PolicyReport - Cato Institute · fundamental law and crafted the actual ... All friends of freedom have ... Trade Policy Studies Edward L. Hudgins

b y J o h n S a m p l e s

James Madison once remarked that theConstitution of the United States wasthe work of many minds and manyhands. He was being too modest. Madi-

son, more than anyone else at the Consti-tutional Convention that hot summer of1787, developed the ideas embodied in ourfundamental law and crafted the actualwording of the document. Moreover, JamesMadison was a persistent and powerfulfriend of liberty. All friends of freedom havegood reason to celebrate the 250th anniver-sary of his birth on March 16, 1751.

We are familiar today with intellectualsand politicians. Intellectuals we knowfrequently as pure theorists, if not irrele-vant utopians, cosseted by tenure and polit-ically irresponsible. Politicians are oftendemagogues with an eye on the polls anda talent for short-term thinking. In con-trast, Madison and many of the other Framersof the Constitution were engaged intellec-tuals, men whose political experience bothconstrained and ennobled their constitu-tional thinking. By 1787 Madison was noinnocent. He understood that, as we saytoday, politics is hardball. However, thatfact was not an excuse for cynicism butrather a sound foundation upon which tobuild a constitution that would perdure.

Madison’s life before the Constitution-al Convention prepared him well for hisgreat task. At Princeton he was a devotedstudent who completed his degree in twoyears and stayed on to study Hebrew andphilosophy with the president of the uni-versity. (Time did not make him less of a“grind”: an ungenerous critic called the 30-year-old Madison “the most unsociablecreature in existence.”) He remained pro-ficient in Latin and Greek throughout his

life and returned again and again to ancientauthors.

Four years out of Princeton, he beganhis political career as a delegate to the Vir-ginia Constitutional Convention of 1776.Thereafter, he twice served as a member ofthe Virginia House of Delegates and a mem-ber of the Continental Congress. Duringhis second stint in the Virginia body, heblocked a proposed tax to support the teach-ing of Christianity and brought about thepassage of a bill that both decriminalizedheresy and abolished the religious test forpublic office.

As flaws in the Articles of Confedera-tion became more evident, Madison believedconstitutional reform was inevitable. Twoyears before the Constitutional Conven-tion of 1787, he repaired to the family estate,Montpelier, and prepared to play a majorrole in the second founding of the UnitedStates. He devoured histories of republics,ancient and modern, and read the mostadvanced theorists of his day. He impor-

PolicyReportMarch/April 2001 Vol. XXIII No. 2

Niskanen on tax cuts 2

Cato Handbook for Congress released 3

Forums on National Defense 4

Upcoming Cato events 5

How employers can fix health care 6

Lessons of Election 2000 8

Universal education credit 8

Quotations from Chairman Madison 11

Cato fires back on corporate welfare 14

In This Issue

Terrorism at Cato, p. 4

Rita J. Simon, University Professor at American University, signs copies of It’s Getting Better Allthe Time: 100 Greatest Trends of the Last 100 Years by Stephen Moore and her late husbandJulian L. Simon, at a Cato Book Forum on December 29, the last business day of the century.

John Samples is director of the Cato Insti-tute’s Center for Representative Govern-ment. Continued on page 10

James Madison’s Vision of Liberty

During his campaign for the presidency,George W. Bush proposed a generalreduction of federal income tax ratesand a partial privatization of Social

Security. As president, Bush should con-tinue to promote those two measures asa package rather than delay the neces-sary first steps toward replacing SocialSecurity with a system of private retire-ment accounts.

The prospect of a large unified budg-et surplus over the next 10 years presentsa rare opportunity to address several major

long-term problems of the federal budget. The most severe of thoseproblems is the Social Security system: Current payroll tax rates willnot be sufficient to pay the promised benefits once the baby-boomgeneration retires, and therate of return on the pay-roll taxes of young work-ers is already far less thanon alternative investments.Another major problem isthe federal income tax code:The current structure of mar-ginal tax rates, in combi-nation with the numerousphase-out provisions andthe payroll tax, substantiallyreduces economic growth,and the increasing com-plexity of the tax code is anational scandal.

There are two reasonsfor addressing those prob-lems as a package—one sub-stantive, one marketing. Forany taxpayer, the effectivemarginal tax rate on earnings is the sum of the income tax rate andthe payroll tax rate; for this reason, changes in the income tax ratesshould take into account the structure of the payroll taxes. Second,addressing income tax rate cuts and private retirement accountsas a package should reduce concern about the distribution of thebenefits of those measures. Any reduction in income tax rates wouldmost benefit those in the upper half of the income distribution,because they now pay more than 95 percent of federal incometaxes. In contrast, allowing workers to set aside a part of their pay-roll tax in a private retirement account would most benefit lower-wage workers, who pay a substantial payroll tax and little or noincome tax. Combining these two measures, thus, would lead to a

broader distribution of benefits and should increase supportfor both proposals.

This is not the place to describe the details of a package ofSocial Security and tax reforms. My preferences, however, leadme to recommend that this package include the following majorprovisions:

1. Allow any worker to set aside 6.2 percentage points of thepayroll tax in a private retirement account in exchange forforgoing all future Social Security pension benefits. (Aminimum retirement income would be guaranteed througha public or private arrangement as part of the plan.) Thisoffer would be especially attractive to younger, mostlylower-wage, workers.

2. Increase the upper limit on the 15 percent income tax brack-et to include all earnings subject to the Social Security tax.This would benefit primarily middle-income families, espe-cially those with two workers, and would effectively end themarriage penalty. For workers in this earnings range, thecombined marginal tax rate (including the 15.3 percent pay-roll tax) would be 30.3 percent.

3. Reduce the top income tax rate to 28 percent. The directbenefits of this provision, of course, would accrue to high-er-income taxpayers, but this provision would also have thelargest positive effect on general economic growth. For work-ers in this earnings range, the combined marginal tax rate(including the 2.9 percent Medicare tax) would be 30.9 per-cent.

4. Finally, do not worry about tapping into the so-called SocialSecurity surplus. There is no economic difference betweenthe economic effects of the on-budget surplus and the SocialSecurity surplus, and there is no reason to worry about reduc-ing the Social Security surplus if the above measures leadto a larger reduction in the huge implicit debt to providepromised Social Security benefits.

Approval of this package would be the critical major steptoward both a sustainable pension system and a flat-rate taxsystem. Good economics. Good politics. Seize the day!

—William A. Niskanen

2 • Cato Policy Report March/April 2001

Chairman’s Message

Pair Tax Cuts with Social Security Reform

❝Allowing workersto set aside a partof their payroll tax in a privateretirement accountwould most benefitlower-wage work-ers, who pay a substantial payrolltax and little or no income tax.❞

Abolish seven major federal agencies.Eliminate numerous agencies anddepartments. Shut down or reformcostly programs. That’s part of the

advice the Cato Institute gives the new Con-gress in the Cato Handbook for Congress.

Released on January 12, the Handbookgives lawmakers a 680-page, 64-chapterdetailed blueprint for cutting spending,reforming and abolishing government pro-grams, and ensuring the constitutionalityof proposed laws to restore the federal gov-ernment to the limited role the Foundersmeant for it to have. The policy suggestionsfrom Cato’s fourth Handbook would resultin a savings of at least $256 billion for tax-payers.

The Cato Handbook for Congress rec-ognizes that the biggest problem facingAmerica is a federal government that hasslipped its constitutional bounds to becomea threat to our lives, liberties, and pursuitof happiness.

“Washington now controls a $2 trillionbudget, most of which it redistributes tobuy votes, ‘reform’ problems it created, andkeep the incumbents of both politicalparties in power,” says Edward H. Crane,Cato’s president and CEO. “That is notwhat the Founders wanted, it is not whatthe Constitution prescribes, but it is whatthe Handbook can help fix.”

March/April 2001 Cato Policy Report • 3

Cato Book

Cato Policy Report is a bimonthly review published by the CatoInstitute and sent to all contributors. It is indexed in PAISBulletin. Single issues are $2.00 a copy. ISSN: 0743-605X.©2001 by the Cato Institute.•Correspondence should beaddressed to Cato Policy Report, 1000 Massachusetts Ave.,N.W., Washington, D.C. 20001. • INTERNET: [email protected] •WEBSITE: http://www.cato.org or call 202-842-0200 or fax 202-842-3490.

CATO POLICY REPORTDavid Boaz....................................................................... EditorDavid Lampo ...................................................Managing EditorAmanda Elliott .........................................................Art DirectorCasey J. Lartigue Jr. ...........................................Assistant Editor

CATO INSTITUTEEdward H. Crane..........................................President and CEOWilliam A. Niskanen ...................................................ChairmanDavid Boaz .........................................Executive Vice PresidentRobert N. Borens ..........................................V. P., DevelopmentTed Galen Carpenter ...V. P., Defense & Foreign Policy StudiesJames A. Dorn ........................................V. P., Academic AffairsWilliam Erickson.................V. P., Finance and AdministrationRoger Pilon ....................................................V. P., Legal Affairs

Virginia Anderson ....................Manager, Information ServicesRadley Balko...............................................Marketing ManagerDoug Bandow .......................................................Senior FellowPatrick Basham.....................................................Senior FellowAndrew Biggs.........................................Social Security AnalystDiana Brady ...................................Director of AdministrationSusan Chamberlin .............................Director, External AffairsRandy Clerihue......................................Director, Public AffairsClyde Wayne Crews Jr...................Director, Technology StudiesGary Dempsey ........................................Foreign Policy AnalystIvan Eland ..............................Director, Defense Policy StudiesDaniel Griswold....Assoc. Dir., Center for Trade Policy StudiesMark Groombridge.......Research Fellow, Trade Policy StudiesEdward L. Hudgins .......................Director, Regulatory StudiesCinda Jones ....................................Director, CommunicationsElizabeth W. Kaplan...................................... Senior CopyeditorM. Christine Klein ..........................Director, Sponsor RelationsDavid Lampo ...........................................Publications DirectorRobert A. Levy ...............Senior Fellow, Constitutional StudiesBrink Lindsey...........Director, Center for Trade Policy StudiesAaron Lukas...............................................Trade Policy AnalystTimothy Lynch ..................................Director, Criminal JusticeLaura Major ............................................Director, ConferencesDerrick Max ...............................Director, Government AffairsThomas P. Miller.......................Director, Health Policy StudiesDarcy Olsen ...................Director, Education and Child PolicyTom G. Palmer......................................................Senior FellowAlan Peterson.....................................................Director of MIS

Jacobo Rodríguez ......Asst. Director, Global Economic LibertyJohn Samples ...............Director, Ctr. for Representative Govt.Stephen Slivinski........................................Fiscal Policy AnalystMichael Tanner...............Director, Health and Welfare StudiesJerry Taylor........................Director, Natural Resource StudiesAdam Thierer..............Director, Telecommunications StudiesPeter VanDoren ..............................................Editor, RegulationIan Vásquez ........................Director, Global Economic Liberty

James M. Buchanan......................Distinguished Senior FellowEarl C. Ravenal .............................Distinguished Senior Fellow

James Bovard ......................................Associate Policy AnalystBarbara Conry ......................................Associate Policy AnalystPeter J. Ferrara .....................................................Senior FellowLawrence Gasman...........Senior Fellow in TelecommunicationsDavid B. Kopel.....................................Associate Policy AnalystChristopher Layne ...........Visiting Fellow, Foreign Policy StudiesPatrick J. Michaels....Senior Fellow in Environmental StudiesStephen Moore .....................................................Senior FellowP. J. O’Rourke ..................................Mencken Research FellowTim Penny .................................Fellow in Fiscal Policy StudiesJosé Piñera..................Co-chair, Social Security PrivatizationJim Powell.............................................................Senior FellowRonald Rotunda ............Senior Fellow, Constitutional StudiesDean Stansel ........................................Associate Policy AnalystTeller.................................................Mencken Research FellowCathy Young .................................................Research Associate

Washington Post: “2.5 pounds and nearly 700 pages of policy information and prescriptions”

The Handbook, coedited by Crane andCato’s executive vice president David Boaz,is being distributed to every member of theHouse and Senate and to President Bush’sWhite House staff.

The 64 chapters include new essays onlessons to be learned from the presidentialelection controversy, campaign finance reg-ulation, the president’s war powers, guncontrol, monetary policy, child care, andeducation, as well as updated advice onissues ranging from Social Security and thefederal budget to term limits, defense spend-ing, and education.

Among the Handbook’s recommenda-tions are that Congress

• accept its responsibility under the Con-stitution to make decisions about warand refuse to cede that authority to reg-ulatory agencies or the president;

• allow young workers to redirect theirSocial Security payroll taxes to privateretirement accounts;

• enact a five-year tax cut of $2 trillion,abolish capital gains and estate taxes,replace the income tax with a nationalsales tax, and close the Internal RevenueService;

• end all corporate welfare, which coststaxpayers $65 billion a year;

• cut the defense budget from $300 bil-

lion to $185 billion, end“peacekeeping” mis-sions, deploy a limit-ed national missiledefense, withdrawU.S. forces fromEurope by 2005, andreassess NATO;

• close the depart-ments of Educa-tion, Energy, Com-merce, Agricul-ture, and Interior; theNEA; the Legal Services Corporation;the Tennessee Valley Authority; and other entities, saving taxpayers $256 billion;

• open medical savings accounts to allAmericans, free of federal meddling;

• reject attempts to make state crimes fed-eral crimes, stop blanket Federal Bureauof Investigation computer surveillance,and defend property rights under theFifth Amendment;

• declare an end to the “war” on drugs;and

• lift trade barriers and support the WorldTrade Organization.

The Cato Handbook for Congress canbe ordered at 1-800-767-1241 or online atwww.cato.org for $18.95. �

Cato Releases Fourth Handbook for Congress

107TH CONGRESS

�November 20: Companies and nations witha strong commitment to diversity and open-ness will rise to the top, while those thatseek to insulate themselves from outsidepeople and influences will languish, saidauthor G. Pascal Zachary at a Cato BookForum, Mighty Is the Mongrel? Winningin the Global Economy. Zachary, seniorwriter for the Wall Street Journal and authorof The Global Me, rejected the notion of aglobal “monoculture,” in which local cus-toms and practices fall victim to colorlesscommercialism. He argued instead thatmixing trumps isolation, that it “spawnscreativity, nourishes the human spirit, spurseconomic growth, and empowers nations.”Peter Skerry, senior fellow at the Brookings

Institution, and Tyler Cowen, author of InPraise of Commercial Culture and pro-fessor of economics at George Mason Uni-versity, commented.

�November 27: The United States needs toadopt a more restrained military policy toreduce America’s attractiveness as a targetfor terrorists, said Ivan Eland at a Cato Pol-icy Forum, “How Should the United StatesRespond to Terrorism?” Eland, director ofdefense policy studies at Cato, said thatWashington should intervene abroad onlywhen U.S. interests are at stake. John Para-

chini of the Monterey Institute of Inter-national Studies said that Washington mustfocus on prevention as well as responsepreparation. Anthony Cordesman of theCenter for Strategic and International Stud-ies doubted that reducing American for-eign policy engagements would make Amer-ica less of a target for terrorists. Bruce Hoff-man of the RAND Corporation said thatit is vital that Washington evenly apply anti-terrorism measures to include even the IrishRepublican Army.

�December 8: A panel of health benefitsanalysts examined the future of employer-sponsored health insurance at a Cato Pol-icy Forum, “The Future of Employer-Spon-

sored Health Care:Defined Contribu-tions vs. DefinedBenefits.” GerrySmedinghoff of Uni-versalCIO advisedU.S. employers toget out of the healthcare business. Hesaid that employerswill be unable toovercome the flawedstructure of thehealth care industry.Gary Alquist ofBooz-Allen &Hamilton predicteda large-scale con-

version of employee-sponsored health plansto defined-contribution formats. Bill Custerof Georgia State University defended employ-ment-based health insurance, arguing thatit is the private sector’s response to marketfailures in the insurance market.

�December 18: The top general in the Armyhas decided that the Army is too heavy andshould “lighten up.” The Army’s propos-al to transform six brigades into a medi-um-weight force by buying 2,000 lightervehicles was the subject of a Cato PolicyForum, “Should the U.S. Army ‘LightenUp’?” Col. Douglas A. Macgregor of theU.S. Army National Defense University saidthat it is critical to integrate ground andair forces in new ways within the frame-work of the inevitable transformation.


Cato Events

Forums Look at Terrorism, Weapons SystemsDoes globalization stifle local culture?

Television crews film Cato’s Brink Lindsey andauthors G. Pascal Zachary and Tyler Cowen at aPolicy Forum on globalization.

At a Policy Forum on terrorism, AnthonyCordesman says the Clinton administration’spunitive strikes againstterrorists aren’t theanswer.

Col. Douglas MacGregorlistens as defense analyst David McGinnisargues that the UnitedStates should rely moreheavily on the NationalGuard in rare cases that require a U.S. military intervention.


Leading terrorismexpert Bruce Hoffmancriticizes the politicization of theState Department’s“terrorism list.”

Cato’s Ivan Eland andTed Galen Carpenterlisten as military historian WilliamsonMurray outlines which Air Force projects the Bush administrationshould eliminate.

Cato Calendar

Thomas McNaugher of RAND Corpora-tion and David McGinnis, an independ-ent defense analyst, addressed critics whoare resistant to change. McNaugher saidthe general is attempting to create a mid-dle ground to avoid alienating advocates ofheavy armor as well as supporters of trans-formation. Reporters Sean Naylor of theArmy Times and Kim Burger of Inside theArmy examined the military’s need for atransformation. Naylor said that he hasn’t seen evidence that the military is light-ening up.

�December 29: The gloom-and-doom indus-try has got it all wrong, said Stephen Moore,senior fellow at the Cato Institute, at a CatoBook Forum, It’s Getting Better All theTime: 100 Greatest Trends of the Last 100Years. Moore, who coauthored the bookwith the late Julian Simon, said, “There’sbeen more material progress in the last cen-tury than in all of the previous centuriescombined.” Moore highlighted some of theleading trends of the last century. Rita J.Simon, the widow of Julian Simon and pro-fessor of public affairs at American Uni-

versity, said that we are now living in the“good new days.” Jared Bernstein of theEconomic Policy Institute argued that gov-ernment has played a key role in improv-ing living standards.

�January 18: The alleged shortfall in mil-itary spending should be seen as overpro-gramming, said Ivan Eland at a Cato Pol-icy Forum, “Which Weapons Systems Shouldthe Bush Administration Skip?” Eland,director of defense policy studies at Cato,said the Bush administration should cutthe Virginia-class submarine and the B-22.Williamson Murray of the Institute forDefense Analyses advised the secretary ofdefense to cut the Joint Strike Fighter. ChrisHellman of the Center for Defense Infor-mation said the Comanche helicopter pro-gram, which has had numerous delays andcost overruns, may be a program the Bushadministration will cut.

Most Cato Forums can be viewed live orlater on the Web with RealPlayer. Visitwww.cato.org and select “Audio-VisualArchives.” �

Policy Perspectives 2001New York • Waldorf-Astoria

April 27, 2001Speakers include Bradley A. Smith

and David Horowitz.

Making a Federal Case Out of Health Care:

Five Years of HIPAAWashington • Cato Institute

July 31, 2001Speakers include Richard Epstein,

Mark Hall, Fred Cate, andMark Pauly.

Policy Perspectives 2001Austin • Four Seasons Hotel

October 16, 2001

Policy Perspectives 2001Dallas • Four Seasons Las Colinas

October 17, 2001

Money and Markets in the Americas19th Annual Monetary ConferenceMexico City • Four Seasons Hotel

October 24, 2001Speakers include

Francisco Gil-Diaz, Steve H. Hanke, Judy Shelton,

Robert McTeer Jr., Robert Mundell, and

Ricardo Salinas Pliego.

Cato UniversityMontreal • Omni Mont-Royal

October 25–28, 2001

Policy Perspectives 2001Chicago • Ritz-Carlton

November 1, 2001

Policy Perspectives 2001New York • Waldorf-Astoria

November 16, 2001

Updated information on Cato events, including Policy Forums and Book Forums

not shown here, can be found atwww.cato.org/events/calendar.html.

On December 8, 2000, the Cato Insti-tute sponsored a Policy Forum on thefuture of employer-sponsored healthcare. The speakers included Gary

Ahlquist, senior vice president and man-aging partner of Booz-Allen & Hamilton’sHealth and Insurance Group, and GerrySmedinghoff, director of market awarenessfor UniversalCIO. Excerpts from theirremarks follow.

Gary Ahlquist: Here we are predictingthe future. And those of you who followbaseball, as I do, remember Yogi Berra’sonce saying, “Never make predictions, espe-cially about the future.” That’s certainlytrue of health care.

The managed-care system is a $600 mil-lion industry in the United States. Few ofthe system’s users are particularly happywith it. Consumers are unhappy with therestrictiveness of the system and theprocess they have to go through toget health care. They have no mar-ket signals to use to tell the systemwhat they actually want.

Suppliers of health care also arevery unhappy with the current sys-tem. They feel that their practiceshave been interfered with time andagain. Employers are not particu-larly happy. They are now in the thirdyear of double-digit price increas-es. And the health plans themselvesfeel like everybody’s scapegoat. Theyare getting it from all sides.

So we have a system of managedcare that has had some benefit anddelivered some one-time cost savingsbut has not been particularly easy to livewithin, and people are asking, “What’snext? Is there a next?” A consumer-drivenmarket for employer-based individuallyselected insurance is a probable answer.

A consumer-driven, or defined-contri-bution, market would have several key fea-tures. First, there would be an annualallowance of, or voucher for, an amountof money for each employee to use to enterthe market and purchase health insurancewith pretax dollars.

Second, that amount of money wouldbe risk adjusted to take into account themedical risk of the individual.

Third, multiyear contracts are a possi-bility. Why buy health insurance for justa year? We don’t buy life insurance for justa year. Why don’t we have three-year,four-year, or five-year contracts, whichmight assume some inflation but wouldprotect against medical risks in some pre-determined way?

And fourth, if a catastrophic eventoccurred at any point in time, there wouldbe some stop-loss coverage to protect us,much the way commercial insurance orauto insurance protects against the big event,but we don’t insure against it on a regularout-of-pocket, or premium, basis.

There are clearly some forces, especial-ly consumer interest, that are pushing inthat direction. Employers are beginning tolook for alternatives, and innovation hascome with that: segmentation of the mar-ket, defining products and solutions so indi-

viduals can meet their needs, as opposedto the one-size-fits-all insurance proposi-tion we have today—you take the policythat is offered or you don’t, and there is noway of really tailoring coverage to yourindividual needs.

And then, finally, on the driving side, isthe supply-side stimulus. There is a fairamount of innovation going on now in themarket. Something on the order of $300 mil-lion to $400 million of venture capital hasfound its way into this niche, even afterthe market decline last spring. And so weexpect to see some success, at least some realexperimentation, on the supply side, and we

will see just how this works and how it needsto be adjusted to make it work better.

Booz-Allen & Hamilton has done a sur-vey of the Fortune 100 best employers towork for. Seventy-four percent of the ben-efits executives in those companies wouldbe interested, likely, or very likely to lookat a shift to defined-contribution healthbenefits in the next three to five years.KPMG surveyed employees of Fortune 1000companies. They reported that 73 per-cent were interested in having defined-con-tribution health benefits.

There are several new entrants, largelyInternet-enabled, who are making runs atthis space. The first are what I would calldefined-contribution health plans. Thereare about 10 to 12 companies that are look-ing to be risk-bearing insurance plans, Inter-net-based, with individually tailored choic-es for consumers.

There are what we might call aggre-gators, who will offer other peo-ple’s products through their pipelinebut pool the risk and the funds at thefront end. And so they will be riskbearers but not necessarily productmanufacturers in this space.

And there are a number of e-healthplayers who are looking at verticalslices in the value chain, either mak-ing a market in information, mak-ing a market in provider services andthen offering those to insurers, ormaking a market as a utility for pro-cessing transactions and outsourc-ing.

We have said that within the nexttwo years we will see Fortune 500

companies entering this new world and try-ing it out. We actually believe that is toolong an estimate. While they haven’t gonepublic with it yet, we expect that in thespring or summer of 2001 we will start tohear more about it. And we will see if itworks.

Gerry Smedinghoff: U.S. employers shouldget out of the health care business. The rea-son is simple: there is absolutely nothingemployers can do about the failing healthcare sector. The health care economy vio-lates the laws of economics, and employ-ers trying to provide health care in the cur-


Policy Forum

The Future of Employer-Sponsored Health Care

Gary Ahlquist: “What’s next? A consumer-driven market foremployer-based individually selected insurance is a probableanswer.”

rent system are like pilots ignoring the lawsof gravity.

The defined-contribution model is nota solution to the problem. That model bringsto mind something Tom Peters said aboutthe American quality movement of the1980s. The bad news, he said, was that in1980 Americans were making lousy prod-ucts that customers didn’t want. And by1990, he said, we were making great prod-ucts that customers don’t want. The defined-contribution model offers the same thing.Instead of having no choice with a lousyhealth maintenance organization that youdon’t want, defined contribution gives youa limited choice among several lousy HMOsthat you still don’t want.

This is the primary reason for our cur-rent crisis in health care. The main mech-anism for delivery of health care, the man-aged-care–HMO model, does not exist any-where else in our economy. The HMO saysthat we are going to provide all productsto all people at all places at all times at thehighest quality and at the best price. TheHMO model has been tried only twice inthe last 20 years by major U.S. companies.It was a disastrous failure both times.

The first time was in the early 1980s,when United Airlines tried to do this withtravel. You might call it a TMO, or a trav-el maintenance organization. They weregoing to cover the traveler’s every need fromdoor to door: the flight, the hotel, the rentalcar, the cruise, all the way on down. Doesanybody remember the name of the com-pany that United Airlines formed for itsTMO? It was Allegis. Not many peoplerecall it because it lasted for only about 18months. The other trial of the HMO con-cept was Sears’ ill-fated foray into offeringcomprehensive financial services in the ear-ly 1980s under the heading of the SearsFinancial Network.

The only place today where you will stillsee a remote resemblance to any HMOmodel is the new car dealership. Whenwe buy a new car, the salesperson tries toconvince us to bring the car back to thatdealer for all service. But since there is notax code coercing us and there are no realincentives for the car owner to return tothe dealership for all maintenance and serv-ice, what do we do? We get our oil changed

at Jiffy Lube; we get our mufflers fromMidas, our batteries from Sears, and ourtires at Goodyear. The good news is wedon’t need to get a referral from Mr. Good-wrench, our primary care mechanic, togo there.

Here’s what the HMO-type system doesto our economy. Let’s say you are a smallbusiness owner with 10 employees, andyou are paying them each about $50,000a year. If you have a good year and youwant to reward your employees for theirefforts, you could give them an additional$5,000 in wages. But what happens to thatmoney, before the employee gets any of it?

The first $750 of that $5,000 is goingto pay Social Security taxes. The next $1,400,or 28 percent, is going to pay federal incometax. And the next $350, or 7 percent, isgoing to pay state and local taxes. So youremployees are going to be left with abouthalf of the $5,000 that you originally intend-ed to give them.

However, if you decide to buy healthcare for your employees, none of those tax-es have to be paid. So, given a choice of$2,500 in after-tax income or $5,000 inhealth care, most people feel the latter isan offer they can’t refuse. Employers thinkthey can double employees’ money by buy-ing health care instead of giving them cash.Well, what is the effect of doubling ourspending on health care? I will give you a

hint, with another question. What do healthcare, single-family homes, and higher edu-cation have in common?

The answer is that single-family homes,higher education, and health care are all sub-sidized by some form of tax exemption. Theyhave all experienced inflation far in excessof the consumer price index since World WarII, and they are all examples of what I callGold’s law of economics. (named after anactuary turned economist, Jeremy Gold.)

Essentially, what Gold’s law says is that95 percent of a legally mandated cost advan-tage will end up as waste. What that meansis that doubling the amount of money wespend on health care doesn’t double theamount of resources. Resources availabledo not change because we segregate ourmoney through the tax code. All we do bydoubling the amount of money is double thecost of the goods. Since resources don’tchange when you move to a segregated econ-omy, all you do is double the prices.

Another issue is choice. Economistsbroadly divide goods and services into twocategories, public goods and private goods.A public good, like a public road, is onethat provides everybody the same thing inthe same way. A private good is one thatprovides us each what we want, individu-ally tailored products and services. Whatdifferentiates the public good from the pri-vate good is the answer to this question:Can different people satisfy their person-al preferences simultaneously without anynegative consequences?

Obviously, with food and clothing, theanswer is yes. We all wore different cloth-ing here today, we ate different things forbreakfast, and nobody suffered from some-body else’s decision. With public roads andtraffic laws, the answer is obviously no. Ican’t decide I am just going to ignore allthe red lights on my drive back to the air-port this afternoon.

The logic of public choice theory holdsthat people engage in “rational ignorance”when everyone gets the same goods andservices despite his desires. Take somethingvery simple, motor oil. If you drive into aJiffy Lube to get your oil changed, the firstquestion the person that works there isgoing to ask you is something like “do you


Continued on page 12

❝Your health and health care are way too important to be left to your employer.❞

Gerry Smedinghoff: “Employers are giving theiremployees the company credit card, with nospending limit, to buy items that have no price tag on them.”

The television networks were roundlycriticized for prematurely calling thepresidential race on election night,but congressional hearings on media

mistakes are a bad idea that could suppressfree expression, according to a new Catostudy, “Lessons of Election 2000” (CatoBriefing Paper no. 59). “Supporters of afree society should worry that congres-sional hearings would have a chilling effecton the news media,” according to JohnSamples and Patrick Basham of Cato’s Cen-ter for Representative Government andTom G. Palmer, senior fellow at Cato. “Anygovernment regulation of when and howthe media report the results of exit pollswould contravene the prohibitions explic-itly stated in the First Amendment,” theysay. The authors draw six main lessonsfrom the election, including (1) Congressshould set up a commission to recommendchanges in the electoral system. (2) TheElectoral College should be preserved tolimit arbitrary power. (3) Campaign spend-ing enhanced turnout and participation inElection 2000.

�Clinton’s Legacy: The Imperial PresidencyIn his classic 1973 book The Imperial Pres-idency, historian Arthur Schlesinger Jr.warned that the American political sys-tem was threatened by “a conception ofpresidential power so spacious and peremp-tory as to imply a radical transformationof the traditional polity.” Almost threedecades later, a Cato Institute study exam-ines U.S. foreign policy and finds that the“imperial presidency” is stronger and moremenacing than at any time since the Viet-nam War. In “Arrogance of Power Reborn:The Imperial Presidency and Foreign Pol-icy in the Clinton Years” (Policy Analysisno. 389), attorney Gene Healy argues thatPresident Clinton “adopted a view of hisexecutive power that is positively Nixon-ian in its breadth and audacity.” As a result,Clinton routinely abused the treaty pow-er and usurped the congressional war pow-er, Healy argues. In Bosnia, Kosovo, andelsewhere, Healy concludes, Clinton “repeat-edly and brazenly violated the originalunderstanding of the war power, assert-ing an unchecked, unilateral presidentialauthority to wage war.” Congress has failed

to stop the usurpation of its power andbalks at reclaiming it, Healy notes. “Con-gressional courage of the kind needed toreclaim the war power will not be forth-coming unless Americans demand it. UnlessAmericans rediscover their reverence forconstitutional limits, and vote according-ly, the slide toward empire will continue,”he says.

�Universal Education Credits IncreaseParental ChoiceVoucher initiatives in California and Michi-gan suffered defeats at the polls in Novem-ber, but vouchers aren’t the only way togive parents more choice about where theirchildren go to school. In “Reclaiming OurSchools: Increasing Parental Control ofEducation through the Universal Educa-tion Credit” (Policy Analysis no. 388), Dar-cy Ann Olsen and Matthew J. Brouilletteargue that universal education tax credits,which would allow taxpayers to subtractfrom their state tax bills money spent oneducation, are the best way to create a moredecentralized and competitive educationmarketplace. Olsen, director of educationand child policy at the Cato Institute, andBrouillette, director of education policy atthe Michigan-based Mackinac Center forPublic Policy, propose a universal educa-tion credit that would allow any taxpay-er—including parents, other individual tax-payers, and businesses—to receive a dol-lar-for-dollar reduction in tax liability formoney spent on any child’s education. Thecredit would be capped at one-half of theper pupil expenditure in the local publicschool system, and taxpayers could takecredit for more than one student as long asthe combined credits didn’t exceed theirstate tax liability. Universal tax creditsare also the best way to create a truly com-petitive education market, the authors say.Under the current education system, par-ents seeking independent education haveto pay twice: once for the state-run schoolsthey aren’t using and a second time fortuition at an independent school. Creditswould “reduce the financial penalty borneby parents who select and pay for their chil-dren’s schools,” creating a more level play-ing field between public and private optionsin education.

�No Link between Campaign Spending andMistrust of GovernmentSen. John McCain (R-Ariz.) has reintro-duced his campaign finance legislation,claiming public support for fixing a sys-tem that breeds mistrust of government.But according to a new Cato Institute study,“Public Opinion and Campaign Finance:A Skeptical Look at Senator McCain’sClaims” (Cato Briefing Paper no. 60),McCain is wrong on both counts: cam-paign spending does not cause cynicismtoward politics, and the American peo-ple care little about campaign financereform. “Yes, citizens’ trust in governmentis low, and, yes, campaign spending hasbeen increasing at a rapid pace,” writesDavid M. Primo of Stanford University.But time-series data indicate no cause-and-effect relationship between the two. Themajor drop in public trust occurred beforethe run-up in campaign spending. Nor isthe public clamoring for campaign-financelegislation, Primo says. “In poll after poll,campaign finance is near the bottom of thelist of important issues alongside worldpeace and homelessness,” he says, callingthe public’s response to the issue a “col-lective yawn.”

�Social Security a Worse DealSocial Security will become an increasing-ly bad deal for each successive generationof retirees, according to a new Cato Insti-tute study. Thomas F. Siems, a senior econ-omist at the Federal Reserve Bank of Dal-las, explains in “Reengineering Social Secu-rity for the New Economy” (Social Secu-rity Paper no. 22) that as it’s now struc-tured—taxes from current workers go topay the benefits of current retirees, withnothing saved for the future—Social Secu-rity will become an increasingly bad dealfor each successive generation of retirees.“As an unfunded program,” Siems writes,“Social Security gives windfall returns tothe first generation of participants, sincethey paid in little relative to the benefitsthey receive, and gives below-market returnsto later generations.” This problem is com-pounded, he says, by the fact that the num-ber of workers relative to retirees contin-ues to decline, from 16 to 1 in 1950 to 3.4


Cato Studies

Six Lessons from Election 2000Clinton’s “Nixonian view of executive power”

Continued on page 9

to 1 today. Siems favors proposals thatwould transform part of Social Securityinto a system of individual retirementaccounts, which would give workers morecontrol over their investments and shieldtheir retirement income from legislativechanges. But the time to act is now. “Thelonger reform is delayed, the costlier thefix will be,” Siems says. �


Pollock Heads Revamped Cato CommunicationsPalmer, Basham, Moore named senior fellows

Richard Pollock has been named vicepresident for communications at theCato Institute, where he will overseemedia relations, government affairs,

and marketing efforts. Valerie Walston hasbeen named manager of media relations,responsible for helping to promote Cato’speople and policy research to the newsmedia.

Pollock comes to Cato from ShandwickPublic Affairs, where he spent three years,

most recently asexecutive vice pres-ident. Before that hewas a senior pro-ducer for Fox NewsSunday. He has alsobeen a Washingtonproducer for ABC’sGood MorningAmerica and presi-dent of his own pub-lic relations firm,

Richard Pollock Associates Inc.Before his exodus from left-wing poli-

tics, Pollock was director of the HealthCharities Reform Project with the Centerfor Science in the Public Interest and

director of the Crit-ical Mass Energy Project, a consumerorganization found-ed by Ralph Nader.He has also been afellow at the Indochi-na Resource Center,where he coauthoredVietnam: What Kindof Peace? and direc-tor of international

relations for the U.S. National StudentAssociation. Pollock is a graduate of Amer-ican University in Washington, D.C., witha degree in political science.

“From my own perch at ABC and Fox,I know Cato has always been one of thecountry’s most effective organization atcommunicating the ideas of limited gov-ernment and individual liberty to journal-ists, thought leaders, and the public,” Pol-lock said. “I hope to continue that tradi-tion as the country enters a new centuryin which libertarian ideas will begin to takecenter stage in many public policy debates.”

Richard Pollock

News Notes

Valerie Walston joins Cato from theRepublican National Committee, whereshe was assistant press secretary. Beforethat she served as press secretary to LamarAlexander during his presidential cam-paign and as assistant press secretary toGov. Pete Wilson of California. Walstonis a graduate of Sweet Briar College inSweet Briar, Virginia, with a degree in gov-ernment.

“We’re extremely pleased that Richardand Valerie have joined Cato,” said presi-dent and CEO Ed Crane. “With the CatoInstitute’s 25th anniversary just around thecorner, we now have in place the most tal-ented communications department in Cato’shistory.”

Stephen Moorehas been named asenior fellow of theCato Institute, anonstaff position.He served as direc-tor of fiscal policystudies from 1990through 2000 butwas on leave formost of the pastyear. He has nowjoined the Club for Growth, a politicalaction committee, full-time as president.He will continue to write occasionally forCato.

Patrick Basham has joined the Cato Insti-tute as a senior fellow in the Center forRepresentative Government. He comes toCato after three yearsas director of theSocial Affairs Cen-ter at the Fraser Insti-tute in Vancouver.He holds degrees inpolitical science fromCarleton Universityand the Universityof Houston and willsoon receive a D.Phil.from CambridgeUniversity. At thecenter he will concentrate on such issuesas term limits, the party system, and elec-toral reform.

Valerie Walston

Stephen Moore

Tom G. Palmer has been named a sen-ior fellow at Cato. He has been with Catofor more than five years and just receiveda D.Phil. in politicsfrom Oxford Uni-versity. He will con-tinue to direct CatoUniversity, serve asa senior editor, andwrite about issuesof political philoso-phy and socialthought. His lectureson the origins ofproperty rights andconstitutional gov-ernment have become extremely popularat Cato University, the Benefactor Summit,and other events.

According to the Web site ranking service Top9.com, Junkscience.com was thesixth most popular site in thecategory “General Science” dur-ing January 2001, behind thesites of the National Geographicand Scientific American.Junkscience.com isoperated by StevenMilloy, a Catoadjunct scholar andauthor of Sciencewithout Sense andthe forthcomingJunk Science Judo.Top9.com alsorates www.cato.orgfirst or secondamong think-tank sites over the past fewmonths. �

Patrick Basham

Tom G. Palmer

STUDIES Continued from page 8


tuned his closest friend, Thomas Jefferson,then serving as minister to France, to sendhim crates of works by European authors.In sum, no man ever came better preparedthan Madison to the task of writing a con-stitution.

At the convention itself, he took notesof all that was said and of the votes tak-en; his account remains essential to under-standing what happened in Philadelphia.During the ratification struggle, he wrote,along with Alexander Hamilton and JohnJay, the famous Federalist Papers defend-ing the new Constitution. His contribu-tions tell us much about what he had learnedfrom his formal and political education.

Madison once wrote: “It has been saidthat all Government is an evil. It would bemore proper to say that the necessity ofany Government is a misfortune.” Menare not angels and will not live together inpeace and freedom without some gov-ernment. Yet government is a double-edgedsword. The power to deter and coerce crim-inals can be transformed into the powerto restrict individual liberty, take proper-ty, and impose tyrannical government. Howto control government? Elections, in thefirst instance. But Madison did not sharethe naïve faith so common today that thepeople can do no wrong. He knew thatmajority rule, like all unconstrained polit-ical power, posed its own dangers for indi-vidual freedom.

Madison on Majority RuleMadison’s justly famous 10th Feder-

alist Paper offers a brilliant practical solu-tion to controlling government. He beginswith a tough-minded analysis of the dan-gers of faction in a republic. People tend,he says, to divide themselves into groupsor factions on the basis of wealth, occu-pation, or religious commitment and seekto dominate others. Protecting against fac-tional domination thus became a centralproblem for a government founded onmajority rule.

If a faction were a majority, it wouldpose a grave political danger to any repub-lic. Moved by passion or greed or right-eous visions, a majority would violate the

rights of a minority. The idle might plun-der the industrious. Religious sectariansmight seek legal privileges or bans onother faiths. Madison and his colleagueswrote the new American Constitution toprevent such abuses of power and to real-ize the goods of liberty and security.

Madison argued that the sheer size of thenew American republic made such injusticesless likely. In pure democracies, such asancient Athens, individuals quickly discov-ered common interests, formed factions, andoppressed their fellow citizens. The greatdiversity of interests and groups in the newAmerican republic worked against a mobacting in unison. A farmer in Massachusettsand another in Virginia might not agree thatcreditors were Satan’s henchmen. Even ifthey did share that thought, acting on theircommon hope of renouncing debts wouldbe immensely complicated.

Madison worried about majorities abus-ing minorities; he did not fear that minori-ties could exploit “the greater number.” HereMadison erred. Every day in the United Statessmall minorities—for example, those whobenefit from owning or working for the sug-ar industry—extract millions of dollars fromthe mass of consumers by virtue of tradeprotection. Striving for such privileges isso common that scholars have given it aname, rent seeking. Madison did not see thatminorities could exploit majorities when thebenefits of government action to those minori-ties were huge and the costs to each indi-vidual in the majority were small.

Madison emphasized that the UnitedStates would have a representative gov-ernment rather than a pure democracy. Hehad little sympathy for the “theoretic politi-cians” who supported the direct rule of thepeople. In pure democracies nothing wouldlimit the majority’s abuse of a “weaker par-ty, or the obnoxious individual.” Madison’sindictment is stark: “Such democracies haveever been spectacles of turbulence and con-tention; have ever been found incompati-ble with personal security, or the rights ofproperty; and have in general been as shortin their lives, as they have been violent intheir deaths.”

The delegation of the people’s power torepresentatives, on the other hand, would“refine and enlarge the public views” and

dampen the vicious passions that haddestroyed so many republics of the past.Giving the people an indirect voice in mak-ing the laws, Madison concluded, wouldmore likely serve the public good thanwould direct democracy.

Madison also spoke of the need for “aux-iliary precautions” in the Constitution tolimit government and protect freedom. Themost important one was the division andbalancing of powers. Madison and the oth-er Framers of the Constitution feared thegradual concentration of power in onebranch of government. His solution to thisdanger was entirely pragmatic: the leadersof each branch must have “the necessaryconstitutional means, and personal motives,to resist encroachment of the…others.Ambition must be made to counteract ambi-tion.” Madison’s invitation to struggleamong the branches has worked imper-fectly in recent years. Congress has par-tially restrained the “imperial presidency”of Kennedy and Nixon; the states havedone less well at restraining an “imperial”Washington establishment. Congress hasdelegated too much of its authority to theexecutive branch where unaccountablebureaucrats make policy outside the ruleof law.

Madison also insisted that the peopleretained all rights not expressly delegatedto the new government of the United States.The powers enumerated in the Constitu-tion thus placed a limit on what govern-ment could do legitimately. In Madison’sday, as in our own, some people contend-ed that the federal government had implic-it powers to attain the goals stated in thepreamble to the Constitution, especiallythe goal of promoting the general welfare.Madison disagreed strongly. Such a theo-ry would “convert the government fromone limited as hitherto supposed, to theenumerated powers, into a governmentwithout any limits at all.” We may wellwonder whether today we live under a gov-ernment “without any limits at all.”

In Madison’s opinion, an essential rightretained by the people was liberty of con-science in matters of religion. Some of hisearliest letters denounce religious intoler-ance in Virginia. His Christian faith can-not be doubted, nor can his unyielding

MADISON Continued from page 1

❝The powers enumerated in the Constitution placed a limit on what government could do legitimately.❞


Continued on page 12

❝Madison did not see that minorities could exploit majorities when the benefits of government action to those minorities were huge

and the costs to each individual in the majority were small.❞

resistance to mixing politics and religion.For Madison, bringing religion into thepublic realm corrupted both faith and gov-ernment.

We might close by recalling Thomas Jef-ferson’s assessment of his friend: “I can sayconscientiously that I do not know in theworld a man of purer integrity, more dis-passionate, disinterested, and devoted togenuine Republicanism; nor could I in thewhole scope of America and Europe pointout an abler head.” The passage of timehas amply confirmed Jefferson’s judgment.Madison’s ideas, his life, and his great accom-plishment should now inspire us to reclaimthe American legacy of liberty and limit-ed government.

Political Insights from MadisonMadison once said, “Knowledge will

forever govern ignorance; and a people whomean to be their own Governors, must armthemselves with the power which knowl-edge gives.” In that spirit, I offer the fol-lowing insights from Madison’s politicalthought.

Ambition“Ambition is so vigilant, and where it

has a model always in view as in the pres-ent case, is so prompt in seizing its advan-tages, that it can not be too closely watched,or too vigorously checked.”

Letter to Thomas Jefferson, December 25, 1797

Balance of Powers“But what is government itself but the

greatest of all reflections on human nature?If men were angels, no government wouldbe necessary. If angels were to govern men,neither external nor internal controls ongovernment would be necessary. In fram-ing a government which is to be adminis-tered by men over men, the great difficul-ty lies in this: You must first enable the gov-ernment to control the governed; and inthe next place, oblige it to control itself.A dependence on the people is no doubtthe primary control on the government; butexperience has taught mankind the neces-sity of auxiliary precautions.”

Federalist no. 51, February 6, 1788

Civil Liberty and Property“In a free government, the security for

civil rights must be the same as that for reli-gious rights. It consists in the one case inthe multiplicity of interests, and in the oth-er, in the multiplicity of sects.”


“As a man is said to have a right to hisproperty, he may be equally said to havea property in his rights. Where an excessof power prevails, property of no sort isduly respected. No man is safe in his opin-ions, his person, his faculties, or his pos-sessions.”

National Gazette essay, March 27, 1792

Commerce“I own myself the friend to a very free

system of commerce, and hold it as a truth,that commercial shackles are generallyunjust, oppressive and impolitic—it is alsoa truth, that if industry and labour areleft to take their own course, they will gen-erally be directed to those objects whichare the most productive, and this in a morecertain and direct manner than the wisdomof the most enlightened legislature couldpoint out.”

Speech in Congress, April 9, 1789

Civic Virtue“Is there no virtue among us? If there

be not, we are in a wretched situation.No theoretical checks—no form of gov-ernment can render us secure. To supposethat any form of government will secureliberty or happiness without any virtue inthe people, is a chimerical idea. If therebe sufficient virtue and intelligence in thecommunity, it will be exercised in the selec-tion of these men. So that we do not dependon their virtue, or put confidence in ourrulers, but in the people who are to choosethem.”

Speech in the Virginia Ratifying Convention, June 20, 1788

Enumerated Powers“This is not an indefinite government

deriving its powers from the general termsprefixed to the specified powers—but, a

limited government tied down to the spec-ified powers, which explain and define thegeneral terms.”

Speech in Congress, February 6, 1792

War“The constitution supposes, what the

History of all Governments demonstrates,that the Executive is the branch of powermost interested in war, and most prone toit.”

Letter to Thomas Jefferson, April 2, 1798

Faction“The latent causes of faction are thus

sown in the nature of man; and we see themeverywhere brought into different degreesof activity, according to the different cir-cumstances of civil society. A zeal for dif-ferent opinions concerning religion, con-cerning government, and many other points,as well of speculation as of practice; anattachment to different leaders ambitious-ly contending for pre-eminence and pow-er; or to persons of other descriptions whosefortunes have been interesting to the humanpassions, have in turn divided mankind intoparties, inflamed them with mutual ani-mosity, and rendered them much more dis-posed to vex and oppress each other, thanto co-operate for their common good.”

Federalist no. 10, November 22, 1787

Government“It has been said that all Government is

an evil. It would be more proper to say thatthe necessity of any Government is a mis-fortune. This necessity however exists; andthe problem to be solved is, not what formof government is perfect, but what of theforms is least imperfect.”

Letter to an unidentified correspondent, ca. 1833

Legislation“It will be of little avail to the people

that the laws are made by men of their ownchoice, if the laws be so voluminous thatthey cannot be read, or so incoherent thatthey cannot be understood; if they be repealedor revised before they are promulgated, or

❝If industry and labour are left to take their own course, they will generally be directed to those objects

which are the most productive.❞


undergo such incessant chances that noman who knows what the law is today canguess what it will be tomorrow.”


Passion in Politics“In all very numerous assemblies, of

whatever characters composed, passionnever fails to wrest the scepter from rea-son. Had every Athenian citizen been aSocrates, every Athenian assembly wouldstill have been a mob.”


Majority Rule“Wherever the real power in a Gov-

ernment lies, there is the danger of oppres-sion. In our Governments the real powerlies in the majority of the Community, andthe invasion of private rights is chiefly tobe apprehended, not from acts of Gov-ernment contrary to the sense of its con-stituents, but from acts in which the Gov-ernment is the mere instrument of the majornumber of the constituents.”

Letter to Thomas Jefferson, October 17, 1788

Power“All men having power ought to be dis-

trusted to a certain degree.”Speech in the Constitutional

Convention, July 11, 1787

Property“Government is instituted to protect prop-

erty of every sort; as well that which lies inthe various rights of individuals, as thatwhich the term particularly expresses. Thisbeing the end of government, that alone isa just government, which impartially securesto every man, whatever is his own.”

National Gazette essay, March 27, 1792

Public Servants“If neither gratitude for the honor of

the trust, nor responsibility for use of it,be sufficient to curb the unruly passionsof public functionaries, add new bits to the

bridle rather than to take it off altogeth-er. This is the precept of common senseillustrated and enforced by experience—uncontrolled power, ever has been, andever will be administered by the passionsmore than by reason.”

“Political Reflections,” February 23, 1799

Religious Freedom“Religious bondage shackles and debil-

itates the mind and unfits it for every nobleenterprise.”

Letter to William Bradford, April 1, 1774

Republicanism“When the people have formed a con-

stitution, they retain those rights whichthey have not expressly delegated. It is aquestion whether what is thus retained canbe legislated upon. Opinion are not theobjects of legislation… . If we advert to thenature of republican government, we shallfind that the censorial power is in the peo-ple over the government, and not in thegovernment over the people.”

Speech in Congress, November 27, 1794

Slavery“We have seen the mere distinction of

colour made in the most enlightened peri-od of time, a ground of the most oppressivedominion ever exercised by man over man.”

Speech at the Constitutional Convention, June 6, 1787

Military Establishments“A standing military force, with an over-

grown Executive will not long be safe com-panions to liberty. The means of defenceagainst foreign danger, have been alwaysthe instruments of tyranny at home.”

Speech at the Constitutional Convention, June 29, 1787

Liberty at Home“The fetters imposed on liberty at home

have ever been forged out of the weaponsprovided for defence against real, pretended,or imaginary dangers from abroad."

“Political Reflections,” February 23, 1799 �

want Pennzoil 10W30?” Well, most of usare rationally ignorant about motor oil.Despite that, we get a choice of motoroil.

Let’s take something that’s much moreimportant than motor oil, the education ofchildren. Unfortunately, education is a pub-lic good. You are stuck with the publicschools in your neighborhood whether youlike them or not. If you want to make achoice and go outside that system, the costcan be prohibitively high. So we remainrationally ignorant about choices that wecan’t really exercise. Unfortunately, healthcare, like education, is primarily distrib-uted as a public good in this country.

You will notice that we have our pri-orities upside down. About the things thatare the least important in our lives, like ourmotor oil, we have the most choices. Aboutthe things that are the most important, likethe education of our children and our health,we have limited choices, if any.

Our health care system serves best thosewho have the least interest in and place theleast value on their health. Consider thebusiness consequences of rationally igno-rant health care. Essentially, employers aregiving their employees the company cred-it card, with no spending limit, to buy itemsthat have no price tags on them. How manybusinesses or households operate that way?Yet that is the way we are operating at least90 percent of our health care economy.

So, what is the road to recovery? Weneed to repeal the Employee RetirementIncome Security Act and put choices abouthealth care back on the individual levelwhere they belong. What is more person-al and private than your health care?

We also need to repeal the Internal Rev-enue Code. Not only are we segregatingour money through the Internal RevenueCode; we are segregating it a second timeby making our employers responsible formaking health care decisions for us.

Clemenceau noted that “war is too impor-tant to be left to the generals.” Likewise,the education of your children is too impor-tant to be left to the government, and yourhealth and health care are way too impor-tant to be left to your employer. �

FORUM Continued from page 7MADISON Continued from page 11


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On March 7, the sadly misnamed Website TomPaine.com ran a $34,000ad on the op-ed page of the NewYork Times denouncing corporate

welfare that harms the environment andderisively challenging the “limited-gov-ernment, free-market crowd” to endorsethe proposed cuts. But “we don’t expectto hear a peep” from those groups, the adproclaimed. TomPaine.com president JohnMoyers wrote to Cato president Ed Craneand other free-market leaders enclosingthe ad, repeating the challenge, and prom-ising to print any response. The Cato Insti-tute, of course, was exposing corporatewelfare long before John Moyers receivedhis first foundation grant (see “EndingCorporate Welfare As We Know It,” Pol-icy Analysis no. 225, May 12, 1995, andthe studies cited therein for some earlyexamples). Cato’s Jerry Taylor, director ofnatural resource studies, and Stephen Slivin-ski, fiscal policy analyst, fired back in aletter to Moyers. This is an excerpt of theirletter.

Thank you for the complimentary copiesof Green Scissors 2001 and the invita-tion to Cato’s president, Ed Crane, to com-ment on that report for your Web page.The polite tone of your letter, however, wasquite a contrast to that of your “op-ad”

in the New YorkTimes. The only rea-son we can think ofthat you would writethat “we don’texpect to hear apeep” from groupslike the Cato Insti-tute about the cutsproposed in GreenScissors 2001 is thatyou have not paid

the slightest attention to our work. For instance, while you’re quite smug

about offering up $55 billion worth oftaxpayer savings and insinuate that you’veone-upped the “limited-government, free-market” crowd, you would have had onlyto pick up a copy of the Cato Handbookfor Congress (full text available onlineat hhtp://www.cato.org/pubs/handbook/handbook 107.html) to see that your corpo-

Tom Paine’s name abused

Cato Fires Back on Corporate Welfarerate welfare cuts are a drop in the bucketcompared with what’s possible. While weagree with the vast majority of the cutsproposed in Green Scissors 2001 (most ofwhich we called for in the Handbook),we’ve outlined an additional $48 billionin annualized budget savings and anoth-er $13 billion to $19 billion in one-timebudget savings—all from programs thatcould fairly be described as “corporatewelfare” with negative environmental impli-cations.

Unfortunately, the estimated budget sav-ings in Green Scissors 2001 are, to put itcharitably, unreliable. According to theauthors of the report, the proposed budg-

et savings are not“exact” but “illus-trative” and, mostdisingenuously, lumptogether multi-yearand single-year esti-mates. So while it’simpossible to knowfrom that reportexactly how largethe proposed cutsreally are, they are

certainly far less than the implied $55billion annually.

It is indeed striking to consider all ofthe corporate welfare the report conve-niently ignores. In the agricultural section,for instance, the report omits eliminationof the milk program. Why? Are milk sub-sidies somehow less obnoxious than sug-ar, peanut, tobacco, or mohair subsidies?Or did the report pull its punches becausethose subsidies are delivered to votinggroups that liberals seek to court?

Green Scissors 2001 also convenientlyoverlooked the biggest of all transferpayments to farmers: the fixed schedulepayments under the Federal AgriculturalImprovement and Reform Act and the loandeficiency payments of the AgriculturalMarket Transition Act. Both of those pro-grams meet anyone’s definition of corpo-rate welfare, and they both have negativeenvironmental impacts because they keepmore farmland under plow and more farm-ers in business than market forces wouldotherwise allow. Moreover, those programsare far more costly than the programs you

assailed in your report: $14 billion in fis-cal year 2001. We’ve long called for elim-ination of those programs; why didn’t the Green Scissors coalition?

Most inexplicably of all, the report some-how failed to find any fault with the noto-rious ethanol program, a corn subsidy oper-ation decried by virtually every importantenvironmental organization as a major con-tributor to summertime urban smog and anotorious pork barrel for such agri-giantsas Archer Daniels Midland (for details, seethe discussion in “Archer Daniels Midland:A Case Study in Corporate Welfare,” Pol-icy Analysis no. 241, September 26, 1995).Eliminating that program would save tax-payers $600 million.

And why protect wind, solar, and geo-thermal subsidies? All those energy sourcesrequire massive amounts of developmentin sensitive ecosystems since those placestend to be the best locations for such facil-ities (see “Renewable Energy: Not Cheap,Not ‘Green,’” Policy Analysis no. 280,August 27, 1997). Public expenditures forresearch on and development of those fuelsamount to $410 million annually. Thenthere is the 1.5-cent per kilowatt-hour pro-duction tax credit for those fuels in theEnergy Policy Act of 1992—another $80million annually.

Similarly, Green Scissors’ proposed cutsfor the power marketing administrations(PMAs) are far too timid. The PMAs haveonly one mission: to deliver below-mar-ket-cost power to ratepayers in their serv-ice territories. That mission should be anti-thetical to any real environmentalist becauseit encourages excessive energy consump-tion and all the pollution attendant there-to. So why not privatize the PMAs andend the subsidies? That would returnbetween $13 billion and $18 billion to thetaxpayer.

The report’s proposed international andmilitary program cuts are likewise timid inthe extreme. Why not go after U.S. pay-ments to the World Bank, which serve onlyto subsidize infrastructure projects thatcan’t stand on their own in the private mar-ketplace? The same thing goes for the U.S.Agency for International Development, theInter-American Development Bank, theAfrican Development Fund, and the Euro-

Jerry Taylor

Stephen Slivinski


pean Bank for Reconstruction and Devel-opment. Most of the projects funded havedirect or indirect impacts (usually detri-mental) on the environment, and all havefailed to promote economic growth. Onlya few years ago the bulk of the environ-mental community supported the elimina-tion of the World Bank. What happened?Potential savings from defunding the aboveprograms would amount to $1.5 billionannually.

The proposed cuts in public lands pro-grams are, unfortunately, a mixed bag. Thecall for increasing grazing fees is dubioussince current holders of public-land graz-ing permits have already paid full marketprice for their permits. A better alternativeis to maintain the current grazing fee for-mula while lowering the costs of the graz-ing program to the taxpayer. That can bedone by shifting responsibility for range-land management, improvement, moni-toring, and mitigation from federal agen-cies to public-land ranchers.

Why did Green Scissors 2001 forgo anassault on the more obnoxious and costlyrancher subsidies, such as publicly fund-ed rangeland reclamation, herbicidal andmechanical brush control, emergency feedsubsidies, animal insect and damage con-trol, range betterment funds, and experi-mental stewardship programs? Our study“Beyond the Grazing Fee: An Agenda forRangeland Reform” (Policy Analysis no.234, July 13, 1995) documents all the eco-logical harm done by those programs andproposes their elimination.

The same argument can be made aboutthe alleged subsidies to the timber indus-try. While it’s certainly true that the feesgenerated from timber cutting on ForestService lands do not equal the taxpayer costof managing those programs, that imbal-ance has less to do with the paucity of thefees levied than with the ridiculously exces-sive cost of Forest Service administration.A better way of remedying the imbalancefrom the taxpayer’s perspective is to reformForest Service management practices. Econ-omist Randal O’Toole, an adjunct schol-ar at the Cato Institute and executive direc-tor of the Oregon-based Thoreau Institute,has laid out a set of reforms to do just that(http://www.ti.org), all of which would

increase taxpayer savings far beyond thoseproposed in your report.

The report’s high-decibel assault on the1872 Mining Law is likewise misguided.Only by misleading accounting can thatlaw be termed a “subsidy” to the miningindustry. Superficial analysis aside, the lawcertainly could use reform, but eliminationwould harm, not help, the taxpayer (see“Two Cheers for the 1872 Mining Law,”Policy Analysis no. 300, April 9, 1998, fora more detailed discussion).

The proposed transportation programcuts selectively target some programs, mys-teriously ignore the elimination of othersimilar programs, and miss the big pictureby refusing to consider the elimination ofall federal transportation spending. Thatspending is a bottomless barrel of pork,overbuilding and subsidizing infrastruc-ture projects in the districts of politicallyimportant voters and shortchanging therest of us to do so. Better to eliminate thatspending altogether and let each state wor-ry about how much it should spend onpublic transportation and on what proj-ects, given competing budgetary needs.Such a plan would not only reduce feder-al spending, it would reduce federal tax-es insofar as the federal gasoline tax wouldno longer be necessary. That’s another $26billion the report missed.

Identical problems haunt the report’sproposed water program cuts. Why sug-gest major cuts in the activities of the ArmyCorps of Engineers and the Bureau of Recla-mation but resist the logical conclusion thatboth of those agencies should be elimi-nated? Their mission is to subsidize devel-opment projects that cannot attract suffi-cient private capital. Are any of their activ-ities defensible from an environmental per-spective? Even the corps’ Everglades restora-tion project (which, as I’m sure you’re aware,has its own environmental problems) wouldbe unnecessary if the sugar program (themain cause of ecological damage in thatecosystem) were eliminated. Eliminatingthe corps and the Bureau of Reclamationwould increase proposed taxpayer savingsby $5 billion each year.

And it is an utter mystery to us whyGreen Scissors 2001 refused to address sub-sidies to the domestic fishing industry. Pay-

ments to fishermen authorized in the Mag-nuson-Stevens Fishery Conservation andManagement Act are directly responsiblefor much of the overharvesting of dwin-dling commercial fish species. Eliminat-ing those subsidies would save at least anoth-er $160 million annually.

In conclusion, while we applaud theeffort to find wasteful government spend-ing and find only a few program cuts toquibble with, Green Scissors 2001 man-aged to let more anti-Green corporate wel-fare to escape than not. The programs giv-en a free pass in the report all have onething in common: they are targeted at swingvoters actively courted by the left or at vot-ers in districts represented by liberal Demo-crats. Too bad the contributors to GreenScissors 2001 lacked the intellectual courageof their newly minted “limited-govern-ment” convictions. Next time, spare us thelecture. And do your homework beforeaccusing us of hypocrisy in the New YorkTimes. �

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CATO POLICY REPORT1000 Massachusetts Ave., N.W.Washington, D.C. 20001

ADDRESS CORRECTION REQUESTED

“To Be Governed...”

�Give ’em a voucher and send ’em ontheir way

[State senator] Warren E. Barry [pro-posed that] Virginia should require stu-dents in every public school classroomto recite the pledge each morning.

“A lot of kids don’t stand for the Pledgeof Allegiance, and as a former Marine,I find that unconscionable,” said Barry.. . . “These kids have no understandingof what the American flag symbolizes. Ifthey refuse to salute the flag, I think theybelong elsewhere.”

—Washington Post, Jan. 25, 2001

�James Madison need not apply“I have no doubt that [Gale] Norton

is a very decent and capable person,” saidSenator Jeff Bingaman, the New Mexi-co Democrat acting as the committee’schairman. “But . . . [f]or over 20 years,she has consistently championed the inter-ests of the individual over the public [and]the states over the federal government.”

—New York Times, Jan. 19, 2001

�Tell it to Grant Snowden, the BranchDavidians, Bill Gates, and Elian

[Janet] Reno told a crowd of morethan 1,000 in the [Justice] department’sGreat Hall [that] she helped protect fun-damental rights and liberties that are thecornerstone of a democracy.


�He’s already growing in officeAlthough [Sen. Spencer] Abraham pro-

posed abolishing the Energy Department

as a means of reducing federal spending,the Bush transition team said he no longerholds that view because of the energychallenges facing the country.


�Paying for what you take equals anarchism

Interior Secretary Bruce Babbitt . . .declined to criticize [secretary-designateGale] Norton, but did denounce an ideaNorton and [Rep. Jim] Hansen have sup-ported: compensating property ownerswhen environmental regulations stopthem from developing their land.

“The radical property rights crowdare anarchists at heart, and I don’t believethe American people will buy into that,”Babbitt said.

—Associated Press, Jan. 8, 2001

�Rule by decreeInterior Secretary Bruce Babbitt . . .

said he is proud that the administration,through regulations, has accomplishedmany of the goals blocked by Congress.. . . “Here we are, having achieved 80percent of what was sought in legislation,by administrative rule,” said Babbitt.

—Associated Press, Jan. 8, 2001

�Famous last wordsI confess to being double-minded when

it comes to President Bush’s plan to offergovernment funds to religious charitiesthat provide social services. . . .

What concerns me is that religiousorganizations might be tempted, or forced,

to dilute their life-transforming messagein order to get government subsidies. . . .

Government help to faith-based char-ities is worth a try but let’s keep a sharpeye on it.

—Cal Thomas in the Washington Times, Jan. 31, 2001

�Get the government out of our bedrooms

The Virginia Senate voted yesterdayto let Fairfax County prohibit its resi-dents from sleeping anywhere but theirbedrooms.


�What did they say about Clinton’s 43percent?

Another implication of the disputedelection is that Bush’s opponents have aright to insist that decisions made dur-ing his term bind future administra-tions as little as possible. James K. Gal-braith, a professor at the Lyndon B. John-son School of Public Affairs at the Uni-versity of Texas, says that a presidentwho lost the popular vote and won a dis-puted victory should have—note the small“d”—the democratic humility not to presshis advantage too hard. . . .

Galbraith, a former congressionalstaffer, also argues that, in the currentpolitical circumstances, Bush’s opponentshave a right to demand that the new pres-ident not use tax cuts to tie the handsof his successors.

—E. J. Dionne Jr. in the Washington Post, Jan. 28, 2001

Documents

PolicyReport - Cato Institute · fundamental law and crafted the actual ... All friends of freedom have ... Trade Policy Studies Edward L. Hudgins