure 9) makes it clear that the measured administrative costs of running health insurance companies are not a large proportion of the total. Indeed, in 1990 they came to 5.81 percent of the total cost of our health care system.(22)

However, health insurance administrative costs are only a part of the true administrative costs of the current system. After all, hospitals and physicians have enormous amounts of paperwork, much of which they send to the health insurance companies. Yet only the costs to the insurance companies are included in Figure 9. Still, the administrative costs of running health insurance companies should mirror the costs that hospitals and physicians incur, since the forms go back and forth between those parties. If so, then the growth of one category of administrative costs will reflect the growth in other categories of administrative costs.

As a first approximation, administrative costs could be expected to grow at about the same rate as other medical costs, since some administration is necessary. If administrative costs are excessively high, and if the excess has not been in the health system from the beginning, then we should find that administrative costs have increased by more than other medical costs. Figure 10 compares the growth of total medical costs with the growth in the cost of administering private health insurance since 1965.

Source: Based on data from Health Insurance Association of America, 1991 Source Book of Health Insurance Data.

Source: Based on data from Health Insurance Association of America, 1991 Source Book of Health Insurance Data.

Figure 10 indicates that administrative costs increased slightly less than overall medical costs from 1965 to 1975, but that since 1975 they have grown very rapidly.(23) Thus, there is some evidence to indicate that administrative costs might be too high. It is important to understand just why those costs might have started to grow so rapidly after 1975.

The most likely explanation seems to be the emergence of Professional Standards Review Organizations (PSROs) in 1972 and Professional Review Organizations (PROs) 10 years later. Those organizations are privately contracted agents of the government that review the decisions made by doctors and other health professionals, purportedly to save taxpayers money on Medicare and Medicaid cases by eliminating unnecessary or wasteful expenditures. Since private health insurance companies act as fiscal intermediaries for the government's Medicare program, the reviews are bound to affect their costs as well. The flip side is Utilization Review (UR), a system very similar to PROs, in that private health insurance companies hire third parties to review the behavior of doctors. All three systems give doctors incen tives to document all aspects of care, since otherwise they might not be compensated by the third-party payer.

If the entire difference in the growth of administrative costs and other medical costs since 1965 were taken to be excess administrative costs, then 50 percent of current administrative costs would be excessive. And it is inter esting that there is no evidence that the extra administrative costs have lowered overall medical costs, so that the supposition that the new administrative costs do not provide any value seems plausible. Of course, the true test of whether the additional administrative costs are worthwhile requires comparing actual medical costs with what the costs would have been without the additional administrative costs, a test that I do not attempt here, nor am I aware of any such calculation by others. Since administrative costs for health insurance were somewhat less than $50 billion in 1990, and doctors and hospitals must duplicate those costs, we can conservatively assume that total administrative costs are at least $100 billion. Then, if the costs were 50 percent too high, the excessive administrative costs would be $33 billion.

There are many estimates of the excess costs of administering health care, as might be expected given the difficulty in measuring them.(24) It has been claimed that current administrative costs are twice as high as they should be, and that as much as 10 percent of medical expenditure is excess administrative costs. Still, even those estimates indicate that excessive administrative costs are small ($83 billion in 1992) compared to the excessive use of medical resources due to third-party payments.

The current Clinton heath plan claims that there will be large savings in administrative costs and that those savings will help to cover the cost of health insurance for some 37 million Americans who are thought not to have health insurance at any moment.(25) But those cost savings are predicated on there being fewer forms to be filled out, since there will be fewer insurers. But if the additional administrative costs are due to wasteful utilization reviews by third-party payers, there would be no reason to expect administrative costs to fall, given that the Clinton plan expands the role of third-party payers. The Clinton plan also adds entire new layers of government bureaucracy, which, if history is any guide, seems most unlikely to reduce overall administrative waste.

How Patient Power Lowers Health Care Costs

The Patient Power plan avoids excessive costs--both those associated with excessive use of medical care and those associated with excessive administrative burdens. It reduces medical expenditures by giving patients an incentive to use medical care efficiently, rather than overusing it. To that end, tax laws would be altered. The tax break extended for the purchase of health coverage would be allowed only for basic, no-frills catastrophic insurance policies. No longer would patients be faced with a choice of having their employer pay for small medical bills with before-tax dollars or paying out-of-pocket costs with aftertax dollars. Thus, there would be no reason for them to prefer to have insurance pay for most medical bills, and insurance policies would no longer carry small copayments. As we have seen, that is the most crucial element in stopping the soaring increase in health care costs without clumsy, government-imposed price controls.

The Patient Power plan would allow patients to selfinsure (meaning that patients themselves pay for the treatment of their illnesses) for many potential medical bills through medical savings accounts that would go hand in hand with the tax changes. It typically costs an employer more than $4,800 to provide health insurance for a worker, her spouse, and two children. Under the Patient Power plan, employers would purchase only catastrophic policies for workers, and workers would deposit the savings in premiums in medical savings accounts. The medical savings accounts could be used to pay for small, routine medical bills not covered by catastrophic health insurance. If the account was not used to pay for medical bills, the owner could roll it over into an IRA to be used for other purposes after retirement. Patients would have an incentive not to use their medical savings accounts except for medical care that they deemed worth the money, since they would benefit directly from economizing on medical care. In addition, selfinsurance eliminates the paperwork involved with having third parties pay medical bills. It also eliminates the costs of having third parties monitor the transactions between patient and doctor, thereby greatly reducing administration costs generated by PSROs, PROs, and URs.

Second, Patient Power would reduce state regulations that currently mandate many benefits that must be provided by each health insurance policy sold in a state irrespective of patients' wants or needs. Such regulations drive up the price of health insurance and make the purchase of a policy less attractive for persons who are not interested in the extra benefits mandated by the state. If consumers are allowed to purchase insurance that is tailored to their specific needs without having to comply with state mandates, they will be happier and will save money.

Finally, Patient Power would reform tort law to allow patients and doctors to contract in advance to rationally insure against accidents or errors.


The moral of this story is crystal clear: third-party payment mechanisms have raised the total consumption of medical resources to unprecedented levels. The excessive use of medical resources due to third-party payments was estimated to be over $300 billion and the excessive administrative costs to be in the vicinity of $33 billion.

To lower the currently very large medical expenditures in the United States, the third-party payment system must be reined in. Putting the patient back in control of the medical purchasing decision is the most effective way to control third-party mechanisms, while still providing a safety net for Americans.

The worst policy that we could follow would be to increase third-party payments and reduce copayments. Yet that is exactly what is proposed by the Clinton administra tion. The evidence makes it abundantly clear that the current increase in medical bills will only be exacerbated by the Clinton plan and that rising costs will quickly run into the spending caps contained in the Clinton plan. That plan would be greatly improved if it were to impose high copayments on patients instead of low copayments, and if it were to keep predictable and relatively inexpensive medical costs, such as dentistry and eye care, out of the thirdparty payment system. But even if those changes were made, the Clinton plan would still create a large government bureaucracy controlling and limiting consumer choices, and it still would contain the dreadful idea of spending caps as a means of reducing medical costs.

The Patient Power plan is much more likely to reduce health care costs.


(1) Recreational expenditures, relative to disposable in come, increased from 5.0 percent in 1958 to 7.1 percent in 1988, according to statistics reported in Harold Vogel, Entertainment Industry Economics (Cambridge: Cambridge University Press, 1990), p. 348.

(2) John C. Goodman and Gerald L. Musgrave, Patient Power: Solving America's Health Care Crisis (Washington: Cato Institute, 1992).

(3) Ibid. That appears to be an outgrowth of two factors. First, during World War II price controls were in place at a time when employers were looking to increase the pay of workers. Providing additional fringe benefits allowed employers to circumvent price controls, and fringe benefits thus became a common part of an employee's compensation. Second, tax laws allow employers to deduct medical insurance premiums, whereas individuals have no such right (unless their medical bills are large enough for them to declare them as itemized deductions, which is certainly not the usual case). Obviously, those factors provide a strong incentive for most employees to purchase their medical insurance through their employers.

(4) Note that the inconvenience of the medical procedure, lost wages, pain, and so on, are taken into account in the patient's valuation of the medical procedure. Thus, a patient will request any procedure for which all "psychic" costs are less than the benefits, ignoring the monetary costs of the procedure itself.

(5) Although the leadership of the American Medical Associa tion originally opposed Medicare in 1965, they were against it for philosophical reasons and actually predicted that it would increase revenues going to doctors. Their opposition ended when most doctors realized the bonanza that it provid ed. See Edward Annis, Code Blue (Washington: Regnery Gate way, 1993).

(6) Health Insurance Association of America, 1991 Source Book of Health Insurance Data (Washington: HIAA, 1992), Table 2.2.

(7) Ibid., Table 4.4.

(8) Joseph Newhouse et al., "Some Interim Results from a Controlled Trial of Cost Sharing in Health Insurance," New England Journal of Medicine, December 17, 1981.

(9) Using the GDP deflator found in Robert J. Gordon, Macro economics (New York: Harper-Collins, 1993), appendix A.

(10) Robert Brook et al., "Does Free Care Improve Adults' Health? Results from a Randomized Clinical Trial," New England Journal of Medicine, December 8, 1983.

(11) Alan Sorkin reports on 20 estimates of price elasticity for various medical services. Price elasticity measures the responsiveness of consumption to changes in price. The majority are between 0.2 and 1, which is consistent with the RAND experiment. Sorkin, Health Economics (New York: Lex ington Books, 1992), p. 31.

(12) Health Insurance Association of America, Table 4.1.

(13) A large portion of expenditures on drugs is for overthe-counter products, which most medical plans do not cover.

(14) Ibid., Tables 2.2, 4.1, and 4.4; and Gordon, appendix A.

(15) There were three other categories of expenditure that were not included: nursing home expenditures, other health services, and other professional services. Since the con tents of categories with the term "other" is unclear, and might change dramatically over time, I followed the common practice of removing them. Nursing home expenditures in creased dramatically over the period, but that is probably more attributable to the decline in the extended family and the increase in life span than it is to any increase in medical use. Nursing homes, after all, generally do not respond to specific health problems so much as to old age and general inability to look after oneself. (Younger family members used to look after elderly relatives.) In addition, regulation of nursing homes during the period raised their costs significantly, according to Goodman and Musgrave, p. 107. Had those categories been included, the statistical confidence in the relationship between out-ofpocket costs and growth in expenditure would have weakened considerably, although the direction of the relationship would have been the same.

(16) Obviously, the change in expenditures on those catego ries of medical care are likely to depend on many variables other than just the change in copayments. Some of those factors are changes in age cohorts, changes in medical technology (which itself is likely to be affected by the copayment rate), and changes in diet and exercise. Never theless, these results are consistent with those of prior studies, are statistically significant, and are not related in a clear way to potential left-out factors.

(17) Regressing on the share of out-of-pocket expenses (OOPE) gave the equation: Growth in Expenditures (GIE) = -255 _ OOPE + 478. The t-statistic on OOPE is 12.34 and the rsquared (adjusted) is .97. Those coefficients imply that if out-of-pocket expenses had been 100 percent, medical expen diture would have grown in 1990 to only 223 percent (478 255) of its 1965 value. The GNP in 1990 was 194 percent of its 1965 value, so medical care would have remained almost constant as a percentage of GNP.

(18) This estimate implies a higher growth in medical expen diture than some others suggest. For example, Sorkin re ports that most estimates of income elasticity of medical care are in the range of .5 to .7, meaning that medical expenses would be expected to grow only 60 percent as fast as income, holding everything else constant.

(19) In 1992 spending on medical care was approximately $830 billion. Assuming that our best alternative is to have third-party payments in the vicinity of 25 percent, we would expect current spending to be approximately 60 percent too high. Thus, for 1992, under a system with smaller thirdparty payments, medical spending would have been only $520 billion, and, therefore, slightly over $300 billion in health care spending was excessive.

(20) Measuring the actual deadweight losses associated with excessive expenditures is an imprecise task. Martin Feld stein calculated the possible deadweight losses from the overuse of hospitalization. On the basis of the 1969 outof-pocket expense of 33 percent, he estimated that the dead weight loss ran from a low of 23 percent of total hospital revenues to a high of 67 percent of total revenues. Felds tein, Hospital Costs and Health Insurance (Cambridge, Mass.: Harvard University Press, 1981), chap. 6. With current outof-pocket expenses for hospitalization running at only 5 percent, we would expect even larger deadweight losses than he found. Feldstein reports (p. 99) that Mark Pauly mea sured welfare loss at $450 million for 1963, which is 15 percent of 1963 total health expenditures, as reported in Health Insurance Association of America, Table 4.4.

(21) Feldstein, p. 66. He reports estimates that the elas ticity of hospital days with respect to price is between .5 and .7. Assuming that .6 is the appropriate number, and assuming that it is an arc elasticity, decreasing payment from the market price to zero would increase usage by 250 percent.

(22) Health Insurance Association of America, Table 4.1.

(23) It should be noted that using data on personal consump tion expenditure, which exclude Medicaid and some other government spending (public health, research, construction) and which go back to 1950, there is no evidence that admin istrative costs grew more rapidly than other medical expens es from 1950 to 1965.

(24) Some of the higher estimates come from Steffie Wool handler and David Himmelstein, "Administrative Costs of U.S. Health Care," New England Journal of Medicine, May 2, 1991; they claim that about 20 percent of medical spending is administrative in nature. They also claim that health care administration costs in Canada were only about 10 percent of health care spending, and conclude, therefore, that about half of the U.S. administrative expense was wasteful. They also note that there was a very significant increase in wasteful administrative costs between 1983 and 1987, for which they blame the increased use of cost-containment mechanisms. There are good reasons to be suspicious of those results, as reported in a critique of the study by the Health Insurance Association of America in the May 30, 1991, issue of Medical Benefits.

(25) Although approximately 37 million Americans may not have health insurance on any given day, only about 7 million fail to have health insurance for an entire year. Most uninsured individuals are only temporarily uninsured.

Published by the Cato Institute, Policy Analysis is a regular series evaluating government policies and offering proposals for reform. Nothing in Policy Analysis should be construed as necessarily reflecting the views of the Cato Institute or as an attempt to aid or hinder the passage of any bill before Congress. Contact the Cato Institute for reprint permission. Printed copies of Policy Analysis are $6.00 each ($3.00 in bulk). To order, or for a complete listing of available studies, write to: Policy Analysis, Cato Institute, 1000 Massachusetts Avenue NW, Washington, D.C. 20001. (202)842-0200 FAX (202)842-3490 E-mail

© 1994 The Cato Institute
Please send comments to webmaster