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CATO HANDBOOK FOR
CONGRESS
POLICY RECOMMENDATIONS FOR THE 108TH CONGRESS

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1. Introduction
Seven years ago, President Bill Clinton informed the nation in his State
of the Union address that the '' era of big government'' was over. It
now appears that his pronouncement may have been premature. Turning
Clinton's statement on its head, Sen. Charles Schumer (D-N. Y.) wrote in
December 2001, '' The era of a shrinking federal government has come
to a close. '' Schumer was hardly alone. Well before the wreckage of the
World Trade Center had stopped smoldering, such pundits as Francis
Fukuyama and George Will were eagerly heralding the '' fall'' of libertari-anism
and the '' death'' of small-government conservatism. September 11
had proven— had it not?— the necessity of a muscular central government
with sweeping powers. The wave of corporate scandals beginning with
Enron's collapse had proven it again by demonstrating the need for robust
regulation to comfort increasingly skittish investors.
In light of this new conventional wisdom, it might seem anachronistic,
even quaint, to echo President Reagan's famous claim that '' government
is not the solution to our problem; government is the problem. '' Who, in
these chaotic times, could seriously suggest that we need, not larger and
more flexible government, but fewer federal programs, less spending,
fewer regulations?
Well, the Cato Institute. Not merely because we have been committed
to the principles of limited government, respect for individual rights, and
open markets since our inception, but because the new orthodoxy is grossly
at variance with reality. Our military and intelligence forces must, of
course, focus their full energies on dismantling the al-Qaeda terrorist
network and preventing any future attacks against the homeland. But
neither public sentiment nor the public good demands a wider scope for
government in general. If anything, the great challenges the United States
now faces require, more than ever, that its government respect the bound-aries
set by the Constitution, so that it may focus more vigorously on its
core functions.
As poll watchers well know, there was a paradoxical surge of public
trust in government following the attacks of September 11, 2001, just

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when the failure of government to carry out its most central obligation—
the protection of the homeland— had been made terrifyingly clear. Perhaps
the rise in trust can best be interpreted as a sort of prospective vote of
confidence, a reflection, not of our belief in what government had been
doing, but in our expectation of its capabilities when put to the test.
Optimism has its limits, however, and the most recent data show that
long-term trends toward lower public trust in government, and policy
preferences favoring smaller government, are beginning to reassert them-selves.

Plus C¸a Change: The Public Mood
The 1960s and 1970s saw a continual decline in public support for
more government activism, a trend that bottomed out in 1980. Support
for activism then climbed throughout the 1980s, perhaps because of the
prosperity of the era and the perceived success of the Reagan administra-tion.
Since 1990, however, the overall trend has been away from support
for government activism; in recent years, the policy mood measure has
declined steadily and about as steeply as it did during the 1970s. The
Washington establishment seems not to realize that, as the 108th Congress
convenes, the political mood of Americans is every bit as skeptical as it
was in 1981 at the start of the Reagan revolution.
Conventional wisdom notwithstanding, data compiled by University of
North Carolina political scientist James Stimson reveal no perceptible shift
in this trend as a result of the 2001 terror attacks. Stimson's latest data,
from 2002, indicate a continued move away from support for expansive
government. The evidence also indicates a renewed decline in public trust
in the federal government. For many years survey researchers have asked
citizens how much they trusted the federal government to do the right
thing. The proportion that answered '' just about always'' or '' most of the
time'' provides a rough measure of public trust in the federal government.
Trust has declined most of the time since its historic high point in the 1960s.
About a month after September 11, Princeton Survey Research Associ-ates
posed the trust question to a sample of Americans. They found 57
percent of those polled trusted the federal government to do the right thing
'' just about always'' or '' most of the time''— strikingly higher than the
recent trend. But this trust soon faded: the same question posed in May
2002 showed that only 40 percent of respondents trusted the federal
government. This fits well with a public mood skeptical of expanded

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federal power. After all, a public that trusts government less and less will
hardly demand that it do more and more.
The willingness of a frightened polity to sacrifice civil liberties for the
sake of increased security has also ebbed. Early in 2002, a Gallup/ CNN/
USA Today poll found that 47 percent of those polled thought the govern-ment
should take all necessary steps to prevent terrorism even if the
respondent's civil liberties suffered; 49 percent opposed such steps if the
price included their basic civil liberties. By June 2002, 56 percent opposed
preventing terrorism at the cost of civil liberties, and 40 percent supported
'' all necessary steps'' against terrorism. Americans seem to be moving
back toward their pre– September 11 views on civil liberties.
On a wide variety of issues, citizens are increasingly willing to seek
innovative private-sector solutions to problems government has failed to
ameliorate. An annual Phi Delta Kappa/ Gallup poll on school choice found
a dramatic leap in support for vouchers: a majority of those polled would
now support a proposal to '' allow parents to send their school-age children
to any public, private, or church-related school they choose, '' with govern-ment
paying part or all of the tuition. Perhaps most surprising, a Cato
Institute/ Zogby International poll conducted during the stock market slump
in the summer of 2002, mere weeks after news of the WorldCom scandal
broke, found that more than 68 percent of likely voters favored '' changing
the Social Security system to give younger workers the choice to invest
a portion of their Social Security taxes through individual accounts. ''
Clearly, the prophets of a new '' era of big government'' are less skilled
at gauging voter opinion than they are at projecting their own policy
preferences onto the electorate.

The Beltway Cocoon
What explains this massive disparity between what the public wants
and what pundits and elected officials seem to think the public wants? In
part, it may simply be that the panicked call to '' do something'' and the
resurgence of faith in government following the attacks on New York
and Washington, D. C., understandably made a more palpable impression
on most observers than the cooling off that followed. The more troublesome
explanation, though, is that there exists in Congress a systemic bias toward
seeing the expansion of government as a solution to almost every problem.
That bias is not a fluke but a direct consequence of the current structure
of American electoral politics.

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Whereas the Founders of the American republic envisioned a govern-ment
of citizen legislators for whom public service would be a solemn
but temporary charge, we now see a regime composed almost exclusively
of professional politicians. It was not always this way: average congres-sional
tenure has risen steeply over the past century. Chief among the
culprits responsible for this change is the huge and growing advantage
enjoyed by House incumbents, who in recent years have seen reelection
rates rise above 98 percent. In addition to all the traditional privileges
afforded incumbents— a staff devoted to constituent service, the power
of franking, access to Congress's television studio, to say nothing of the
ability to name hospitals and highways after oneself— sitting legislators
are now protected by increasingly stringent campaign finance laws, which
limit the ability of challengers to overcome those advantages through
vigorous political speech. Even redistricting, which historically led to
dozens of more competitive congressional races, has deteriorated into a
bipartisan, computer-driven process of incumbent protection.
Incumbent advantage leads to a vicious cycle, wherein the most compe-tent
potential challengers are deterred from entering contests, except those
for open seats, further tightening the incumbent's hold on power. As
incumbent protection drives up average tenure, the amount of time one
must be willing to commit to politics in order to build support or secure
an influential committee chair also increases. Decades of this process have
transformed politics into a game worth playing only for those determined
to make a career of it.
This may not be entirely bad: some such people may just be unusually
committed to public service. But whatever their motives, those who find
the prospect of spending their lives in government attractive are also likely
to have an inflated view of the role and importance of the state in American
life. An old story about the chess genius Bobby Fischer has him interrupting
a conversation about politics between some fellow players with the
demand, '' What's that got to do with chess? '' Entrenched political classes
are afflicted with a parallel sort of myopia. For them, discussion of any
public benefit bubbling up from civil society or the private sector provokes
the response, '' What has that got to do with a new federal program? ''
To promote real political leadership, it will probably be necessary to
change the institutional constraints that give rise to that kind of tunnel
vision. In the meantime, however, legislators who sincerely desire to serve
the public trust must force themselves to notice this pervasive bias and
to overcome it.

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Terror and Scandal
The two developments most frequently cited as evidence for the neces-sity
of enlarging government power are the War on Terror and the spate of
corporate accounting scandals that began with Enron's collapse. Legislators
have been eager to propose new laws intended to combat both terror and
corporate malfeasance, but there has been far less examination of how
existing laws contributed to both problems. While new laws may in some
instances be both necessary and proper, we should put first things first.
Before we contemplate what else we can do to make things better, we
ought to ask what we may already be doing to make things worse.
Crooked CEOs are wholly responsible for defrauding investors, but as
William Niskanen observes in Chapter 22, legal incentives increased both
the likelihood of the bankruptcies that fraud was intended to cover and
the lack of managerial accountability that made the fraud itself possible.
Biases in the tax code encourage corporations to take on excessive debt
and to compensate CEOs in the form of stock options. Since option holders
can win big on a dramatic rise in the price of their companies' stock, but
lose nothing if it drops further below the exercise price, options encourage
them to take larger risks than they otherwise might. Moreover, corporate
governance rules— an inscrutable tangle of federal securities laws, state
regulations, and policies particular to each company— have left managers
increasingly insulated from the shareholder scrutiny and control that might
check unsound business practices. In the long term, fixing these structural
imbalances will do more to prevent future scandals than will parading a
few handcuffed CEOs before the evening news cameras.
Of course, when malfeasance does occur, there is surely a place for
government in punishing deception. However, instead of asking why the
Securities and Exchange Commission failed to use its already ample
powers to catch that deception earlier on, Congress, eager to demonstrate
its '' toughness, '' tipped the balance too far in the other direction by
effectively criminalizing corporate risk taking and created a redundant
Accounting Oversight Board of dubious constitutionality.
The government's response to terror has in many ways been equally
unreflective. There has been no serious examination of how government
failed on September 11. We have not yet had an independent investigation
of intelligence and other failures. But we know that poor communication
between intelligence agencies led to the neglect of numerous warning
signs that an attack was imminent. We know that the Immigration and
Naturalization Service was not keeping track of people who entered on
temporary visas. We know that for more than a year, both before and

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after September 11, the FBI kept 10 agents employed conducting a full-time
wiretap of a New Orleans brothel. We know that at the moment the
planes crashed into the World Trade Center, the president of the United
States was in an elementary school classroom in Florida— a striking exam-ple
of the federal government's loss of focus on its essential functions in
an endless and diffuse morass of programs.
It would be natural to conclude that federal law enforcement has used
its existing powers ineffectively— perhaps because it has been forced to
squander its energies on prying in the bedrooms of adults, breaking down
the doors of sick people who smoke marijuana, and carrying out police
functions that both intelligent policy and constitutional fidelity demand
be left to the states. Instead, Congress's response has been to fiddle a bit
with the Federal Emergency Management Agency and the INS and create
new layers of bureaucracy— apparently on the theory that nothing speeds
along the smooth flow of information like more red tape— while leaving
the major structural problems unaddressed. Instead of finding ways to
make better use of existing police and intelligence powers, it has recklessly
added to those powers. It is almost as though endless discussions of the
'' tradeoffs between liberty and security'' have led us to infer that constrict-ing
liberty automatically increases security. Yet as Robert Levy and Timo-thy
Lynch argue in their analyses of current threats to civil liberties in
Chapters 12 and 13, proposals to introduce a national ID or to try '' enemy
combatants, '' as determined via executive fiat, by military tribunal would
do little to make Americans safer. They would, in fact, have only one
absolutely certain effect: the evisceration of citizens' rights to privacy and
due process.
No less troubling is our newly bellicose approach to foreign affairs.
The kind of hysterical overreaction to hypothetical worst-case scenarios
that was once the exclusive province of the most radical fringe of the
environmental movement has apparently found a home at the heart of the
current administration. At a time when we have more than enough proven
threats with which to cope, advocates of '' preemption'' would have us
swing erratically from perceived enemy to perceived enemy. This disas-trous
prescription would blur our collective focus, undermining our efforts
to break the back of the terrorist networks that are our most pressing
concern, and, indeed, swelling their ranks. Osama bin Laden would surely
like nothing better than an American attempt to establish an imperial
caliphate in the heart of the Muslim world; the administration's reasons
for sharing his eagerness are opaque.

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Introduction
Conclusion
Fidelity to our founding principles of respect for civil liberties and
limited government is easy when times are easy, as they were through
much of the tech boom of the 1990s. The true test of our faith in those
principles comes now, when we are beset by diabolical assaults from
without and economic turmoil within, when public anxiety may temporarily
make it seem expedient to put those principles aside.
We know that the Constitution is functioning properly when it frustrates
us. Bland and innocuous speech has little need of constitutional protec-tions;
the First Amendment exists to safeguard the contentious, provoca-tive,
and even offensive speech that stirs censorious impulses. By the same
token, the importance of paying scrupulous deference to the Constitution's
limits on federal power, of respecting its careful system of checks and
balances, is greatest precisely when the temptation to flout them is strong-est.
The enemies of freedomhave made their horrifying statement already.
By demonstrating a commitment to the core ideals of a constitutional
republic, the defenders of freedom now have an opportunity to make
theirs. This Handbook provides the policy vocabulary from which that
statement can be constructed. In these pages, our scholars survey the
major issues confronting the 108th Congress and provide concrete recom-mendations
with the goal of preserving both the security to which Ameri-cans
are entitled and the freedom that serves as a beacon to the world
and a reproach to our enemies.

Suggested Readings
Bastiat, Frederic. The Law. 1850. Irvington, N. Y.: Foundation for Economic Educa-tion, 1998.

Boaz, David. Libertarianism: A Primer. New York: Free Press, 1997. Brooks, David L., ed. From Magna Carta to the Constitution: Documents in the Struggle
for Liberty.
San Francisco: Fox & Wilkes, 1993.
Constitution of the United States of America. Crane, Edward H. Defending Civil Society. Cato's Letter no. 8. Washington: Cato

Institute, 1994. Epstein, Richard. Simple Rules for a Complex World. Cambridge, Mass.: Harvard Univer-sity
Press, 1995. Friedman, Milton. Capitalism and Freedom. Chicago: University of Chicago Press, 1962.
Friedman, Milton, and Rose D. Friedman. The Tyranny of the Status Quo. San Diego: Harcourt Brace, 1984.
Higgs, Robert. Crisis and Leviathan: Critical Episodes in the Growth of American Government. Oxford: Oxford University Press, 1987.
Murray, Charles. In Pursuit: Of Happiness and Good Government. New York: Simon & Schuster, 1988.

—Prepared by Edward H. Crane and David Boaz
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2. Limited Government and the Rule of Law
Congress should
live up to its constitutional obligations and cease the practice
of delegating legislative powers to administrative agencies; legislation should be passed by Congress, not by unelected

administration officials; before voting on any proposed act, ask whether that exercise
of power is authorized by the Constitution, which enumerates the powers of Congress;
exercise its constitutional authority to approve only those
appointees to federal judgeships who will take seriously the constitutional limitations on the powers of both states and the

federal government; and pass and send to the states for their approval a constitutional
amendment limiting senators to two terms in office and repre-sentatives to three terms, in order to return the legislature to
citizen legislators.

Limited government is one of the greatest accomplishments of humanity.
It is imperfectly enjoyed by only a portion of the human race, and, where
it is enjoyed, its tenure is ever precarious. The experience of the 20th
century is surely witness to the insecurity of constitutional government
and to the need for courage in achieving it and vigilance in maintaining it.
Advocates of limited government are not anti-government per se, as
some people would charge. Rather, they are hostile to concentrations of
coercive power and to the arbitrary use of power against right. With a deep
appreciation for the lessons of history and the dangers of unconstrained
government, they are for constitutionally limited government, with the

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delegated authority and means to protect our rights, but not so powerful
as to destroy or negate them.
The American system was established to provide limited government.
The independent existence of the United States was based on certain truths:

that all Men are created equal, that they are endowed by their Creator with
certain unalienable Rights, that among these are Life, Liberty, and the
Pursuit of Happiness— That to secure these Rights, Governments are insti-tuted
among Men, deriving their just Powers from the Consent of the
Governed, that whenever any Form of Government becomes destructive
of these Ends, it is the Right of the People to alter or to abolish it, and to
institute new Government, laying its Foundation on such Principles, and
organizing its Powers in such Form, as to them shall seem most likely to
effect their Safety and Happiness.

On this foundation the American Founders established a system of govern-ment
based on delegated, enumerated, and thus limited powers.
The American Founders did not pluck these truths out of thin air, nor
did they simply invent the principles of American government. They drew
from their knowledge of thousands of years of human history, during
which many peoples struggled for liberty and limited government. There
were both defeats and victories along the way. The results were distilled
in the founding documents of the American experiment in limited govern-ment:
the Declaration of Independence, the Articles of Confederation, the
state constitutions, and the Constitution of the United States.
The American Founders were careful students of history. It was Thomas
Jefferson, in his influential A Summary View of the Rights of British
America,
prepared in 1774, who noted that '' history has informed us that
bodies of men as well as individuals are susceptible of the spirit of
tyranny. '' Another Founder, Patrick Henry, devoted great attention to the
study of history. He summed up the importance of history thus: '' I have
but one lamp by which my feet are guided, and that is the lamp of
experience. I know of no way of judging the future but by the past. ''
History— the lamp of experience— is indispensable to understanding and
defending the liberty of the individual under constitutionally limited, repre-sentative
government.
Through the study of history the Americans learned about the division
of power among judicial, legislative, and executive branches; about federal-ism;
about checks and balances among divided powers; about redress and
representation; and about the right of resistance, made effective by the
legal right to bear arms, an ancient right of free persons. Liberty and

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Limited Government and the Rule of Law
limited government were not invented in 1776; they were reaffirmed and
strengthened. The American Revolution set the stage for the benefits of
liberty and limited government to be extended to all. As John Figgis,
professor of modern history at Cambridge University, noted at the begin-ning
of the 20th century:

The sonorous phrases of the Declaration of Independence . . . are not an
original discovery, they are the heirs of all the ages, the depository of the
emotions and the thoughts of seventy generations of culture.

The roots of the history of limited government stretch far back, to the
establishment of the principle of the higher law by the ancient Hebrews
and by the Greek philosophers. The story of the Golden Calf in the Book
of Exodus and the investigations of nature by Aristotle both established—
in very different ways— the principle of the higher law. Law is not merely
an expression of will or power; it is based on transcendent principles. The
legislator is as bound by law as is the subject or citizen; no one is above
the law.
Many strands have been entwined to form the fabric of liberty:

The struggle between church and state, which was put into high gear
in the Latin West by Pope Gregory VII in the 11th century under
the motto, '' freedom of the church. '' That movement, which created
an institutional distinction between the church and the secular authori-ties,
was the first major '' privatization'' of a previously state-owned
industry (the church) and provided the foundation for such important
institutions as the rule of law and legal accountability, federalism,
and the independent and self-governing associations that make up
civil society.
The growth of civil society in the self-governing chartered towns of
Europe, in which the guiding principle was '' city air makes one
free. '' The independent cities of Europe were the seedbeds of modern
civil society— of the market economy, of personal liberty, and of the
security of person and property.
The fixing of limits on the powers of monarchs and executives through
written constitutions. The Magna Carta of 1215 is the most memorable
of those documents to inheritors of the Anglo-Saxon political tradition.
It included the requirement that taxes could not be imposed without
the consent of the '' general council of the realm, '' which provided
the origin of the English parliament, as well as other very specific
limitations on the king's power, including the stipulations that no

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one be imprisoned or outlawed or exiled or his estate seized '' except
by the lawful judgment of his peers or the law of the land'' and that
'' merchants shall have safe conduct in and out of England. '' That
was the precursor of the Petition of Right of 1628, the Bill of Rights of
1689, the American Declaration of Independence, and the American
Constitution and Bill of Rights.

Those various movements reinforced each other in a multitude of ways.
The assertion of the freedom of the church and even of its supremacy
over the secular powers was bound up with the idea of the higher law,
by which all are judged— emperor, pope, and peasant alike. As legal
scholar Henry Bracton, a judge during the reign of Henry III, noted of
the royal authority, '' The law makes him king. Let the king therefore give
to the law what the law gives to him, dominion and power; for there is
no king where will, and not law, bears rule. '' Were the king to consider
himself above the law, it was the job of the king's council— the precursor
of parliament— to rein him in: '' if the king were without a bridle, that is,
the law, they ought to put a bridle upon him. '' Not only was the nascent
parliament above the king; the law was above the parliament, as Sir
Edward Coke noted in the 17th century:

when an act of Parliament is against common right and reason, or repugnant,
or impossible to be performed, the common law will controul it, and adjudge
such Act to be void.

The supremacy of the law over the exercise of power is a hallmark of
the Western legal tradition. The rule of law is not satisfied by merely
formal or ceremonial exercises, such as the publication of edicts in barely
understandable form, whether in the archaic '' Law French'' of the king's
courts or the pages of the Federal Register; the laws must be understandable
and actually capable of being followed.
There was also widespread recognition of the principle of reciprocity
between the holders of power and the general populace. Rights were
spelled out in contractual form in constitutions and charters. Those rights
were not gifts from the powerful, which could be taken away on a whim,
but something on which one could take a stand. Tied up in the notion of
a chartered right was the ancillary right to defend that right, even to the
point of resistance with force of arms. The higher law, reciprocity and
mutuality of obligations, written charters of rights, the right to be consulted
on policy and to grant or refuse one's consent, and the right of resistance

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in defense of those rights are the foundations of constitutionally limited
government. They were won over many centuries at great sacrifice.
Just how precious that heritage is can be gleaned from comparing it
with the history of Russia, where, until very recently, there was no reciproc-ity
between rulers and ruled and no independent power able to challenge
the rulers. The principality of Muscovy and its successors were despotic
to a high degree, with no charters of liberty, no power higher than the
tsar (or his successor, the Communist Party), no limits on power— in
effect, no law. As Harvard University historian Richard Pipes noted in
his book Russia under the Old Regime, '' There is no evidence in medieval
Russia of mutual obligations binding prince and his servitor, and, therefore,
also nothing resembling legal and moral 'rights' of subjects, and little
need for law and courts. '' The immense difficulties in establishing the
rule of law, a system of well-defined and legally secure property, and a
market economy are testimony to the great and vital importance of building
on a tradition of stable, constitutionally limited government. They also
remind us how important it is for us to maintain our heritage of limited
government and the rule of law.
The struggle for limited government was a struggle of liberty against
power. The demands for religious liberty and the protection of property
were fused in the heroic resistance of the Netherlands to the Empire of
Spain in their great revolt. The Dutch inspired the English to rise up against
the Stuart kings, who sought to fasten upon the English the absolutism that
had made such headway on the Continent. The American Revolution was
one link in a long chain of revolutions for liberty. The historian John
Lothrop Motley opened his magisterial history The Rise of the Dutch
Republic
by connecting the Dutch Republic with the United States of
America:

The rise of the Dutch Republic must ever be regarded as one of the leading
events of modern times.... The maintenance of the right by the little
provinces of Holland and Zealand in the sixteenth, by Holland and England
united in the seventeenth, and by the United States of America in the
eighteenth centuries, forms but a single chapter in the great volume of
human fate; for the so-called revolutions of Holland, England, and America,
are all links of one chain.

Motley continued:
For America the spectacle is one of still deeper import. The Dutch Republic
originated in the opposition of the rational elements of human nature to

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sacerdotal dogmatism and persecution— in the courageous resistance of
historical and chartered liberty to foreign despotism.

The Dutch, like the British and the Americans after them, became a
shining example of what was possible when people were free: prosperity
was possible without the guiding hand of the king and his bureaucrats;
social harmony was possible without enforced religious conformity; law
and government were possible without an unlimited and absolute
sovereign.
The story of the attempts to institute absolutism in the Netherlands and
in England was well known by the American Founders, who were, after
all, British colonists. One cannot understand the American attempt to
institute limited, representative government without understanding the his-tory
of England. What they were struggling against was the principle that
the powers of the state are '' plenary, '' that they fill up the whole space
of power. King James I of England (then King James VI of Scotland)
had written in 1598 that '' the King is above the law, as both the author
and giver of strength thereto. '' In 1610 James made A Speech to the Lords
and Commons of the Parliament at White-Hall
in which he railed against
the notions of popular consent and the rule of law and stated that '' as to
dispute what God may do is blasphemy . . . so it is sedition in subjects
to dispute what a king may do in the height of his power. ''
In other words, there are no limits to power. Distinct echoes of that
view are still heard today. For example, the solicitor general of the United
States, Drew Days, arguing in the case of United States v. Lopez before
the Supreme Court, was unable to identify a single act of Congress,
other than those expressly prohibited by the Constitution, that would be
impermissible under the Clinton administration's expansive view of the
Commerce Clause. Solicitor Days contended that the powers of Congress
are plenary, that is, unlimited, unless, perhaps, specifically prohibited.
That all-too-common view turns the notion of limited government on its
head. Limited government means that government is limited both to the
exercise of its delegated powers and in the means it can employ, which
must be both '' necessary and proper. '' The English Revolution of 1640,
the Glorious Revolution of 1688, and the American Revolution of 1776
were fought precisely to combat unlimited government. What Americans
need is not unlimited government, as Days proposed, but limited govern-ment
under law, exercising delegated and enumerated powers. That is
how the equal liberties of citizens are protected. As the philosopher John
Locke, himself an active participant in the struggles for limited government

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in Britain and the primary inspiration of the American revolutionaries,
argued in his Second Treatise on Government:

The end of Law is not to abolish or restrain, but to preserve and enlarge
Freedom:
For in all the states of created beings capable of Laws, where
there is no Law, there is no Freedom. For Liberty is to be free from restraint
and violence from others, which cannot be, where there is no Law: But
Freedom is not, as we are told, A Liberty for every Man to do what he
lists:
(For who could be free, when every other Man's Humour might
domineer over him?) But a Liberty to dispose, and order, as he lists, his
Person, Actions, Possessions, and his whole Property, within the Allowance
of those Laws under which he is; and therein not to be subject to the
arbitrary Will of another, but freely follow his own.

The American experiment in limited government generated a degree
of liberty and prosperity that was virtually unimaginable only a few
centuries before. That experiment revealed flaws, of course, none of which
was more striking and repugnant than the toleration of slavery, or '' man-stealing,
'' as it was called by its libertarian opponents, for it deprived an
individual of his property in his own person. That particular evil was
eliminated by the Thirteenth Amendment to the Constitution, showing the
self-correcting nature and basic resilience of the American constitutional
system, which could survive such a cataclysm as the Civil War.
Other flaws, however, have been revealed or have surfaced since.
Among them are the following:

An erosion of the basic principles of federalism, as the federal govern-ment
has consistently encroached on the authority of the states. Fed-eral
criminalization of acts that are already criminalized by the states,
for example, usurps state authority (as well as circumventing— opin-ions
of the Supreme Court notwithstanding— the prohibition of dou-ble
jeopardy in the Fifth Amendment to Constitution: '' nor shall any
person be subject for the same offense to be twice put in jeopardy
of life or limb''). An even more striking contemporary example of
the overreach of federal law is the continued exercise of federal
controls over marijuana use in the nine states that have broken with
federal law and allow medical use of that drug. The Tenth Amendment
is quite explicit on this point: '' The powers not delegated to the
United States by the Constitution, nor prohibited by it to the States,
are reserved to the States respectively, or to the people. ''
Violation of the separation of powers between the various branches
of government. In Article I, section 8, for example, the Constitution

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explicitly reserves the power to declare war to the Congress, a power
that the Congress has allowed to be usurped by the executive branch
and which it should retake to itself.
Failure of the legislative branch to fulfill its responsibilities when it
delegates its legislative powers to administrative agencies of the
executive branch, such as the Food and Drug Administration and the
Federal Trade Commission. In addition to violating the Constitution,
that has led to the erosion of the rule of law, as such administrative
agencies have burdened the population with an unimaginably complex
welter of edicts; the Federal Register ran 64,431 pages in 2001,
reflecting a degree of minute regulation that is unreasonable and
burdensome and that virtually guarantees that any citizen involved
in a commercial transaction, for example, will run afoul of some part
of it, no matter how well intentioned or scrupulous he or she may
be. Such a situation is an invitation to the arbitrary exercise of power,
rather than the application of law. That illegal delegation of powers is
an abdication of the representative function described in the Federalist
Papers
and elsewhere by the Founders. Members of Congress are
thereby converted from representatives of their constituents into
'' fixers, '' who offer to intercede on behalf of constituents with the
agencies that are illegally exercising the authority of the legislative
branch. Thus, members of Congress can avoid responsibility for
onerous laws but can take credit for gaining special treatment for
their constituents. That system may be thoroughly congenial to the
interests of the existing officeholders of both the executive and the
legislative branches, but it is directly contrary to the doctrine of
the separation of powers and to the very concept of representative
government.
Inattention to the important role of the federal judiciary as a check
on arbitrary and unauthorized exercises of power. Especially since
the Court-packing '' constitutional revolution of 1937, '' there has
been too little attention by the federal judiciary— and by the Congress
in ratifying judicial nominees— to fulfilling the role of the courts in
enforcing constitutional restraints on both the federal and the state
governments, as set out in Article III, section 2, of the Constitution.
Sections of the Constitution that have suffered from relative neglect
include Article I, section 1 ('' All legislative Powers herein granted
shall be vested in a Congress of the United States''); Article I, section
8 (enumerating and thus limiting the powers of Congress); Article I,

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Limited Government and the Rule of Law
section 10 ('' No state shall . . . pass any . . . Law impairing the
Obligation of Contracts''); the Fifth Amendment ('' No person shall
be . . . deprived of life, liberty, or property, without due process of
law; nor shall private property be taken for public use without just
compensation''); the Ninth Amendment ('' The enumeration in the
Constitution of certain rights shall not be construed to deny or dispar-age
others retained by the people''); the Tenth Amendment ('' The
powers not delegated to the United States by the Constitution, nor
prohibited by it to the States, are reserved to the States respectively,
or to the people''); and the Fourteenth Amendment ('' No state shall
make or enforce any law which shall abridge the privileges or immuni-ties
of citizens of the United States''). Although the First and Four-teenth
Amendments have indeed been the source of significant judicial
activity, the Court has not consistently applied the prohibitions of
the First Amendment to either commercial speech or political speech
(the latter in the context of campaign finance), nor has the Court
rectified the novel (and specious) distinction between personal liber-ties
and economic liberties drawn by Justice Harlan F. Stone in United
States v. Carolene Products Co.
(1938).
The failure to pass a constitutional amendment limiting members of
the Senate to two terms and members of the House of Representatives
to three terms. Just as the president is limited in the number of
terms he or she can serve, so should be the other elected branch of
government, to guarantee the rotation in office that the Founders
believed essential to popular government.

Those flaws can, however, be corrected. What is needed is the courage
to place the health of the constitutional order and the future of the American
system above short-term political gain. The original American Founders
were willing '' to mutually pledge to each other our Lives, our Fortunes,
and our sacred Honor. '' Nothing even remotely approaching that would
be necessary for today's members of Congress to renew and restore the
American system of constitutionally limited government.
In defending the separation of powers established by the Constitution,
James Madison clearly tied the arrangement to the goal of limiting govern-ment
power:

It may be a reflection on human nature that such devices should be necessary
to control the abuses of government. But what is government itself but the
greatest of all reflections on human nature? If men were angels, no govern-17 18
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ment would be necessary. If angels were to govern men, neither external
nor internal controls would be necessary. In framing a government which
is to be administered by men over men, the great difficulty lies in this:
you must first enable the government to control the governed; and in the
next instance oblige it to control itself. A dependence on the people is, no
doubt, the primary control on the government; but experience has taught
mankind the necessity of auxiliary precautions.

What is needed for the survival of limited government is a renewal of
both of the forces described by Madison as controls on government:
dependence on the people, in the form of an informed citizenry jealous
of its rights and ever vigilant against unconstitutional or otherwise unwar-ranted
exercises of power, and officeholders who take seriously their oaths
of office and accept the responsibilities they entail.

Suggested Readings
Berman, Harold. Law and Revolution: The Formation of the Western Legal Tradition. Cambridge, Mass.: Harvard University Press, 1983.

Boaz, David. Libertarianism: A Primer. New York: Free Press, 1997. Boaz, David, ed. The Libertarian Reader: Classic and Contemporary Readings from
Lao-tzu to Milton Friedman.
New York: Free Press, 1997.
Bramsted, E. K., and K. J. Melhuish, eds. Western Liberalism: A History in Documents from Locke to Croce. New York: Longman, 1978.

Brooks, David L., ed. From Magna Carta to the Constitution: Documents in the Struggle for Liberty. San Francisco: Fox & Wilkes, 1993.
Ely, James W. Jr. The Guardian of Every Other Right: A Constitutional History of Property Rights. New York: Oxford University Press, 1998.
Epstein, Richard A. Simple Rules for a Complex World. Cambridge, Mass.: Harvard University Press, 1997.
. Takings: Private Property and the Right of Eminent Domain. Cambridge, Mass.: Harvard University Press, 1985.
Hamilton, Alexander, James Madison, and John Jay, The Federalist Papers. New York: Mentor, 1961.
Hayek, F. A. The Constitution of Liberty. Chicago: University of Chicago Press, 1960. Higgs, Robert. Crisis and Leviathan: Critical Episodes in the Growth of American
Government.
New York: Oxford University Press, 1987.
Jefferson, Thomas. '' A Summary View of the Rights of British North America. '' In The Portable Jefferson. New York: Penguin Books, 1977.

Locke, John. Two Treatises of Government. 1690. Cambridge: Cambridge University Press, 1988.
Spencer, Herbert. Political Writings. Cambridge: Cambridge University Press, 1994. Storing, Herbert, ed. The Anti-Federalist. Chicago: University of Chicago Press, 1985.

—Prepared by Tom G. Palmer

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3. Congress, the Courts, and the Constitution
Congress should
encourage constitutional debate in the nation by engaging in
constitutional debate in Congress, as was urged by the House Constitutional Caucus during the 104th Congress;

enact nothing without first consulting the Constitution for proper
authority and then debating that question on the floors of the House and the Senate;

move toward restoring constitutional government by carefully
returning power wrongly taken over the years from the states and the people; and

reject the nomination of judicial candidates who do not appreci-ate
that the Constitution is a document of delegated, enumer-ated, and thus limited powers.

Introduction
In a chapter devoted to advising members of Congress about their
responsibilities under the Constitution, one hardly knows where to begin—
so far has Congress taken us, over the 20th century, from constitutional
government. James Madison, the principal author of the Constitution,
assured us in Federalist no. 45 that the powers of the federal government
under that document were '' few and defined. '' No one believes that
describes Washington's powers today. That raises fundamental questions
about the constitutional legitimacy of modern American government.
For a while at century's end, after the realigning election of 1994, it
looked like Congress was at last going to rethink its seemingly inexorable
push toward ever-larger government. In fact, the 104th Congress saw the

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creation in the House of a 100-strong Constitutional Caucus dedicated to
promoting the restoration of limited constitutional government. And shortly
thereafter, President Clinton announced that the era of big government
was over. But the spirit of that Congress has waned over time. By the
107th Congress, respect for constitutional limits on congressional power
was all but gone.
The principles of the matter have not gone away, however; nor of
course has the Constitution itself. It is still the law of the land, however
little Congress heeds it. And the moral, political, and economic implications
of limited constitutional government have not changed either. That kind
of government is the foundation for liberty, prosperity, and the vision of
equality that most people cherish. Indeed, that insight has been gaining
ground around the world as the Leviathans of the 20th century have aged
or crumbled. Yet all too many members of Congress seem still to believe
that the good life is brought about primarily by government programs,
not by individuals acting in their private capacities. And they believe
equally that the Constitution authorizes them to enact such programs.
In growing numbers, however, Americans know better. Below the level
that polling usually reaches, they have come to see that government rarely
solves the problems it purports to solve; in fact, it usually makes those
problems worse. More deeply, they have come to understand that a life
dependent on government is too often not only impoverishing but impover-ished.
It is no accident, therefore, that the electoral trends of the past
quarter of a century have been in the direction of less government, even
if Washington has been slow to appreciate that message.
In moving from a world in which government is expected to solve our
problems to a world in which individuals, families, and communities
assume that responsibility— indeed, take up that challenge— the basic
questions are how much and how fast to reduce government. Those are
not questions about how to make government run better— government
will always be plagued by waste, fraud, and abuse— but about the funda-mental
role of government in this nation.

How Much to Reduce Government
The first of those questions— how much to reduce government— would
seem on first impression to be a matter of policy; yet in America, if we
take the Constitution seriously, it is not for the most part a policy question,
a question about what we may or may not want to do. For the Founding
Fathers thought long and hard about the proper role of government in our

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Congress, the Courts, and the Constitution
lives, and they set forth their thoughts in a document that explicitly
enumerates the powers of the federal government.
Thus, setting aside for the moment all practical concerns, the Constitu-tion
tells us as a matter of first principle how much to reduce government
by telling us, first, what powers the federal government in fact has and,
second, how governments at all levels must exercise their powers— by
respecting the rights of the people.
That means that if a federal power or federal program is not authorized
by the Constitution, it is illegitimate. Given the present size of government,
that is a stark conclusion, to be sure. But it flows quite naturally from the
Tenth Amendment, the final statement in the Bill of Rights, which says,
'' The powers not delegated to the United States by the Constitution, nor
prohibited by it to the States, are reserved to the States respectively, or
to the people. '' In a nutshell, the Constitution establishes a government
of delegated, enumerated, and thus limited powers. As the Federalist
Papers
make clear, the Constitution was written not simply to empower
the federal government but to limit it as well.
Since the Progressive Era, however, the politics of government as
problem solver has dominated our public discourse. And since the collapse
of the Supreme Court during the New Deal, following President Roose-velt's
notorious Court-packing scheme, the Court has abetted that view
by standing the Constitution on its head, turning it into a document of
effectively unenumerated and hence unlimited powers. (For a fuller discus-sion
of the Constitution and the history of its interpretation, see Chapter
3 of theCato Handbook for Congress: 104th Congress.)
Indeed, limits on government today come largely from political and
budgetary rather than from constitutional considerations. Thus, it has not
been because of any perceived lack of constitutional authority that govern-ment
in recent years has failed to undertake a program, when that has
happened, but because of practical limits on the power of government to
tax and borrow— and even those limits have failed in times of economic
prosperity. That is not the mark of a limited, constitutional republic. It is
the mark of a parliamentary system, limited only by periodic elections.
The Founding Fathers could have established such a system, of course.
They did not. But we have allowed those marks of a parliamentary system
to supplant the system they gave us. To restore truly limited government,
therefore, we have to do more than define the issues as political or
budgetary. We have to go to the heart of the matter and raise the underlying
constitutional questions. In a word, we have to ask the most fundamental

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question of all: does the government have the authority, the constitutional
authority, to do what it is doing?

How Fast to Reduce Government
As a practical matter, however, before Congress or the courts can relimit
government as it was meant to be limited by the Constitution, they need
to take seriously the problems posed by the present state of public debate
on the subject. It surely counts for something that a substantial number
of Americans— to say nothing of the organs of public opinion— have little
apprehension of or appreciation for the constitutional limits on activist
government. Thus, in addressing the question of how fast to reduce govern-ment,
we have to recognize that the Supreme Court, after more than 65
years of arguing otherwise, is hardly in a position, by itself, to relimit
government in the far-reaching way a properly applied Constitution
requires. But neither does Congress at this point have sufficient moral
authority, even if it wanted to, to end tomorrow the vast array of programs
it has enacted over the years with insufficient constitutional authority.
For either Congress or the Court to be able to do fully what should be
done, therefore, a proper foundation must first be laid. In essence, the
climate of opinion must be such that a sufficiently large portion of the
American public stands behind the changes that are undertaken. When
enough people come forward to ask— indeed, to demand— that govern-ment
limit itself to the powers it is given in the Constitution, thereby
freeing individuals, families, and communities to solve their own problems,
we will know we are on the right track.
Fortunately, a change in the climate of opinion on such basic questions
has been under way for some time now. The debate today is very different
than it was only a decade ago, much less a quarter of a century ago. But
there is a good deal more to be done before Congress and the courts are
able to move in the right direction in any far-reaching way, much less
say that they have restored constitutional government in America. To
continue the process, then, Congress should take the lead in the follow-ing
ways.

Encourage Constitutional Debate in the Nation by Engaging in Constitutional Debate in Congress, As Was Urged by the
House Constitutional Caucus during the 104th Congress
Under the leadership of House freshmen like J. D. Hayworth and John
Shadegg of Arizona, Sam Brownback of Kansas, and Bob Barr of Georgia,

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Congress, the Courts, and the Constitution
together with a few senior congressmen like Richard Pombo of California,
an informal Constitutional Caucus was established in the '' radical'' 104th
Congress. Its purpose was to encourage constitutional debate in Congress
and the nation and, in time, to restore constitutional government. Unfortu-nately,
the caucus has been moribund since then. It needs to be revived—
along with the spirit of the 104th Congress— and its work needs to be
expanded.
The caucus was created in response to the belief that the nation had
strayed very far from its constitutional roots and that Congress, absent
leadership from elsewhere in government, should begin addressing the
problem. By itself, of course, neither the caucus nor the entire Congress
can solve the problem. To be sure, in a reversal of all human experience,
Congress in a day could agree to limit itself to its enumerated powers and
then roll back the countless programs it has enacted by exceeding that
authority. But it would take authoritative opinions from the Supreme Court,
reversing a substantial body of largely post– New Deal decisions, to embed
those restraints in '' constitutional law''— even if they have been embedded
in the Constitution from the outset, the Court's modern readings of the
document notwithstanding.

The Goals of the Constitutional Caucus
The ultimate goal of the caucus and Congress, then, should be to
encourage the Court to reach such decisions. But history teaches, as noted
above, that the Court does not operate entirely in a vacuum, that to some
degree public opinion is the precursor and seedbed of its decisions. Thus,
the more immediate goal of the caucus should be to influence the debate
in the nation by influencing the debate in Congress. To do that, it is not
necessary or even desirable, in the present climate, that every member of
Congress be a member of the caucus— however worthy that end might
ultimately be— but it is necessary that those who join the caucus be
committed to its basic ends. And it is necessary that members establish
a clear agenda for reaching those ends.
To reduce the problem to its essence, every day members of Congress
are besieged by requests to enact countless measures to solve endless
problems. Indeed, listening to much of the recent campaign debate, one
might conclude that no problem is too personal or too trivial to warrant
the attention of the federal government. Yet most of the '' problems''
Congress spends most of its time addressing— from health care to day
care to retirement security to economic competition— are simply the per-23 24
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sonal and economic problems of life that individuals, families, and firms,
not governments, should be addressing. What is more, as a basic point
of constitutional doctrine, under a constitution like ours, interpreted as
ours was meant to be interpreted, there is little authority for government
at any level to address such problems.
Properly understood and used, then, the Constitution can be a valuable
ally in the efforts of the caucus and Congress to reduce the size and scope
of government. For in the minds and hearts of most Americans, it remains
a revered document, however little it may be understood by a substantial
number of them.

The Constitutional Vision
If the Constitution is to be thus used, however, the principal misunder-standing
that surrounds it must be recognized and addressed. In particular,
the modern idea that the Constitution, without further amendment, is an
infinitely elastic document that allows government to grow to meet public
demands of whatever kind must be challenged. More Americans than
presently do must come to appreciate that the Founding Fathers, who
were keenly aware of the expansive tendencies of government, wrote the
Constitution precisely to check that kind of thinking and that possibility.
To be sure, the Founders meant for government to be our servant, not
our master, but they meant it to serve us in a very limited way— by
securing our rights, as the Declaration of Independence says, and by doing
those few other things that government does best, as spelled out in the
Constitution.
In all else, we were meant to be free— to plan and live our own lives,
to solve our own problems, which is what freedom is all about. Some
may characterize that vision as tantamount to saying, '' You're on your
own, '' but that kind of response simply misses the point. In America
individuals, families, and organizations have never been '' on their own''
in the most important sense. They have always been members of communi-ties,
of civil society, where they could live their lives and solve their
problems by following a few simple rules about individual initiative and
responsibility, respect for property and promise, and charity toward the
few who need help from others. Massive government planning and pro-grams
have upset that natural order of things— less so in America than
elsewhere, but very deeply all the same.
Those are the issues that need to be discussed, both in human and in
constitutional terms. We need, as a people, to rethink our relationship to

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Congress, the Courts, and the Constitution
government. We need to ask not what government can do for us but what
we can do for ourselves and, where necessary, for others— not through
government but apart from government, as private citizens and organiza-tions.
That is what the Constitution was written to enable. It empowers
government in a very limited way. It empowers people— by leaving them
free— in every other way.
To proclaim and eventually secure that vision of a free people, the
Constitutional Caucus should reconstitute itself and rededicate itself to
that end at the beginning of the 108th Congress and the beginning of
every Congress thereafter. Standing apart from Congress, the caucus should
nonetheless be both of and above Congress— as the constitutional con-science
of Congress. Every member of Congress, before taking office,
swears to support the Constitution— hardly a constraining oath, given the
modern Court's open-ended reading of the document. Members of the
caucus should dedicate themselves to the deeper meaning of that oath.
They should support the Constitution the Framers gave us, as amended
by subsequent generations, not as '' amended'' by the Court's expansive
interpretations.

Encouraging Debate
Acting together, the members of the caucus could have a major impact
on the course of public debate in this nation— not least, by virtue of their
numbers. What is more, there is political safety in those numbers. As
Benjamin Franklin might have said, no single member of Congress is
likely to be able to undertake the task of restoring constitutional government
on his own, for in the present climate he would surely be hanged, politically,
for doing so. But if the caucus hangs together, the task will be made more
bearable and enjoyable— and a propitious outcome made more likely.
On the agenda of the caucus, then, should be those specific undertakings
that will best stir debate and thereby move the climate of opinion. Drawn
together by shared understandings, and unrestrained by the need for serious
compromise, the members of the caucus are free to chart a principled
course and employ principled means, which they should do.
They might begin, for example, by surveying opportunities for constitu-tional
debate in Congress, then making plans to seize those opportunities.
Clearly, when new bills are introduced, or old ones are up for reauthoriza-tion,
an opportunity is presented to debate constitutional questions. But
even before that, when plans are discussed in party sessions, members
should raise constitutional issues. Again, the caucus might study the costs

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and benefits of eliminating clearly unconstitutional programs, the better
to determine which can be eliminated most easily and quickly.
Above all, the caucus should look for strategic opportunities to employ
constitutional arguments. Too often, members of Congress fail to appreci-ate
that if they take a principled stand against a seemingly popular pro-gram—
and state their case well— they can seize the moral high ground
and prevail ultimately over those who are seen in the end to be more
politically craven.
All of that will stir constitutional debate— which is just the point. For
too long in Congress that debate has been dead, replaced by the often
dreary budget debate. This nation was not established by men with green
eyeshades. It was established by men who understood the basic character
of government and the basic right to be free. That debate needs to be
revived. It needs to be heard not simply in the courts— where it is twisted
through modern '' constitutional law''— but in Congress as well.

Enact Nothing without First Consulting the Constitution for Proper Authority and Then Debating That Question on the
Floors of the House and the Senate
It would hardly seem necessary to ask Congress, before it enacts any
measure, to cite its constitutional authority for doing so. After all, is that
not simply part of what it means, as a member of Congress, to swear to
support the Constitution? And if Congress's powers are limited by virtue
of being enumerated, presumably there are many things Congress has no
authority to do, however worthy those things might otherwise be. Yet so
far have we strayed from constitutional thinking that such a requirement
is today treated perfunctorily— when it is not ignored altogether.
The most common perfunctory citations— captured ordinarily in consti-tutional
boilerplate— are to the General Welfare and Commerce Clauses
of the Constitution. It is no small irony that both those clauses were written
as shields against overweening government; yet today they are swords of
federal power.

The General Welfare Clause
The General Welfare Clause of Article I, section 8, of the Constitution
was meant to serve as a brake on the power of Congress to tax and spend
in furtherance of its enumerated powers or ends: the spending that attended
the exercise of an enumerated power had to be for the general welfare,
not for the welfare of particular parties or sections of the nation.

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Congress, the Courts, and the Constitution
That view, held by Madison, Jefferson, and most others, stands in
marked contrast to the view of Hamilton— that the Constitution established
an independent power to tax and spend for the general welfare. But as
South Carolina's William Drayton observed on the floor of the House in
1828, Hamilton's view would make a mockery of the doctrine of enumer-ated
powers, the centerpiece of the Constitution, rendering the enumeration
of Congress's other powers superfluous: whenever Congress wanted to
do something it was barred from doing by the absence of a power to do
it, it could simply declare the act to be serving the '' general welfare'' and
get out from under the limits imposed by enumeration.
That, unfortunately, is what happens today. In 1936 the Court came
down, almost in passing, on Hamilton's side, declaring that there is an
independent power to tax and spend for the general welfare. Then in 1937,
in upholding the constitutionality of the new Social Security program, the
Court completed the job when it stated the Hamiltonian view not as dicta
but as doctrine, then reminded Congress of the constraints imposed by
the word '' general, '' but added that the Court would not police that
restraint; rather, Congress would be left to police itself, the very Congress
that was distributing money from the Treasury with ever greater particular-ity.
Since that time the relatively modest redistributive schemes that
preceded the New Deal have grown exponentially until today they are
everywhere.

The Commerce Clause
The Commerce Clause of the Constitution, which grants Congress the
power to regulate '' commerce among the states, '' was also written primar-ily
as a shield— against overweening state power. Under the Articles of
Confederation, states had erected tariffs and other protectionist measures
that impeded the free flow of commerce among the states. Indeed, the
need to break the logjam that resulted was one of the principal reasons
for the call for a convention in Philadelphia in 1787. To address the
problem, the Framers gave Congress the power to regulate— or '' make
regular''— commerce among the states. It was thus meant to be a power
primarily to facilitate free trade.
That functional account of the commerce power is consistent with
the original understanding of the power, the 18th-century meaning of
'' regulate, '' and the structural limits entailed by the doctrine of enumerated
powers. Yet today the functional account is all but unknown. Following
decisions by the Court in 1937 and 1942, Congress has been able to regulate

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anything that even '' affects'' interstate commerce, which in principle is
everything. Far from regulating to ensure the free flow of commerce
among the states, much of that regulation, for all manner of social and
economic purposes, actually frustrates the free flow of commerce.
As the explosive growth of the modern redistributive state has taken
place almost entirely under the General Welfare Clause, so, too, the growth
of the modern regulatory state has occurred almost entirely under the
Commerce Clause. That raises a fundamental question, of course: if the
Framers had meant for Congress to be able to do virtually anything it
wanted under those two simple clauses alone, why did they bother to
enumerate Congress's other powers, or bother to defend the doctrine of
enumerated powers throughout the Federalist Papers? Had they meant
that, those efforts would have been pointless.

Lopez and Its Aftermath
Today, as noted above, congressional citations to the General Welfare
and Commerce Clauses usually take the form of perfunctory boilerplate.
When it wants to regulate some activity, Congress makes a bow to the
doctrine of enumerated powers by claiming that it has made findings that
the activity at issue '' affects'' interstate commerce— say, by preventing
interstate travel. Given those findings, Congress then claims it has authority
to regulate the activity under its power to regulate commerce among
the states.
Thus, when the 104th Congress was pressed in the summer of 1996 to
do something about what looked at the time like a wave of church arsons
in the South, it sought to broaden the already doubtful authority of the
federal government to prosecute such acts by determining that church
arsons '' hinder interstate commerce'' and '' impede individuals in moving
interstate. '' Never mind that the prosecution of arson has traditionally
been a state responsibility, there being no general federal police power in
the Constitution. Never mind that church arsons have virtually nothing to
do with interstate commerce, much less with the free flow of goods and
services among the states. The Commerce Clause rationale, set forth in
boilerplate language, was thought by Congress to be sufficient to enable
it to move forward and enact the Church Arson Prevention Act of 1996—
unanimously, no less.
Yet only a year earlier, in the celebrated Lopez case, the Supreme Court
had declared, for the first time in nearly 60 years, that Congress's power

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Congress, the Courts, and the Constitution
under the Commerce Clause has limits. To be sure, the Court raised the
bar against federal regulation only slightly: Congress would have to show
that the activity it wanted to regulate '' substantially'' affected interstate
commerce, leading Justice Thomas to note in his concurrence that the
Court was still a good distance from a proper reading of the clause.
Nevertheless, the decision was widely heralded as a shot across the bow
of Congress. And many in Congress saw it as confirming at last their
own view that the body in which they served was simply out of control,
constitutionally. Indeed, when it passed the act at issue in Lopez, the Gun-Free
School Zones Act of 1990, Congress had not even bothered to cite
any authority under the Constitution. In what must surely be a stroke of
consummate hubris— and disregard for the Constitution— Congress sim-ply
assumed that authority.
But to make matters worse, despite the Lopez ruling— which the
Court reinforced in May 2000 when it found parts of the Violence
Against Women Act unconstitutional on similar grounds— Congress
in September 1996 passed the Gun-Free School Zones Act again.
This time, of course, the boilerplate was included— even as Sen.
Fred Thompson of Tennessee was reminding his colleagues from the
floor of the Senate that the Supreme Court had recently told them
that they '' cannot just have some theoretical basis, some attenuated
basis'' under the Commerce Clause for such an act. The prosecution
of gun possession near schools— like the prosecution of church
arsons, crimes against women, and much else— is very popular, as
state prosecutors well know. But governments can address problems
only if they have authority to do so, not from good intentions alone.
Indeed, the road to constitutional destruction is paved with good
intentions.
Congressional debate on these matters is thus imperative: it is not
enough for Congress simply to say the magic words—'' General Welfare
Clause'' or '' Commerce Clause''— to be home free, constitutionally.
Not every debate will yield satisfying results, as the examples above
illustrate. But if the Constitution is to be kept alive, there must at least
be debate. Over time, good ideas tend to prevail over bad ideas, but
only if they are given voice. The constitutional debate must again be
heard in the Congress of the United States as it was over much of our
nation's history, and it must be heard before bills are enacted. The
American people can hardly be expected to take the Constitution and
its limits on government seriously if their elected representatives do not.

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Move toward Restoring Constitutional Government by Carefully Returning Power Wrongly Taken over the Years
from the States and the People
If Congress should enact no new legislation without grounding its
authority to do so securely in the Constitution, so too should it begin
repealing legislation not so grounded, legislation that arose by assuming
power that rightly rests with the states or the people. To appreciate how
daunting a task that will be, simply reflect again on Madison's observation
that the powers of the federal government under the Constitution are '' few
and defined. ''
But the magnitude of the task is only one dimension of its difficulty.
Let us be candid: there are many in Congress who will oppose any efforts
to restore constitutional government for any number of reasons, ranging
from the practical to the theoretical. Some see their job as one primarily
of representing the interests of their constituents, especially the short-term
interests reflected in the phrase '' bringing home the bacon. '' Others simply
like big government, whether because of an '' enlightened'' Progressive
Era view of the world or because of a narrower, more cynical interest in
the perquisites of enhanced power. Still others believe sincerely in a
'' living constitution, '' one extreme form of which— the '' democratic''
form— imposes no limit whatsoever on government save for periodic
elections. Finally, there are those who understand the unconstitutional and
hence illegitimate character of much of what government does today but
believe it is too late in the day to do anything about it. All of those people
and others will find reasons to resist the discrete measures that are necessary
to begin restoring constitutional government. Yet, where necessary, their
views will have to be accommodated as the process unfolds.

Maintaining Support for Limited Government
Given the magnitude of the problem, then, and the practical implications
of repealing federal programs, a fair measure of caution is in order. As
the nations of Eastern Europe and the former Soviet Union have learned,
it is relatively easy to get into socialism— just seize all property and labor
and place it under state control— but much harder to get out of it. It is
not simply a matter of returning what was taken, for much has changed
as a result of the taking. People have died and new people have come
along. Public law has replaced private law. And new expectations and
dependencies have arisen and become settled over time. The transition to
freedom that many of those nations are experiencing is what we and many

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Congress, the Courts, and the Constitution
other nations around the world today are facing, to a lesser extent, as we
too try to reduce the size and scope of our governments.
As programs are reduced or eliminated, then, care must be taken to do
as little harm as possible— for two reasons at least. First, there is some
sense in which the federal government today, vastly overextended though
it is, stands in a contractual relationship with the American people. That
is a very difficult idea to pin down, however, for once the genuine con-tract—
the Constitution— has broken down, the '' legislative contracts''
that arise to take its place invariably reduce, when parsed, to programs
under which some people have become dependent upon others, although
neither side had a great deal to say directly about the matter at the outset.
Whatever its merits, that contractual view is held by a good part of the
public, especially in the case of so-called middle-class entitlements.
That leads to the second reason why care must be taken in restoring
power to the states and the people, namely, that the task must be undertaken,
as noted earlier, with the support of a substantial portion of the people—
ideally, at the urging of those people. Given the difficulty of convincing
people— including legislators— to act against their relatively short-term
interests, it will take sound congressional judgment about where and when
to move. More important, it will take keen leadership, leadership that is
able to frame the issues in a way that will communicate both the rightness
and the soundness of the decisions that are required.
In exercising that leadership, there is no substitute for keeping '' on
message'' and for keeping the message simple, direct, and clear. The aim,
again, is both freedom and the good society. We need to appreciate how
the vast government programs we have created over the years have actually
reduced the freedom and well-being of all of us— and have undermined
the Constitution besides. Not that the ends served by those programs are
unworthy— few government programs are undertaken for worthless ends.
But individuals, families, private firms, and communities could bring about
most of those ends, voluntarily and at far less cost, if only they were free
to do so— especially if they were free to keep the wherewithal that is
necessary to do so. If individual freedom and individual responsibility are
values we cherish— indeed, are the foundations of the good society— we
must come to appreciate how our massive government programs have
undermined those values and, with that, the good society itself.

Redistributive Programs
Examples of the kinds of programs that should be returned to the states
and the people are detailed elsewhere in this Handbook, but a few are in

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order here. Without question, the most important example of devolution
to come from the '' radical'' 104th Congress was in the area of welfare.
However flawed the final legislation may have been from both a constitu-tional
and a policy perspective, it was still a step in the right direction.
Ultimately, as will be noted below in a more general way, welfare should
not be even a state program. Rather, it should be a matter of private
responsibility, as it was for years in this nation. But the process of getting
the federal government out of the business of charity, for which there is
no authority in the Constitution, has at least begun.
Eventually, that process should be repeated in every other '' entitlement''
area, from individual to institutional to corporate, from Social Security
and Medicare to the National Endowment for the Arts to the Department
of Agriculture's Market Access Program and on and on. Each of those
programs was started for a good reason, to be sure, yet each involves
taking from some to give to others— means that are both wrong and
unconstitutional, to say nothing of monumentally inefficient. Taken
together, they put us all on welfare in one way or another, and we are all
the poorer for it.
Some of those programs will be harder to reduce, phase out, or eliminate
than others, of course. Entitlement programs with large numbers of benefi-ciaries,
for example, will require transition phases to ensure that harm is
minimized and public support is maintained. Other programs, however,
could be eliminated with relatively little harm. Does anyone seriously
doubt that there would be art in America without the National Endowment
for the Arts? Indeed, without the heavy hand of government grant making,
the arts would likely flourish as they did long before the advent of the
NEA— and no one would be made to pay, through his taxes, for art
he abhorred.
It is the transfer programs in the '' symbolic'' area, in fact, that may
be the most important to eliminate first, for they have multiplier effects
reaching well beyond their raw numbers, and those effects are hardly
neutral on the question of reducing the size and scope of government.
The National Endowment for the Arts, the National Endowment for the
Humanities, the Corporation for Public Broadcasting, the Legal Services
Corporation, and the Department of Education have all proceeded without
constitutional authority— but with serious implications for free speech and
for the cause of limiting government. Not a few critics have pointed to the
heavy hand of government in those symbolic areas. Of equal importance,
however, is the problem of compelled speech: as Jefferson wrote, '' To

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Congress, the Courts, and the Constitution
compel a man to furnish contributions of money for the propagation of
opinions which he disbelieves is sinful and tyrannical. '' But on a more
practical note, if Congress is serious about addressing the climate of
opinion in the nation, it will end such programs not simply because they
are without constitutional authority but because they have demonstrated
a relentless tendency over the years in only one direction— toward even
more government. Indeed, one should hardly expect those institutions
to be underwriting programs that advocate less government when they
themselves exist through government.

Regulatory Redistribution
If the redistributive programs that constitute the modern welfare state
are candidates for elimination, so too are many of the regulatory programs
that have arisen under the Commerce Clause. Here, however, care must
be taken not simply from a practical perspective but from a constitutional
perspective as well, for some of those programs may be constitutionally
justified. When read functionally, recall, the Commerce Clause was meant
to enable Congress to ensure that commerce among the states is regular,
and especially to counter state actions that might upset that regularity.
Think of the Commerce Clause as an early North American Free Trade
Agreement, without the heavy hand of '' managed trade'' that often accom-panies
the modern counterpart.
Thus conceived, the Commerce Clause clearly empowers Congress,
through regulation, to override state measures that may frustrate the free
flow of commerce among the states. But it also enables Congress to take
such affirmative measures as may be necessary and proper for facilitating
free trade, such as clarifying rights of trade in uncertain contexts or
regulating the interstate transport of dangerous goods. What the clause
does not authorize, however, is regulation for reasons other than to ensure
the free flow of commerce— the kind of '' managed trade'' that is little
but a thinly disguised transfer program designed to benefit one party at
the expense of another.
Unfortunately, most modern federal regulation falls into that final cate-gory,
whether it concerns employment or health care or insurance or
whatever. In fact, given budgetary constraints on the ability of government
to tax and spend— to take money from some, run it through the Treasury,
then give it to others— the preferred form of transfer today is through
regulation. That puts it '' off budget. '' Thus, when an employer, an insurer,
a lender, or a landlord is required by regulation to do something he would

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otherwise have a right not to do, or not do something he would otherwise
have a right to do, he serves the party benefited by that regulation every
bit as much as if he were taxed to do so, but no tax increase is ever
registered on any public record.
The temptation for Congress to resort to such '' cost-free'' regulatory
redistribution is of course substantial, and the effects are both far-reaching
and perverse. Natural markets are upset as incentives are changed; econo-mies
of scale are skewed as large businesses, better able to absorb the
regulatory burdens, are advantaged over small ones; defensive measures,
inefficient from the larger perspective, are encouraged; and general uncer-tainty,
anathema to efficient markets, is the order of the day. Far from
facilitating free trade, redistributive regulation frustrates it. Far from being
justified by the Commerce Clause, it undermines the very purpose of
the clause.

Federal Crimes
In addition to misusing the commerce power for the purpose of regula-tory
redistribution, Congress has misused that power to create federal
crimes. Thus, a great deal of '' regulation'' has arisen in recent years under
the commerce power that is nothing but a disguised exercise of a police
power that Congress otherwise lacks. As noted earlier, the Gun-Free School
Zones Act, the Church Arson Prevention Act, and the Violence Against
Women Act are examples of legislation passed nominally under the power
of Congress to regulate commerce among the states; but the actions subject
to federal prosecution under those statutes— gun possession, church arson,
and gender-motivated violence, respectively— are ordinarily regulated
under state police power, the power of states, in essence, to '' police'' or
secure our rights. The ruse of regulating them under Congress's commerce
power is made necessary because there is no federal police power enumer-ated
in the Constitution— except as an implication of federal sovereignty
over federal territory or an incidence of some enumerated power.
That ruse should be candidly recognized. Indeed, it is a mark of the
decline of respect for the Constitution that when we sought to fight a war
on liquor earlier in the century we felt it necessary to do so by first
amending the Constitution— there being no power otherwise for such a
federal undertaking. Today, however, when we engage in a war on drugs—
with as much success as we enjoyed in the earlier war— we do so without
as much as a nod to the Constitution.
The Constitution lists three federal crimes: treason, piracy, and counter-feiting.
Yet today there are more than 3,000 federal crimes and perhaps

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Congress, the Courts, and the Constitution
300,000 regulations that carry criminal sanctions. Over the years, no faction
in Congress has been immune, especially in an election year, from the
propensity to criminalize all manner of activities, utterly oblivious to the
lack of any constitutional authority for doing so. We should hardly imagine
that the Founders fought a war to free us from a distant tyranny only to
establish a tyranny in Washington, in some ways even more distant from
the citizens it was meant to serve.

Policing the States
If the federal government has often intruded upon the police power of
the states, so too has it often failed in its responsibility under the Fourteenth
Amendment to police the states. Here is an area where federal regulation
has been, if anything, too restrained— yet also unprincipled, oftentimes,
when undertaken.
The Civil War Amendments to the Constitution changed fundamentally
the relationship between the federal government and the states, giving
citizens an additional level of protection, not against federal but against
state oppression— the oppression of slavery, obviously, but much else
besides. Thus, the Fourteenth Amendment prohibits states from abridging
the privileges or immunities of citizens of the United States; from depriving
any person of life, liberty, or property without due process of law; and
from denying any person the equal protection of the laws. By implication,
section 1 of the amendment gives the courts the power to secure those
guarantees. Section 5 gives Congress the '' power to enforce, by appropriate
legislation, the provisions of this article. ''
As the debate that surrounded the adoption of those amendments makes
clear, the Privileges or Immunities Clause was meant to be the principal
source of substantive rights in the Fourteenth Amendment, and those
rights were meant to include the rights of property, contract, and personal
security— in short, our '' natural liberties, '' as Blackstone had earlier under-stood
that phrase. Unfortunately, in 1873, in the notorious Slaughterhouse
Cases,
a bitterly divided Supreme Court essentially eviscerated the Privi-leges
or Immunities Clause. There followed, for nearly a century, the era
of Jim Crow in the South and, for a period stretching to the present,
a Fourteenth Amendment jurisprudence that is as contentious as it is
confused.
Modern liberals have urged that the amendment be used as it was meant
to be used— against state oppression; but they have also urged that it be
used to recognize all manner of '' rights'' that are no part of the theory

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of rights that stands behind the amendment as understood at the time of
ratification. Modern conservatives, partly in reaction, have urged that the
amendment be used far more narrowly than it was meant to be used—
for fear that it might be misused, as it has been.
The role of the judiciary under section 1 of the Fourteenth Amendment
will be discussed below. As for Congress, its authority under section 5—
'' to enforce, by appropriate legislation, the provisions of this article''—
is clear, provided Congress is clear about those provisions. And on that,
we may look, again, to the debates that surrounded not only the adoption
of the Fourteenth Amendment but the enactment of the Civil Rights Act
of 1866, which Congress reenacted in 1868, just after the amendment
was ratified.
Those debates give us a fairly clear idea of what it was that the American
people thought they were ratifying. In particular, all citizens, the Civil
Rights Act declared, '' have the right to make and enforce contracts, to
sue, be parties and give evidence; to inherit, purchase, lease, sell, hold,
and convey real personal property, and to full and equal benefit of all
laws and proceedings for the security of persons and property. '' Such
were the privileges and immunities the Fourteenth Amendment was meant
to secure.
Clearly, those basic common law rights, drawn from the reason-based
classical theory of rights, are the stuff of ordinary state law. Just as clearly,
however, states have been known to violate them, either directly or by
failure to secure them against private violations. When that happens, appeal
can be made to the courts, under section 1, or to Congress, under section 5.
The Fourteenth Amendment gives no power, of course, to secure the
modern '' entitlements'' that are no part of the common law tradition of
life, liberty, and property: the power it grants, that is, is limited by the
rights it is meant to secure. But it does give a power to reach even intrastate
matters when states are violating the provisions of the amendment. The
claim of '' states' rights, '' in short, is no defense for state violations of
individual rights.
Thus, if the facts had warranted it, something like the Church Arson
Prevention Act of 1996, depending on its particulars, might have been
authorized not on Commerce Clause grounds but on Fourteenth Amend-ment
grounds. If, for example, the facts had shown that arsons of white
churches were being prosecuted by state officials whereas arsons of black
churches were not, then we would have had a classic case of the denial
of the equal protection of the laws. With those findings, Congress would

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Congress, the Courts, and the Constitution
have had ample authority under section 5 of the Fourteenth Amendment
'' to enforce, by appropriate legislation, the provisions of this article. ''
Unfortunately, in the final version of the act, Congress removed citations
to the Fourteenth Amendment, choosing instead to rest its authority entirely
on the Commerce Clause. Not only is that a misuse of the Commerce
Clause, inviting further misuse; but, assuming the facts had warranted it,
it is a failure to use the Fourteenth Amendment as it was meant to be
used, inviting further failures. To be sure, the Fourteenth Amendment has
itself been misused, both by Congress and by the courts. But that is no
reason to ignore it. Rather, it is a reason to correct the misuses.
In its efforts to return power to the states and the people, then, Congress
must be careful not to misunderstand its role in our federal system. Over
the 20th century, Congress assumed vast powers that were never its to
assume, powers that belong properly to the states and the people. Those
need to be returned. But at the same time, Congress and the courts do
have authority under the Fourteenth Amendment to ensure that citizens
are free from state oppression. However much that authority may have
been underused or overused, it is there to be used; and if it is properly
used, objections by states about federal interference in their '' internal
affairs'' are without merit.

Reject the Nomination of Judicial Candidates Who Do Not Appreciate That the Constitution Is a Document of Delegated,
Enumerated, and Thus Limited Powers
As noted earlier, Congress can relimit government on its own initiative
simply by restricting its future actions to those that are authorized by the
Constitution and repealing those past actions that were taken without such
authority; but for those limits to become '' constitutional law, '' they would
have to be recognized as such by the Supreme Court, which essentially
abandoned that view of limited government during the New Deal. Thus,
for the Court to play its part in the job of relimiting government constitu-tionally,
it must recognize the mistakes it has made over the years, espe-cially
following Roosevelt's Court-packing threat in 1937, and rediscover
the Constitution— a process it began in Lopez, however tentatively, when
it returned explicitly to '' first principles. ''
But Congress is not powerless to influence the Court in that direction:
as vacancies arise on the Court and on lower courts, it has a substantial
say about who sits there through its power to advise and consent. To
exercise that power well, however, Congress must have a better grasp of

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the basic issues than it has shown in recent years during Senate confirmation
hearings for nominees for the Court. In particular, the Senate's obsession
with questions about '' judicial activism'' and '' judicial restraint, '' terms
that in themselves are largely vacuous, only distracts it from the real
issue— the nominee's philosophy of the Constitution. To appreciate those
points more fully, however, a bit of background is in order.

From Powers to Rights
The most important matter to grasp is the fundamental change that took
place in our constitutional jurisprudence during the New Deal and the
implications of that change for the modern debate. The debate today is
focused almost entirely on rights, not powers. Indeed, until the 107th
Congress and its focus on ideology, the principal concern during Senate
confirmation hearings had been with a nominee's views about what rights
are '' in'' the Constitution. That is an important question, to be sure, but
it must be addressed within a much larger constitutional framework, a
framework too often missing from recent hearings.
Clearly, the American debate began with rights— with the protests that
led eventually to the Declaration of Independence. And in that seminal
document, Jefferson made rights the centerpiece of the American vision:
rights to life, liberty, and the pursuit of happiness, derived from a premise
of moral equality, itself grounded in a higher law discoverable by reason—
all to be secured by a government of powers made legitimate through
consent.
But when they set out to draft a constitution, the Framers focused on
powers, not rights, for two main reasons. First, their initial task was to
create and empower a government, which the Constitution did once it
was ratified. But their second task, of equal importance, was to limit that
government. Here, there were two main options. The Framers could have
listed a set of rights that the new government would be forbidden to violate.
Or they could have limited the government's powers by enumerating
them, then pitting one against the other through a system of checks
and balances— the idea being that where there is no power there is, by
implication, a right, belonging to the states or the people. They chose the
second option, for they could hardly have enumerated all of our rights,
but they could enumerate the new government's powers, which were
meant from the outset to be, again, '' few and defined. '' Thus, the doctrine
of enumerated powers became our principal defense against overweening
government.

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Only later, during the course of ratification, did it become necessary
to add a Bill of Rights— as a secondary defense. But in so doing, the
Framers were still faced with a pair of objections that had been posed
from the start. First, it was impossible to enumerate all of our rights,
which in principle are infinite in number. Second, given that problem, the
enumeration of only certain rights would be construed, by ordinary methods
of legal construction, as denying the existence of others. To overcome
those objections, therefore, the Framers wrote the Ninth Amendment: '' The
enumeration in the Constitution of certain rights shall not be construed to
deny or disparage others retained by the people. ''

Constitutional Visions
Thus, with the Ninth Amendment making it clear that we have both
enumerated and unenumerated rights, the Tenth Amendment making it
clear that the federal government has only enumerated powers, and the
Fourteenth Amendment later making it clear that our rights are good
against the states as well, what emerges is an altogether libertarian picture.
Individuals, families, firms, and the infinite variety of institutions that
constitute civil society are free to pursue happiness however they wish,
in accord with whatever values they wish, provided only that in the process
they respect the equal rights of others to do the same; and governments
are instituted to secure that liberty and do the few other things their
constitutions make clear they are empowered to do.
That picture is a far cry from the modern liberal's vision, rooted in the
Progressive Era, which would have government empowered to manage
all manner of economic affairs. But it is a far cry as well from the modern
conservative's vision, which would have government empowered to man-age
all manner of social affairs. Neither vision reflects the true constitu-tional
scheme. Both camps want to use the Constitution to promote their
own substantive agendas. Repeatedly, liberals invoke democratic power
for ends that are nowhere in the Constitution; at other times they invoke
'' rights'' that are no part of the plan, requiring government programs that
are nowhere authorized. For their agenda, conservatives rely largely on
expansive readings of democratic power that were never envisioned,
thereby running roughshod over rights that were meant to be protected.

From Liberty to Democracy
The great change in constitutional vision took place during the New
Deal, when the idea that galvanized the Progressive Era— that the basic

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purpose of government is to solve social and economic problems— was
finally instituted in law through the Court's radical reinterpretation of the
Constitution. As noted earlier, following the 1937 Court-packing threat,
the Court eviscerated our first line of defense, the doctrine of enumerated
powers, when it converted the General Welfare and Commerce Clauses
from shields against power into swords of power. Then in 1938 a cowed
Court undermined the second line of defense, our enumerated and unenu-merated
rights, when it declared that henceforth it would defer to the
political branches and the states when their actions implicated '' nonfunda-mental''
rights like property and contract— the rights associated with
'' ordinary commercial affairs. '' Legislation implicating such rights, the
Court said, would be given '' minimal scrutiny'' by the Court, which is
tantamount to no scrutiny at all. By contrast, when legislation implicated
'' fundamental'' rights like voting, speech, and, later, certain '' personal''
liberties, the Court would apply '' strict scrutiny'' to that legislation, proba-bly
finding it unconstitutional.
With that, the Constitution was converted, without benefit of amend-ment,
from a libertarian to a largely democratic document. The floodgates
were now open to majoritarian tyranny, which very quickly became special-interest
tyranny, as public-choice economic theory amply demonstrates
should be expected. Once those floodgates were opened, the programs
that poured through led inevitably to claims from many quarters that rights
were being violated. Thus, the Court in time would have to try to determine
whether those rights were '' in'' the Constitution— a question the Constitu-tion
had spoken to indirectly, for the most part, through the now-discredited
doctrine of enumerated powers; and if it found the rights in question, the
Court would then have to try to make sense of its distinction between
'' fundamental'' and '' nonfundamental'' rights.

Judicial '' Activism'' and '' Restraint''
It is no accident, therefore, that until very recently the modern debate
has been focused on rights, not powers. With the doctrine of enumerated
powers effectively dead, with government's power essentially plenary, the
only issues left for the Court to decide, for the most part, are whether
there might be any rights that would limit that power and whether those
rights are or are not '' fundamental. ''
Both liberals and conservatives today have largely bought into this
jurisprudence. As noted above, both camps believe the Constitution gives
a wide berth to democratic decisionmaking. Neither side any longer asks

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the first question, the fundamental question: do we have authority, constitu-tional
authority, to pursue this end? Instead, they simply assume that
authority, take a policy vote on some end before them, then battle in court
over whether there are any rights that might restrict their power.
Modern liberals, fond of government programs, call upon the Court to
be '' restrained'' in finding rights that might limit their redistributive and
regulatory schemes, especially '' nonfundamental'' rights like property and
contract. At the same time, even as they ignore those rights, liberals ask
the Court to be '' active'' in finding other '' rights'' that were never meant
to be among even our unenumerated rights.
But modern conservatives are often little better. Reacting to the abuses
of liberal '' activism, '' many conservatives call for judicial '' restraint''
across the board. Thus, if liberal programs have run roughshod over the
rights of individuals to use their property or freely contract, the remedy,
conservatives say, is not for the Court to invoke the doctrine of enumerated
powers— that battle was lost during the New Deal— nor even to invoke
the rights of property and contract that are plainly in the Constitution—
that might encourage judicial activism— but to turn to the democratic
process to overturn those programs. Oblivious to the fact that restraint in
finding rights is tantamount to activism in finding powers, and ignoring
the fact that it was the democratic process that gave us the problem in
the first place, too many conservatives offer us a counsel of despair
amounting to a denial of constitutional protection.
No one doubts that in recent decades the Court has discovered '' rights''
in the Constitution that are no part of either the enumerated or unenumer-ated
rights that were meant to be protected by that document. But it is
no answer to that problem to ask the Court to defer wholesale to the
political branches, thereby encouraging it, by implication, to sanction
unenumerated powers that are no part of the document either. Indeed, if
the Tenth Amendment means anything, it means that there are no such
powers. Again, if the Framers had wanted to establish a simple democracy,
they could have. Instead, they established a limited, constitutional republic,
a republic with islands of democratic power in a sea of liberty, not a sea
of democratic power surrounding islands of liberty.
Thus, it is not the proper role of the Court to find rights that are no
part of the enumerated or unenumerated rights meant to be protected by
the Constitution, thereby frustrating authorized democratic decisions. But
neither is it the proper role of the Court to refrain from asking whether
those decisions are in fact authorized and, if authorized, whether their

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implementation is in violation of the rights guaranteed by the Constitution,
enumerated and unenumerated alike.
The role of the judge in our constitutional republic is thus profoundly
important and oftentimes profoundly complex. '' Activism'' is no proper
posture for a judge, but neither is '' restraint. '' Judges must apply the
Constitution to cases or controversies before them, neither making it up
nor ignoring it. They must appreciate especially that the Constitution is
a document of delegated, enumerated, and thus limited powers. That will
get the judge started on the question of what rights are protected by the
document; for where there is no power there is, again, a right, belonging
either to the states or to the people: indeed, we should hardly imagine
that, before the addition of the Bill of Rights, the Constitution failed to
protect most rights simply because most were not '' in'' it. But reviving
the doctrine of enumerated powers is only part of the task before the
Court; it must also revive the classical theory of rights if the restoration
of constitutional government is to be completed correctly.
Those are the two sides— powers and rights— that need to be examined
in the course of Senate confirmation hearings for nominees for the courts
of the United States. More important than knowing a nominee's '' judicial
philosophy'' is knowing his philosophy of the Constitution. For the Consti-tution,
in the end, is what defines us as a nation.
If a nominee does not have a deep and thorough appreciation for the
basic principles of the Constitution— for the doctrine of enumerated powers
and for the classical theory of rights that stands behind the Constitution—
then his candidacy should be rejected. In recent years, Senate confirmation
hearings have become extraordinary opportunities for constitutional debate
throughout the nation. Those debates need to move from the ethereal
realm of '' constitutional law'' to the real realm of the Constitution. They
are extraordinary opportunities not simply for constitutional debate but
for constitutional renewal.
Alarmingly, however, in the 107th Congress we saw the debate move
not from '' constitutional law'' to the Constitution but in the very opposite
direction— to raw politics. The demand that judicial nominees pass an
'' ideological litmus test''— that they reflect and apply the '' mainstream
values'' of the American people, whatever those may be— is tantamount
to expecting and asking judges not to apply the law, which is what judging
is all about, but to make the law according to those values, whatever the
actual law may require. The duty of judges under the Constitution is to
decide cases according to the law, not according to whatever values or

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Congress, the Courts, and the Constitution
ideology may be in fashion. For that, the only ideology that matters is
the ideology of the Constitution.

Conclusion
America is a democracy in the most fundamental sense of that idea:
authority, or legitimate power, rests ultimately with the people. But the
people have no more right to tyrannize each other through democratic
government than government itself has to tyrannize the people. When
they constituted us as a nation by ratifying the Constitution and the
amendments that have followed, our ancestors gave up only certain of
their powers, enumerating them in a written constitution. We have allowed
those powers to expand beyond all moral and legal bounds— at the price
of our liberty and our well-being. The time has come to return those
powers to their proper bounds, to reclaim our liberty, and to enjoy the
fruits that follow.

Suggested Readings
Bailyn, Bernard. The Ideological Origins of the American Revolution. Cambridge, Mass.: Belknap, 1967.

Barnett, Randy E. The Structure of Liberty: Justice and the Rule of Law. New York: Oxford University Press, 1998.
Barnett, Randy E., ed. The Rights Retained by the People: The History and Meaning of the Ninth Amendment. Fairfax, Va.: George Mason University Press, 1989.
Corwin, Edward S. The '' Higher Law'' Background of American Constitutional Law. Ithaca, N. Y.: Cornell University Press, 1955.
Dorn, James A., and Henry G. Manne, eds. Economic Liberties and the Judiciary. Fairfax, Va.: George Mason University Press, 1987.
Epstein, Richard A. Principles for a Free Society: Reconciling Individual Liberty with the Common Good. Reading, Mass.: Perseus Books, 1998.
. '' The Proper Scope of the Commerce Power. '' Virginia Law Review 73 (1987). . Simple Rules for a Complex World. Cambridge, Mass.: Harvard University
Press, 1995. . Takings: Private Property and the Power of Eminent Domain. Cambridge,
Mass.: Harvard University Press, 1985. Hamilton, Alexander, James Madison, and John Jay. The Federalist Papers. New York:
Mentor, 1961. Lawson, Gary. '' The Rise and Rise of the Administrative State. '' Harvard Law Review
107 (1994). Lawson, Gary, and Patricia B. Granger. '' The 'Proper' Scope of Federal Power: A
Jurisdictional Interpretation of the Sweeping Clause. '' Duke Law Journal 43 (1993). Locke, John. '' Second Treatise of Government. '' In Two Treatises of Government. Edited
by Peter Laslett. New York: Mentor, 1965. Miller, Geoffrey P. '' The True Story of Carolene Products. '' Supreme Court Review
(1987).

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CATO HANDBOOK FOR CONGRESS
Pilon, Roger. '' Freedom, Responsibility, and the Constitution: On Recovering Our Found-ing Principles. '' Notre Dame Law Review 68 (1993).
. '' How Constitutional Corruption Has Led to Ideological Litmus Tests for Judicial Nominees. '' Cato Institute Policy Analysis no. 446, August 8, 2002.
. '' The Purpose and Limits of Government. '' Cato's Letter, no. 13 (1999). . '' Restoring Constitutional Government. '' Cato's Letter, no. 9 (1995).
Reinstein, Robert J. '' Completing the Constitution: The Declaration of Independence, Bill of Rights and Fourteenth Amendment. '' Temple Law Review 66 (1993).
Shankman, Kimberly C., and Roger Pilon. '' Reviving the Privileges or Immunities Clause to Redress the Balance among States, Individuals, and the Federal Government. ''
Cato Institute Policy Analysis no. 326, November 23, 1998. Siegan, Bernard H. Economic Liberties and the Constitution. Chicago: University of
Chicago Press, 1980. Sorenson, Leonard R. Madison on the '' General Welfare'' of America. Lanham, Md.:
Rowman & Littlefield, 1995. Warren, Charles. Congress as Santa Claus: Or National Donations and the General
Welfare Clause of the Constitution.
1932. Reprint, New York: Arno Press, 1978.
Yoo, John Choon. '' Our Declaratory Ninth Amendment. '' Emory Law Journal 42 (1993).

—Prepared by Roger Pilon

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4. Clearing the Decks for War
The U. S. government should
promptly eliminate the foreign aid budget devoted to develop-mental
aid, withdraw all U. S. military personnel from Bosnia and Kosovo

within one year, withdraw all U. S. troops stationed in Western Europe by 2005,
withdraw all U. S. troops stationed in South Korea by 2005,
withdraw all U. S. troops stationed in Japan by 2007,
transfer some of the funding and personnel involved in the
above withdrawals to units and tasks relevant to the war on terrorism, and

demobilize all surplus forces.

President Bush has emphasized that the war against terrorism will be
lengthy and difficult, despite the gratifying initial successes in Afghanistan.
He is right. Even if the war is confined (as it should be) to campaigns
against those organizations responsible for the September 11, 2001, attacks
or any future attacks instead of becoming an amorphous crusade against
evil in the world, the conflict will not be over quickly. That's why it is
imperative that the United States promptly clear the decks for war. America
must jettison obsolete or unnecessary commitments and expenditures.
When a family suffers an unexpected hardship or tragedy, it does not
continue with business as usual, leaving its priorities and spending patterns
unaltered. Likewise, a nation must alter its priorities when facing difficult-ies.
For America, the war against the terrorists who committed the Septem-ber
11 outrages will be the top priority for the foreseeable future. Yet,
instead of reducing or eliminating less essential commitments, Washington
seems inclined to pile the new commitments on top of the old.

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Barely a year into the war on terrorism, the failure to trim other commit-ments
is already creating strains on the military. Gen. Tommy Franks,
the commander of U. S. forces in Afghanistan, and other military leaders
have complained that the deployment is creating overburdened and
stressed-out personnel. That is a most troubling development. The United
States has fewer than 10,000 troops in Afghanistan and only a few thousand
more deployed in Pakistan and some of the Central Asian republics near
Afghanistan. As military deployments go, the campaign against al-Qaeda
and the Taliban to this point has not been an especially large one. Yet
even this modest effort is creating significant strains. One has to wonder
how severe the strain will become if a substantially larger deployment in
the war on terrorism is ever required.
There are numerous commitments that should be candidates for elimina-tion,
including a plethora of wasteful and unnecessary domestic spending
programs. The United States should also make significant cuts in the realm
of international affairs, starting with the elimination of the $10.9 billion
of developmental aid in the foreign aid budget. Numerous scholars have
documented the dismal record of developmental aid over the past half
century (see Chapter 66). U. S. developmental aid programs have subsidized
counterproductive economic policies in recipient countries and helped
entrench corrupt political elites. Such aid was a foolish expenditure the
United States could ill afford even before September 11. In a post– Sep-tember
11 environment, it should be one of the first programs on the
chopping block.
But developmental aid is not the only arena in which the U. S. govern-ment
needs to reorder its priorities in international affairs. There are also
a number of obsolete or unnecessary security commitments that should
be terminated. Four such candidates for elimination stand out.

Terminate the Nation-Building Missions in the Balkans
The nation-building missions in Bosnia and Kosovo were foolish and
unnecessary from the outset. Despite the exertions of America and its
NATO allies, Bosnia is no closer to being a viable country today than it
was when the Dayton Peace Agreement was signed more than seven
years ago. The NATO intervention in Kosovo is even worse. It merely
strengthened the hand of Albanian nationalists who want to create a Greater
Albania and who have recently stirred up trouble across the border in
Macedonia.

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Clearing the Decks for War
The missions in Bosnia and Kosovo cost the United States nearly $6
billion a year. More than 3, 000 U. S. troops are tied down in Bosnia in
glorified police work. More than 6, 000 troops are stationed in Kosovo
performing similar tedious tasks. U. S. leaders should immediately inform
the European members of NATO that we will be withdrawing all of our
forces over the next year.
The European allies would then have to decide whether to continue the
Balkan peacekeeping missions without U. S. participation or withdraw their
own forces as well. U. S. leaders should not especially care which option
the Europeans select. The Balkans have never been an arena in which
vital American interests were at stake. The region is more important to
the nations of the European Union, and they should decide whether a
peacekeeping venture is worth the expense and bother. It is absurd to
argue that the prosperous nations of the European Union cannot police
the Balkans if they wish to do so. American money, as well as the U. S.
military personnel tied down in useless peacekeeping tasks, could be used
far more effectively to prosecute the war against terrorism.

Withdraw the 100, 000 U. S. Troops Stationed in Western Europe

The U. S. troop presence in Western Europe is an utterly obsolete
commitment inherited from the Cold War. As noted in Chapter 51, the
original concept of NATO did not include the permanent stationing of
U. S. troops in Europe. Since the Cold War has been over for more than
a decade, the time is long overdue for the withdrawal of all such personnel
still deployed on the Continent.
Even the most creative defenders of the deployment would have diffi-culty
explaining just why the troops are still there. The U. S. forces are
apparently on duty to prevent an invasion of Western Europe by a Warsaw
Pact that no longer exists led by a Soviet Union that no longer exists.
How tank divisions stationed in Germany benefit the security of the United
States in the 21st century is truly a mystery.
The Europeans clearly can provide for their own security without relying
on U. S. troops. There is no serious security threat in Europe, nor is one
likely to emerge in the foreseeable future. The security problems that do
exist are small-scale, with the disorders in the Balkans being the primary
examples. The nations of the European Union should certainly be able to
manage their own defense and deal with such minor security contingencies.
Collectively, the European Union has a population larger than that of the

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United States as well as a larger gross domestic product. That is true even
without taking into account the new nations that will be added to the EU
within the next two years.
True, the European nations (especially the major states in the EU) might
have to raise their military budgets slightly to offset the withdrawal of
U. S. forces, but that action would hardly result in an onerous burden.
Besides, it is appropriate that the Europeans pay the full cost of their own
defense. Giving the prosperous European allies a de facto defense subsidy
made no sense even before September 11. It is a luxury the United States
simply cannot afford in a post– September 11 setting.
The U. S. military units stationed in Europe should be withdrawn by
the beginning of 2005 and demobilized. Some of the personnel should
then be reassigned to lighter, more mobile units that would be relevant
in the fight against terrorism. The military commitment to NATO costs
the United States nearly $40 billion a year. Even a partial demobilization
would save American taxpayers several billion dollars.

Withdraw the 37,000 U. S. Troops Stationed in South Korea
The U. S. troop presence in South Korea is another obsolete, Cold War–
era obligation. U. S. troops stayed in that country after the end of the
Korean War in 1953. At that time, a plausible argument could be made
for the commitment. U. S. leaders worried that a new war on the peninsula
would be merely one phase of an overall communist offensive to dominate
all of East Asia— a development that would have threatened important
American interests. Moreover, South Korea was a poor, war-torn country
incapable of defending itself. Not only did it face a hostile, well-armed
communist North Korea, but it faced a North Korea backed by both
Moscow and Beijing.
That is clearly no longer the case. Today, South Korea faces only one
adversary: a desperately poor and increasingly isolated North Korea. The
last thing either Moscow or Beijing desires is another war on the Korean
peninsula. Indeed, in recent years both Russia and China have distanced
their policies from those of their ostensible North Korean ally and forged
close political and economic ties with South Korea. Moreover, South
Korea now has enormous advantages in the contest with North Korea.
The South has twice the population and an economy nearly 40 times
larger than that of its adversary. A nation with those characteristics should
certainly be able to defend itself.

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Clearing the Decks for War
Unfortunately, U. S. officials seem to have adopted an American version
of the Brezhnev Doctrine when it comes to the military tie to South Korea.
That doctrine, articulated by Soviet leader Leonid Brezhnev, asserted that
once a nation became a member of the communist camp it must always
remain in the communist camp. The U. S. version seems to be '' Once a
security dependent of the United States, always a security dependent of
the United States. ''
Instead of taking responsibility for its own security, South Korea chooses
to underinvest in defense and remain dependent on the United States for
major portions of its military needs. Despite being next door to one of
the more bizarre and unpredictable regimes in the world, Seoul actually
spends a lower percentage of its gross domestic product on defense than
does the United States. Moreover, one of South Korea's first responses
to the East Asian financial crisis in the late 1990s was to cut its already
anemic defense budget.
U. S. leaders should inform their South Korean counterparts that the
days of free riding on the U. S. security guarantee are over. America has
its own war to wage, and it can no longer afford to subsidize prosperous
security clients. The security commitment to South Korea costs the United
States approximately $15 billion a year. Even if some of the forces with-drawn
were subsequently redeployed to wage the war on terrorism, Ameri-can
taxpayers would realize substantial savings.

Withdraw the Nearly 50,000 Troops Stationed in Japan
The U. S. military presence in Japan is yet another obsolete commitment.
In the decades following World War II, U. S. officials wanted to keep
Japanese rearmament to a minimum. Indeed, Article 9 of Japan's constitu-tion,
placed in the document in response to intense pressure from the
United States, renounced war and seemed to preclude the existence of
any armed forces. Because Washington soon wanted some Japanese assis-tance
in the struggle against the Soviet Union, however, U. S. leaders
endorsed a more flexible interpretation of Article 9, and Japan developed
modest ground, air, and naval '' self-defense forces. ''
Nevertheless, the United States has never fully trusted Japan and has
shown no support for Japan's playing a vigorous security role— much
less an independent security role— in East Asia. Even the much-touted
changes in the defense guidelines for the U. S.-Japanese alliance, adopted
in 1997, authorize Japan merely to provide nonlethal logistical support
for U. S. military operations in East Asia unless Japan itself is attacked.

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U. S. officials seem content to keep Japan as a barely trusted junior security
helper. The tradeoff for that limitation is that Tokyo expects the United
States to keep military forces in Japan and take primary responsibility for
Japan's security.
That policy needs to change. Some of the U. S. forces stationed in Japan
sit as uselessly as the troops stationed in Western Europe. The more than
18,000 Marines stationed on Okinawa fall into that category. The air and
naval units deployed in Japan arguably contribute to the overall stability
of East Asia, but they also provide a de facto defense subsidy to Japan.
It is time for Japan to step forward and assume its rightful role as the
principal stabilizing power in East Asia. Japan has the world's second
largest economy, and its military forces— although relatively small— are
modern and capable. A modest increase in defense spending would enable
Japan to offset the withdrawal of U. S. forces in a few years. Although
the security environment in East Asia is not as benign as the environment
in Europe, there is no need for a large U. S. military presence. It should
be humiliating for Japan, with all its capabilities, to still be dependent on
the United States for its security.
The Marines on Okinawa should be withdrawn over the next two years,
and the air and naval units should depart gradually thereafter. Some of
the latter units probably would be redeployed to assist in the war on
terrorism, but even so, much of the nearly $20 billion a year cost of the
U. S. military commitment to Japan could be saved.
It is uncertain whether the United States would need to redirect all of
the money saved from terminating the foreign aid budget and ending
obsolete or unnecessary overseas military commitments to the war on
terrorism. Clearly, some additional resources ought to be devoted to beefing
up our special forces units and intelligence gathering and evaluation capa-bilities.
They have both been shortchanged for years, and yet they are the
front-line forces in the fight against terrorism.
But there may well be some money left over. That is not a bad thing.
At the very least, such savings might head off the looming prospect of a
return to large federal budget deficits. The savings might even be enough
to give the beleaguered American taxpayer a modest break. But however
the money is used, it would be better than the current wasteful situation.

Recommended Readings
Bandow, Doug. '' Korean Detente: A Threat to Washington's Anachronistic Military Presence? '' Cato Institute Foreign Policy Briefing no. 59, August 17, 2000.

. '' Okinawa: Liberating America's East Asian Military Colony. '' Cato Institute Policy Analysis no. 344, May 18, 1999.

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Clearing the Decks for War
. Tripwire: Korea and U. S. Foreign Policy in a Changed World. Washington: Cato Institute, 1996.
Carpenter, Ted Galen. '' Fixing U. S. Foreign Policy. '' Reason, October 2002. . NATO's Empty Victory: A Postmortem on the Balkan War. Washington: Cato
Institute, 2000. Carpenter, Ted Galen, ed. NATO Enters the 21st Century. London: Frank Cass, 2001.
Dempsey, Gary, ed. Exiting the Balkan Thicket. Washington: Cato Institute, 2002. Eland, Ivan. Putting '' Defense'' Back into U. S. Defense Policy. Westport, Conn.:
Praeger, 2001. Harrison, Selig S. Korean Endgame: A Strategy for Reunification and U. S. Disengage-ment.
Princeton, N. J.: Princeton University Press, 2002. Layne, Christopher. '' Death Knell for NATO? The Bush Administration Confronts the
European Security and Defense Policy. '' Cato Institute Policy Analysis no. 394, April 4, 2001.
Olsen, Edward A. '' A Northeast Asian Peace Dividend. '' Strategic Review (Summer 1998).
. U. S. National Defense for the Twenty-First Century: The Grand Exit Strategy. London: Frank Cass, 2002.

—Prepared by Ted Galen Carpenter

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5. Waging an Effective War
Congress should
stress to the administration that the joint resolution approved
by the Senate and House of Representatives authorized the president '' to use all necessary and appropriate force against

those nations, organizations, or persons he determines planned, authorized, committed, or aided the terrorist attacks
that occurred on September 11, 2001, '' not to wage an amor-phous war on '' evil'';
urge the administration to focus the war on terrorism only on the
al-Qaeda terrorist network and not expand it to other terrorist groups or countries that have not attacked the United States;

urge the administration to reduce military operations in Afghan-istan
and expand military operations into the Peshawar border region in Pakistan to root out al-Qaeda and Taliban forces; and

recognize that much of the war against terrorism will not involve
military action but will emphasize diplomatic, intelligence, and law enforcement cooperation with other countries.

The war on terrorism is unlike any other war the United States has
waged. The enemy is not a traditional nation-state with armed forces.
Instead, it is a dispersed terrorist network operating in more than 60
countries around the world. As demonstrated on September 11, terrorists
are unlikely to attack using conventional military means— and they are
willing to sacrifice themselves in suicide operations. Also unlike traditional
wars, the war on terrorism does not have a geographical front where battle
lines are clearly drawn. The terrorists will choose where they will attack
(either in the United States or U. S. targets abroad), but the United States
may not know where to direct retaliatory action. This war is likely to
be long (if the English experience with the Irish Republican Army and

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the Israeli experience with Palestinian terrorist groups are any indication).
The mere absence of terrorist violence against the United States or U. S.
targets overseas will not be a reliable standard for determining if the war
is being won. There could be long lulls between terrorist attacks. And
there is not likely to be a clearly and easily defined victory— the terrorists
will probably not surrender. Realistically, the United States may not be
able to win the war in the traditional sense of '' winning'' and '' losing. ''
Recognizing and accepting that the strategic outcome may be ambiguous
can help effective engagement with the enemy.

Focus on al-Qaeda
To begin, the United States must clearly define the terrorist enemy, and
in this instance the enemy is the al-Qaeda terrorist network, which is the
group responsible for the September 11 attacks against the World Trade
Center towers and the Pentagon. Indeed, the joint resolution of Congress
after the attacks authorized the president '' to use all necessary and appro-priate
force against those nations, organizations, or persons he determines
planned, authorized, committed, or aided the terrorists attacks that occurred
on September 11, 2001. '' Therefore, the focus of the war and our efforts
must be on al-Qaeda, not a more expansive and nebulous war against
terrorism in general. That means avoiding distractions (which use up scarce
resources and could potentially lead to getting bogged down) that are
tenuous and tangential to al-Qaeda, such as the Abu Sayef in the Philippines
and Muslim Chechen rebels in the Republic of Georgia. Both of those
are internal problems best left to their respective governments. Similarly,
the United States needs to avoid making false linkages between the war
on terrorism and the war on drugs by including the Colombian FARC as
a target. And the United States must avoid needlessly stirring the hornets'
nest by trying to connect al-Qaeda to other terrorist groups, such as Hamas
and Hezbollah, which do not focus their attacks against the United States,
without clear proof that such groups are collaborating against the United
States. It also means understanding that— unless hard evidence proves
otherwise— except for the Taliban regime in Afghanistan, al-Qaeda is not
linked to, does not receive support from, and has not been given safe
haven by other countries. In other words, the war on terrorism should not
be expanded to include military operations against any of the countries
of the '' axis of evil. ''
It is also important to understand that military operations— such as
Operation Enduring Freedom in Afghanistan— are likely to be the excep-54 55
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Waging an Effective War
tion rather than the rule in the war on terrorism. Intelligence and law
enforcement operations will probably be more important to the successful
prosecution of the war. Thus, even calling this a '' war'' on terrorism is
somewhat misleading, given traditional thinking about wars and how they
are waged.

Afghanistan
Operation Anaconda and subsequent military operations in the wake
of Operation Enduring Freedom have demonstrated that only tattered
remnants of the Taliban and al-Qaeda remain in Afghanistan. Furthermore,
the U. S. bombing of a wedding party in the Uruzgan province in July
2002 demonstrates that the continued use of airpower for military opera-tions
inside Afghanistan may be counterproductive. Therefore, if there is
a requirement for '' mop-up'' operations against al-Qaeda and the Taliban
inside Afghanistan, the United States should rely more on ground forces—
in particular special operations forces.
That said, given the post-Taliban political maneuvering by various
regional and local actors in Afghanistan, the United States needs to be
extremely careful and wary about intelligence received from Afghan
sources about al-Qaeda and Taliban in hiding. There is evidence to suggest
that ulterior motives may have been behind intelligence information that
prompted several U. S. military actions against the wrong targets or the
killing of innocent civilians in Afghanistan. The U. S. military can ill afford
too many of those episodes. The biggest mistake the United States can
make in Afghanistan is to have the Afghan people view the U. S. military
presence as an invading and occupying military force rather than the force
that liberated them from oppressive Taliban rule. History shows that while
the various factions inside Afghanistan often fight among themselves, they
tend to unite against any invading power.
The other '' traps'' that U. S. military forces need to avoid in Afghanistan
are peacekeeping and nation building. Both are nonessential to the success-ful
prosecution of the war on terrorism. The United States needs to recog-nize
that domestic opposition to the Karzai government does not automati-cally
mean the opponents are al-Qaeda or Taliban supporters who are a
threat to the United States. Furthermore, the U. S. military should not be
used (or be perceived) to prop up the Karzai government. That government
must be able to sustain itself on its own merits. That the Karzai government
might fall does not necessarily mean the return of Taliban rule and a safe
haven for al-Qaeda. Rather, the country would likely revert to its traditional

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form of governance— a highly decentralized system with a nominal
national government and most power held by tribal leaders and so-called
regional warlords. That may not be either efficient or democratic by
Western standards, but U. S. interests in the war on terrorism demand only
that whatever government is in power in Afghanistan not provide safe
haven and support for al-Qaeda terrorists. That the United States is serious
and willing to take all necessary action to realize this objective is certainly
the single most important lesson learned by the Afghans from Operation
Enduring Freedom.

Pakistan
Ultimately, Afghanistan becomes less important as a place to conduct
military operations in the war on terrorism and more important as a place
from which to launch military operations. And those operations should
be directed across the border into neighboring Pakistan, which is where
al-Qaeda and the Taliban are known to have fled.
Such operations will not be easy. The lessons learned in Afghanistan
suggest that the United States should expect to have to rely more heavily
on ground forces to find, engage, and destroy al-Qaeda and Taliban forces.
In other words, military victories in Pakistan will not be won with airpower
and precision-guided munitions, which means that U. S. forces are likely to
experience casualties. Given that al-Qaeda and the Taliban have apparently
found shelter in the western Pakistan border area, U. S. military forces
cannot reasonably expect support from the population in the region. Indeed,
in some instances, the inhabitants may put up fierce resistance. And because
of the political situation in Pakistan, the United States cannot count on
significant support from Pakistan's army and other military forces. Presi-dent
Pervez Musharraf of Pakistan is conducting a high-wire balancing
act that will make it difficult enough for him to condone U. S. military
action inside his country, let alone actively participate in such action. But
if Pakistan is to claim to be an ally of the United States in the war on
terrorism, the United States must prevail and persuade Musharraf to allow
the U. S. military to expand operations in Pakistan to finish the job it
started in Afghanistan.

Weak States
It is apparent that weak states are potential breeding grounds and hiding
places for terrorists. Therefore, the Middle East and Africa are areas that

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Waging an Effective War
require careful attention. Certainly, the United States must be prepared to
use military force when and where necessary. But first and foremost, the
United States should work to convince the governments of countries that
are likely to be hiding places and bases of reconstitution for al-Qaeda—
for example, Sudan, Somalia, and Yemen— to take action themselves.
Only if such countries refuse or are unable to take action against a signifi-cant
al-Qaeda presence should the United States consider conducting
military operations (in all likelihood with special forces) to hunt down
and capture or kill al-Qaeda members.

Saudi Arabia
The United States also needs to put political and diplomatic pressure
on friendly Arab countries to cooperate and assist with hunting down al-Qaeda
inside their borders. Most notably, 15 of the 19 hijackers involved
in the September 11 attacks against the World Trade Center towers and
the Pentagon were Saudi nationals. Yet— as was the case after the 1996
bomb attack on the Khobar Towers in Dharan that killed 19 Americans—
the Saudi government has been less than cooperative and remains reluctant
to take any meaningful action against potential terrorists. Given the U. S.
military presence in Saudi Arabia (at the request of the House of Saud
and itself a contributing factor to making the United States a target for
terrorism), such behavior is unacceptable. Just as President Musharraf
must ultimately be convinced to give the U. S. military freedom of action
in western Pakistan if he is to continue to claim to be an ally in the war
on terrorism, the Saudis must also cooperate. If they don't, the United
States should sever its ties with the House of Saud.

Indonesia
Another area of the world that bears watching is Indonesia, which has
the world's largest Muslim population and is just emerging from years
of political, social, and economic turmoil. Various claims have been made
about an al-Qaeda presence, including terrorist training camps, in Indone-sia.
Therefore, the United States needs to determine carefully whether
there is a direct al-Qaeda presence in Indonesia or the situation involves
an indigenous insurgency with tenuous and tangential links to al-Qaeda
(in the Philippines, for example). The mere presence of radical Muslims
does not necessarily signify a direct threat from al-Qaeda. And if a stable,
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ism, the United States needs to be careful about placing undue strains on
Indonesia's fledging democracy. The presence of U. S. troops in the coun-try,
for example, could fuel the anger of Muslim extremists. As is the
case with Sudan, Somalia, and Yemen, the United States needs to coax
and cajole the Indonesian government to take necessary actions and precau-tions.
But use of U. S. military force should be resorted to only if there
is direct evidence of a significant al-Qaeda presence and all other options
for dealing with the threat have been exhausted.

Allies and Friendly Countries
The rest of the war on terrorism will be waged against al-Qaeda cells
operating in countries that are either allies of or friendly to the United
States. The task will be to ferret out and capture al-Qaeda members. The
war will not be military in nature. Rather, it will be the hard (and sometimes
mundane) work of intelligence and law enforcement agencies. That will
require unprecedented cooperation between such U. S. agencies and those
in foreign countries. (Cooperation should be limited to intelligence and
law enforcement; the U. S. military should not become involved in fighting
other nations' wars for them.) The United States needs to improve relations
with foreign intelligence agencies in order to be able to share information
about suspected al-Qaeda operatives. Foreign law enforcement and internal
security agencies will have primary responsibility for apprehending sus-pected
al-Qaeda terrorists. And the hurdles of extradition will have to be
overcome so that foreign governments hand over the terrorists who are
caught. Again, the United States will need to exert political and diplomatic
skill to elicit such cooperation. The threat of military force (let alone its
actual use) is not a viable option.
In the final analysis, the United States will not be able to go it alone
in the war on terrorism. The United States will need to convince other
countries to take actions that are in U. S. interests. Diplomacy and statecraft
may ultimately be the most important tools for achieving success against
al-Qaeda.

Suggested Readings
Bandow, Doug. '' Befriending Saudi Princes: A High Price for a Dubious Alliance. '' Cato Institute Policy Analysis no. 428, March 20, 2002.

Bergen, Peter L. Holy War, Inc. New York: Free Press, 2001. Carr, Caleb. The Lessons of Terror. New York: Random House, 2002.
Doran, Michael Scott. '' Somebody Else's Civil War. '' Foreign Affairs 81, no. 1 (January– February 2002).

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Waging an Effective War
Eland, Ivan. '' Robust Response to 9/ 11 Is Needed but Poking the Hornets' Nest Is Ill-Advised. '' Cato Institute Foreign Policy Briefing no. 69, December 18, 2001.
Hadar, Leon T. '' Pakistan in America's War against Terrorism: Strategic Ally or Unreliable Client? '' Cato Institute Policy Analysis no. 436, May 8, 2002.
Hoffman, Bruce. Inside Terrorism. New York: Columbia University Press, 1998. Pen~ a, Charles V. '' The Anti-Terrorism Coalition: Don't Pay an Excessive Price. ''
Cato Institute Foreign Policy Briefing no. 68, December 11, 2001. Vlahos, Michael. '' Terror's Mask: Insurgency within Islam. '' Johns Hopkins Univer-sity,
Applied Physics Laboratory, May 2002.
—Prepared by Charles V. Pen~ a

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6. Homeland Security
Congress should
monitor closely the implementation of the new Department of
Homeland Security and instruct the president to trim and stream-line the disparate bureaucracies incorporated into it so that

the department can be effective in fighting agile terrorist groups; prune and then consolidate the agencies of the intelligence
community to reduce the coordination problems that led to the events of September 11, 2001;
abolish the Office of Homeland Security and the Homeland
Security Council and the position of the homeland security adviser (nowthat a Department of Homeland Security has been

established) and use the existing National Security Council and national security adviser to coordinate homeland security issues
among agencies; and ensure that the new department does not undertake measures
that improve homeland security only at the margins, while undermining America's unique and cherished civil liberties.

In the largest open society in the world, improving homeland security
is a daunting task. Among other vulnerable targets, the United States has
thousands of miles of borders; thousands of bridges, sports stadiums, and
shopping malls; and hundreds of skyscrapers and nuclear power plants.
Defending against terrorist attacks perpetrated with weapons of mass
destruction or disruption may be even more challenging. According to
the 1997 Defense Science Board report, DoD Responses to Transnational
Threats,
'' There are a number of challenges that have been regarded as
'too hard' to solve: the nuclear terrorism challenge, defense against biologi-cal
and chemical warfare threat, and defense against the information
warfare threat. '' Yet the September 11, 2001, attacks on the Pentagon and

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World Trade Center put intense pressures on Congress and the Bush
administration to show that security against future attacks is being
enhanced. The key question is whether rearranging boxes on the govern-ment's
organizational chart and adding new bureaucracy will make the
average American safer from terrorist attacks. Unless the agencies being
incorporated into the new Department of Homeland Security are trimmed
and streamlined in order to fight agile terrorists, the answer is no.

Adding New Bureaucracy May Reduce Security Rather Than Enhance It

Originally, the Bush administration opposed the Democratic proposal to
create a new department charged with homeland security. Then revelations
about the existence of intelligence information that might have helped
uncover the September 11 attacks before they occurred and about the lack
of coordination in and among government agencies— within the Federal
Bureau of Investigation and between the FBI and the Central Intelligence
Agency— which led to failure to piece the information together and act
on it, caused the administration to reverse its opposition to the creation
of a new security bureaucracy.
As usual, Washington's response to a crisis is a reorganization of
government, and this one is the largest since 1947. Bits and pieces of
disparate departments and agencies will be pasted together to form the
new department. For example, among other federal entities, the Federal
Emergency Management Agency, the Customs Service and Secret Service
(from the Treasury Department), the Coast Guard and Transportation
Security Administration (from the Transportation Department), the Animal
and Plant Health Inspection Service (from the Agriculture Department),
and the Border Patrol and Immigration and Naturalization Service (from
the Justice Department) will be included in the new department.
The threat from al-Qaeda and other terrorist groups is one of agile,
nonbureaucratic adversaries who have the great advantage of being on
the offense— knowing where, when, and how they will attack. Terrorists
take advantage of the sluggishness of and the poor coordination among
military, intelligence, law enforcement, and domestic response bureaucra-cies
to attack gaps in the defenses. Yet the Bush administration rushed—
before the congressional intelligence panels had completed their work to
determine the exact nature of the government lapses prior to September
11— to propose a solution that did not seem to deal with preliminary
indications of what the major problem seems to have been: a lack of

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Homeland Security
coordination between and within the intelligence agencies that make up
the vast U. S. intelligence bureaucracy. Instead, the president has proposed
reorganizing other government agencies into a new super bureaucracy,
leaving out the CIA and FBI. Furthermore, although seeming to consolidate
federal efforts at homeland defense, the new department may actually
reduce U. S. security by adding bureaucracy rather than reducing it. More
bureaucracy means more coordination problems of the kind that seem to
have been prevalent in the intelligence community prior to September 11.
The intelligence community and other agencies involved in security
have traditionally battled nation-states. Fortunately, those states have gov-ernments
with bureaucracies that are often more sluggish than our own
government's agencies. In contrast, terrorist groups have always been
nimble opponents that were difficult to stop, but they were not a strategic
threat to the U. S. homeland. As dramatically illustrated by the attacks
of September 11, terrorists willing to engage in mass slaughter (with
conventional weapons or weapons of mass destruction) and commit suicide
now pose a strategic threat to the U. S. territory and population.
No security threat to the United States matches this one. To fight this
nontraditional threat, the U. S. government must think outside the box and
try to be as nimble as the opponent (a difficult task). The Bush administra-tion
is correct that the current U. S. government structure— with more than
100 federal entities involved in homeland security— is not optimal for
defending the nation against the new strategic threat. Although consolidat-ing
federal efforts is not a bad idea in itself, creating a new department
does not ensure that the bureaucracy will be more streamlined, experience
fewer coordination problems, or be more effective in the fight against
terrorism.
In fact, the reorganization will add yet another layer of bureaucracy to
the fight against terrorism. In his message to Congress urging the passage
of his proposal to create the new department, the president made a favorable
reference to the National Security Act of 1947, which merged the Depart-ments
of War and the Navy to create the Department of Defense and
created an Office of the Secretary of Defense to oversee the military
services. But today, 55 years after the act's passage, that office is a bloated
bureaucracy that exercises comparatively weak oversight of military ser-vices
whose failure to coordinate and cooperate even during wartime is
legendary. Even Secretary of Defense Donald Rumsfeld has compared
the efficiency and responsiveness of the DoD bureaucracy to Soviet cen-tral
planning.

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The proposed new department is similar to DoD because it will bring
together agencies with very different missions and methods of operation
and create a large new departmental bureaucracy to try to rein them all in.
As was the case when DoD was created, consolidation of the government's
efforts is laudable, but it may be unhelpful or even counterproductive
to establish another layer of bureaucracy without cutting out layers of
management from the agencies being merged or removing some agencies
entirely from the homeland security arena and giving their functions to
other agencies. Interagency coordination problems may become intra-agency
coordination problems.
Consolidation of agencies would have been fine had cutting come before
pasting rather than vice versa. In other words, agencies should have been
trimmed and reformed (and some totally eliminated) before they were
consolidated. Instead, the agencies will be consolidated, with cuts or
savings to come later. That promise is not likely to be fulfilled. Once the
new, large, consolidated department is created— it will be one of the
largest departments in the government— the new department head will be
a powerful advocate for more money and people rather than the opposite.
Although the Bush administration did promise some efficiencies from
consolidation, the administration did not project overall net savings from
the reorganization. At best, policymakers in the administration promised
that a consolidated department would not increase costs. But it is telling that
the president's plan had no cost estimates accompanying it. Historically,
mergers of government agencies have increased costs rather than decreased
them. Although some longer-term savings from consolidation of payroll
and computer systems may occur, creating the new secretary's bureaucracy
to ride herd on all of the agencies will likely increase net costs. The
president's proposal for the department calls for adding one deputy secre-tary,
five under secretaries, and up to 16 assistant secretaries. According
to the Congressional Budget Office, the new department could cost as
much as $4.5 billion more (from 2003 to 2007) than operating the disparate
agencies separately.
So the president's plan is likely to cost more rather than less. Following
the money is important; if costs are not going down, the plan is unlikely
to streamline the government's efforts at counterterrorism and homeland
defense. With too many federal entities already involved in homeland
security, more government is not better than less. With so many agencies
involved, if a catastrophic attack with weapons of mass destruction occur-red,
administrative chaos would be the probable outcome. After creation

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Homeland Security
of the new department, there will be fewer organizational entities but
probably more government. A stealthy and nimble enemy is at the gates,
and there is not much time to put the government on a diet. Instead, the
government may be headed to the pastry shop. More bureaucracy means
more coordination problems and more opportunities for terrorists.

Bush's Plan Does Not Solve the Problem with Intelligence and May Make It Worse

The president's plan for a new department does not solve what seems
to be the primary problem— the lack of coordination within and between
U. S. intelligence agencies, specifically the FBI and the CIA. Those agen-cies
are conspicuously missing from the new department.
Yet, for enhanced homeland security, intelligence is the key ingredient.
The U. S. government has infinitely more resources for use against al-Qaeda
and other terrorist groups than they do against it. If the U. S.
government can discover plots or the location of targets and terrorists in
time to take action, the overwhelming U. S. superiority in military and law
enforcement resources can be brought to bear to foil the plot. Mitigating
the effects of the attack after it happens is important, but, in many cases,
the government may be able to only marginally help reduce casualties.
Without good intelligence, that may be the government's only role. The
United States already has an unparalleled ability to collect vast amounts
of raw intelligence data— the pieces of the jigsaw puzzle— but the already
too numerous agencies in the U. S. intelligence community have had trouble
fusing it into a complete picture.
Regrettably, in intelligence, as in the overall homeland security realm,
the reorganization will make the government even less likely to put the
jigsaw puzzle together and even more ungainly and sluggish in combating
terrorists. A new intelligence analysis center will be created in the new
Department of Homeland Security to analyze threats to the U. S. homeland.
However, the FBI, the CIA, and other intelligence agencies already analyze
such threats. Thus, the new agency will be analyzing the analyses of other
agencies. If the new analysis center is supposed to be fusing the analyses
of those agencies, it would seem to be usurping the role of the intelligence
community staff under the director of central intelligence. Furthermore,
if the FBI and the CIA fail to fully cooperate or coordinate with each
other because of turf jealousies, excessive secrecy, or burdensome bureau-cratic
rules for interagency coordination, the problem is likely to get worse
as another competing bureaucracy is added.

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The Government Already Had the Machinery to Coordinate Homeland Security
The National Security Council includes the heads of the major depart-ments
and agencies that are responsible for the nation's security. The
president's powerful national security adviser officially only coordinates
policy among the agencies but in reality is a potent independent voice in
the policymaking process. It would seem logical that catastrophic terrorism
against the U. S. homeland would affect national security and thus fit
under the purview of the NSC and the national security adviser. But
apparently not.
Before proposing the new Department of Homeland Security, the presi-dent
created a White House Office of Homeland Security, a homeland
security adviser, and a Homeland Security Council. Even with the creation
of the new department, all of this bureaucracy remains. The president
maintains that protecting America from terrorism will remain a multide-partmental
issue and will continue to require those entities to oversee
interagency coordination. But the roles of the homeland security adviser
and the Homeland Security Council appear to be redundant with those of
the national security adviser and the NSC. For 55 years, the NSC existed
to provide for the national security, but as soon as the nation was attacked
at home, a new security bureaucracy was thought to be needed. By creating
a new cabinet department, U. S. policymakers appear to subscribe to the
strange notion that the NSC should provide for security only overseas.
Piling new bureaucracy on new bureaucracy is not the way to fight
nimble terrorists. Sen. Richard Shelby (R-Ala.), vice chairman of the
Senate Select Committee on Intelligence, noted that the FBI and the CIA
are not very agile, and the General Accounting Office has recommended
reducing the layers, levels, and units within the FBI. That recommendation
should apply to all agencies that remain in the homeland security arena.
Many of the more than 100 federal entities involved in homeland security
need to be removed from performing the mission. To reduce the chances
of lapses in intelligence coordination and chaos in domestic crisis response,
there should be fewer government entities in need of coordination.
Although reducing the number of people and the amount of bureaucracy
seems to go against the tide in the present crisis atmosphere, preliminary
indications are that the main problem is coordination among governmental
entities, not a lack of raw information or insufficient resources. In short,
Congress should not be afraid to streamline or even eliminate agencies
involved in homeland security— both within and outside the new
department.

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Homeland Security
Homeland Security and Civil Liberties
Congress should carefully scrutinize any new security measures to make
sure they really enhance security and do not merely erode the civil liberties
that make America unique. Osama bin Laden is a sophisticated operative
who has stated that one of his major goals is to change the U. S. system.
If America's civil liberties are eroded needlessly, bin Laden may achieve
an even bigger victory than he did with the horrific attacks of September 11.
In a crisis, the government has an incentive to take measures designed
to show progress in dealing with it. In the wake of the September 11
attacks, many of the measures proposed or implemented by the Justice
Department to restrict civil liberties seemed to be '' for show, '' with
little hope of effectively fighting terrorism— for example, the Terrorism
Information and Prevention System program that would have inundated
law enforcement agencies with dead-end leads from postal and utility
workers spying on private residences and businesses. Congress needs to
make sure the new department avoids such fiascos. In short, Congress
needs to make sure that any new security measures are needed and effective
and do not unduly restrict civil liberties.

Suggested Readings
Congressional Budget Office. '' Congressional Budget Office Cost Estimate: H. R. 2005— Homeland Security Act of 2002. '' July 23, 2002.

Eland, Ivan. '' Homeland Security: Calibrating Calamity. '' Washington Times, July 25, 2002.
. Testimony before the Subcommittee on Technology, Terrorism, and Govern-ment Information of the Senate Judiciary Committee. June 25, 2002.
Lynch, Timothy. '' Breaking the Vicious Cycle: Preserving Our Liberties While Fighting Terrorism. '' Cato Institute Policy Analysis no. 443, June 26, 2002.
Office of the Secretary of Defense. Final Report. Vol.1 ofThe Defense Science Board 1997 Summer Study Task Force on DoD Responses to Transnational Threats. Octo-ber
1997. Taylor, Eric R. '' Are We Prepared for Terrorism Using Weapons of Mass Destruction?
Government's Half Measures. '' Cato Institute Policy Analysis no. 387, November 27, 2000.
. '' The New Homeland Security Apparatus: Impeding the Fight against Agile Terrorists. '' Cato Institute Foreign Policy Briefing no. 70, June 26, 2002.

—Prepared by Ivan Eland

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7. Reducing the '' Lightning Rod'' Problem
Congress should
support a decisive, but narrowly focused, war on terrorism to eradicate the terrorists who perpetrated the Sep-tember
11, 2001, attacks. In the long term, Congress should refuse to provide funds for U. S. military presence and military
and political interventions overseas that are not required to defend vital U. S. interests and could result in catastrophic retaliatory
attacks by terrorists on U. S. targets, including the American home-land. Most urgently, Congress should

direct that U. S. military forces be withdrawn fromSaudi Arabia;
adopt a more even-handed approach to the Israeli-Palestinian
conflict by removing U. S. military and economic support for Israel and ending active mediation of the Israeli-Palestinian

conflict; end the comprehensive economic sanctions against Iraq; and
end support for despotic Arab governments, such as those in
Egypt and Saudi Arabia.

Current U. S. policies are unnecessary for U. S. security and incite radical
Islamist terrorists to attack U. S targets.

The U. S. Government Has Endangered Citizens
Compared with other nations, the United States is disproportionately
attacked by terrorists— in terms of both number of attacks and casualties.
In 2001, according to the U. S. State Department's Patterns of Global
Terrorism 2001,
anti-U. S. attacks accounted for 63 percent of terrorist
incidents worldwide. During the same year, attacks in North America
alone (the vast majority of the casualties were American citizens) accounted

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for 71 percent of the world's casualties caused by terrorist attacks. Why
do terrorists single out the United States?
Some observers argue that the United States is a lightning rod for
terrorists because it is a large, rich, capitalist nation; because it is a
constitutional republic whose citizens enjoy many freedoms; or because
American culture is pervasive and perceived as decadent by some groups.
Although those factors no doubt have some effect, a deeper analysis should
raise suspicions about them as significant causes for anti-U. S. terrorism.
Many other countries are large, rich, capitalist nations with republican
forms of government (for example, Germany and Japan), but they do not
experience the magnitude of terrorism that afflicts the United States. True,
American culture is pervasive, but American economic and political values
(that is, civil society) are the envy of the world. Absent the element of
U. S. government– driven military power, those values do not usually have
coercive or ill effects on other countries and are not generally resented.
Many analysts focus on perceived Islamic hatred of decadent American
culture. Yet more than one Zogby poll of numerous Islamic and Arab
countries has shown that majorities in those countries liked American
freedom, democracy, technology, and culture— including movies and tele-vision.
Conversely, overwhelming majorities disliked U. S. government
policies toward the Middle East. More important, if the goal is to uncover
the motivations of the radical Islamists who attack the United States (and
it should be, because that task is vital to both fighting and avoiding
terrorism but has been neglected because of its sensitivity), the best place
to start is with what Islamists say and write. For example, Peter Bergen,
the CNN correspondent who interviewed Osama bin Laden and wrote
Holy War, Inc., notes that bin Laden has never railed against the decadence
of American or Western culture. His hatred of America is generated by
U. S. foreign policy— his biggest bone of contention is the unnecessary
U. S. military presence in Saudi Arabia, which he believes desecrates
Islam's holiest sites located there.
Although some pundits have claimed that America is targeted by terror-ists
for '' who it is'' rather than '' what it does, '' even high-level U. S.
government sources admit a link between interventionist U. S. foreign
policy (that is, being the world's policeman) and retaliatory terrorist attacks
on U. S. targets.
That link was recognized in the upper levels of the U. S. government
long before the September 11 terrorist attacks. According to a study
completed in 1997 by the Defense Science Board, a panel of experts that
advises the secretary of defense:

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As part of its global power position, the United States is called upon
frequently to respond to international causes and deploy forces around the
world. America's position in the world invites attacks simply because
of its presence. Historical data show a strong correlation between U. S.
involvement in international situations and an increase in terrorist attacks
against the United States
[emphasis added].

In an August 8, 1998, radio address justifying cruise missile attacks on
Afghanistan and Sudan in response to bin Laden's earlier bombings of
two U. S. embassies, President Bill Clinton admitted as much but put a
positive spin on it with political hyperbole: '' Americans are targets of
terrorism in part because we have unique leadership responsibilities in the
world, because we act to advance peace and democracy, and because we
stand united against terrorism. ''
Most striking of all is the post– September 11 '' National Strategy for
Homeland Security'' issued by the Bush White House's Office of Home-land
Security in July 2002:

For more than six decades, America has sought to protect its own sovereignty
and independence through a strategy of global presence and engagement.
In so doing, America has helped many other countries and peoples advance
along the path of democracy, open markets, individual liberty, and peace
with their neighbors. Yet there are those who oppose America's role in
the world, and who are willing to use violence against us and our friends.
Our great power leaves these enemies with few conventional options for
doing us harm. One such option is to take advantage of our freedom and
openness by secretly inserting terrorists into our country to attack our
homeland. Homeland security seeks to deny this avenue of attack to our
enemies and thus to provide a secure foundation for America's ongoing
global engagement.

What is astonishing is that after 60 years the aberration in American
history of acting as the world's policeman has become an end in itself.
It is even a higher goal than that which should be any government's
primary function— to make its territory and citizens safe and secure.
Profligate intervention in the affairs of other nations (the United States is
the only country in the world that regularly intervenes in every region of
the world) is not a national security policy— in fact, it is quite the opposite.
The Office of Homeland Security periodically issues '' duck and cover''
warnings to U. S. citizens at home, and the State Department does so
to U. S. tourists, expatriates, and business people abroad. But the U. S.
government's own actions are responsible for the disproportionate bull's-eye
that is being drawn around Americans.

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Extended Defense Perimeter Actually Increases the Vulnerability of the Homeland

During the Cold War the military paradigm of defending forward to
keep the adversary far away from the homeland made some sense. The
United States faced a foe with conventional military forces and reaped
advantages from ensuring that its opponent did not make inroads in certain
key strategic areas of the world. Although both superpowers possessed
nuclear weapons, the disadvantages of U. S. intervention overseas were
limited by the '' managed competition'' between the two behemoths that
avoided direct interventions in the other's regions of core concern. Now,
however, the disadvantages vastly outweigh any advantages gained from
profligate U. S. interventions in remote parts of the world that are no longer
strategic (if they ever were). The United States no longer has to check
the advances of another superpower and now faces an unconventional foe
in a war that has no front line. All of the layers of the extended U. S.
defense perimeter did not prevent al-Qaeda from carrying out a catastrophic
attack on the U. S. homeland and actually reduced U. S. security by generat-ing
much of the hatred that led to the attack. In short, the nontraditional
interventionist foreign policy on a grand scale— initiated during the Cold
War but abhorrent to U. S. policymakers for the prior 170 years— is now
out of date and profoundly dangerous.

What the United States Should Do about Terrorism
The U. S. government has several options for dealing with terrorism. The
possibilities include improving intelligence, enhancing homeland security
measures, increasing military and covert action against terrorists, and
reducing military and covert action. Even U. S. intelligence professionals
reach the disquieting conclusion that there will be more terrorist attacks
and that U. S. intelligence will not be able to detect some of them before
they happen. That conclusion is especially unnerving now that terrorists
are clearly willing to inflict mass casualties and are willing to give their
lives in the attack. It should be noted that the conventional means used
in the September 11 attacks are not the worst possibility; attacks with
chemical, biological, or nuclear weapons could be far more deadly.
The United States certainly should take measures to enhance homeland
security, but the public should not be lulled by all the official activity into
thinking that the U. S. government can do more than catch some of the

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Reducing the '' Lightning Rod'' Problem
attackers before they attack or reduce casualties at the margins after an
attack. The United States is one of the largest and most open societies in
the world— both in population and in area. The nation has thousands of
miles of borders, countless skyscrapers and sports stadiums, vulnerable
infrastructure, and a political system that prevents law enforcement's
behaving too aggressively in the fight against terrorism. Moreover, accord-ing
to the Defense Science Board, the problems of nuclear terrorism,
defense against the threat of biological and chemical weapons, and defense
against information warfare have historically been regarded as '' too hard''
to solve. Yet the U. S. government is now inculcating the American public
with a false sense that government can solve those problems.
Finally, the question of military and covert action needs to be addressed.
In the short term, the United States has no choice but to try to eradicate
bin Laden and the al-Qaeda terrorist network by using intelligence, law
enforcement, and, if necessary, military assets. In most nations (for exam-ple,
Yemen and Pakistan), the United States should first rely on supporting
local governments in their efforts to eradicate terrorists within their borders
and, if that proves insufficient or ineffective, then take direct military
action. But the United States should not get dangerously distracted in this
war against the enemy at the gates by military or covert actions against
terrorist groups that do not normally focus their attacks on the United
States (for example, Hezbollah or Hamas) or against rogue states that
cannot be linked to the September 11 attacks. Many foreign terrorist
organizations on the State Department's terrorism list do not focus their
attacks on the United States. Attacking them militarily or using covert
action (which the Bush administration has authorized) is simply stirring
the hornets' nest unnecessarily. The United States can continue to engage
in lower-profile regional cooperation in intelligence and law enforcement
with other nations to combat such groups.
Although narrowly focused military action will be needed in the short
term to expunge the threat from al-Qaeda, a policy of military restraint
should be adopted in the long term. Because improvements in intelligence
capabilities (particularly intelligence from human sources) and homeland
security measures will provide positive results only at the margins in the
detection, prevention, and mitigation of terrorist attacks, it is vital that the
United States lower its target profile vis-a `-vis terrorists. That goal can be
achieved by reducing the U. S. military presence abroad and intervening
militarily or politically only on the rare occasions when vital U. S. interests
are threatened.

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Specific Recommendations to Lessen U. S. Vulnerability to Terrorist Attacks

Remove the U. S. Military Presence from Saudi Arabia
The withdrawal of U. S. forces from the land of Islam's most holy sites
would remove an irritant that inflames Islamic terrorists to strike U. S.
targets but would not adversely affect other U. S. security interests. Even
if it were necessary to use the U. S. military to defend Persian Gulf oil—
and economists from across the political spectrum attest that it is not—
the United States did so successfully during the Gulf War in 1991 without
having a prior peacetime military presence in Saudi Arabia. Furthermore,
a substantial portion of U. S. military assets has already been moved to
surrounding countries because of restrictions on their use imposed by the
Saudi regime. Anonymously, even senior U. S. military officials have
expressed to the Washington Post a desire to withdraw U. S. forces from
Saudi territory.
Furthermore, it is ethically questionable to use U. S. forces to defend a
despotic regime with an abysmal human rights record that indirectly
supported al-Qaeda terrorists and directly supported the radical religious
schools in Pakistan that spawned those terrorists and the repressive Taliban
regime in Afghanistan that harbored them. The Saudi government also
makes the lives of American service personnel miserable by putting heavy
restrictions on their personal lives and their mingling with Saudi citizens.
Some observers would argue that withdrawing from Saudi Arabia would
hand bin Laden a victory by fulfilling his desire for a U. S. withdrawal.
That argument can be nullified as long as the United States neutralizes
most of the al-Qaeda network as U. S. forces pull back from Saudi Arabia.
In addition, according to the Washington Post, because of fears that the
American presence was destabilizing their regime by stirring up Islamic
militants, the Saudis have been on the verge of asking U. S. forces to
leave. The United States should take advantage of those sentiments as a
cover and quietly pull out its forces if asked to do so.

Develop a More Even-Handed Approach to the Israeli-Palestinian Conflict by Cutting Off Military and Economic Aid to Israel

Unbalanced U. S. involvement in the Israeli-Palestinian conflict inflames
the Islamic world and is a principal motive behind terrorist attacks by
Islamists on U. S. targets worldwide. The desire to assist a nation inclined
toward democracy is understandable, but doing so is no longer advisable

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given the possibility of retaliatory mass terrorist attacks, including the use
of nuclear, chemical, and biological weapons, on the U. S. homeland.
In attempting to mediate the negotiation of a settlement to an intractable
conflict, the United States is perceived by Arabs to be pushing the Palestin-ians
to end violence more than they are prodding Israel to do so. But both
sides in the struggle have used excessive violence against civilians. Those
excesses have made it even less likely that either side would be willing
to end the conflict. The United States should discontinue futile efforts to
pressure the parties to reach a settlement that neither wants and therefore
has little chance of succeeding. Both sides must indicate a strong willing-ness
to reach a settlement before the United States resumes mediation.
When the United States does so, its role should be strictly limited and
neutral. A much more modest and disinterested U. S. mediation role would
lower the U. S. target profile to Islamic terrorism.

End Comprehensive Economic Sanctions against Iraq
The most grinding and complete sanctions in world history should come
to an end. When economic sanctions are imposed, the target regime—
usually a despotic government that tightly controls its nation's political
and economic systems— usually transfers the pain of sanctions to the
poorest members of society and earns enormous profits from smuggling.
In addition, the sanctions create a strong '' rally-around-the-flag'' effect
for the regime against the nations that imposed the strictures. The embargo
also takes the blame for economic problems that are caused by the regime's
poor policies. In those ways, economic sanctions have the perverse effect of
actually strengthening the despotic government's hold on power. Although
counterintuitive, the best way to weaken a despotic regime is to get Western
products, services, and investment, and the ideas that go with them, into
the target nation. But that strategy will work only over the long term.
In the case of Iraq, the bone-crushing U. S.-led embargo has devastated
the Iraqi poor but made Saddam Hussein's regime stronger. The sanctions'
ill effects on Iraqi society have provoked radical Islamic elements all over
the world. The United States should break with conventional wisdom and
lead the world in scrapping the sanctions. By doing so, the United States
would lower the probability of retaliatory catastrophic terrorist attacks on
U. S. targets.

Stop Supporting Despotic Regimes in the Middle East
The Cold War is over, and supporting '' friendly'' authoritarian regimes,
such as Saudi Arabia and Egypt, is no longer necessary (if it ever was).

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As noted before, other strategic reasons for supporting them— for example,
the great oil reserves in Saudi Arabia— are questionable. Saudi Arabia
and the other authoritarian Persian Gulf oil producers— which obtain the
vast bulk of their export earnings and foreign currency from the sale of
oil— are more desperate to sell the oil than the United States is to buy it.
The corruption of those regimes generates the hatred of radical Islamists,
as does U. S. support for those governments. As would implementing the
other three recommendations, ending support for such authoritarian nations
would lower the U. S. profile as a target for Islamic radicals.

Suggested Readings
Carpenter, Ted Galen. America Entangled: The Persian Gulf Crisis and Its Consequences. Washington: Cato Institute, 1991.

Carr, Caleb. Lessons of Terror: A History of Warfare against Civilians: Why It Has Always Failed and Why It Will Fail Again. New York: Random House, 2002.
Eland, Ivan. '' Does U. S. Intervention Overseas Breed Terrorism? The Historical Record. '' Cato Institute Foreign Policy Briefing no. 50, December 17, 1998.
. '' Protecting the Homeland: The Best Defense Is to Give No Offense. '' Cato Institute Policy Analysis no. 306, May 5, 1998.
. '' Robust Response to 9/ 11 Is Needed but Poking the Hornets' Nest Is Ill-Advised. '' Cato Institute Foreign Policy Briefing no. 69, December 18, 2001.
Hoffman, Bruce. Inside Terrorism. New York: Columbia University Press, 1998. Hoge, James F. Jr., and Gideon Rose, eds. How Did This Happen?: Terrorism and the
New Year.
New York: Public Affairs, 2001.
Smith, James M., and William C. Thomas, eds. The Terrorism Threat and U. S. Govern-ment Response: Operational and Organizational Factors. U. S. Air Force Institute

for National Security Studies, March 2001. U. S. Department of State. Patterns of Global Terrorism 2001. Washington: U. S. Depart-ment
of State, May 2002.
—Prepared by Ivan Eland

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8. The Delegation of Legislative Powers
Congress should
require all '' lawmaking'' regulations to be affirmatively
approved by Congress and signed into law by the president, as the Constitution requires for all laws; and

establish a mechanism to force the legislative consideration of
existing regulations during the reauthorization process.

Separation of Powers: The Bulwark of Liberty
When the legislative and executive powers are united in the same person,
or in the same body of magistrates, there can be no liberty.
—Montesquieu, The Spirit of the Laws

Article I, section 1, of the U. S. Constitution stipulates, '' All legislative
powers herein granted shall be vested in the Congress of the United States,
which shall consist of a Senate and House of Representatives. '' Article
II, section 3, stipulates that the president '' shall take care that the laws
be faithfully executed. '' Thus, as we all learned in high school civics, the
Constitution clearly provides for the separation of powers between the
various branches of government.
The alternative design— concentration of power within a single govern-mental
body— was thought to be inimical to a free society. John Adams
wrote in 1776 that '' a single assembly, possessed of all the powers of
government, would make arbitrary laws for their own interest, and adjudge
all controversies in their own favor. '' James Madison in Federalist no.
47 justified the Constitution's separation of powers by noting that it was
a necessary prerequisite for '' a government of laws and not of men. ''
Further, he wrote, '' The accumulation of all powers, legislative, executive,
and judiciary, in the same hands, whether of one, a few, or many, and

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whether hereditary, self-appointed, or elective, may justly be pronounced
the very definition of tyranny. ''
For the first 150 years of the American Republic, the Supreme Court
largely upheld the original constitutional design, requiring that Congress
rather than administrators make the law. The suggestion that Congress
could broadly delegate its lawmaking powers to others— particularly the
executive branch— was generally rejected by the courts. And for good
reasons. First, the Constitution was understood to be a document of enumer-ated
and thus limited powers, and nowhere was Congress either explicitly
or even implicitly given the power to delegate. Second, the fear of power
concentrated in any one branch still animated both the Supreme Court
and the legislature. Third, Americans believed that those who make the
law should be directly accountable at the ballot box.
The upshot was that the separation of powers effectively restrained
federal power, just as the Founders had intended. As Alexis de Tocqueville
observed, '' The nation participates in the making of its laws by the choice
of its legislators, and in the execution of them by the choice of agents of
the executive government. '' He also observed that '' it may also be said
to govern itself, so feeble and so restricted is the share left to the administra-tors,
so little do the authorities forget their popular origins and the power
from which they emanate. ''

The New Deal: '' Delegation Running Riot''
The sense of political crisis that permeated the 1930s effectively buried
the nondelegation doctrine. In his first inaugural address, Franklin Roose-velt
compared the impact of the ongoing economic depression to a foreign
invasion and argued that Congress should grant him sweeping powers to
fight it.
Shortly after taking office, Congress in 1933 granted Roosevelt virtually
unlimited power to regulate commerce through passage of the Agricultural
Adjustment Act (which authorized the president to increase agricultural
prices via administrative production controls) and the National Industrial
Recovery Act (known as the NIRA), which authorized the president to
issue industrial codes to regulate all aspects of the industries they covered.
The Supreme Court, however, temporarily arrested the tide in 1935 in
its unanimous opinion in A. L. A. Schechter Poultry Corp. v. United States.
The Court overturned the industrial code provisions of the NIRA, and, in
a separate opinion, Justice Benjamin Cardozo termed the NIRA— and
thus the New Deal—'' delegation running riot. '' That same year, the Court

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struck down additional NIRA delegations of power in Panama Refining
Co. v. Ryan.
Largely because of the Schechter and Panama Refining decisions, Presi-dent
Roosevelt decried the Court's interference with his political agenda
and proposed legislation enlarging the size of the Court so that he could
appoint additional justices— the so-called Court-packing plan. He lost that
battle but won the war. Although the Court never explicitly reversed its
1935 decisions and continues to articulate essentially the same verbal
formulas defining the scope of permissible delegation— indeed, Schechter
and Panama Refining theoretically are good law today— it would be
nearly 40 years before the Court again struck down business regulation
on delegation grounds.
As long as Congress articulates some intelligible standard (no matter
how vague or arbitrary) to govern executive lawmaking, courts today are
prepared to allow delegation, in the words of Justice Cardozo, to run riot.
John Locke's admonition that the legislature '' cannot transfer the power
of making laws to any other hands, for it being but a delegated power
from the people, they who have it cannot pass it over to others, '' is a
forgotten vestige of an era when individual liberty mattered more than
administrative convenience. As Federal District Judge Roger Vinson wrote
in United States v. Mills in 1989, '' A delegation doctrine which essentially
allows Congress to abdicate its power to define the elements of a criminal
offense, in favor of an un-elected administrative agency such as the [Army]
Corps of Engineers, does violence to this time-honored principle....
Deferent and minimal judicial review of Congress' transfer of its criminal
lawmaking function to other bodies, in other branches, calls into question
the vitality of the tripartite system established by our Constitution. It also
calls into question the nexus that must exist between the law so applied
and simple logic and common sense. Yet that seems to be the state of
the law. ''

Delegation: The Corrosive Agent of Democracy
The concern over congressional delegation of power is not simply
theoretical and abstract, for delegation does violence, not only to the ideal
construct of a free society, but also to the day-to-day practice of democracy
itself. Ironically, delegation does not help to secure '' good government'';
it helps to destroy it.

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Delegation Breeds Political Irresponsibility
Congress delegates power for much the same reason that Congress ran
budget deficits for decades. With deficit spending, members of Congress
can claim credit for the benefits of their expenditures yet escape blame
for the costs. The public must pay ultimately, of course, but through taxes
levied at some future time by some other officials. Likewise, delegation
allows legislators to claim credit for the benefits that a regulatory statute
airily promises yet escape the blame for the burdens it will impose, because
they do not issue the laws needed to achieve those high-sounding benefits.
The public inevitably must suffer regulatory costs to realize regulatory
benefits, but the laws will come from an agency that legislators can then
criticize for imposing excessive burdens on their constituents.
Just as deficit spending allows legislators to appear to deliver money
to some people without taking it from others, delegation allows them to
appear to deliver regulatory benefits without imposing regulatory costs.
It provides, in the words of former Environmental Protection Agency
deputy administrator John Quarles, '' a handy set of mirrors— so useful
in Washington— by which politicians can appear to kiss both sides of
the apple. ''

Delegation Is a Political Steroid for Organized Special Interests
As University of Miami law professor John Hart Ely has noted, '' One
reason we have broadly based representative assemblies is to await some-thing
approaching a consensus before government intervenes. '' The Con-stitution
was intentionally designed to curb the '' facility and excess of
law-making'' (in the words of James Madison) by requiring that statutes
go through a bicameral legislature and the president.
Differences in the size and nature of the constituencies of representatives,
senators, and the president— and the different lengths of their terms in
office— increase the probability that the actions of each will reflect a
different balance of interests. That diversity of viewpoint, plus the greater
difficulty of prevailing in three forums rather than one, makes it far more
difficult for special-interest groups or bare majorities to impose their will on
the totality of the American people. Hence, the original design effectively
required a supermajority to make law as a means of discouraging the
selfish exercise of power by well-organized but narrow interests.
Delegation shifts the power to make law from a Congress of all interests
to subgovernments typically representative of only a small subset of all

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interests. The obstacles intentionally placed in the path of lawmaking
disappear, and the power of organized interests is magnified.
That is largely because diffuse interests typically find it even more
difficult to press their case before an agency than before a legislature.
They often have no direct representation in the administrative process,
and effective representation typically requires special legal counsel, expert
witnesses, and the capacity to reward or to punish top officials through
political organization, press coverage, and close working relationships
with members of the appropriate congressional subcommittee. As a result,
the general public rarely qualifies as a '' stakeholder'' in agency proceed-ings
and is largely locked out of the decisionmaking process. Madison's
desired check on the '' facility and excess of law-making'' is thus smashed.

Delegation Breeds the Leviathan State
Perhaps the ultimate check on the growth of government rests in the
fact that there is only so much time in a day. No matter how many laws
Congress would like to pass, there are only so many hours in a session
to do so. Delegation, however, dramatically expands the realm of the
possible by effectively '' deputizing'' tens of thousands of bureaucrats,
often with broad and imprecise missions to '' go forth and legislate. '' Thus,
as Jacob Weisberg has noted in the New Republic, '' As a labor-saving
device, delegation did for legislators what the washing machine did for
the 1950s housewife. Government could now penetrate every nook and
cranny of American life in a way that was simply impossible before. ''

The Threadbare Case for Delegation
Although delegation has become so deeply embedded in the political
landscape that few public officials even recognize the phenomenon or the
issues raised by the practice, political observers are becoming increasingly
aware of the failure of delegation to deliver its promised bounty of good
government.

The Myth of Technical Expertise
It was once maintained that delegation produces more sensible laws
by transferring lawmaking from elected officials, who are beholden to
concentrated interests, to experts, who can base their decisions solely on
a cool appraisal of the public interest. Yet most agency heads are not
scientists, engineers, economists, or other kinds of technical experts; they
are political operatives. Since the Environmental Protection Agency's

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inception in 1970, for example, the overwhelming majority of its adminis-trators
and assistant administrators have been lawyers. As MIT professor
Michael Golay wrote in Science, '' Environmental protection policy dis-agreements
are not about what to conclude from the available scientific
knowledge; they represent a struggle for political power among groups
having vastly differing interests and visions for society. In this struggle,
science is used as a means of legitimizing the various positions . . . science
is a pawn, cynically abused as may suit the interests of a particular
protagonist despite great ignorance concerning the problems being
addressed. '' Perhaps that's why the EPA's own Science Advisory Board
was forced to concede in a 1992 report that the agency's science '' is
perceived by many people both inside and outside the agency to be adjusted
to fit policy. ''
We should not necessarily bemoan the lack of agency expertise, for it
is not entirely clear that government by experts is superior to government
by elected officials. There is no reason to believe that experts possess
superior moral knowledge or a better sense of what constitutes the public
good. Indeed, specialization often impairs the capacity for moral judgment
and often breeds professional zealotry. Likewise, specialized expertise
provides too narrow a base for the balanced judgments that intelligent
policy requires.
Although both agency administrators and legislators often lack the
expertise to evaluate technical arguments by themselves, they can get help
from agency and committee staff, government institutes (like the Centers
for Disease Control or the General Accounting Office), and private sources
such as medical associations, think tanks, and university scientists. After
all, that is what the hearings process is supposed to be about.
And only someone naive about modern government would seriously
claim today that the winds of politics blow any less fiercely in administra-tive
meeting rooms than they do in the halls of Congress. As Nobel
laureate economist James Buchanan and others have observed, public
officials have many incentives to pursue both private and political ends
that often have little to do with their ostensible missions.

Is Congress Too Busy?
New Dealers once argued that '' time spent on details [by Congress]
must be at the sacrifice of time spent on matters of the broad public
policy. '' But Congress today spends little time on '' matters of broad public
policy, '' largely because delegation forces Congress to spend a large chunk

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of its time constructing the legislative architecture— sometimes over a
thousand pages of it— detailing exactly how various agencies are to decide
important matters of policy. Once that architecture is in place, members
of Congress find that a large part of their job entails navigating through
those bureaucratic mazes for special interests jockeying to influence the
final nature of the law. Writing such instructions and performing agency
oversight to ensure that they are carried out would be unnecessary if
Congress made the rules in the first place.
Moreover, delegation often works to prolong disputes and keep stan-dards
of conduct murky because pressures from legislators and the compli-cated
procedures imposed upon agencies turn lawmaking into an excruciat-ingly
slow process. Agencies typically report that they have issued only
a small fraction of the laws that their long-standing statutory mandates
require. Competing interests devote large sums of money and many of
their best minds to this seemingly interminable process. For example, it
took the EPA 16 years to ban lead in gasoline despite the fact that the
1970 Clean Air Act explicitly gave them the authority to do so. Simply
making the rules the first time around in the legislative process would
take less time than the multiyear regulatory sausage machine requires to
issue standards.

Complex Rules for a Complex World
Perhaps the most widely accepted justification for some degree of
delegation is the complex and technical nature of the world we live in
today. As the Supreme Court opined in 1989, '' Our jurisprudence has
been driven by a practical understanding that in our increasingly complex
society, replete with ever changing and more technical problems, Congress
simply cannot do its job absent an ability to delegate power under broad
general directives. ''
Yet the vast majority of decisions delegated to the executive branch
are not particularly technical in nature. They are instead hotly political,
for the reasons mentioned above. If Congress must regulate, it could (and
probably should) jettison micromanagerial command-and-control regula-tions
that make up the bulk of the Federal Register and instead adopt
regulations that are less prescriptive and more performance based or market
oriented. Most regulatory analysts on both the left and the right agree that
this would also have the happy consequences of decreasing regulatory
costs, increasing regulatory efficiency, and decreasing the burden on regu-lators.
In addition, a Congress not skewed toward regulation by delegation

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would rediscover practical reasons for allowing many matters to be left
to state and local regulators.

Conclusion
Forcing Congress to vote on each and every administrative regulation
that establishes a rule of private conduct would prove the most revolution-ary
change in government since the Civil War— not because the idea is
particularly radical, but because we are today a nation governed, not by
elected officials, but by unelected bureaucrats. The central political issues
of the 108th Congress— the complex and heavy-handed array of regula-tions
that entangle virtually all manner of private conduct, the perceived
inability of elections to affect the direction of government, the disturbing
political power of special interests, the lack of popular respect for the
law, the sometimes tyrannical and self-aggrandizing exercise of power by
government, and populist resentment of an increasingly unaccountable
political elite— are but symptoms of a disease largely caused by delegation.
'' No regulation without representation! '' would be a fitting battle cry
for the 108th Congress if it is truly interested in fundamental reform of
government. It is a standard that both the left and the right could comfort-ably
rally around, given that many prominent constitutional scholars, policy
analysts, and journalists— from Nadine Strossen, president of the American
Civil Liberties Union, to former judge Robert Bork— have expressed
support for the end of delegation.
Some observers complain that voting on all regulations would over-whelm
Congress. Certainly, federal agencies do issue thousands of regula-tions
every year. However, the flow of new rules is no argument against
congressional responsibility. Congress could bundle relatively minor regu-lations
together and vote on the whole package. Both houses could then
give major regulations— those that impose costs of more than $100 million
annually— close scrutiny.
Of course, forcing Congress to take full and direct responsibility for
the law would not prove a panacea. The legislature, after all, has shown
itself to be fully capable of violating individual rights, subsidizing special
interests, writing complex and virtually indecipherable law, and generally
making a hash of things. But delegation has helped to make such phenom-ena,
not the exception, but the rule of modern government. No more
crucial— and potentially popular— reform awaits the attention of the
108th Congress.

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The Delegation of Legislative Powers
Suggested Readings
Anthony, Robert. '' Unlegislative Compulson: How Federal Agency Guidelines Threaten Your Liberty. '' Cato Policy Analysis no. 312, August 11, 1998.

Breyer, Stephen. '' The Legislative Veto after Chadha. '' Thomas F. Ryan lecture. George-town Law Journal 72 (1984).
DeLong, James. Out of Bounds— Out of Control: Regulatory Enforcement at the EPA. Washington: Cato Institute, 2002.
Lawson, Gary. '' Delegation and the Constitution. '' Regulation 22, no. 2 (1999). Lowi, Theodore. The End of Liberalism: The Second Republic of the United States. 2d
ed. New York: W. W. Norton, 1979. Schoenbrod, David. Power without Responsibility: How Congress Abuses the People
through Delegation.
New Haven, Conn.: Yale University Press, 1993.
Smith, Nick. '' Restoration of Congressional Authority and Responsibility over the Regu-latory Process. '' Harvard Journal on Legislation 33 (1996).

—Prepared by David Schoenbrod and Jerry Taylor

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9. Term Limits and the Need for a Citizen Legislature
Each member of Congress should
pledge to be a citizen legislator by limiting his or her time in
office to no more than three additional terms in the House of Representatives and no more than two additional terms in the

Senate and keep that pledge.

Americans are dissatisfied with Washington. For more than a generation,
polls have found a steady decline in the proportion of citizens who believe
Washington can be trusted to do what is right. Most people believe that
politics has nothing to do with their lives or that it is run for the benefit
of a few. Not surprisingly, a poll by Princeton Survey Research Associates
revealed that only 12 percent of the electorate have a great deal of confi-dence
in Congress as an institution.
Americans can reclaim their democracy. They can have a government
that is accountable to their will, a government for and by the people. They
can have a citizen legislature in Washington and in every statehouse in
America. Citizen legislators will make laws that make sense to ordinary
people and revive our national faith in representative government.
How can we have citizen legislatures? The power of office has virtually
put incumbents beyond the reach of the people. Restoring democracy
requires term limits for incumbents. All members of Congress should
pledge to limit their stay on Capitol Hill.

The People Support Term Limits
Members of Congress should listen to the good sense of the American
people on this issue. For years, national polls have found that three of
four voters support term limits. In a June 2000 poll by Diversified Research,

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Inc., 69 percent of Californians said that they still approved of the original
(1990) term limits initiative. In March 2002, a ballot initiative designed
to weaken California's term limits law was soundly defeated at the polls.
According to Paul Jacob, executive director of U. S. Term Limits, '' If the
people of this country got a chance tomorrow to vote on term limits for
members of Congress, you would see them rush to the nearest polling
place. ''
Indeed, the people have spoken loudly and clearly on term limits in
virtually all of the states that provide an opportunity to do so. Twenty-two
states representing nearly half of Congress had term limited their
delegations by 1994. The great majority of those states had opted to limit
their representatives to three terms, and all of those states had limited
their senators to two terms. Only 2 of the 22 states chose six terms for
the House.
In November 2000, Nebraska became the 19th state to limit the terms
of state legislators. By 2001, term limits had affected more than 700
legislative seats. The first 19 states passed term limits by an average of
67 percent of the vote (Table 9.1). Moreover, every effort by incumbents
to roll back term limits has been defeated by voters.
Despite the overwhelming support of the American people for term
limits, the incumbent establishment has made it extremely difficult for
the will of the people to be translated into law. When the Supreme Court
declared that states could not limit the terms of their representatives
in Washington, advocates of term limits petitioned the new Republican
Congress— which had put term limits in its Contract with America—
to pass a constitutional amendment to impose nationwide term limits.
Incumbent members of Congress had an obvious conflict of interest on
the issue, and they did not pass an amendment.

Take the Pledge
Americans believe term limits will make Congress a citizen legislature.
But a Congress controlled by career politicians will never pass a term
limits amendment. So the term limits movement, one of the most successful
grassroots political efforts in U. S. history, has set out to change Congress
from a bastion of careerism into a citizen legislature the best way it can—
district by district.
George Washington set the standard. Perhaps the most popular and
powerful American in history, Washington nevertheless stepped down
after two terms as president. He handed back to the people the immense

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Term Limits and the Need for a Citizen Legislature
Table 9.1 State Legislative Term Limits
Making a Difference One State at a Time
Limited: Terms Year Law Percentage
State Year (total years allowed) Takes Effect Voting Yes

Arizona 1992 House: 4 terms (8 years) House: 2000
Senate: 4 terms (8 years) Senate: 2000 74%

Arkansas 1992 House: 3 terms (6 years) House: 1998
Senate: 2 terms (8 years) Senate: 2000 60%

California 1990 Assembly: 3 terms (6 years) House: 1996
Senate: 2 terms (8 years) Senate: 1998 52%

Colorado 1990 House: 4 terms (8 years) House: 1998
Senate: 2 terms (8 years) Senate: 1998 71%

Florida 1992 House: 4 terms (8 years) House: 2000
Senate: 2 terms (8 years) Senate: 2000 77%

Louisiana** 1995 House: 3 terms (12 years) House: 2007
Senate: 3 terms (12 years) Senate: 2007 76%

Maine* 1993 House: 4 terms (8 years) House: 1996
Senate: 4 terms (8 years) Senate: 1996 68%

Michigan 1992 House: 3 terms (6 years) House: 1998
Senate: 2 terms (8 years) Senate: 2002 59%

Missouri 1992 House: 4 terms (8 years) House: 2002
Senate: 2 terms (8 years) Senate: 2002 75%

Montana 1992 House: 4 terms (8 years) House: 2000
Senate: 2 terms (8 years) Senate: 2000 67%

Nebraska 2000 Unicameral: 2 terms
(8 years) 2008 56%

Nevada 1994 Assembly: 6 terms (12 years) House: 2006
Senate: 3 terms (12 years) Senate: 2006 70%

Ohio 1992 House: 4 terms (8 years) House: 2000
Senate: 2 terms (8 years) Senate: 2000 66%

Oklahoma 1990 12-year combined total
for both houses 2002 67%

South Dakota 1992 House: 4 terms (8 years) House: 2000
Senate: 2 terms (8 years) Senate: 2000 64%

(continued)

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Table 9.1 (continued)

Limited: Terms Year Law Percentage
State Year (total years allowed) Takes Effect Voting Yes

Utah** 1994 House: 6 terms (12 years) House: 2006
Senate: 3 terms (12 years) Senate: 2006 n/ a

Wyoming*** 1992 House: 6 terms (12 years) House: 2004
Senate: 3 terms (12 years) Senate: 2004 77%

Average Percentage of Vote 67%
SOURCE: U. S. Term Limits, www. termlimits. org/ Current Info/ State TL/ Index. html.
Note: Italics indicate states limited by statute. All others are limited by state constitutional amendment.
*Maine's law is retroactive.
** Louisiana's and Utah's laws were passed by the state legislatures.
*** Wyoming's law was originally passed by initiative in 1994. The legislature amended the law to allow
members of the House to serve 12 years. A referendum to return to the original 6-year House limits garnered
54% of the vote but failed to get 50% plus 1 of all voters to veto the legislature.

power and trust they had given to him— dramatically making the case
that no one should monopolize a seat of power.
The tradition of a two-term limit for the president lasted uninterrupted
for almost a century and a half. When Franklin D. Roosevelt broke the
tradition, Congress moved to codify the term limit by proposing the
Twenty-Second Amendment to the Constitution, which the states ratified
in just 12 short months. The presidential term limit remains tremen-dously
popular.
We can establish such a tradition in Congress. Since 1994, several
dozen new faces have entered the halls of Congress serious about changing
the culture of Washington and after pledging to limit themselves to three
terms in the House or two terms in the Senate. Those pledges have
resonated with the voters who understand that a lawmaker's career interests
do not always coincide with the interests of the people back home. A poll
by Fabrizio-McLaughlin and Associates asked, '' Would you be more
likely to vote for a candidate who pledges to serve no more than three
terms in the House, or a candidate who refuses to self limit? '' Seventy-two
percent of respondents said they would be more likely to vote for
the self-limiter.
Self-limiters serve their constituents well. Rep. Matt Salmon of Arizona,
in reaffirming the pledge he made in 1994 to serve only three terms in
the House, said:

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Term Limits and the Need for a Citizen Legislature
The independence that comes from limiting my terms has enabled me to
vote against the bloated budget deal of 1997, and to challenge my own
party's leadership when I feel it would be best for the people of Arizona.
Instead of looking ahead to my own career in the House, I am able to put
my Arizona constituents first.

Self-limiters also resist Washington's culture of spending. They are
able to vote for spending limits because of the freedom of conscience
afforded by their term limit pledge. The self-limiters' collective experience
suggests that self-limitation helps to discipline a politician's legislative
behavior. Self-limiters exercise greater independence than their non-term-limited
peers and appear less fearful of incurring the wrath of either party
power brokers or special interest groups. During the past several years,
many self-limiters stood out as the most fiscally conservative members
of Congress.
Not surprisingly, self-limiters have spearheaded opposition to pork-barrel
spending and committee budget increases. They have demanded
honest accounting and pioneered the political push for real reform of
flawed government programs such as Social Security and Medicare— so
often used by professional politicians as political footballs.

Term Limits on Committee Chairs
Most laws begin life in congressional committees led by powerful chairs
who act as gatekeepers for floor votes on legislation. For decades, the
average tenure of a committee chair was about 20 years. The seniority
system allowed entrenched politicians from the least competitive districts
to wield power over other members, not on the basis of merit, but because
of their longevity. In the past, the only way to lose a chair was by death,
resignation, retirement, or electoral defeat.
The seniority system increased the level of pork-barrel spending and
blocked much needed change. For example, in a Cato Institute Policy
Analysis, '' Term Limits and the Republican Congress, '' Aaron Steelman
examined 31 key tax and spending proposals in the 104th and 105th
Congresses. He found that junior Republicans in Congress were '' more
than twice as likely to vote for spending or tax cuts as were senior
Republicans. '' Steelman pointed out that '' veteran Republican legislators
have proven they are comfortable with big government. It is unlikely that
fundamental change in Washington will occur while they continue to
control legislative debate and action. ''

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For those reasons, in 1995 the Speaker of the House decided to limit
the terms of House committee chairs to three terms, totaling six years.
Those limits are an important dent in a corrupt system. Term limits on
those powerful positions make the House more responsible and open the
way for newer members to influence policy. In 1996, the Republican caucus
imposed six-year limits on GOP committee chairs. As a consequence, some
changes have occurred on the traditional Senate leadership career path.
But the pace of change should be quickened, not slowed. The 108th
Congress should retain term limits on committee chairs in the House and
extend them to Senate committee chairs.

Why We Need a Citizen Legislature
Why are term limits so popular? Americans believe that career legislators
and professional politicians have created a gaping chasm between them-selves
and their government. For democracy to work, it must be representa-tive—
a government of, by, and for the people. Democracy in America
requires a citizen legislature.
To be a citizen legislator, a member of Congress should not be far
removed fromthe private sector. The members of the House of Representa-tives,
in particular, should be close to the people they represent. As
Rhode Island's Roger Sherman wrote at the time of our nation's founding:
'' Representatives ought to return home and mix with the people. By
remaining at the seat of government, they would acquire the habits of the
place, which might differ from those of their constituents. '' In the era of
year-round legislative sessions, the only way to achieve that objective is
through term limits.
What should be the limit on terms? Some observers have proposed as
many as six terms (or 12 years) for the House. Three terms for the House
is better for several reasons. America is best served by a Congress whose
members are there out of a sense of civic duty but who would rather live
their lives in the private sector, holding productive jobs in civil society,
far removed from government and politics. Such individuals might be
willing to spend two, four, or even six years in Washington, but not if
the legislative agenda is being set by others who have gained their authority
through seniority. Twelve-year '' limits, '' which amount to a mini-career,
do little to remove this major obstacle to a more diverse and representative
group of Americans seeking office.
We have solid evidence that short, three-term limits enhance the demo-cratic
process: Proposition 140 in California, which was passed by the

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Term Limits and the Need for a Citizen Legislature
voters there in 1990 and limited the state assembly to three two-year
terms. The 1992 assembly elections witnessed a sharp increase in the
number of citizens seeking office, with a remarkable 27 freshmen elected
to the 80-member lower house of the California legislature. In an article
on that freshman class, the Los Angeles Times said:

Among the things making the group unusual is that most of them are true
outsiders. For the first time in years, the freshman class does not include
an abundance of former legislative aides who moved up the ladder to
become members.... Among the 27 are a former U. S. Air Force fighter
pilot, a former sheriff-coroner, a paralegal, a retired teacher, a video store
owner, a businesswoman-homemaker, a children's advocate, an interior
designer, a retired sheriff's lieutenant, and a number of businessmen, law-yers,
and former city council members.

A scholarly study of the California legislature by Mark Petracca of the
University of California at Irvine found that the strict term limits Califor-nians
passed in 1990 had had the following consequences:

Turnover in both legislative chambers had increased markedly.
The number of incumbents seeking reelection had dropped sharply.
The percentage of elections in which incumbents won reelection had
dropped significantly.
The number of women in both houses had increased.
The number of uncontested races had declined.
The number of candidates seeking office in both chambers had
increased.
The winning margin of incumbents had declined.

While perhaps not attractive to people seeking to be career politicians, all
those developments please the great majority of Americans who favor a
return to citizen legislatures.
Similarly, a three-term limit for the U. S. House of Representatives will
return control of the House— not just through voting, but also through
participation— to the people. We must make the possibility of serving in
Congress a more attractive option for millions more Americans.
A second reason for shorter term limits is that the longer one is in
Congress, the more one is exposed to and influenced by the '' culture of
ruling'' that permeates life inside the Beltway. Groups like the National
Taxpayers Union have shown that the longer people serve in Congress,
the bigger spenders, taxers, and regulators they become. That is just as
true of conservatives as it is of liberals. It is also understandable. Members

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of Congress are surrounded at work and socially by people who spend
other people's money and regulate their lives. It is the unusual individual—
although such people do exist— who is not subtly but surely affected by
that culture.
Three terms rather than six would better serve as an antidote to the
growing '' professionalization'' of the legislative process. As Mark Petracca
has written:

Whereas representative government aspires to maintain a proximity of
sympathy and interests between representative and represented, profession-alism
creates authority, autonomy, and hierarchy, distancing the expert
from the client. Though this distance may be necessary and functional for
lawyers, nurses, physicians, accountants, and social scientists, the qualities
and characteristics associated with being a '' professional'' legislator run
counter to the supposed goals of a representative democracy. Professional-ism
encourages an independence of ambition, judgment, and behavior that
is squarely at odds with the inherently dependent nature of representative
government.

Finally, shorter limits for the House would enhance the competitiveness
of elections and, as previously noted, increase the number and diversity
of Americans choosing to run for Congress. The most competitive races
(and the ones that bring out the largest number of primary candidates)
are for open seats.
At least a third of all House seats would be open each election under
three-term limits, and it is probable that as many as half would not feature
an incumbent seeking reelection. We also know from past experience that
women and minorities have greater electoral success in races for open seats.
The members of a true citizen legislature literally view their time in
office as a leave of absence from their real careers. Their larger ambitions
lie in the private sector and not in expanding the ambit of government.
Citizen legislators are true public servants, not the new masters of the
political class.

State Legislative Term Limits Are Working
Term limits are taking effect all over the country in state legislatures—
and they are working. Term limits were intended to end careerism among
legislators. Scholarly research on the effects of term limits suggests that
they have substantially attained that goal. Congress should take note:

Term limits remain popular with state electorates long after their
introduction.

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Term Limits and the Need for a Citizen Legislature
Term limits stimulate electoral competition in state legislative
elections.
Term limits enable nontraditional candidates to run for seats in state
legislatures. Female, Hispanic, and Asian candidates find it easier to
enter term-limited legislatures than non-term-limited bodies.
Term limits weaken seniority systems in state legislatures.
Term limits have not strengthened interest groups, state bureaucracies,
or legislative staffs as predicted by critics of term limits.
Term limits foster public policies that serve to halt, or at least reduce,
the growth in the size and scope of government. Term-limited politi-cians
demonstrate greater respect than their non-term-limited col-leagues
for taxpayers' money.

Clearly, term limits are working. Congress can't hold out forever.

Conclusion
The term limits movement is not motivated by disdain for the institution
of Congress. It is motivated by a sincere desire on the part of the American
people to regain control of the most representative part of the federal
government. Resistance to this movement on the part of elected federal
legislators only underscores the image of an Imperial Congress.
Those who sign the Term Limits Declaration are on the record as citizen
legislators. Increasingly, that pledge will make the difference in winning
competitive seats in Congress. The seniority system, rotten at its core,
cannot survive a Congress where more and more members are under term
limits. Nor can wrong-headed policies and wasteful spending projects
survive a Congress with so many citizen legislators.
Term limits remain an issue to be reckoned with. Public support is
even stronger and deeper for candidates making personal term limits
commitments than for a term limits amendment. Voters seek to replace
career politicians with dedicated citizen legislators as the best solution to
what ails us in Washington. Political leaders who understand the problems
created by a permanent ruling elite in Washington— or who simply want
to abide by the overwhelming will of their constituents— will pledge to
serve no more than three additional terms in the House or two in the Senate.

Suggested Readings
Crane, Edward H., and Roger Pilon, eds. The Politics and Law of Term Limits. Washing-ton: Cato Institute, 1994.

Bandow, Doug. '' The Political Revolution That Wasn't: Why Term Limits Are Needed Now More Than Ever. '' Cato Institute Policy Analysis no. 259, September 5, 1996.

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Basham, Patrick, '' Assessing the Term Limits Experiment: California and Beyond, '' Cato Institute Policy Analysis no. 413, August 31, 2001.
Carey, John M., Richard G. Niemi, and Lynda W. Powell. Term Limits in the State Legislatures. Ann Arbor: University of Michigan Press, 2000.
Elhauge, Einer. '' What Term Limits Do That Ordinary Voting Cannot. '' Cato Institute Policy Analysis no. 328, December 16, 1998.
O'Keefe, Eric. Who Rules America? The People vs. the Political Class. Spring Green, Wis.: Citizen Government Foundation, 1999.
O'Keefe, Eric, and Aaron Steelman. '' The End of Representation: How Congress Stifles Electoral Competition. '' Cato Institute Policy Analysis no. 279, August 20, 1997.
Owings, Stephanie, and Rainald Borck. '' Legislative Professionalism and Government Spending: Do Citizen Legislators Really Spend Less? '' Public Finance Review 23
(2000). Steelman, Aaron. '' Term Limits and the Republican Congress. '' Cato Institute Briefing
Paper no. 41, October 27, 1998.
—Prepared by Edward H. Crane and Patrick Basham

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10. Campaign Finance, Corruption, and the Oath of Office
Congress should
repeal the Bipartisan Campaign Reform Act of 2002,
reject proposals to mandate electoral advertising paid for by
the owners of the television networks, reform the Federal Election Commission to bring it under the

rule of law, and deregulate the current campaign finance system.

The 107th Congress passed the most sweeping new restrictions on
campaign finance in a generation, the Bipartisan Campaign Reform Act
of 2002, marking them to take effect at the conclusion of the 2002 elections.
During much of the 108th Congress, the new law, challenged the day it was
signed, will be working its way through the judicial system. Meanwhile,
proponents of even more restrictions will be urging Congress to mandate
'' free'' political advertising for candidates and to replace the current
Federal Election Commission with a new agency modeled on the Federal
Bureau of Investigation.
The new law and the proposed changes in current law reflect the
mistaken assumptions of the so-called reformers. We begin by exposing
those flawed assumptions about corruption and American politics.

Freedom and Corruption
We begin, as we must, with the Constitution, which prohibits the govern-ment
from abridging freedom of speech. In the seminal case of Buckley
v. Valeo
(1976), the Supreme Court recognized that restrictions on political
spending are restrictions on political speech:

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A restriction on the amount of money a person or group can spend on
political communication during a campaign necessarily reduces the quantity
of expression by restricting the number of issues discussed, the depth of
their exploration, and the size of the audience reached. This is because
virtually every means of communicating ideas in today's mass society
requires the expenditure of money.

Note that the Court did not say, '' Money equals speech. '' It said that
money is necessarily tied to speech in a society in which candidates
communicate to the voters through the mass media. Restricting political
spending thus restricts political speech just as surely as throttling the
speaker on the proverbial street corner soapbox limits speech. Both spend-ing
ceilings and strangulation shut off the medium of political expression
and thus the protected speech itself.
Unfortunately, contributions to campaigns do not enjoy the same consti-tutional
protections. In 1974, Congress imposed limits on campaign contri-butions
for the purpose of preventing '' corruption or the appearance of
corruption. '' Until recently those ceilings have governed American elec-tions
without being adjusted for inflation. BCRA raised the limits on
'' hard money'' contributions, but their real value remains well below the
ceilings enacted in 1974.
The lower protection provided for contributions makes little sense.
Political candidates spend money to obtain the means (often television
time) to get their messages across to voters; such spending, as noted
earlier, is properly protected speech. But contributors give to candidates
for the same reason— to enable candidates to obtain the means to advance
their views to the electorate. Thus, limiting contributions inevitably
'' reduces the quantity of expression by restricting the number of issues
discussed, the depth of their exploration, and the size of the audience
reached'' by the candidate.
What about corruption? Campaign finance reformers claim to be driven
by the desire to end corruption or its appearance. But what is the nature
of the corruption that concerns reformers? And just how much corruption
is there to be rooted out?
Clean government requires that public office not be sold— not for
money, not for personal gain, not even for elective office. Thus, money
is not the real issue, even if cases of corruption often involve money. The
issue, rather, is trust. Public office is a trust, solemnized by the oath of
office, through which officeholders swear to support the Constitution. That
oath obligates public officials to serve the general good, the good of all,

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Campaign Finance, Corruption, and the Oath of Office
as spelled out in the Constitution, a document intended to serve all the
people. When an officeholder sells his vote to a special interest for any
narrower reason, he appears, at least, to be breaching the trust he assumed
when he swore to support the Constitution. His oath entails an obligation
to avoid even the appearance of doing so.
As a practical matter, however, corruption requires us to distinguish
between appearance and reality. A member of Congress who votes for a
bill in exchange for some payoff is said to be corrupt. But if that same
member votes the same way because he believes he is serving the general
good, he is not thought to be corrupt. The same act may or may not be
corrupt depending on the reasons behind it. Yet reasons or motives, being
subjective, are notoriously difficult for others to determine, especially
when they are mixed. What are we to say when a member accepts a
campaign contribution from a special interest, votes as the interest wishes,
but does so because he genuinely believes he is voting for the general
good? After all, a particular good and the general good may coincide.
Until the federal law of 1974, we recognized the difficulties of discerning
corruption and chose to enact only limited rules addressing fairly clear
cases of favors granted for cash, what the Supreme Court has called quid
pro quo corruption. Judged by that standard, our legal system has found
rather less corruption in politics than the reformers would have us believe
exists. Social scientists also report scant evidence of corruption of the
legislature. One proponent of public financing concludes, '' Various studies
have failed to produce the sort of evidence of a strong correlation between
campaign donations and a representative's public actions needed to back
up suspicions of general quid pro quo understandings. '' Thus, the basic
premise of the campaign finance reform movement— that money corrupts
and more money corrupts even more— comes up short on the evidence.

Congressional Conflicts of Interest
The intense interest in the campaign finance regulation shown by mem-bers
of Congress— substantially greater than the interest shown by most
Americans— should hardly surprise. For no other issue today affects mem-bers
more directly— not taxes, not spending, not war or peace. Indeed,
campaign finance law bears directly on the ability of members to remain
in office. All the talk of good government aside, for many it is a matter
of job security. Thus, the high correlation between past campaign finance
legislation and reelection rates is no accident, for the temptation to write
the law to favor incumbents is palpable and inescapable.

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There, in stark relief, is the conflict of interest that every member of Congress faces when considering proposals to reform our campaign finance
law. Campaign finance regulation brings every member face to face with the problem of self-dealing— not only the self-dealing the regulations are
supposed to prevent but, more immediately, the self-dealing that is inherent in writing regulations not simply for oneself but for those who would
challenge one's power to write such regulations in the first place. Figure 10.1 graphically suggests the electoral consequences of having
the winners write the rules for financing congressional campaigns. Only one congressional election since 1974 has seen an incumbent
reelection rate lower than 90 percent. Even the '' revolution'' of 1994, which changed control of the House of Representatives, saw 90 percent
of incumbents reelected. The last three elections have seen reelection rates of over 98 percent.
Campaign finance restrictions may not fully explain the lack of competi-tion in American politics. But those restrictions encumber entry into the
political market and thus discourage credible challenges to incumbents. A challenger needs large sums to mount a campaign for public office,
especially at the federal level. He needs big money to overcome the manifest advantages of incumbency— name recognition, the power of

Figure 10.1 Reelection Rates of Congressional Incumbents, 1976– 2000

0%
10%

20%
30%
40%
50%
60%
70%
80%
90%

100%

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Reelection
Rate

SOURCES: Norman J. Ornstein, Thomas E. Mann, and Michael J. Malbin, Vital Statistics on Congress: 1999– 2000
(Washington: AEI Press, 2000), p. 57; and Cato calculations.

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office, the franking privilege, a knowledgeable staff, campaign experience,
and, perhaps most important, easy access to the media. Yet current law
limits the supply of campaign dollars: in any given election cycle, an
individual can give no more than $1, 000 to a candidate, and a political
party or a political action committee (PAC) can give no more than $5,000.
BCRA did raise the limit for individuals to $2,000. But again that remains
far less in real dollars than was allowed by the original 1974 law.
In a free and open political system, challengers would be able to do
what they used to be able to do— find a few '' deep pockets'' to get
themselves started, then build support from there, unrestrained by any
restrictions save for the traditional prohibitions on vote selling and vote
buying. That is how liberal Eugene McCarthy challenged an incumbent
president in 1968. It is how conservative James Buckley challenged an
incumbent senator and a major party challenger in 1970. Today, neither
would be able to do that— thanks to the '' reforms'' of 1974. Both would
incur massive compliance costs, including the risk of future litigation and
prosecution. Both would be discouraged, in all likelihood, from mounting
a challenge. That is not healthy for democracy.
BCRA makes things worse. By banning '' soft money''— unregulated
contributions given to the political parties— Congress has complicated
the lives of challengers. Parties have traditionally directed soft money
contributions to races in which challengers might have a chance. A Cato
Institute study found, not surprisingly, that state restrictions on giving to
parties (regulations similar to BCRA's soft money ban) reduce the overall
competitiveness of elections. At the same time, BCRA does not affect
donations by PACs, most of which go to incumbents. BCRA does loosen
federal contribution limits for incumbents running against self-funding
individuals. Apparently, contributions over $2,000 corrupt politics— unless
an incumbent faces a self-funding millionaire. That strains credulity. In
the end, BCRA seems little more than an incumbent protection law, a
monument to the dangers of self-dealing.
But conflict of interest does not end with the ban on soft money. For
several years now, interest groups have underwritten aggressive issue ads
criticizing members of Congress during their reelection campaigns. To be
sure, some of those ads have been unfair or inaccurate, but the Constitution
protects the right to be both. With the passage of BCRA, however, Congress
decided to regulate such issue advertising by redefining it as '' express
advocacy'' and hence as subject to federal election law, including contribu-tion
limits. In effect, Congress has decided to complicate the lives of its

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critics. Making issue ads subject to election law means the next election
will have fewer issue ads, less debate of public matters, and less criticism
of elected officials. Many experts think the Supreme Court will strike
down those restrictions on political speech. Congress might save the Court
the trouble by reconsidering its regulations.

Taxpayer Financing of Campaigns
Many people have argued that our system could preclude corruption
or its appearance by prohibiting all private contributions, whether desig-nated
as campaign contributions or not, and moving to a system of taxpayer-financed
campaigns. As a practical matter, how would a system of public
campaign financing work? Would incumbents and challengers receive
equal amounts of money? Given the extraordinary advantages of incum-bency
noted above, that would hardly level the playing field or respect
the democratic process. Then what is the right ratio? When Congress last
seriously debated taxpayer financing in 1997, the funding levels proposed
were not adequate. Law professor Bradley Smith, now a federal election
commissioner, assessed the 1997 proposal:

Every challenger spending less than the proposed limit in Senate campaigns
had lost in each of the 1994 and 1996 elections, whereas every incumbent
spending less than the limit had won. Similarly, only 3 percent of challengers
spending less than the proposed limit for House races had won in 1996,
whereas 40 percent of challengers spending more than that limit had won.

Taxpayer financing of congressional campaigns would only exacerbate
the conflict of interest faced by every member in writing campaign finance
regulations.
Proponents of campaign finance reform will likely propose that the
108th Congress enact mandatory political advertising paid for by the
owners of the television networks. Over the years, such proposals have
taken several forms; the latest would make the networks '' donate'' air
time, which would then be given to the political parties in the form of
vouchers. Thus, the shareholders of the companies that own the networks
effectively would be taxed to pay for this advertising. Proponents justify
such taxes as a fair price for the use of public property, the airwaves. In
fact, economist Thomas Hazlett has shown that government's claim to
'' ownership'' of the airwaves amounts to nothing more than imposing
political control over the media of radio and television. Even if we grant
for purposes of argument that the airwaves belong to the public, we might

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ask why the broadcasters have to pay for political advertising. After all,
trucking companies pay taxes for the upkeep of roads, but they are not
required to haul freight for members of Congress.

The Federal Election Commission
Not content to have passed BCRA, reformers now argue that the Federal
Election Commission has failed to enforce the old law, that the FEC will
undermine BCRA, and that Congress should replace the FEC with a
stronger agency— one with a law enforcement mission, a kind of Federal
Bureau of Investigation for elections and political campaigns.
The juxtaposition of the FBI and political campaigns should give imme-diate
pause. Do we want a federal law enforcement agency investigating
the campaigns of members of Congress and those who challenge them
for office? That is an invitation for political or partisan abuse. The late,
unlamented Independent Counsel statute comes immediately to mind. Do
members of Congress really want every detail of their last campaigns
subject to investigation by an agency controlled either by their political
enemies or the reformers themselves?
This does not mean the FEC should continue to exist. Congress should
get rid of the FEC as part of a broader deregulation of political speech
and electoral campaigns. Absent that, Congress should move to reform
the FEC to make its procedures comport with the rule of law.
Defendants before the FEC have few due process safeguards. When a
complaint comes before the commission, its general counsel makes the
case against the alleged lawbreaker, who has no right to appear before
the commission. The general counsel provides the commission with a
report that summarizes and criticizes the legal arguments of the accused
and is present to answer questions from the commissioners. Those reports
are not given to the accused even though they may contain new arguments
or information.
The FEC also sends out discovery subpoenas on the recommendation
of its general counsel. To contest a subpoena, a citizen must appeal to
the FEC itself, which turns the matter over to its Office of General Counsel.
Need we mention that the commission rarely grants motions to quash its
own subpoenas? Beyond that, the commission often will not provide the
accused with documents that might aid the defendant. How could all of
this accord with the rule of law?
The FEC has hardly been a pussycat in enforcing federal restrictions
on campaign finance. Like most burgeoning bureaucratic empires, it has

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continually tried to extend its regulatory authority. Consider issue advo-cacy.
In Buckley v. Valeo the Supreme Court said that the government
could regulate only those ads that expressly advocated the election or
defeat of a candidate. The First Amendment protects all other advocacy
about political issues.
The FEC has tried through most of its history to expand the meaning
of '' express advocacy'' beyond explicit words advocating the election or
defeat of a candidate. Time and again courts have rejected those grabs
for more power. Thus, in 1997 a federal court struck down an FEC
regulation redefining express advocacy, concluding that the commission's
argument that '' no words of advocacy are necessary to expressly advocate
the election of a candidate'' could not have been offered in good faith.
Far from weak, the FEC's stance on express advocacy has defied judicial
authority and tended toward lawlessness.
The FEC has attacked political speech in other ways as well. Thus, the
government can constitutionally regulate '' political committees. '' Some
people on the FEC argue that spending on issue advocacy, a protected
freedom, makes a group a political committee and thus subjects it to
regulation. In the Orwellian world of the FEC, a constitutional freedom
justifies government coercion. Federal law also regulates electoral activities
if they are coordinated with a candidate. The FEC has always pushed a
broad concept of coordination, the better to bring more political activity
under its control.
Not surprisingly those aggressive FEC attacks have chilled political
activities at the grassroots. After all, individuals and small groups hardly
have the resources to take on a bevy of specialized, zealous lawyers
supported by taxpayers. The FEC represents yet another expansive federal
bureaucracy that should be reined in by Congress in the near term and
eliminated over the long term.

The Real Problem
The laws we now have on the books have made our politics less
competitive by favoring incumbents over challengers, thereby striking at
the very heart of democratic government. The whole point of democracy,
after all, is to enable the people, through the ballot box, to select and
thereby control those who govern. To the extent that campaign finance
law undermines that power, it undermines democracy. Moreover, as we
will now see, to the extent that incumbency is correlated with ever-larger

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government, as studies repeatedly show, our present law exacerbates the
very problem it was meant to reduce— corruption.
We come, then, to the heart of the matter. The focus on campaign
finance reform is a distraction from the real issue, the ultimate source of
the potential for corruption— ubiquitous government. Government today
is a magnet for corruption of every form because it exercises vast powers
over virtually every aspect of life. Given that reality, is it any wonder that
special interests— indeed that every interest but the general— should be
trying either to take advantage of that or to protect themselves from it?
The Founders understood the problem of what they called '' factions. ''
They understood that interests would be tempted to capture government
for their own ends. To reduce that temptation, they wrote a constitution
that granted government only limited powers. They understood that the
best way to reduce corruption is to reduce the opportunities for corruption.
Far from forcing everyone to contribute to campaigns, the Founders
left individuals free to decide the matter for themselves— and free also
to decide how much to contribute. The Founders were mindful of the
potential for real corruption, which they left to traditional legal means to
ferret out. They had a pair of better ideas about how to handle the various
forms of corruption. The first was to rely on competition, to construct a
system that enabled interest to be pitted against interest. There is no
shortage, after all, of special interests. But if you fetter them all, through
some grand regulatory scheme, you stifle the natural forces that are neces-sary
for the health of the system. No individual, no committee of Congress,
no blue-ribbon committee of elders, can fine-tune the system of political
competition. It has to be free to seek its own equilibrium.
The second idea was equally simple, yet equally profound: limit power
in the first place, the better to limit the opportunities for corruption. After
all, if a member of Congress has only limited power to sell, there will be
limited opportunities to buy. That will not eliminate all corruption, of
course, but it will greatly reduce it.
Once we recognize the essential character of corruption— that it is a
breach of the trust that is grounded in the oath of office and, ultimately,
in the Constitution— it becomes clear that the problem is much broader
than is ordinarily thought, even if most such corruption should not be the
subject of regulation and prosecution. In fact, people who try to reduce
the issue to one of money— big money buying access— miss the larger
picture entirely. Money may induce a member to vote for an interest
narrower than the general good— the evidence notwithstanding— but when

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we ratified the Constitution we gave members the opportunity to do so
only to a very limited degree. In fact, it was because we understood, as
Lord Acton would later put it, that power tends to corrupt and absolute
power corrupts absolutely, that we so limited our officials. And we realized
that they would be tempted to breach their oaths of office not only for
money but for power as well— indeed, for the office itself. Thus, it was
not '' special interests'' alone that the Founders feared but the people too:
The Founders wanted to protect against the capture of government by that
ever-changing special interest known as '' the majority. '' For that reason
too— no, especially— they limited government's powers.
The problem with post– New Deal government, with its all but unlimited
power to redistribute and regulate at will, is that it virtually ensures that
members of Congress will act not for the general good, the good of all,
but for some narrower interest. Indeed, the modern state is premised on
'' corruption, '' for when it takes from some to give to others, it does not
serve the general good— and cannot, by definition. Thus, candidates find
themselves selling their office right from the start. When they promise
'' free'' goods and services from government, in exchange for votes, they
are selling their office, plain and simple: '' Vote for me and I'll vote to
give you these goods. '' That is where corruption begins. It begins with
the corruption— or death (the root of '' corruption''}— of the oath of office.
For not remotely does our Constitution authorize the kind of redistributive
state we have in this nation today (see Chapter 3 of this Handbook for a
detailed discussion).
To root out the kind of generalized corruption that is endemic to modern
government, then, one should begin not with more campaign finance
regulations but with the Constitution and the oath of office. The Constitu-tion
establishes a government of delegated, enumerated, and thus limited
powers. It sets forth powers that are, as Madison put it in Federalist no.
45, '' few and defined. '' Thus, it addresses the problem of self-dealing by
limiting the opportunities for self-dealing. If Congress has only limited
power to control citizens' lives— if citizens are otherwise free to plan and
live their own lives— there is little power for members of Congress to
sell, whether for cash, for perquisites, or for votes.
Before they take the solemn oath of office, therefore, members of
Congress should reflect on whether they are swearing to support the
Constitution as written and understood by those who wrote and ratified
it or the Constitution the New Deal Court discovered in 1937. The contrast
between the two could not be greater. One was written for limited govern-106 107
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Campaign Finance, Corruption, and the Oath of Office
ment; the other was crafted for potentially unlimited government. As that
potential has materialized, the opportunities for corruption of every kind
have become ever more manifest, as members know only too well. Indeed,
to appreciate the point, we need only notice the corruption that is endemic to
totalitarian systems— the ultimate redistributive states— despite draconian
sanctions against it. It goes with ubiquitous government.

Conclusion
In most cases, therefore, the answer to the corruption that is thought
to attend our system of private campaign financing is not more campaign
finance regulations but fewer such regulations. The limits on campaign
contributions, in particular, should be removed, for they are the source of
many of our present problems. More generally, however, the opportunities
for corruption that were so expanded when we abandoned constitutionally
limited government need to be radically reduced. Members of Congress can
do that by taking the Constitution and their oaths of office more seriously.

Suggested Readings
Basham, Patrick. '' It's the Spending, Stupid! Understanding Campaign Finance in the Big Government Era. '' Cato Institute Briefing Paper no. 64, July 18, 2001.

BeVier, Lillian R. '' Campaign Finance 'Reform' Proposals: A First Amendment Analy-sis. '' Cato Institute Policy Analysis no. 282, September 4, 1997.
Hazlett, Thomas W. '' The Rationality of U. S. Regulation of the Broadcast Spectrum. '' Journal of Law and Economics 33 (April 1990): 133– 75.
LaRaja, Ray, and Thad Kousser. '' The Effect of Campaign Finance Laws on Electoral Competition: Evidence from the States. '' Cato Institute Policy Analysis no. 426,
February 14, 2002. Pilon, Roger. '' Freedom, Responsibility, and the Constitution: On Recovering Our Found-ing
Principles. '' Notre Dame Law Review 68 (1993). Smith, Bradley A. '' Campaign Finance Regulation: Faulty Assumptions and Undemo-cratic
Consequences. '' Cato Institute Policy Analysis no. 238, September 13, 1995. . Unfree Speech: The Folly of Campaign Finance Reform. Princeton, N. J.:
Princeton University Press, 2001. Smith, Bradley A., and Stephen M. Hoersting. '' A Toothless Anaconda: Innovation,
Impotence and Overenforcement at the Federal Election Commission. '' Election Law Journal 1 (2002): 145– 71.

—Prepared by Roger Pilon and John Samples

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11. Reclaiming the War Power
Congress should
insist that U. S. armed forces not be deployed to areas where
hostilities are likely or imminent unless and until both houses of Congress have approved such action,

defund any such deployment that lacks the prior approval of
Congress, insist that hostilities not be initiated by the executive branch

unless and until Congress has authorized such action, and oppose any effort to reshape national security doctrine in a
manner that denies congressional supremacy over the war power.

The horror of September 11, 2001, changed many things: it ended a
certain American innocence and sense of invincibility; it taught Americans
that those who hate us could strike at us on our own soil; and it provided
ample justification for defending ourselves by waging war on al-Qaeda
and its nation-state allies. It did not, however, amend the Constitution.
Indeed, President Bush has repeatedly made it clear that the fight against
terrorists is a fight to maintain our free institutions and the way of life
they sustain. Six days after the destruction of the World Trade Center and
the attack on the Pentagon, President Bush issued a proclamation in honor
of our Constitution. In it, he declared that '' today, in the face of the
terrorist attacks of September 11, 2001, we must call upon, more than
ever, the Constitutional principles that make our country great. ''
No constitutional principle is more important than the principle that the
war power belongs to Congress. In affairs of state, no more momentous
decision can be made than the decision to go to war. For that reason, in
a democratic republic it is essential that that decision be made by the most
broadly representative body: the legislature. As James Madison put it: '' In

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no part of the constitution is more wisdom to be found, than in the clause
which confides the question of war or peace to the legislature, and not to
the executive department. ''

The Constitutional Framework
Under the Constitution as Madison and the other Framers designed it,
the president lacks the authority to initiate military action. In the Framers'
view, absent prior authorization by Congress, the president's war powers
were purely reactive; if the territory of the United States or U. S. forces
were attacked, the president could respond. But he could not undertake
aggressive actions without prior congressional authorization.
On August 17, 1787, the Constitutional Convention considered the
recommendation of the Committee of Detail that the legislature should
have sole power '' to make war. '' Only one delegate, South Carolina's
Pierce Butler, spoke in favor of granting that authority to the executive.
As Madison's notes from the convention tell us, Butler's proposal was
not warmly received. '' Mr. [Elbridge] Gerry [of Massachusetts said he]
never expected to hear in a republic a motion to empower the Executive
alone to declare war. '' For his part, George Mason of Virginia '' was agst.
giving the power of war to the Executive, because not to be trusted with
it. . . . He was for clogging rather than facilitating war. ''
However, the delegates did take seriously the objection, raised by
Charles Pinckney of South Carolina, that the House of Representatives
was too large and unwieldy, and met too infrequently, to supervise all the
details attendant to the conduct of a war. For that reason, '' Mr. M[ adison]
and Mr. Gerry moved to insert 'declare, ' striking out 'make' war; leaving
to the Executive the power to repel sudden attacks. '' Roger Sherman of
Connecticut '' thought [the proposal] stood very well. The Executive shd.
be able to repel and not to commence war. '' The motion passed.
The document that emerged from the convention vests with Congress
the bulk of the powers associated with military action, among them the
powers '' to declare War, [and] grant Letters of Marque and Reprisal. ''
Other important war-making powers include the power '' to raise and
support Armies, but no Appropriation of Money to that Use shall be for
a longer Term than two years, '' and '' to provide for calling forth the
Militia to execute the Laws of the Union, suppress Insurrections and repel
invasions. ''
Significantly, several of the enumerated powers allocated to Congress
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Reclaiming the War Power
gress's power to issue letters of marque and reprisal and its power to call
out the militia inform our understanding of Congress's authority to declare
war. A letter of marque and reprisal is a legal device (long fallen into
disuse) empowering private citizens to take offensive action against citizens
of foreign countries, usually privateers attacking ships. Since military
attacks carried out by American citizens might well be considered acts
of war by foreign powers, and accordingly embroil the United States in
hostilities, the Constitution vests the important decision to grant this power
in the most deliberative body: the legislature. Similarly, Article I, section
8, gives Congress power over the militia, allowing Congress to decide when
domestic unrest has reached the point where military action is required.
In contrast, the authority granted to the executive as commander in
chief of U. S. Armed Forces is entirely supervisory and reactive. The
president commands the Army and Navy, should Congress choose to
create them, and leads them into battle, should Congress choose to declare
war. He commands the militia to suppress rebellions, should the militia
be '' called into the actual Service of the United States. '' In this, as Hamilton
noted in Federalist no. 69, the president acts as no more than the '' first
General'' of the United States. And generals, it should go without saying,
are not empowered to decide with whom we go to war. The Constitution
leaves that decision to Congress. As Constitutional Convention delegate
James Wilson explained to the Pennsylvania ratifying convention: '' This
system will not hurry us into war; it is calculated to guard against it. It
will not be in the power of a single man, or a single body of men, to
involve us in such distress; for the important power in declaring war is
vested in the legislature at large. ''

War with Iraq
Given that constitutional framework, the yearlong debate about war
with Iraq left a lot to be desired. Bush administration officials proceeded
as if no authorization were necessary. Then, in August 2002, the White
House Counsel's Office brazenly insisted that the administration already
had congressional authorization for Gulf War II, in the form of the 1991
joint resolution that authorized the first Persian Gulf War. How could a
resolution passed in 1991 to give a previous president authority to expel
Saddam Hussein from Kuwait authorize another president to take Baghdad
11 years later? A good question, the answer to which was not at all apparent
in the 1991 resolution. Such tendentious stretching of legal authority might
have been appropriate for a trial lawyer zealously pressing his client's

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interest. But for a president sworn to uphold the Constitution, and seeking
legal justification to lead troops into battle, something more than clever
'' lawyering'' was required: new and independent authorization for a
new war.
To its credit, the administration eventually sought, and secured, congres-sional
authorization for use of force against Iraq. It did so despite the fact
that some prominent members of Congress did not want to be burdened
with the vast responsibility the Constitution places on their shoulders.
Senate Minority Leader Trent Lott (R-Miss.), for instance, treated the
Democrats' push for congressional authorization as a partisan annoyance
rather than a solemn constitutional duty, calling it '' a blatant political
move that's not helpful. ''
In some ways, this is nothing new. Throughout the 20th century, congres-sional
control of the war power eroded, not simply as a result of executive
branch aggrandizement, but also because of congressional complicity. The
imperial presidency continues to grow, largely because many legislators
want to duck their responsibility to decide the question of war and peace;
delegate that responsibility to the president; and reserve their right to
criticize him, should military action go badly.
Indeed, even in authorizing the president to use force, Congress
attempted to shirk its responsibility to decide on war. After voting for the
resolution, which gave the president all the authority he needs to attack
Iraq should he choose to do so, prominent members of Congress insisted
they hadn't really voted to use force. That was for the president to decide.
As Senate Majority Leader Tom Daschle (D-S. D.) put it: '' Regardless of
how one may have voted on the resolution last night, I think there is an
overwhelming consensus . . . that while [war] may be necessary, we're
not there yet. ''
It is not for the president to decide whether we are '' there yet. '' The
Constitution leaves that question to Congress. Thus far in the war on
terror, though, Congress has dodged that responsibility, delegating it to
the president. The use-of-force resolution Congress passed immediately
after September 11, 2001, contains an even broader delegation of authority
to the president, authorizing him to make war on '' those nations, organiza-tions,
or persons he determines planned, authorized, committed, or aided
the terrorist attacks that occurred on Sept. 11, 2001, or harbored such
organizations or persons'' [emphasis added]. By its plain terms, the resolu-tion
leaves it to the president to decide when the evidence that a target
nation has cooperated with al-Qaeda justifies war. President Bush has

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Reclaiming the War Power
exercised that authority in good faith so far, declining to argue that the
flimsy evidence of a Saddam– al-Qaeda connection permits him to attack
Iraq under the September 14, 2001, resolution. But if Congress wants a
say on whether we should go to war with Iran, Syria, Lebanon, or any
number of other nations the president may target in the future, it will have
a difficult case to make.
Such broad delegations of legislative authority are constitutionally sus-pect
in the domestic arena; surely they are no less so when it comes to
questions of war and peace. As Madison put it:

Those who are to conduct a war cannot in the nature of things, be proper
or safe judges, whether a war ought to be commenced, continued, or
concluded.
They are barred from the latter functions by a great principle
in free government, analogous to that which separates the sword from the
purse, or the power of executing from the power of enacting laws [emphasis
in original].

Preemptive Wars
The administration's new security doctrine, which emphasizes preemp-tive
military strikes, may have equally troubling consequences for congres-sional
control over the war power. Under the new doctrine, rogue nations
in the process of developing nuclear, chemical, or biological weapons will
be vulnerable at any time to sudden attack by the United States. In a
graduation speech given at West Point on June 1, 2002, President Bush
discussed the new strategy: '' The war on terror will not be won on the
defensive, '' he said, '' we must take the battle to the enemy . . . [and]
be ready for preemptive action when necessary. '' The administration
formalized the policy in the National Security Strategy of the United
States of America, released in September. That document does not discuss
whether preemptive wars will be conducted pursuant to congressional
authorization or launched unilaterally as surprise attacks by the president.
In the case of Iraq, which may be the administration's first preemptive
war, the president has not used the doctrine as an excuse to bypass the
constitutional requirement of congressional authorization. But the develop-ment
of the doctrine must be carefully monitored by this Congress and
future ones, lest it become a pretext for unilateral presidential war making.
Granted, the Constitution does not categorically rule out unilateral mili-tary
action by the president. No one would argue that, when missiles are
in the air or enemy troops are landing on our shores, the president is
obliged to call Congress into session before he can respond. As Madison's

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notes from the Constitutional Convention make clear, the constitutional
consensus about war powers was that, though Congress had the power to
'' commence war, '' the president would have '' the power to repel sudden
attacks. '' Within that power, there's some latitude for preemptive strikes.
If a rogue state plans a nerve gas attack on the New York subway system,
the president need not and should not wait until enemy agents are ashore
to order military action.
But if the preemptive strike doctrine morphs into a freestanding justifica-tion
for presidential wars, that will have grave consequences for the
constitutional balance of power. The doctrine applies whether or not any
specific attack on the United States is planned and whether or not U. S.
intelligence can establish with any certainty that the target has weapons
of mass destruction (WMD). It could be used by this administration or
future ones to avoid the inconvenient task of securing authority from
Congress. That would change the president's constitutional power to repel
sudden attacks into a dangerous and unconstitutional power to launch
sudden attacks.
Moreover, such a power would be ripe for abuse. Firm evidence of
WMD capability is very hard to come by— indeed, in the case of Iraq,
Secretary of Defense Donald Rumsfeld doubts that even an intensive, on-the-
ground inspection regime, such as the United Nations operated in Iraq
until December 1998, could determine with any degree of certainty what
Saddam's WMD capabilities are. Justifications for preemptive wars will
necessarily be speculative and susceptible to manipulation. The potential
for politically driven attacks would be enormous.
Public opinion polls indicate that Americans view President Bush as a
person of integrity and reward him with a high level of public trust. But
Bush will not be the last president to wield the broad new powers his
administration is forging in the domestic and foreign affairs arenas. As
Rumsfeld has noted, the war on terror will take years, and if and when
victory is achieved, we may not know with any certainty that we've won.
Our entire constitutional system repudiates the notion that electing good
men is a sufficient check on abuse of power. As President Bush himself
noted in his September 17 proclamation: '' In creating our Nation's Consti-tutional
framework, the Convention's delegates recognized the dangers
inherent in concentrating too much power in one person, branch, or institu-tion.
'' It's imperative that the 108th Congress resist the tendency to concen-trate
power and the further growth of the imperial presidency.

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Suggested Readings
Fisher, Louis. Congressional Abdication on War and Spending. College Station: Texas A& M University Press, 2000.

. Presidential War Power. Lawrence: University Press of Kansas, 1995. Healy, Gene. '' Arrogance of Power Reborn: The Imperial Presidency and Foreign Policy
in the Clinton Years. '' Cato Institute Policy Analysis no. 389, December 13, 2000. Levy, Leonard W. Original Intent and the Framers' Constitution. New York: Macmil-lan,
1988. Schlesinger, Arthur. The Imperial Presidency. Boston: Houghton-Mifflin, 1973.
Wormuth, Francis D., and Edwin B. Firmage. To Chain the Dog of War. Dallas: Southern Methodist University Press, 1986.

—Prepared by Gene Healy

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12. USA PATRIOT Act and Domestic Detention Policy
Congress should
tighten the PATRIOT Act's requirements for advance judicial
approval and judicial review; impose a shorter-term sunset clause on all provisions of the

PATRIOT Act; exclude ordinary criminal activities from coverage of the
PATRIOT Act; establish rules that govern detention of citizens and noncitizens
suspected of terrorist links; and ensure that domestic detainees have access to counsel and
judicial review.

USA PATRIOT Act
Government is legitimately charged with defending life, liberty, and
property against both domestic and foreign predators. First among those
obligations is to protect life. With America under attack, and lives at risk,
civil liberties cannot remain inviolable. But that does not mean civil
liberties can be arbitrarily flouted without establishing, first, that national
security interests are compelling and, second, that those interests can be
vindicated only by encroaching on individual rights. Some parts of the
PATRIOT Act do not pass that test.
Proponents of the new bill surely understood that many of its provisions
were incompatible with civil liberties. Yet rather than modify the offending
provisions, the president and Congress decided to promote the bill as an
expression of patriotism. Hence the acronym— USA PATRIOT— and its
bloated title, Uniting and Strengthening America by Providing Appropriate

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Tools Required to Intercept and Obstruct Terrorism. The sales pitch
worked. Fearful of being labeled disloyal after the atrocities of September
11, 2001, the House endorsed the bill 357 to 66, followed by a 98-to-1
romp through the Senate, with only Russ Feingold (D-Wis.) in opposition.
From its initial draft to its final adoption, the PATRIOT Act zipped
through in six weeks— less time than Congress typically spends on routine
bills that raise no constitutional concerns. Congress's so-called deliberative
process was reduced to this: closed-door negotiations, no conference com-mittee,
no committee reports, no final hearing at which opponents could
testify, not even an opportunity for most of the legislators to read the 131
single-spaced pages about to become law. Indeed, for part of the time,
both the House and Senate were closed because of the anthrax scare;
congressional staffers weren't able to retrieve their working papers.
The negligible legislative record will make it difficult for courts to
determine the intent of Congress. And because legislative intent matters
to some judges— for example, Supreme Court Justices Stephen Breyer
and David Souter— the PATRIOT Act might ultimately be invalidated as
unconstitutionally vague. Ironically, Congress's rush job, which facilitated
passage of the bill, could be the cause of the bill's downfall. The same
law that was promoted as an act of patriotism might even provide a
rationale for releasing madmen who committed horrific acts against the
United States.
Yet the more acute objections to the new statute are substantive, not
procedural. They fall into three main categories. First, any law with the
potential to dramatically alter conventional notions of individual freedom
should fastidiously guard against abuse. The doctrine of separation of
powers has been a traditional buffer against such abuse. Requiring advance
judicial authorization of executive actions, followed by judicial review to
ensure that those actions have been properly performed, shields our liberties
from excessive concentrations of power in a single branch of government.
Under the PATRIOT Act, however, the locus of power is unmistakably
the executive branch. In some cases, law enforcement officials have access
to business and personal records without advance judicial notice or subse-quent
judicial review. In other cases— voicemail retrieval is an example—
advance approval is necessary, but the requisite court order can be obtained
with a minimal showing of relevancy. That same low standard governs
traces of Internet surfing and e-mail. Equally objectionable, under sec.
213 of the act, secret '' sneak and peek'' searches of physical property
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USA PATRIOT Act and Domestic Detention Policy
able'' time after the search has occurred. No knowledge means no opportu-nity
to contest the validity of the search, including such obvious infractions
as rummaging through office drawers when the warrant authorizes a garage
search, or even searching the wrong address.
Second, the new rules are defended as a necessary instrument of anti-terrorism.
If so, why do many of the provisions apply not only to suspected
terrorist acts but also to everyday national security investigations and even
ordinary criminal matters? In effect, our government has used the events
of September 11 to impose national police powers that skirt time-honored
constraints on the state. The executive branch will not always wield its
new powers in the service of ends that Americans find congenial.
To illustrate, the PATRIOT Act expands the Foreign Intelligence Sur-veillance
Act (FISA)— a Carter-administration program that created a
special federal court to approve electronic surveillance of citizens and
resident aliens alleged to be acting on behalf of a foreign power. Previously,
the FISA court granted surveillance authority if foreign intelligence was
the primary purpose of an investigation. No longer. Under sec. 218 of the
PATRIOT Act, foreign intelligence need only be a '' significant'' purpose
of an investigation. That sounds like a trivial change, but it isn't. Because
the standard for FISA approval is lower than '' probable cause, '' and
because FISA now applies to ordinary criminal matters if they are dressed
up as national security inquiries, the new rules could open the door to
circumvention of the Fourth Amendment's warrant requirements. The
result: rubber-stamp judicial consent to phone and Internet surveillance,
even in regular criminal cases, and FBI access to medical, educational,
business, and other records that conceivably relate to foreign intelli-gence
probes.
Third, laws that compromise civil liberties must be revisited periodically
to ensure that temporary measures, undertaken in response to a national
security emergency, do not endure longer than necessary. Such laws must
contain sunset clauses; that is, the law should expire automatically within
a short time of enactment— thus imposing on government the continuing
obligation to justify its intrusions. In this instance, the Bush administration
rejected any sunset provision whatsoever. Congress demurred and insisted
on including such a provision, but it applied only to new wiretap and
surveillance powers, not to the whole bill. Moreover, the sunset date was
fixed at December 31, 2005— more than four years after passage of the
legislation. Plainly, a shorter time frame— say, two years— would have
been appropriate. If the emergency persisted, Congress and the president
could reenact the law.

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Detention of Noncitizens in the United States
The PATRIOT Act also raises questions about detention of noncitizens
in the United States. Under sec. 412 of the act, the attorney general can
detain, for seven days, noncitizens suspected of terrorism. After seven
days, deportation proceedings must commence or criminal charges must
be filed. Originally, the Justice Department had asked for authority to detain
suspects indefinitely without charge. Congress could not be persuaded to
go along. But the final bill, for all practical purposes, allows expanded
detention simply by charging the detainee with a technical immigration
violation. If a suspect cannot be deported, he can still be detained if the
attorney general certifies every six months that national security is at stake.
Underlining the magnitude and scope of that problem, the Wall Street
Journal
reported on November 1, 2001, that seven Democrats had filed
Freedom of Information Act requests for a detailed accounting from Attor-ney
General John Ashcroft on the status of roughly 1,200 detainees, mainly
in New York and New Jersey. The lawmakers mentioned that some
detainees had reportedly '' been denied access to their attorneys, proper
food, or protection from . . . physical assault. '' Some of them were alleg-edly
being held in solitary confinement even though they hadn't been
charged with any criminal offense. According to a representative of the
New York Legal Aid Society, several Arab detainees had been limited
to one phone call per week to a lawyer and, if the line was busy, they
had to wait another week. On November 25, the New York Times cited
a senior law enforcement official who said that just 10 to 15 of 1,200
detainees were suspected al-Qaeda sympathizers. The government had not
found evidence linking a single one of them to the September 11 attacks.
Whether or not those reports proved accurate, it was time for the
government to supply some answers. Here's what the Washington Post
had to say in an October 31, 2001, editorial criticizing the Justice Depart-ment
for resisting legitimate requests for information on the detainees:
'' The questions are pretty basic. How many of the 1,000-plus are still in
custody? Who are they? What are the charges against them? What is the
status of their cases? Where and under what circumstances are they being
held? The department refuses not only to provide the answers but also to
give a serious explanation of why it won't provide them. ''
Eight months later, the Justice Department still had not identified the
remaining detainees. A department spokesman said only that fewer than
400 were still in custody— 74 for immigration violations, 100 who had
been criminally charged, 24 held as material witnesses, and 175 awaiting

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deportation. They had been denied legal counsel, access to their families,
and details of pending charges, if any. In effect, nearly 400 detainees
remained in legal limbo as the first anniversary of September 11 rapidly
approached.
Ultimately, the Supreme Court may have to clarify how the civil liberties/
national security tradeoff will unfold. Two terms ago, in Zadvydas v. Davis,
the Court held that immigrants who have committed crimes cannot
be detained indefinitely; they must be deported within a reasonable period
or released. Moreover, said the Court, temporary and even illegal immi-grants,
not just U. S. citizens, are entitled to due process. Still, the Court
noted that different rules may apply to immigrants who are suspected of
terrorism or considered national security risks.
Thus, the law is murky, and the legislation passed in the aftermath of
September 11 adds new elements of uncertainty. Nonetheless, the control-ling
principle is unambiguous. Any attempt by government to chip away at
constitutionally guaranteed rights must be subjected to the most painstaking
scrutiny to determine whether less invasive means could accomplish the
same ends.

Detention of U. S. Citizens
Yaser Esam Hamdi is also in legal limbo. He was raised in Saudi
Arabia, captured in Afghanistan, sent to Guantanamo, then transferred to
a Norfolk, Virginia, military brig after the Defense Department learned
that he was a U. S. citizen, born in Louisiana. Hamdi is being detained
indefinitely, without seeing an attorney, even though he hasn't been
charged with any crime. Jose´ Padilla, who allegedly plotted to build a
radiological '' dirty bomb, '' is a U. S. citizen too. He was arrested at
Chicago's O'Hare airport after a flight from Pakistan, then transferred
from civilian to military custody in Charleston, South Carolina. Like
Hamdi, Padilla is being detained by the military— indefinitely, without
seeing an attorney, even though he hasn't been charged with any crime.
Meanwhile, Zacarias Moussaoui, purportedly the 20th hijacker, is not a
U. S. citizen. Neither is Richard Reid, the alleged shoe bomber. Both have
attorneys. Both have been charged before federal civilian courts.
What gives? Four men: two citizens and two noncitizens. Is it possible
that constitutional rights— like habeas corpus, which requires the govern-ment
to justify continued detentions, and the Sixth Amendment, which
ensures a speedy and public jury trial with assistance of counsel— can be
denied to citizens yet extended to noncitizens? That's what the Bush
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mate, insists Attorney General John Ashcroft, because Hamdi is an '' enemy
combatant'' and there is '' clear Supreme Court precedent'' to handle those
persons differently, even if they are citizens.
Ashcroft's so-called clear precedent is a 1942 Supreme Court case, Ex
Parte Quirin,
which dealt with Nazi saboteurs, at least one of whom was
a U. S. citizen. '' Enemy combatants, '' said the Court, are either lawful—
for example, the regular army of a belligerent country— or unlawful—
for example, terrorists. When lawful combatants are captured, they are
POWs. As POWs, they cannot be tried (except for war crimes); they must
be repatriated after hostilities are over; and they have to provide only their
name, rank, and serial number if interrogated. Clearly, that's not what the
Justice Department had in mind for Hamdi.
Unlawful combatants are different. When unlawful combatants are cap-tured,
they can be tried by a military tribunal. That's what happened to
the Nazi saboteurs in Quirin. But Hamdi has not been charged, much less
tried. Indeed, the president's executive order of November 2001 excludes
U. S. citizens from the purview of military tribunals. If the president were
to modify his order, the Quirin decision might provide legal authority for
the military to try Hamdi. But the decision provides no legal authority
for detaining a citizen without an attorney solely for purposes of aggressive
interrogation.
Moreover, the Constitution does not distinguish between the protections
extended to ordinary citizens on one hand and unlawful-combatant citizens
on the other. Nor does the Constitution distinguish between crimes covered
by the Fifth and Sixth Amendments and terrorist acts. Still, the Quirin
Court justified those distinctions— noting that Congress had formally
declared war and thereby invoked articles of war that expressly authorized
the trial of unlawful combatants by military tribunal. Today, the situation
is different. We've had virtually no input from Congress: no declaration
of war, no authorization of tribunals, and no suspension of habeas corpus.
Yet those functions are explicitly assigned to Congress by Article I of
the Constitution. It is Congress, not the executive branch, which has the
power '' To declare War'' and '' To constitute Tribunals inferior to the
supreme Court. '' Only Congress can suspend the '' Privilege of the Writ
of Habeas Corpus . . . when in Cases of Rebellion or Invasion the public
Safety may require it. '' Congress has not spoken— except by enacting the
PATRIOT Act. And there, we do find authorization for detention of
persons suspected of terrorism— but only noncitizens and only for seven
days,
after which they must be released unless criminal charges are filed
or deportation proceedings commenced.

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No charges were filed in Hamdi's case. That's why a federal public
defender sued on his behalf in May 2002, demanding that he be charged
or released. Adistrict court judge in Norfolk ordered the Justice Department
to explain Hamdi's detention and agreed that he had a right to counsel.
Predictably, the Justice Department appealed. In its legal brief to the U. S.
Court of Appeals for the Fourth Circuit, the government insisted, '' There
is no right under the laws and customs of war for an enemy combatant
to meet with counsel concerning his detention. '' Moreover, asserted the
Justice Department, '' The court may not second-guess the military's enemy
combatant determination. Going beyond that determination would . . .
intrude upon the Constitutional prerogative of the Commander in Chief. ''
That astonishing statement amounts to an explicit declaration by the
executive branch that it may unilaterally abrogate habeas corpus, even for
a U. S. citizen. Furthermore, the Justice Department announced that it
would extend its new doctrine to '' enemy combatants . . . captured . . .
on the battlefield in a foreign land; . . . captured overseas and brought to
the United States [or] captured and detained in this country. '' In July
2002 the Fourth Circuit remanded the Hamdi case to the district court to
reconsider '' the implications [including] what effect petitioner's unmoni-tored
access to counsel might have on the government's ongoing gathering
of intelligence. '' The chief judge of the Fourth Circuit, J. Harvie Wilkinson,
ordered the lower court to be deferential when considering the Justice
Department's position. Still, Wilkinson affirmed the need for judicial
review. He warned, '' With no meaningful judicial review, any American
citizen alleged to be an enemy combatant could be detained indefinitely
without charges or counsel. ''
Perhaps that warning will persuade the administration that it may not
set the rules, prosecute infractions, determine guilt or innocence, then
review the results of its own actions— unless of course the administration
has statutory or constitutional authority. Even persons convinced that
President Bush cherishes civil liberties and understands that the Constitu-tion
is not mere scrap paper must be unsettled by the prospect that an
unknown and less honorable successor could exploit some of the dangerous
precedents that the Bush administration is attempting to put in place.

Conclusion
If civil libertarians have a single overriding concern about the PATRIOT
Act and our detention policies, it is this: the Bush administration has
concentrated too much unchecked authority in the hands of the executive

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branch— making a mockery of the doctrine of separation of powers that
has been a cornerstone of our Constitution for two and a quarter centuries.
We cannot, for example, permit the executive branch to declare unilaterally
that a U. S. citizen may be characterized as an enemy combatant, whisked
away, detained indefinitely without charges, denied legal counsel, and
prevented from arguing to a judge that he is wholly innocent.
That does not mean the Justice Department must set people free to
unleash weapons of mass destruction. But it does mean, at a minimum,
that Congress must get involved, exercising its responsibility to enact a
new legal regimen for detainees in time of national emergency. That
regimen must respect our rights under the Constitution, including the right
to judicial review of executive branch decisions. Constitutional rights are
not absolute. But they do establish a strong presumption of liberty, which
can be overridden only if government demonstrates, first, that its restric-tions
are essential and, second, that the goals it seeks to accomplish cannot
be accomplished in a less invasive manner. When the executive, legislative,
and judicial branches agree on the framework, the potential for abuse is
diminished. When only the executive has acted, the foundation of a free
society can too easily erode.

Suggested Readings
Lynch, Timothy. '' Breaking the Vicious Cycle: Preserving Our Liberties While Fighting Terrorism. '' Cato Institute Policy Analysis no. 443, June 26, 2002.

Quirin, Ex Parte. 317 U. S. 1 (1942).
Shapiro, Stephen J., et al. '' Inter Arma Silent Leges: In Times of Armed Conflict, Should the Laws Be Silent? '' Association of the Bar of the City of New York, Committee

on Military Affairs and Justice, December 2001. Sonnett, Neal R., et al. '' Preliminary Report: Task Force on Treatment of Enemy
Combatants. '' American Bar Association, August 8, 2002. Taylor, Stuart. '' Jailed with No Key. '' Legal Times, July 22, 2002.

—Prepared by Robert A. Levy

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13. National ID Cards and Military Tribunals
Congress should
resist the establishment of a national identification card and
resist the establishment of military tribunals for civilians.

In the wake of a calamitous terrorist attack, such as the one that America
experienced on September 11, 2001, it is prudent for Congress to review
our laws, policies, and customs with an eye to changes that would enhance
our safety and security. Each policy proposal, however, should be carefully
examined. Congress should not hastily enact any proposal simply because
it is packaged as an '' anti-terrorism'' measure. Every proposal should be
vetted for its necessity, efficacy, and constitutionality.

National ID Cards
It was only a matter of days after the attack of September 11 before
some members of Congress proposed the implementation of a national
ID card system as a way of thwarting additional terrorist attacks. The
national ID card has been proposed in the past as a way of stopping illegal
immigration. Since September 11 the policy proposal has been repackaged
as a '' security'' measure.
The national ID card proposal would be a very bad deal for America
because it would require some 250 million people to surrender some of
their freedom and some of their privacy for something that is not going
to make the country safe from terrorist attack. An ID card with biometric
identifiers may seem '' foolproof, '' but there are several ways that terrorists
will be able to get around such a system. If terrorists are determined to
attack America, they can bribe the employees who issue the cards or the
employees who check the cards. Terrorists could also recruit people who

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possess valid cards— U. S. citizens or lawful permanent residents— to carry
out attacks.
Proponents of the card point to countries in Europe, such as France,
that already have national ID card systems. But the experience of those
countries is nothing to brag about. The people in those countries have
surrendered their privacy and their liberty, yet they continue to experience
terrorist attacks. National ID cards simply do not deliver the security that
is promised.
Moreover, the establishment of a national ID card systemwill dilute civil
liberties. The Fourth Amendment to the Constitution protects Americans
against unreasonable searches and seizures. The quintessential '' seizure''
under the Fourth Amendment is to be arrested or detained by the police.
The police can seize or arrest a person when they have an arrest warrant
or when they have '' probable cause'' to believe that the suspect has just
committed a crime in their presence. But the police cannot stop people
on the street and demand an ID, at least not under current law. The police
can request an ID; they can request that people answer their questions.
But the key point is that Americans get to decide whether or not they
wish to cooperate. The legal presumption right now is on the side of the
individual citizen. The people do not have to justify themselves to the
police. The police have to justify their interference with individual liberty.
A national ID card system will turn that important legal principle upside
down. After the enactment of the system, pressure will begin to build to
enact laws that will require citizens to produce an ID whenever a govern-ment
official demands it. This is very likely to happen for two reasons.
First, in the countries that already have national ID card systems, the
police have acquired such powers. Second, in this country there already
are cases in which the police have arrested Americans for failure to produce
IDs. Thus far, however, courts have thrown out such arrests, ruling that
such a refusal does not constitute '' disorderly conduct'' or '' resisting an
officer. '' And yet, if Congress passes a law that says people must produce
IDs, the courts may well yield on that point.
It is important to note that many of the proponents of the national ID
card— such as Alan Dershowitz of Harvard Law School and Larry Ellison
from Oracle— present the idea in its most innocuous form. The proponents
say the card will be '' voluntary'' and that people will have to present it
only at airports. They say there will be no legal duty to produce an ID
card. But, over time, the amount of information on the card will surely
expand. The number of places where one will have to present an ID card

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will also expand, and it will eventually become compulsory. And, sooner
or later, a legal duty to produce an ID whenever a government official
demands it will be created.
Secretary of Defense Donald Rumsfeld has already warned us to expect
more terrorist attacks, so it is a safe bet that more anti-terrorism proposals
will emerge in Congress in the wake of such attacks. Perhaps there will
be an attack a year from now, and a limited national ID card will be
proposed and enacted. Maybe five years later, America will be attacked
again; people will die, and law enforcement will go to Congress and say,
'' We have a national ID card, but the problem is that it is voluntary, not
compulsory. '' Thus, by increments, America will get the full-blown
national ID card system that is now in place in other countries. Congress
should avoid this slippery slope by focusing its attention on more meritori-ous
proposals. A national ID card expands the power of government over
law-abiding citizens, but it will not really enhance security.

Military Tribunals
In November 2001, President Bush issued a '' military order'' that said
that suspected terrorists could, on his command, be tried before specially
designated military tribunals instead of civilian courts. That order immedi-ately
came under fire because of its disregard for constitutional norms.
Article III, section 2, of the Constitution provides, '' The Trial of all
Crimes, except in Cases of Impeachment; shall be by Jury. '' The Sixth
Amendment to the Constitution provides, '' In all criminal prosecutions,
the accused shall enjoy the right to a speedy and public trial, by an impartial
jury. '' To limit the awesome powers of government, the Framers of the
Constitution designed a system in which citizen juries would stand between
the apparatus of the state and the accused. If the government prosecutor
can convince a jury that the accused has committed a crime and belongs
in prison, the accused will lose his liberty and perhaps his life. If the
government cannot convince the jury with its evidence, the prisoner will
go free. In America, an acquittal by a jury is final and unreviewable by
state functionaries.
The federal government did try people before military commissions
during the Civil War. To facilitate that process, President Abraham Lincoln
suspended the writ of habeas corpus— so that the prisoners could not
challenge the legality of their arrest or conviction. The one case that did
reach the Supreme Court, Ex Parte Milligan (1866), deserves careful
attention.

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In Milligan, the attorney general of the United States maintained that
the legal guarantees set forth in the Bill of Rights were '' peace provisions. ''
During wartime, he argued, the federal government can suspend the Bill
of Rights and impose martial law. If the government chooses to exercise
that option, the commanding military officer becomes '' the supreme legis-lator,
supreme judge, and supreme executive. '' Under that legal theory,
many American citizens were arrested, imprisoned, and executed without
the benefit of the legal procedure set forth in the Constitution— trial by jury.
The Supreme Court ultimately rejected the position advanced by the
attorney general. Here is one passage from the Milligan ruling:

The great minds of the country have differed on the correct interpretation
to be given to various provisions of the Federal Constitution; and judicial
decision has been often invoked to settle their true meaning; but until
recently no one ever doubted that the right to trial by jury was fortified in
the organic law against the power of attack. It is now assailed; but if ideas
can be expressed in words and language has any meaning, this right— one
of the most valuable in a free country— is preserved to every one accused
of crime who is not attached to the army, or navy, or militia in actual
service. The sixth amendment affirms that '' in all criminal prosecutions
the accused shall enjoy the right to a speedy and public trial by an impartial
jury, '' language broad enough to embrace all persons and cases.

The Milligan ruling is sound. While the Constitution empowers the
Congress '' To make Rules for the Government and Regulation of the
land and naval Forces'' and '' To provide for organizing, arming, and
disciplining, the Militia, '' the Supreme Court ruled that the jurisdiction
of the military courts could not extend beyond those people who were
actually serving in the army, navy, and militia. That is an eminently
sensible reading of the constitutional text.
President Bush and his lawyers maintain that terrorists are '' unlawful
combatants'' and that unlawful combatants are not entitled to the protec-tions
of the Bill of Rights. The defect in the president's claim is circularity.
A primary function of the trial process is to sort through conflicting
evidence in order to find the truth. Anyone who assumes that a person
who has merely been accused of being an unlawful combatant is, in fact,
an unlawful combatant can understandably maintain that such a person
is not entitled to the protection of our constitutional safeguards. The flaw,
however, is that that argument begs the very question under consideration.
To take a concrete example, suppose that the president accuses a lawful
permanent resident of the United States of aiding and abetting terrorism.

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The person accused responds by denying the charge and by insisting on
a trial by jury so that he can establish his innocence. The president
responds by saying that '' terrorists are unlawful combatants and unlawful
combatants are not entitled to jury trials. '' The president also says that
the prisoner is not entitled to any access to the civilian court system to
allege any violations of his constitutional rights. With the writ of habeas
corpus suspended, the prisoner and his attorney can only file legal appeals
with the president— the very person who ordered the prisoner's arrest in
the first instance!
The Constitution's jury trial clause is not a '' peace provision'' that can
be suspended during wartime. Reasonable people can disagree about how
to prosecute war criminals who are captured overseas in a theater of war,
but the president cannot make himself the policeman, prosecutor, and judge
of people on U. S. soil. In America, the president's power is '' checked'' by
the judiciary and by citizen juries.

Conclusion
It is very important that policymakers not lose sight of what we are
fighting for in the war on terrorism. The goal should be to fight the
terrorists within the framework of a free society. The federal government
should be taking the battle to the terrorists, to their base camps, and killing
the terrorist leadership; it should not be transforming our free society into
a surveillance state.

Suggested Readings
Crews, Clyde Wayne. '' Human Bar Code: Monitoring Biometric Technologies in a Free Society. '' Cato Institute Policy Analysis no. 452, September 17, 2002.

Kopel, David. '' You've Got Identity: Why a National ID Is a Bad Idea. '' National Review Online, February 5, 2002.
Levy, Robert A. '' Don't Shred the Constitution to Fight Terror. '' Wall Street Journal, November 20, 2001.
Lynch, Timothy. '' Breaking the Vicious Cycle: Preserving Our Liberties While Fighting Terrorism. '' Cato Institute Policy Analysis no. 443, June 26, 2002.
. '' Executive Branch Arrests and Trials. '' Testimony before the Senate Judiciary Committee on Military Tribunals. December 4, 2001, www. cato. org/ testimony/
ct tl120401. html. Twight, Charlotte. '' Watching You: Systematic Federal Surveillance of Ordinary Ameri-cans.
'' Cato Institute Briefing Paper no. 69, October 17, 2001.
—Prepared by Timothy Lynch

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14. Regulation of Electronic Speech and Commerce
Congress should
resist the urge to regulate offensive content on the Web,
allow the market to address privacy and marketing concerns,
not undercut individuals' efforts to maintain anonymity on
the Internet, not attempt to regulate adult behavior such as online gambling,

reject attempts to impose new restrictions on encryption and
new surveillance on American citizens, avoid replacing true diversity and democracy on the Internet

with politically motivated '' Internet commons'' or '' public spaces, ''
avoid online protectionism by refusing to allow incumbent busi-nesspeople
to undercut electronic trade on the Internet, and avoid imposing burdensome and unconstitutional tax collection

schemes on the Internet.

It seems that everybody's got a plan to tame the freewheeling Internet
these days. The technology and telecommunications sectors of the Ameri-can
economy are increasingly under assault at the local, state, federal, and
international levels. Republicans and Democrats alike are looking for ways
to regulate everything from privacy to porn, while simultaneously seeking
ways to subsidize access. The Progressive Policy Institute describes a
'' failure of cyber-libertarianism'' that leads, naturally enough, to its '' Stra-tegic
National E-Commerce Policy'' framework. Ralph Nader would
establish a World Consumer Protection Organization to counter the
Internet's libertarian streak, which he finds intolerable. Countless other
special interests are clamoring for increased government activism.

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But policymakers must resist intervention. Whether the government
acts as regulator or facilitator of the high-tech economy and the Internet,
there will be unintended consequences. Industry should find self-regulatory
solutions instead of looking to Washington for answers or assistance.

Protecting Kids Online
The Communications Decency Act, passed to ban pornography on the
Internet, was struck down by the Supreme Court in 1997. But Washington
continues efforts to regulate Internet content. In 2002 the Supreme Court
upheld a portion of the Child Online Protection Act, passed by Congress
in 1998 to shield children from online pornography by requiring that
website operators verify the age of visitors. The Court held that free speech
is not necessarily violated by the imposition of community standards on
a national scale.
Although the Supreme Court does not reject the notion of '' contempo-rary
community standards, '' the lower court got it right when it noted
that the community standard notion lets the most squeamish dictate what
all others can see on the Web. In the name of protecting children, the law
interferes with content that adults should have the right to see under the
First Amendment.
On an Internet that is increasingly capable of direct peer-to-peer com-munication
and broadcast, individual choices and behavior replace
'' community standards. '' And laws like COPA can have unintended conse-quences:
barriers to those who seek porn voluntarily will likely increase
e-mail solicitations for porn (spam), which COPA wouldn't regulate.
The best and least restrictive defense is parental supervision, and helpful
tools, including filtering software and filtered online services, are available
in the private sector. Filtered online services can limit the receipt of
unwanted salacious e-mail, for which COPA is no use. Another tool at
parents' disposal is tracking software that lets them monitor everything a
child does or has done on the Internet.

Online Marketing and Privacy
Websites, as is well known, frequently collect information about visitors
and often sell it. Some legislators want to require online and even main
street firms to reveal what information they collect and share, and to allow
customers to '' opt out. '' Others would require a much more restrictive

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opt-in standard for '' sensitive'' consumer information; under that standard
no information could be used until a consumer granted permission.
But is all the fuss over information-age marketing justified? Free-flowing
information means more and cheaper stuff. Certainly, business use of
personal information to move merchandise may sometimes be irritating,
but federal regulation, which will hurt e-commerce and consumers, isn't
the answer. Small businesses will suffer more than larger companies that
have already assembled databases.
As businesses respond to consumer preferences, more stringent privacy
protections are emerging. The notice and choice sought in privacy legisla-tion
already exist. Most highly trafficked sites already feature privacy
policies. Users can set their Web browsers to reject information gathering.
Software tools that provide for anonymous surfing or warn when informa-tion
is being collected further empower consumers. The marketplace
increasingly forces sites to develop online privacy policies as ever-more-efficient
browser technology alerts users to the level of security provided.
Moreover, Washington itself can be the leading privacy offender. Sep-tember
11, 2001, brought renewed government surveillance, authorized
by the PATRIOT Act, that raises serious constitutional issues and should
be the focus of any serious congressional privacy debate. We don't get
to '' opt out'' of government information collection. Washington does not
have a track record that inspires confidence in it as a protector of personal
information.

Unsolicited E-Mail (spam) Policy
One legitimate purpose of limited government is to stop the use of force
and fraud. That extends to fraudulent e-mail solicitations, the prosecution of
which is the job of the Federal Trade Commission.
Peddling fraudulent merchandise or impersonating somebody else in
the e-mail's header information should be punished, as should breaking
a contract made with an Internet service provider (ISP) that prohibits bulk
mailing. But in the debate over the outpouring of spam, it's important to
avoid unintentionally stifling beneficial e-commerce. Sometimes, commer-cial
e-mail, even if unsolicited, may be welcome if the sender is a business
selling legal and legitimate products in a nonabusive manner.
Increasingly, legitimate companies are embracing permission-based,
'' opt-in'' e-mail standards, which enable people to receive e-mail only
from senders they have chosen. If legislation merely sends the most
egregious offenders offshore, that may simply create legal and regulatory

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hassles for small businesses trying to make a go of legitimate e-commerce
or for mainstream companies that are not spammers. Unwise legislation
could also create headaches for noncommercial e-mailers.
A smarter approach is e-mail filtering, such as setting the owner's screen
to receive only from recognized and approved e-mail addresses. That
standard is particularly appropriate for children's e-mail accounts. Emerg-ing
'' handshake'' or '' challenge and response'' systems capable of totally
blocking spam show promise: since the most offensive spam is sent by
automatic bulk mailing programs that aren't capable of receiving a reply,
spam no longer appears in the inbox. Identifiers or '' seals'' for trusted
commercial e-mail could be another means of helping ISPs block unwanted
e-mail.
As the market works to shift costs of commercial e-mail back to the
sender, we must be on guard against legislative confusion: How might the
definition of '' spam'' expand beyond '' unsolicited'' and '' commercial'' e-mail,
and would such expansion be a good thing? What about unsolicited
political or nonprofit bulk e-mailings, or press releases, resume blasts, and
charitable solicitations? What about newsletters that contain embedded
ads or link back to for-profit websites? Would pop-up ads become suspect
in the aftermath of spam legislation? They're not e-mail, but they are
unsolicited and commercial.
Another piece of proposed legislation would grant ISPs the power to
decide what is spam and to unilaterally block it with '' good faith'' immu-nity
and sue the spammer. It is appropriate for consumers and ISPs to
effect complete blackouts of spammers if they like; computers, wires,
servers, and routers are private property. But it's not necessary to federalize
such contracts.
Finally, legislative bans on false e-mail return addresses, as well as
bans on software capable of hiding such information, have worrisome
implications for free speech and anonymity for individuals— not just mis-behaving
businesses. Individuals can use '' spamware'' to create contempo-rary
versions of the anonymous flyers that have played such an important
role in our history. Individuals must retain the ability to safeguard their
anonymity even in (or perhaps especially in) a mass communications tool
like e-mail. In an era in which so many people are concerned about online
privacy, legislation that impedes a technology that can protect privacy
would be strange indeed.
Given the perfectly understandable desire to stop unsolicited mail, it is all
too easy for Congress to undermine legitimate commerce, communications,

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and free speech. And crippling Internet commerce would be especially
pointless if spam continued pouring in from overseas.

The Internet and Anonymity
Anonymous speech is as old as America. Gentlemen calling themselves
'' Publius'' wrote the Federalist Papers. Thomas Paine's Common Sense
was signed by '' An Englishman. '' Today, e-mail encryption is an important
example of the tradition of speaking freely and anonymously.
But encryption technology in the hands of people bent on destruction
can be deadly. Some observers believe that the terrorists who attacked
America communicated via encrypted messages. Fear of this indisputable
threat led to renewed proposals to give government a '' back door key''
to encryption products. Similarly, calls for a national ID card exemplify
new urges to shine a federal light on individuals. But calls for prohibitions
on encryption products are a nonstarter in the sense that trying to prohibit
bad actors from acquiring hardware or software is futile in today's global,
integrated marketplace.
Government's job is to restrict the liberty of dangerous criminals and
enemies— not that of innocent citizens, or to treat everyone as a suspect.
The USA PATRIOT Act has set up a new law enforcement infrastructure
that can easily increase surveillance of nonterrorists, but that is clearly
beyond the stated intent of combating terrorism. New powers should apply
only to terrorism, not to routine criminal investigations. While surveillance
can and likely will be enhanced to respond to the new realities of instant
electronic communications, the Fourth Amendment's protections against
unreasonable and warrantless searches must not suffer.
Proposals to reregulate encryption are the digital equivalent of seizing
grandma's nail clippers at the airport; terrorists would simply resort to
illegal encryption. Congress decided in the mid-1990s that the benefits of
readily available access to encryption technology are significant. Like
proposals to mandate that everyone carry a national ID card, reregulation
of encryption is a needless undermining of anonymity and privacy.
It's important to remember that the root of the terrorist threat America
faces does not lie entirely in cyberspace, so fighting encryption is a
misplaced priority. Despite the intense Internet privacy debate of recent
years, the real dispute isn't about whether such privacy is achievable; it's
about whether government will allow it where the capability finally exists.
Encryption is essential, not just for keeping intact a pure version of
the principle of free speech, but for such '' mundane'' needs as private

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communication, secure online commerce, and business-to-business
exchanges. Restrictions would damage the security of America's financial
systems, making it easier for the everyday hacker, not to mention the
terrorist, to invade personal information and tinker with the financial
infrastructure. One of the imperatives in combating terrorism is to secure
sensitive and critical systems from attack. Since encryption is essential
for self-protection of companies and individuals, misguided legislation
undermining it hampers sensible, private security measures.
The encryption genie is out of the bottle. Not only can malevolent
programmers create their own strings of ones and zeros capable of
encrypting communications, so can legitimate companies overseas. And
requiring the deposit of an encryption '' key'' at a central governmental
location creates a '' honey pot'' for hackers to attack, reducing our security.
Encryption legislation to deliberately reduce our privacy would have been
unthinkable only recently, given widespread concerns about privacy. As
Rep. Bob Goodlatte (R-Va.) has pointed out, we need more encryption, not
less. New encryption techniques are critical to the protection of intellectual
property, such as digital distribution of books, movies, and music, on
which a rising share of America's wealth creation depends.
Moreover, encryption plays a key role in the struggle for human liberty
itself. It has aided political dissidents shielding themselves from brutal
governments, helping democracy and individual liberty flourish overseas.
Regulating encryption could encumber us far more than the terrorists, who
can still encrypt as well as use other means of communication. Legal
encryption may not be essential for terror, but it is essential for our
advanced economy.

Internet Gambling
Some members of Congress want to stop online gambling by banning
the acceptance of credit cards or other instruments for processing gambling
transactions. It's understandable that politicians would be concerned about
gambling operations being used as tools for terrorist money laundering.
But in this privacy-sensitive era, the question arises: if you were gam-bling
on the Internet, how would the government ever know about it? For
the government to know about such personal, consensual behavior requires
spying. But to impose federal surveillance of consumer financial transac-tions
before consumers have even widely embraced Internet banking and
commerce has serious implications for people's willingness to welcome
online finance.

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Banks and ISPs would be drafted as snoops to sift all financial transac-tions.
Not surprisingly, credit card companies don't want to be held respon-sible
for ensuring that companies for which they process card services
are not involved in gambling operations.
Other rationales for gambling restrictions are to target shady dealers
who run phony, fraudulent operations and to protect people from addiction
to gambling. That is paternalism: Consumers should screen any gambling
operations with which they transact and avoid fly-by-night operators. And
gambling adults are responsible for their own behavior.
What constitutes '' gambling'' is often in the eye of the legislator.
Fantasy sports get a limited exemption in proposed legislation, as do
horseracing and jai alai. And investing in certain technical financial instru-ments
can be a '' gamble'' in the sense that '' the opportunity to win
is predominantly subject to chance''— as proposed legislation defines
gambling. Yet the anti-gambling proposals exempt '' any over-the-counter
derivative instrument, '' though these clearly are not for the squeamish.
Once we travel down the road of regulating behavior on the Internet,
there's basically no limit to government's ability to regulate voluntary
speech and interaction and to substitute its moral vision for that of
individuals.

Protecting an Internet '' Commons''
Some scholars and organizations are clamoring for creation of '' public
spaces'' on the Internet. For example, University of Chicago law professor
Cass Sunstein worries that the individual's habit of personalizing or filter-ing
his Web experiences thwarts the '' unanticipated encounters'' and
'' common experiences'' that should unite us as a democracy. Where the
private sector doesn't come through, he wants the government to '' pick
up the slack, '' requiring sites to disclose their biases and link to opposing
views. And he wants popular sites to act as a '' public sidewalk, '' providing
links '' designed to ensure more exposure to substantive questions. '' Pre-sumably
the government would decide if a site is guilty of '' failure to
attend to public issues. '' According to this view, free speech doesn't mean
saying what you want but providing a platform for other views.
Acting on similar beliefs, former leaders of the Public Broadcasting
System and the Federal Communications Commission set up the Digital
Promise project to '' halt the encroachment of purely market values'' on
the Internet. They propose the establishment of a Digital Opportunity
Investment Trust fund program, or '' DO IT, '' to fund '' the development

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of online courses, training materials, archives, software, civic information,
quality arts and cultural programs, and other digital resources and services
of the highest standards to meet the needs of all citizens and help them
gain access to the best minds and talents in our society. ''
DO IT might best be thought of as a sort of ministry of cyber culture,
the fusion of the National Endowment for the Arts, PBS, and the '' E-Rate''
program (or Gore tax). The $18 billion program would be funded
by revenues from wireless spectrum auctions. Legislation has already been
introduced to make DO IT a reality.
Despite those worries, a torrent of '' shared experiences'' bombards us
despite personalization and filtering. As one critic put it, given Sunstein's
view, '' these sort[ s] of chance encounters should be happening to me less
and less on the Internet. Instead, they seem to be happening more and
more. '' Sources of exposure have ranged from the early bulletin boards
of the 1980s to the peer-to-peer networks of today. And in between
they encompass Web pages, search engines, chat rooms, e-mail, auctions,
Internet phones, instant messaging, and more.
The Internet is already a public space, in the proper sense of the term.
The public shouldn't be compelled to subsidize content deemed appropriate
for cyber citizenship. Nothing in government's legitimate scope qualifies
it as a fountain of superior, purer information or a source of social cohesion.
Governments are well-known for censorship and control, such as the
mandating of library filters and ratings for movies, music, and videogames.
Most fundamentally, the public spaces premise fails because it rests
on the notion that capitalism and freedom are inimical to, rather than
prerequisites for, civil society and the diffusion of ideas. We cherish a
free press, dissent, and debate because governments can threaten those
values. We need markets to maximize output, including that of true and
useful '' public'' information.
In practice, a public spaces regime would simply deteriorate into con-gressional
mandates and funding of '' approved'' sites. But funding is the
role of venture capitalists, who have learned that not every Internet venture
makes sense. Government programs would be failure proof in the sense
that politics rather than competition for eyeballs would matter. Whereas
the unalloyed Internet constitutes a real free press, a potpourri of informa-tion
people seek (or that the unpopular post on their own dime), public
spaces will consist of '' worthy'' things people are forced to pay for or
link to.

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Online Free Speech and the Rising Threat of Global Internet Regulation

As countries across the globe become more aware of the power of the
Internet as a communications medium and channel for global commerce,
they grow more interested in regulating what takes place online.
The most prominent example of such international regulatory mischief
so far has been the efforts by the French courts to force the American-based
Web portal company Yahoo! to remove, or at least block from the
view of French citizens, those portions of its website where Nazi memora-bilia
are for sale. Although a lower district court in California held in
November 2001 that the French ruling could not be extraterritorially
enforced here in America, the Paris Criminal Court held in February
2002 that the case could go forward. Many other countries also have
extraterritorial speech regulations. If such parochial speech controls were
enforceable across the globe, it would obviously force content providers
and network operators to restrict their speech so as to avoid potential
liability or penalties.
But can parochial standards really be applied to the Web? Or is the
Web truly a borderless medium that cannot be regulated in any workable
sense by local authorities? Many important legal issues are at play, espe-cially
when you expand the discussion beyond free speech to include
commercial regulation of the Internet. Some scholars have suggested that
international treaties could be the answer. Others are calling for a '' UN
for the Internet, '' or some sort of global regulatory body to resolve such
questions. Still others suggest that the best answer is to do nothing, since
anarchy, at least so far, has the advantage of broadening the range of free
speech globally.
Although Americans have good reason to ignore the French ruling in
the Yahoo! case, the question remains: how will these disputes be decided
in the future? As Net connectivity across the globe grows, and human
communication and interaction bridge the geographic divides between
countries and continents, governments will attempt to force this new
technology into old regulatory paradigms. Defenders of free speech would
be wise to start thinking about ways to convince them to do otherwise.

State and Local Restraints of Electronic Trade
New York Times reporter John Markoff noted in a December 2000
column, '' In a remarkably short period, the World Wide Web has touched

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or has promised to alter— some would say threaten— virtually every aspect
of modern life. '' Of course, not everyone has enthusiastically embraced
the changes the Internet has brought, especially those who feel threatened
by it.
This is particularly true in the business marketplace where many well-established
industries and older institutions fear that the Net is displacing
their businesses or perhaps entire industry sectors by bringing consumers
and producers closer together.
That older industries fear newer ones is nothing new, of course. Any
new and disruptive technology will attract its fair share of skeptics and
opponents. Steamboat operators feared the railroads; railroaders feared
truckers; truckers feared air shippers; and undoubtedly horse and buggy
drivers feared the first automobiles that crossed their path.
Fear of technological change is to be expected; the problem is that
older industries often have significantly more clout in the political market-place
and can convince policymakers to act on their behalf. State licensing
or franchising laws are often the favored club for entrenched industries
that are looking for a way to beat back their new competitors. Demanding
that producers comply with a crazy-quilt of state and local regulations
will often be enough to foreclose new market entry altogether.
That is simply old-fashioned industrial protectionism. But requiring
national or even global commercial vendors— as is clearly the case with
e-commerce and Internet sellers— to comply with parochial laws and
regulations is antithetical to the interests of consumers and the economy
in general. Consumers clearly benefit from the development of online
commercial websites and value the flexibility such sites give them to do
business directly with producers and distributors. More important, the
development of a vibrant online commercial sector provides important
benefits for the economy as a whole in terms of increased productivity.
The Progressive Policy Institute has estimated that protectionist laws and
regulations could cost consumers more than $15 billion in the aggregate.
Lawmakers must be flexible in crafting public policies so as to not
upset the vibrant, dynamic nature of this marketplace and be willing to
change existing structures, laws, or political norms to accommodate or
foster the expansion of new technologies and industry sectors. The fact
that some Old Economy, Manufacturing Age interests may not like the
emergence of the NewEconomy, Information Age sectors and technologies
does not mean policymakers should seek to accommodate older interests
by stifling the development of the cyber sector. Such a Luddite solution

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Regulation of Electronic Speech and Commerce
will hurt consumers and further set back the development of the online
marketplace. Congress must exercise its powers under the Commerce
Clause of the Constitution to protect interstate electronic commerce when
it is seriously threatened by state and local meddling.

Internet Taxation
A remarkably contentious battle has taken place in recent years over
the Internet Tax Freedom Act of 1998 and the federally imposed morato-rium
on state and local taxation of the Internet. The ITFA moratorium
does not prohibit states or localities from attempting to collect sales or
use taxes on goods purchased over the Internet; it merely prohibits state and
local government from imposing '' multiple or discriminatory'' taxation of
the Internet or special taxes on Internet access.
What pro-tax state and local officials are really at war with is not the
ITFA but 30 years of Supreme Court jurisprudence that has not come
down in their favor. The Court has ruled that states can require only firms
with a physical presence, or '' nexus, '' in their states to collect taxes on
their behalf.
The effort to tax the Internet is a classic case of misplaced blame. In
their zeal to find a way to collect taxes on electronic transactions to
supposedly '' level the (sales tax) playing field, '' most state and local
officials conveniently ignore the fact that the current sales tax system is
perhaps the most unlevel playing field anyone could possibly have
designed. Several politically favored industries and politically sensitive
products receive generous exemptions from sales tax collection obligations
or even from the taxes themselves.
Sales tax collection was fairly effective in the post– World War II period
when a sizable portion of the American economy was still goods based
and subject to the tax.
But as America began a gradual shift to a service-based economy in
subsequent decades, serious strains were placed on the sales tax system
since sales taxes had traditionally not been collected on services. Therefore,
the vast majority of '' service-sector'' industries and professions receive
a blanket exemption from sales tax obligations.
So, as the service sector became a larger portion of the American
economy, the overall sales tax base shrank accordingly. Limited efforts
have been made by some states to expand sales tax coverage to include
services, but those efforts have met with staunch corporate and consumer
opposition. Regardless, the combined effect of the service-sector exemp-141 142
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tions and exemptions for '' special'' goods-producing industries, such as
agriculture and clothing, has been the gradual diminution of the sales tax
base in America.
In fact, in a December 2000 study in the National Tax Journal, econo-mists
Donald Bruce and William F. Fox of the University of Tennessee
Center for Business and Economic Research estimated that the sales tax
base as a percentage of personal income has fallen from roughly 52 percent
in the late 1970s to less than 42 percent today. Worse yet, evidence
suggests that, as the sales tax base has been gradually eroding in recent
decades, average sales tax rates have been going up. In other words, we
now have a rising average tax rate over a shrinking tax base. That is the
textbook definition of an inefficient tax. Optimally, economists want a
low tax rate over a very broad tax base.
Citizens should be cognizant of the deficiencies of the current system
and not allow state and local policymakers to trick them into thinking that
the Internet is to blame for the holes in their sales tax bases. Electronic
commerce sales constituted a surprisingly low 1. 1 percent of aggregate
retail sales in 2001 according to U. S. Department of Commerce data. In
light of this, it's hard to see how the Internet is to blame for the declining
sales tax base.
Before state or local officials beg Congress to save them from the
massive sales tax drain brought on by the Internet, they need to clean up
the mess they've created. And if they really want to find a way to '' level
the playing field'' and tax Internet transactions, an origin-based sales tax
system would allow them to do so in an economically efficient and
constitutionally sensible way. In the meantime, however, Congress would
be wise to permanently extend the existing ITFA moratorium on multiple
and discriminatory taxes, as well as Internet access taxes, and let Supreme
Court precedents continue to govern the interstate marketplace for elec-tronic
commerce transactions.

Suggested Readings
Bell, Tom W. '' Internet Gambling: Popular, Inexorable, and (Eventually) Legal. '' Cato Institute Policy Analysis no. 336, March 8, 1999, www. cato. org/ pubs/ pas/

pa-336es. html.
. '' Internet Privacy and Self-Regulation: Lessons from the Porn Wars. '' Cato Institute Briefing Paper no. 65, August 9, 2001, www. cato. org/ pubs/ briefs/

bp-065es. html.
Corn-Revere, Robert. '' Caught in the Seamless Web: Does the Internet's Global Reach Justify Less Freedom of Speech? '' Cato Institute Briefing Paper no. 71, July 24,

2002, www. cato. org/ pubs/ briefs/ bp-071es. html.

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Crews, Clyde Wayne Jr. '' Why Canning 'Spam' Is a Bad Idea. '' Cato Institute Policy Analysis no. 408, July 26, 2001, www. cato. org/ pubs/ pas/ pa-408es. html.
Lukas, Aaron. '' Tax Bytes: A Primer on the Taxation of Electronic Commerce. '' Cato Institute Trade Policy Analysis no. 9, www. freetrade. org/ pubs/ pas/ tpa-009es. html.
Singleton, Solveig. '' Privacy as Censorship: A Skeptical View of Proposals to Regulate Privacy in the Private Sector. '' Cato Institute Policy Analysis no. 295, January 22,
1998, www. cato. org/ pubs/ pas/ pa-295. html. . '' Will the Net Turn Car Dealers into Dinosaurs? State Limits on Auto Sales
Online. '' Cato Institute Briefing Paper no. 58, July 25, 2000, www. cato. org/ pubs/ briefs/ bp-058es. html.
Wallace, Jonathan D. '' Nameless in Cyberspace: Anonymity on the Internet. '' Cato Institute Briefing Paper no. 54, December 8, 1999, www. cato. org/ pubs/ briefs/
bp-054es. html.
—Prepared by Clyde Wayne Crews Jr. and Adam Thierer

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15. Property Rights and Regulatory Takings
Congress should
enact legislation that specifies the constitutional rights of prop-erty
owners under the Fifth Amendment's Just Compensation Clause;

follow the traditional common law in defining '' private prop-erty,
'' '' public use, '' and '' just compensation''; treat property taken through regulation the same as property

taken through physical seizure; and provide a single forum in which property owners may seek
injunctive relief and just compensation promptly.

America's Founders understood clearly that private property is the
foundation not only of prosperity but of freedom itself. Thus, through the
common law and the Constitution, they protected property rights— the
rights of people to freely acquire and use property. With the growth of
the modern regulatory state, however, governments at all levels today are
eliminating those rights through so-called regulatory takings— regulatory
restraints that take property rights, reducing the value of the property, but
leave title with the owner. And courts are doing little to protect such
owners because the Supreme Court has yet to develop a principled, much
less comprehensive, theory of property rights. That failure has led to the
birth of the property rights movement in state after state. It is time now
for Congress to step in— to correct its own violations and to give guidance
to the courts as they adjudicate complaints about state violations.
When government condemns property outright, taking title from the
owner, courts require it to compensate the owner for his losses under the
Fifth Amendment's Takings or Just Compensation Clause: '' nor shall
private property be taken for public use without just compensation. '' The

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modern problem is not there— provided the compensation is just— but
with regulatory takings that provide goods for the public at the expense
of owners, who are often left with worthless titles. Courts have been
reluctant to award compensation in such cases because they have failed
to grasp the principles of the matter— due in part to an unwarranted
deference to the regulatory state. As a result, owners sometimes lose their
entire investment in their property, and they can do nothing about it.
Meanwhile, governments are only encouraged to further regulation since
the goods that are thus provided are cost free to the public.
Over the past decade, however, the Supreme Court has chipped away
at the problem and begun to require compensation in some cases— even
if its decisions are largely ad hoc, leaving most owners to bear the losses
themselves. Thus, owners today can get compensation when title is actually
taken, as just noted; when their property is physically invaded by govern-ment
order, either permanently or temporarily; when regulation for other
than health or safety reasons takes all or nearly all of the value of the
property; and when government attaches conditions that are unreasonable
or disproportionate when it grants a permit to use property. Even if that
final category of takings were clear, however, those categories would not
constitute anything like a comprehensive theory of the matter, much less
a comprehensive solution to the problem. For that, Congress (or the Court)
is going to have to turn to first principles, much as the old common law
judges did. The place to begin, then, is not with the public law of the
Constitution but with the private law of property.

Property: The Foundation of All Rights
It is no accident that a nation conceived in liberty and dedicated to
justice for all protects property rights. Property is the foundation of every
right we have, including the right to be free. Every legal claim, after all,
is a claim to something— either a defensive claim to keep what one is
holding or an offensive claim to something someone else is holding.
John Locke, the philosophical father of the American Revolution and
the inspiration for Thomas Jefferson when he drafted the Declaration of
Independence, stated the issue simply: '' Lives, Liberties, and Estates,
which I call by the general Name, Property. '' And James Madison, the
principal author of the Constitution, echoed those thoughts when he wrote
that '' as a man is said to have a right to his property, he may be equally
said to have a property in his rights. ''

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Much moral confusion would be avoided if we understood that all of
our rights— all of the things to which we are '' entitled''— can be reduced
to property. That would enable us to separate genuine rights— things to
which we hold title— from specious '' rights''— things to which other
people hold title, which we may want. It was the genius of the old common
law, grounded in reason, that it grasped that point. And the common law
judges understood a pair of corollaries as well: that property, broadly
conceived, separates one individual from another and that individuals are
independent or free to the extent that they have sole or exclusive dominion
over what they hold. Indeed, Americans go to work every day to acquire
property just so they can be independent.

Legal Protection for Property Rights
It would be to no avail, however, if property, once acquired, could not
be used and enjoyed— if rights of acquisition, enjoyment, and disposal
were not legally protected. Recognizing that, common law judges, charged
over the years with settling disputes between neighbors, have drawn upon
principles of reason and efficiency, and upon custom as well, to craft a
law of property that respects, by and large, the equal rights of all.
In a nutshell, the basic rights they have recognized, after the rights of
acquisition and disposal, are the right of sole dominion— or the right to
exclude others, the right against trespass; the right of quiet enjoyment—
a right everyone can exercise equally, at the same time and in the same
respect; and the right of active use— at least to the point where such use
violates the rights of others to quiet enjoyment. Just where that point is,
of course, is often fact dependent— and is the business of courts to decide.
But the point to notice, in the modern context, is that the presumption of
the common law is on the side of free use. At common law, that is, people
are not required to obtain a permit before they can use their property—
no more than people today are required to obtain a permit before they
can speak freely. Rather, the burden is upon those who object to a given
use to show how it violates their right of quiet enjoyment. That amounts
to having to show that their neighbor's use takes something they own
free and clear. If they fail, the use may continue.
Thus, the common law limits the right of free use only when a use
encroaches on the property rights of others, as in the classic lawof nuisance.
The implications of that limit, however, should not go unnoticed, especially
in the context of such modern concerns as environmental protection.
Indeed, it is so far from the case that property rights are opposed to

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environmental protection— a common belief today— as to be just the
opposite: the right against environmental degradation is a property right.
Under common law, properly applied, people cannot use their property
in ways that damage their neighbors' property— defined, again, as taking
things those neighbors hold free and clear. Properly conceived and applied,
then, property rights are self-limiting: they constitute a judicially crafted
and enforced regulatory scheme in which rights of active use end when
they encroach on the property rights of others.

The Police Power and the Power of Eminent Domain
But if the common law of property defines and protects private rights—
the rights of owners with respect to each other— it also serves as a guide
for the proper scope and limits of public law— defining the rights of
owners and the public with respect to each other. For public law, at least
at the federal level, flows from the Constitution; and the Constitution
flows from the principles articulated in the Declaration— which reflect,
largely, the common law. The justification of public law begins, then,
with our rights, as the Declaration makes clear. Government then follows,
not to give us rights through positive law, but to recognize and secure
the rights we already have. Thus, to be legitimate, government's powers
must be derived from and consistent with those rights.
The two public powers that are at issue in the property rights debate
are the police power— the power of government to secure rights— and
the power of eminent domain— the power to take property for public use
upon payment of just compensation, as set forth, by implication, in the
Fifth Amendment.
The police power— the first great power of government— is derived
from what Locke called the Executive Power, the power each of us has
in the state of nature to secure his rights. Thus, as such, it is legitimate,
since it is nothing more than a power we already have, by right, which
we gave to government, when we constituted ourselves as a nation, to
exercise on our behalf. Its exercise is legitimate, however, only insofar
as it is used to secure rights, and only insofar as its use respects the rights
of others. Thus, while our rights give rise to the police power, they also
limit it. We cannot use the police power for non-police-power purposes.
It is a power to secure rights, through restraints or sanctions, not some
general power to provide public goods.
A complication arises with respect to the federal government, however,
for it is not a government of general powers. Thus, there is no general

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federal police power, despite modern developments to the contrary (which
essentially ignore the principle). Rather, the Constitution establishes a
government of delegated, enumerated, and thus limited powers, leaving
most powers, including the police power, with the states or the people,
as the Tenth Amendment makes clear. (See Chapter 3 of this Handbook
for greater detail on this point.) If we are to abide by constitutional
principle, then, we have to recognize that whatever power the federal
government has to secure rights is limited to federal territory, by implica-tion,
or is incidental to the exercise of one of the federal government's
enumerated powers.
But if the police power is thus limited to securing rights, and the federal
government's police power is far more restricted, then any effort to provide
public goods must be accomplished under some other power— under some
enumerated power, in the case of the federal government. Yet any such
effort will be constrained by the Just Compensation Clause, which requires
that any provision of public goods that entails taking private property—
whether in whole or in part is irrelevant— must be accompanied by just
compensation for the owner of the property. Otherwise the costs of the
benefit to the public would fall entirely on the owner. Not to put too fine
a point on it, that would amount to plain theft. Indeed, it was to prohibit
that kind of thing that the Founders wrote the Just Compensation Clause
in the first place.
Thus, the power of eminent domain— which is not enumerated in
the Constitution but is implicit in the Just Compensation Clause— is an
instrumental power: it is a means through which government, acting under
some other power, pursues other ends— building roads, for example, or
saving wildlife. Moreover, unlike the police power, the eminent domain
power is not inherently legitimate: indeed, in a state of nature, none of
us would have a right to condemn a neighbor's property, however worthy
our purpose, however much we compensated him. Thus, it is not for
nothing that eminent domain was known in the 17th and 18th centuries
as '' the despotic power. '' It exists from practical considerations alone—
to enable public projects to go forward without being held hostage to lone
holdouts in a position to extract monopoly charges. As for its justification,
the best that can be said for eminent domain is this: the power was ratified
by those who were in the original position; and it is '' Pareto superior, ''
as economists say, meaning that at least one party (the public) is made
better off by its use while no one is made worse off— provided the owner
does indeed receive just compensation.

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When Is Compensation Required?
We come then to the basic question: When does government have to
compensate owners for the losses they suffer when regulations reduce the
value of their property? The answers are as follows.
First, when government acts to secure rights— when it stops someone
from polluting on his neighbor or on the public, for example— it is acting
under its police power and no compensation is due the owner, whatever
his financial losses, because the use prohibited or '' taken'' was wrong to
begin with. Since there is no right to pollute, we do not have to pay
polluters not to pollute. Thus, the question is not whether value was taken
by a regulation but whether a right was taken. Proper uses of the police
power take no rights. To the contrary, they protect rights.
Second, when government acts not to secure rights but to provide the
public with some good— wildlife habitat, for example, or a viewshed or
historic preservation— and in doing so prohibits or '' takes'' some otherwise
legitimate use, then it is acting, in part, under the eminent domain power
and it does have to compensate the owner for any financial losses he may
suffer. The principle here is quite simple: the public has to pay for the
goods it wants, just like any private person would have to. Bad enough
that the public can take what it wants by condemnation; at least it should
pay rather than ask the owner to bear the full cost of its appetite. It is
here, of course, that modern regulatory takings abuses are most common
as governments at all levels try to provide the public with all manner of
amenities, especially environmental amenities, '' off budget. '' As noted
above, there is an old-fashioned word for that practice: it is '' theft, '' and
no amount of rationalization about '' good reasons'' will change that. Even
thieves, after all, have '' good reasons'' for what they do.
Finally, when government acts to provide the public with some good
and that act results in financial loss to an owner but takes no right of the
owner, no compensation is due because nothing the owner holds free and
clear is taken. If the government closes a military base, for example, and
neighboring property values decline as a result, no compensation is due
those owners because the government's action took nothing they owned.
They own their property and all the uses that go with it that are consistent
with their neighbors' equal rights. They do not own the value in their
property.

Some Implications of a Principled Approach
Starting from first principles, then, we can derive principled answers
to the regulatory takings question. And we can see, in the process, that

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there is no difference in principle between an '' ordinary'' taking and a
regulatory taking, between taking full title and taking partial title— a
distinction that critics of property rights repeatedly urge, claiming that the
Just Compensation Clause requires compensation only for '' full'' takings.
If we take the text seriously, as we should, the clause speaks simply of
'' private property. '' As the quote above from Madison suggests, '' prop-erty''
denotes not just some '' underlying estate'' but all the estates— all
the uses— that can rightly be made of a holding. In fact, in every area of
property law except takings we recognize that property is a '' bundle of
sticks, '' any one of which can be bought, sold, rented, bequeathed, what
have you. Yet takings law has clung to the idea that only if the entire
bundle is taken does government have to pay compensation.
That view enables government to extinguish nearly all uses through
regulation— and hence to regulate nearly all value out of property— yet
escape the compensation requirement because the all but empty title
remains with the owner. And it would allow a government to take 90
percent of the value in year one, then come back a year later and take
title for a dime on the dollar. Not only is that wrong, it is unconstitutional.
It cannot be what the Just Compensation Clause stands for. The principle,
rather, is that property is indeed a bundle of sticks: take one of those
sticks and you take something that belongs to the owner. The only question
then is how much his loss is worth.
Thus, when the Court a few years ago crafted what is in effect a
100 percent rule, whereby owners are entitled to compensation only if
regulations restrict uses to a point where all value is lost, it went about
the matter backwards. It measured the loss to determine whether there
was a taking. As a matter of first principle, the Court should first have
determined whether there was a taking, then measured the loss. It should
first have asked whether otherwise legitimate uses were prohibited by the
regulation. That addresses the principle of the matter. It then remains
simply to measure the loss in value and hence the compensation that is
due. The place to start, in short, is with the first stick, not the last dollar.
The principled approach requires, of course, that the Court have a basic
understanding of the theory of the matter and a basic grasp of how to
resolve conflicting claims about use in a way that respects the equal rights
of all. That is hardly a daunting task, as the old common law judges
demonstrated. In general, the presumption is on the side of active use, as
noted earlier, until some plaintiff demonstrates that such use takes the

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quiet enjoyment that is his by right— and the defendant's right as well.
At that point the burden shifts to the defendant to justify his use: absent
some defense like the prior consent of the plaintiff, the defendant may
have to cease his use— or, if his activity is worth it, offer to buy an
easement or buy out the plaintiff. Thus, a principled approach respects
equal rights of quiet enjoyment— and hence environmental integrity. But
it also enables active uses to go forward— though not at the expense of
private or public rights. Users can be as active as they wish, provided
they handle the '' externalities'' they create in a way that respects the
rights of others.

What Congress Should Do
The application of such principles is often fact dependent, as noted
earlier, and so is best done by courts. But until the courts develop a more
principled and systematic approach to takings, it will fall to Congress to
draw at least the broad outlines of the matter, both as a guide for the
courts and as a start toward getting its own house in order.
In this last connection, however, the first thing Congress should do is
recognize candidly that the problem of regulatory takings begins with
regulation. Doubtless the Founders did not think to specify that regulatory
takings are takings too, and thus are subject to the Just Compensation
Clause, because they did not imagine the modern regulatory state: they
did not envision our obsession with regulating every conceivable human
activity and our insistence that such activity— residential, business, what
have you— take place only after a grant of official permission. In some
areas of business today we have almost reached the point at which it can
truly be said that everything that is not permitted is prohibited. That is
the opposite, of course, of our founding principle: everything that is not
prohibited is permitted— where '' permitted, '' means '' freely allowed, ''
not allowed '' by permit. ''
Home owners, developers, farmers and ranchers, mining and timber
companies, businesses large and small, profit making and not for profit,
all have horror stories about regulatory hurdles they confront when they
want to do something, particularly with real property. Many of those
regulations are legitimate, of course, especially if they are aimed, preemp-tively,
at securing genuine rights. But many more are aimed at providing
some citizens with benefits at the expense of other citizens. They take
rights from some to benefit others. At the federal level, such transfers are
not likely to find authorization under any enumerated power. But even if

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constitutionally authorized, they need to be undertaken in conformity
with the Just Compensation Clause. Some endangered species, to take a
prominent modern example, may indeed be worth saving, even if the
authority for doing so belongs to states, and even if the impetus comes
from a relatively small group of people. We should not expect a few
property owners to bear all the costs of that undertaking, however. If the
public truly wants the habitat for such species left undisturbed, let it buy
that habitat or, failing that, pay the costs to the relevant owners of their
leaving their property unused.
In general, then, Congress should review the government's many regula-tions
to determine which are and are not authorized by the Constitution.
If not authorized, they should be rescinded, which would end quickly a
large body of regulatory takings now in place. But if authorized under
some enumerated power of Congress, the costs now imposed on owners,
for benefits conferred on the public generally, should be placed '' on
budget. '' Critics of doing that are often heard to say that if we did go on
budget, we couldn't afford all the regulations we want. What they are
really saying, of course, is that taxpayers would be unwilling to pay for
all the regulations the critics want. Indeed, the great fear of those who
oppose taking a principled approach to regulatory takings is that once the
public has to pay for the benefits it now receives '' free, '' it will demand
fewer of them. It should hardly surprise that when people have to pay for
something they demand less of it.
It is sheer pretense, of course, to suppose that such benefits are now
free, that they are not already being paid for. Isolated owners are paying
for them, not the public. As a matter of simple justice, then, Congress
needs to shift the burden to the public that is demanding and enjoying
the benefits. Among the virtues of doing so is this: once we have an
honest, public accounting, we will be in a better position to determine
whether the benefits thus produced are worth the costs. Today, we have
no idea about that because all the costs are hidden. When regulatory
benefits are thus '' free, '' the demand for them, as we see, is all but
unbounded.
But in addition to eliminating, reducing, or correcting its own regulatory
takings— in addition to getting its own house in order— Congress needs
to enact general legislation on the subject of takings that might help to
restore respect for property rights and reorient the nation toward its own
first principles. To that end, Congress should

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Enact Legislation That Specifies the Constitutional Rights of Property Owners under the Fifth Amendment's Just Compensation Clause
As already noted, legislation of the kind here recommended would be
unnecessary if the courts were doing their job correctly and reading the
Just Compensation Clause properly. Because they are not, it falls to
Congress to step in. Still, there is a certain anomaly in asking Congress
to do the job. Under our system, after all, the political branches and the
states represent and pursue the interests of the people within the constraints
established by the Constitution; and it falls to the courts, and the Supreme
Court in particular, to ensure that those constraints are respected. To do
that, the Court interprets and applies the Constitution as it decides cases
brought before it— cases often brought against the political branches or
a state, as here, where an owner seeks either to enjoin a government action
on the ground that it violates his rights or to obtain compensation under
the Just Compensation Clause, or both. Thus, it is somewhat anomalous
to ask or expect Congress to right wrongs that Congress itself may be
perpetrating. After all, is not Congress, in its effort to carry out the public's
will, simply doing its job?
The answer, of course, is yes, Congress is doing its job, and thus this
call for reform— against the '' natural'' inclination of Congress, if you
will— is somewhat anomalous. But that is not the whole answer. For
members of Congress take an oath to uphold the Constitution, which
requires them to exercise independent judgment about the meaning of its
terms. In doing that, they need to recognize that we do not live in anything
like a pure democracy. The Constitution sets powerful and far-reaching
restraints on the powers of all three branches of the federal government
and, since ratification of the Civil War Amendments, on the states as
well. Thus, the simple-minded majoritarian view of our system— whereby
Congress simply enacts whatever some transient majority of the population
wants enacted, leaving it to the Court to determine the constitutionality
of the act— must be resisted as a matter of the oath of office. The oath
is taken on behalf of the people, to be sure, but through and in conformity
with the Constitution. When the Court fails to secure the liberties of the
people, there is nothing in the Constitution to prevent Congress from
exercising the responsibility entailed by the oath of office. In fact, that
oath requires Congress to step into the breach.
There is no guarantee, of course, that Congress will do a better job of
interpreting the Constitution than the Court. In fact, given that Congress
is an '' interested'' party, it could very well do a worse job, which is why

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the Founders placed '' the judicial Power''— entailing, presumably, the
power ultimately to say what the law is— with the Court. But that is no
reason for Congress to ignore its responsibility to make its judgment
known, especially when the Court is clearly wrong, as it is here. Although
nonpolitical in principle, the Court does not operate in a political vacuum—
as it demonstrated in 1937, unfortunately, after Franklin Roosevelt's notori-ous
Court-packing threat. If the Court can be persuaded to undo the
centerpiece of the Constitution, the doctrine of enumerated powers, one
imagines it can be persuaded to restore property rights to their proper
constitutional status.
Thus, in addition to rescinding or correcting legislation that now results
in uncompensated regulatory takings, and enacting no such legislation in
the future, Congress should also enact a more general statute that specifies
the constitutional rights of property owners under the Fifth Amendment's
Just Compensation Clause, drawing upon common law principles to do
so. That means that Congress should

Follow the Traditional Common Law in Defining '' Private Property, '' '' Public Use, '' and '' Just Compensation''

As we saw above, property rights in America are not simply a matter
of the Fifth Amendment— of positive law. Indeed, during the more than
two years between the time the Constitution was ratified and took effect
and the time the Bill of Rights was ratified, property rights were protected
not only against private but against public invasion as well. That protection
stemmed, therefore, not from any explicit constitutional guarantee but
from the common law. Thus, the Just Compensation Clause was meant
simply to make explicit, against the new federal government, the guarantees
that were already recognized under the common law. (Those guarantees
were implicit in the new Constitution, of course, through the doctrine of
enumerated powers; for no uncompensated takings were therein author-ized.)
With the ratification of the Civil War Amendments— and the Four-teenth
Amendment's Privileges or Immunities Clause in particular— the
common law guarantees against the states were constitutionalized as well.
Thus, because the Just Compensation Clause takes its inspiration and
meaning from the common law of property, it is there that we must look
to understand its terms.
Those terms begin with '' private property'': '' nor shall private property
be taken for public use without just compensation. '' As every first-year
law student learns, '' private property'' means far more than a piece of

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real estate. Were that not the case, property law would be an impoverished
subject indeed. Instead, the common law reveals the many significations
of the concept '' property'' and the rich variety of arrangements that
human imagination and enterprise have made of the basic idea of private
ownership. As outlined above, however, those arrangements all come
down to three basic ideas— acquisition, exclusive use, and disposal— the
three basic property rights, from which more specifically described rights
may be derived.
With regard to regulatory takings, however, the crucial thing to notice
is that, absent contractual arrangements to the contrary, the right to acquire
and hold property entails the right to use and dispose of it as well. As
Madison said, people have '' a property'' in their rights. If the right to
property did not entail the right of use, it would be an empty promise.
People acquire property, after all, only because doing so enables them to
use it, which is what gives it its value. Indeed, the fundamental complaint
about uncompensated regulatory takings is that, by thus eliminating the
uses from property, government makes the title itself meaningless, which
is why it is worthless. Who would buy '' property'' that cannot be used?
The very concept of '' property, '' therefore, entails all the legitimate
uses that go with it, giving it value. And the uses that are legitimate are
those that can be exercised consistent with the rights of others, private
and public alike, as defined by the traditional common law. As outlined
above, however, the rights of others that limit the rights of an owner are
often fact dependent. Thus, legislation can state only the principle of the
matter, not its application in particular contexts. Still, the broad outlines
should be made clear in any congressional enactment: the term '' private
property'' includes all the uses that can be made of property consistent
with the common law rights of others, and those uses can be restricted
without compensating the owner only to secure such rights, not to secure
public goods or benefits.
The '' public use'' requirement also needs to be tightened, not least
because it is a source of private-public collusion against private rights.
As noted above, eminent domain was known in the 17th and 18th centuries
as '' the despotic power'' because no private person would have the power
to condemn, even if he had a worthy reason and did pay just compensation.
Yet we know that public agencies often do condemn private property for
such private uses as railroad rights-of-way, auto plant construction, and
casino parking lots. Those are rank abuses of the public use principle:
they amount to grants of private eminent domain— and invitations to

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public graft and corruption. Every private use has spillover benefits for
the public, of course. But if that were the standard for defining '' public
use, '' then every time someone wanted to expand his business over his
neighbor's property, he could go to the relevant public agency and ask
that the neighbor's property be condemned since the expansion would
benefit the public through increased jobs, business, taxes, what have you.
He would no longer need to bargain with his neighbor but could simply
ask— or '' pay''— the agency to condemn the property '' for the public
good. ''
Because it is a despotic power, even when just compensation is paid,
eminent domain should be used sparingly and only for a truly public use.
That means for a use that is broadly enjoyed by the public, rather than
by some narrow part of the public; and in the case of the federal government
it means for a constitutionally authorized use. More precisely, it means
for a use that is owned and controlled by the public. Condemnation, after
all, transfers title— either in part, for a regulatory taking, or in whole, for
a full taking. If the condemnation transfers title from one private party to
another, it is simply illegitimate.
Thus, condemnation for building a sports stadium may be authorized
under some state's constitution, but if the stadium is then owned and
managed by and for the benefit of private parties, the '' public use'' standard
has been abused, whatever the spill-over '' public'' benefits may be. Here
again it is the title that settles the matter. Yet even if the public keeps the
title, but the effect of the transfer is to benefit a small portion of the public
rather than the public generally, the condemnation is also likely to be
illegitimate because it is not truly for a '' public'' use. If some small group
wants the benefits provided by the condemnation, private markets provide
ample opportunities for obtaining them— the right way. To avoid abuse
and the potential for corruption, then, Congress needs to define '' public
use'' rigorously, with reference to titles and use.
Finally, Congress should define '' just compensation'' with reference
to its function: it is a remedy for the wrong of taking someone's property.
That the Constitution implicitly authorizes that wrong does not change
the character of the act, of course. As noted above, eminent domain
is '' justified'' for practical reasons— and because '' we'' authorized it
originally, although none of us today, of course, was there to do so. Given
the character of the act, then, the least the public can do is make the
victim whole. That too will be a fact-dependent determination. But Con-gress
should at least make it clear that '' just'' compensation means compen-157 158
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sation for all losses that arise from the taking, plus an added measure to
acknowledge the fact that the losses arise not by mere accident, as with
a tort, but from a deliberate decision by the public to force the owner to
give up his property.
It should be noted, however, that not every regulatory taking will require
compensation for an owner. Minimal losses, for example, may be difficult
to prove and not worth the effort. Moreover, some regulatory restrictions
may actually enhance the value of property or of particular pieces of
property— say, if an entire neighborhood is declared '' historic. '' Finally,
'' just compensation'' should always reflect market value before, and with
no anticipation of, regulatory restrictions. Given the modern penchant for
regulation, that may not always be easy. But in general, given the nature
of condemnation as a forced taking, any doubt should be resolved to the
benefit of the owner forced to give up his property.
If Congress enacts general legislation that specifies the constitutional
rights of property owners by following the common law in defining the
terms of the Just Compensation Clause, it will abolish, in effect, any real
distinction between full and partial takings. Nevertheless, Congress should
be explicit about what it is doing. Any legislation it enacts should

Treat Property Taken through Regulation the Same As Property Taken through Physical Seizure

The importance of enacting a unified and uniform takings law cannot
be overstated. Today, we have one law for '' full takings, '' '' physical
seizures, '' '' condemnations''— call them what you will— and another for
'' partial takings, '' '' regulatory seizures, '' or '' condemnations of uses. ''
Yet there is overlap, too: thus, as noted above, the Court recently said
that if regulations take all uses, compensation is due— perhaps because
eliminating all uses comes to the same thing, in effect, as a '' physical
seizure, '' whereas eliminating most uses seems not to come to the
same thing.
That appearance is deceptive, of course. In fact, the truth is much
simpler— but only if we go about discovering it from first principles. If
we start with an owner and his property, then define '' property, '' as above,
as including all legitimate uses, it follows that any action by government
that takes any property is, by definition, a taking— requiring compensation
for any financial losses the owner may suffer as a result. The issue is
really no more complicated than that. There is no need to distinguish
'' full'' from '' partial'' takings: every condemnation, whether '' full'' or

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'' partial, '' is a taking. Indeed, the use taken is taken '' in full. '' Imagine
that the property were converted to dollars— 100 dollars, say. Would we
say that if the government took all 100 dollars there was a taking, but if
it took only 50 of the 100 dollars there was not a taking? Of course not.
Yet that is what we say under the Court's modern takings doctrine because,
as one justice recently put it, '' takings law is full of these 'all-or-nothing'
situations. ''
That confusion must be ended. Through legislation specifying the rights
of property owners, Congress needs to make it clear that compensation
is required whenever government eliminates common law property rights
and an owner suffers a financial loss as a result— whether the elimination
results from regulation or from outright condemnation.
The promise of the common law and the Constitution will be realized,
however, only through procedures that enable aggrieved parties to press
their complaints. Some of the greatest abuses today are taking place
because owners are frustrated at every turn in their efforts to reach the
merits of their claims. Accordingly, Congress should

Provide a Single Forum in Which Property Owners May Seek Injunctive Relief and Just Compensation Promptly

In its 1998 term the Supreme Court decided a takings case that began
17 years before, in 1981, when owners applied to a local planning commis-sion
for permission to develop their land. After having submitted numerous
proposals, all rejected, yet each satisfying the commission's recommenda-tions
following a previously rejected proposal, the owners finally sued,
at which point they faced the hurdles the courts put before them. Most
owners, of course, cannot afford to go through such a long and expensive
process, at the end of which the odds are still against them. But that
process today confronts property owners across the nation as they seek
to enjoy and then to vindicate their rights. If it were speech or voting or
any number of other rights, the path to vindication would be smooth by
comparison. But property rights today have been relegated to a kind of
second-class status.
The first problem, as noted above, is the modern permitting regime.
We would not stand for speech or religion or most other rights to be
enjoyed only by permit. Yet that is what we do today with property rights,
which places enormous, often arbitrary power in the hands of federal,
state, and local '' planners. '' Driven by political goals and considerations—
notwithstanding their pretense to '' smart growth''— planning commissions

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open the application forum not only to those whose rights might be at
stake but to those with interests in the matter. Thus is the common law
distinction between rights and interests blurred and eventually lost. Thus
is the matter transformed from one of protecting rights to one of deciding
whose '' interests'' should prevail. Thus are property rights effectively
politicized. And that is the end of the matter for most owners because
that is as far as they can afford to take it.
When an owner does take it further, however, he finds the courts are
no more inclined to hear his complaint than was the planning commission.
Federal courts routinely abstain from hearing federal claims brought against
state and local governments, requiring owners to litigate their claims in
state courts before they can even set foot in a federal court on their federal
claims. Moreover, the Supreme Court has held that an owner's claim is
not ripe for adjudication unless (1) he obtains a final, definitive agency
decision regarding the application of the regulation in question, and (2) he
exhausts all available state compensation remedies. Needless to say, plan-ners,
disinclined to approve applications to begin with, treat those standards
as invitations to stall until the '' problem'' goes away. Finally, when an
owner does get into federal court with a claim against the federal govern-ment,
he faces the so-called Tucker Act Shuffle: he cannot get injunctive
relief and compensation from the same court but must instead go to a
federal district court for an injunction and to the Federal Court of Claims
for compensation.
The 105th and 106th Congresses tried to address those procedural
hurdles through several measures, none of which passed both houses.
They must be revived and enacted if the unconscionable way we treat
owners, trying simply to vindicate their constitutional rights, is to be
brought to an end. This is not a matter of '' intruding'' on state and local
governments. Under the Fourteenth Amendment, properly understood and
applied, those governments have no more right to violate the constitutional
rights of citizens than the federal government has to intrude on the legiti-mate
powers of state and local governments. Federalism is not a shield
for local tyranny. It is a brake on tyranny, whatever its source.

Conclusion
The Founders would be appalled to see what we have done to property
rights over the course of the 20th century. One would never know that
their status, in the Bill of Rights, was equal to that of any other right. The
time has come to restore respect for these most basic of rights, the founda-160 161
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Property Rights and Regulatory Takings
tion of all of our rights. Indeed, despotic governments have long understood
that if you control property, you control the media, the churches, the
political process itself. We are not at that point yet. But if regulations that
provide the public with benefits continue to grow, unchecked by the need
to compensate those from whom they take, we will gradually slide to that
point— and in the process will pay an increasingly heavy price for the
uncertainty and inefficiency we create. The most important price, however,
will be to our system of law and justice. Owners are asking simply that
their government obey the law— the common law and the law of the
Constitution. Reduced to its essence, they are saying simply this: Stop
stealing our property; if you must take it, do it the right way— pay for it.
That hardly seems too much to ask.

Suggested Readings
Bethell, Tom. The Noblest Triumph: Property and Prosperity through the Ages. New York: St. Martin's, 1998.

Coyle, Dennis J. Property Rights and the Constitution: Shaping Society through Land Use Regulation. Albany, N. Y.: State University of New York Press, 1993.
DeLong, James V. Property Matters: How Property Rights Are under Assault— And Why You Should Care. New York: Free Press, 1997.
Eagle, Steven J. Regulatory Takings. Charlottesville, Va.: Michie Law Publishers, 1996. Ely, James W. Jr. The Guardian of Every Other Right: A Constitutional History of
Property Rights.
2d ed. New York: Oxford University Press, 1998.
Epstein, Richard A. Takings: Private Property and the Power of Eminent Domain. Cambridge, Mass.: Harvard University Press, 1985.

Farah, Joseph, and Richard Pombo. This Land Is Our Land: How to End the War on Private Property. New York: St. Martin's, 1996.
Locke, John. '' Second Treatise of Government. '' In Two Treatises of Government. Edited by Peter Laslett. New York: Mentor, 1965.
Madison, James. '' Property. '' In National Gazette, March 29, 1792. Reprinted in The Papers of James Madison, vol. 14, 6 April 1791– 16 March 1793. Edited by Robert
A. Rutland et al. Charlottesville: University Press of Virginia, 1983. Pilon, Roger. '' Are Property Rights Opposed to Environmental Protection? '' In The
Moral High Ground: An Anthology of Speeches from the First Annual New York
State Conference on Private Property Rights.
Edited by Carol W. LaGrasse. Stony
Creek, N. Y.: Property Rights Foundation of America, 1995. . '' Property Rights, Takings, and a Free Society. '' Harvard Journal of Law and

Public Policy 6 (1983).
Pipes, Richard. Property and Freedom: How through the Centuries Private Ownership Has Promoted Liberty and the Rule of Law. New York: Alfred A. Knopf, 1999.

Siegan, Bernard H. Property and Freedom: The Constitution, the Courts, and Land-Use Regulation. New Brunswick, N. J.: Transaction Press, 1997.
Siegan, Bernard H., editor. Planning without Prices: The Takings Clause As It Relates to Land Use Regulation without Just Compensation. Lexington, Mass.: Lexington
Books, 1977.
—Prepared by Roger Pilon

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16. Tobacco and the Rule of Law
Congress should
deny funding for the Justice Department's racketeering suit
against cigarette makers, enact legislation to abrogate the multistate tobacco settle-ment,

and reject proposed legislation to regulate cigarette manufacturing
and advertising.

Introduction
Ten months after tobacco companies and 46 state attorneys general
settled their differences for a quarter of a trillion dollars, the U. S. Depart-ment
of Justice decided that it wanted a share of the plunder. DOJ's
complaint alleged that cigarette companies had been conspiring since the
1950s to defraud the American public and conceal information about the
effects of smoking. Specifically, the government contended that industry
executives knowingly made false and misleading statements about whether
smoking causes disease and whether nicotine is addictive.
On the one hand, DOJ promoted its novel lawsuit against cigarette
makers. On the other hand, the same watchdog agency stood idly by while
tobacco companies and state attorneys general teamed up to violate the
antitrust laws. The multistate tobacco settlement, a cunning and deceitful
bargain between the industry and the states, allows the tobacco giants to
monopolize cigarette sales and foist the cost onto smokers.
Congress can take affirmative steps to counteract those abuses of execu-tive
power: first, by denying funds for DOJ's ongoing lawsuit and, second,
by enacting legislation that abrogates the multistate tobacco settlement.

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At the same time, Congress should reject any attempt to regulate cigarette
advertising or the content of tobacco products.

Deny Funding for DOJ's Racketeering Suit against Cigarette Makers

In its litigation against the tobacco industry, the federal government
demanded billions of dollars to pay for health care expenditures— mostly
Medicare outlays— related to smoking. DOJ's legal theory was modeled
after the states' lawsuits, which were designed to replenish depleted Medi-caid
coffers. Like the states, the federal government argued that it could
sue tobacco companies without stepping into the shoes of each smoker.
That way, so the theory goes, DOJ would not be subject to the '' assumption-of-
risk'' defense that had been a consistent winner for the industry over
four decades of litigation.
As you would expect, government officials understood the assumption-of-
risk principle perfectly well. Indeed, former veterans affairs secretary
Jesse Brown invoked it when the government itself was threatened with
liability for having provided soldiers with cigarettes over many years. It
would be '' borderline absurdity'' to pay for '' veterans' personal choice
to engage in conduct damaging to their health, '' he said. '' If you choose
to smoke, you are responsible for the consequences. ''
Evidently that principle applied only if the defendant was a government
agency. When private companies were sued, DOJ asserted that it could
recover from the tobacco industry merely because smoking injured some-one
covered by Medicare— even if that person, having voluntarily assumed
the risk of smoking, could not recover on his own. The same tobacco
company selling the same cigarettes to the same smoker, resulting in the
same injury, would be liable only if the smoker was a Medicare recipient
and the government was the plaintiff. Otherwise, the assumption-of-risk
defense would apply. Liability hinged on the injured party's Medicare
status, a happenstance unrelated to any misconduct by the industry.
The federal government also wanted the court to ignore the traditional
tort law requirement that causation be demonstrated on a smoker-by-smoker
basis. Instead, DOJ wanted to adduce only aggregate statistics,
indicating a higher incidence of certain diseases among smokers than
among nonsmokers. For example, statistics showed that smokers are more
likely than nonsmokers to suffer burn injuries. So tobacco companies
would have to pay for many careless persons who fell asleep with a lit
cigarette. Similarly, the industry would have to shell out for persons who

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had heart attacks and other '' smoking-related'' diseases but who never
smoked. Without individualized corroborating evidence, aggregate statis-tics
might suggest liability. Only common sense would dictate otherwise.
To reinforce and supplement its bizarre tort theories, DOJ relied on
three statutes: the Medical Care Recovery Act, the Medicare Secondary
Payer Act, and the civil provisions of the Racketeer Influenced and Corrupt
Organizations Act. Federal judge Gladys Kessler dismissed both the
MCRA and MSPA claims out of hand. She allowed the RICO claim to go
forward, although she expressed some reservations about the government's
ability to prove damages.
Nowadays, RICO is used as a standard bullying tactic by plaintiffs'
attorneys, even though the act was supposed to be invoked against orga-nized
crime. This time, however, DOJ had to deal with an embarrassing
admission, tucked away in the final sentence of the press release that
announced its lawsuit: '' There are no pending Criminal Division investiga-tions
of the tobacco industry. ''
Two dozen prosecutors and FBI agents had conducted a five-year,
multi-million-dollar inquiry during which they dissected allegations and
plowed through documents for evidence that tobacco executives perjured
themselves and manipulated nicotine levels. Whistleblowers and company
scientists testified before grand juries. The outcome: not a single indictment
of a tobacco company or industry executive.
Nonetheless, then– attorney general Janet Reno somehow conjured up
a RICO claim that accused the industry of the very same infractions for
which grand juries could not find probable cause. Here's just one example,
count number three: In November 1959, the industry '' did knowingly cause
a press release to be sent and delivered by the U. S. mails to newspapers and
news outlets. This press release contained statements attacking an article
written by then– U. S. Surgeon General Leroy Burney about the hazards
of smoking. '' There you have it— racketeering, in all its sordid detail.
Clinton administration insiders knew that the charges were trumped up.
Former Clinton aide Rahm Emanuel put it this way: '' If the White House
hadn't asked, [Reno] would never have looked at it again. '' So it's politics,
not law, that's driving this litigation. The American public needs to know
that our tort system is rapidly becoming a tool for extortion. Sometimes
opportunistic politicians seek money; sometimes they pursue policy goals;
often they abuse their power. When Clinton was unable to persuade
Congress to enact another tax on smokers, he simply bypassed the legisla-ture
and asked a federal court to impose damages in lieu of taxes. Evidently,

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anything goes— and the rule of law goes out the window. But Congress
can do better. Call off the government's anti-tobacco crusade. Put an im-mediate
stop to DOJ's power grab by denying funds to continue its lawsuit.

Enact Legislation to Abrogate the Multistate Tobacco Settlement

While DOJ presses its campaign to extort money from hapless tobacco
companies, the Antitrust Division looks the other way as those same
companies, in collaboration with state attorneys general, commit what is
arguably the most egregious antitrust violation of our generation— a collu-sive
tobacco settlement that is bilking 45 million smokers out of a quarter
of a trillion dollars.
The Master Settlement Agreement, signed in November 1998 by the
major tobacco companies and 46 state attorneys general, transforms a
competitive industry into a cartel, then guards against destabilization of
the cartel by erecting barriers to entry that preserve the dominant market
share of the tobacco giants. Far from being victims, the big four tobacco
companies are at the very center of the plot. They managed to carve out
a protected market for themselves— at the expense of smokers and tobacco
companies that did not sign the agreement.
To be sure, the industry would have preferred that the settlement had
not been necessary. But given the perverse legal rules under which the
state Medicaid recovery suits were unfolding, the major tobacco companies
were effectively bludgeoned into negotiating with the states and the trial
lawyers. Finding itself in that perilous position, the industry shrewdly
bargained for something pretty close to a sweetheart deal.
The MSA forces all tobacco companies— even new companies and
companies that were not part of the settlement— to pay '' damages, '' thus
foreclosing meaningful price competition. Essentially, the tobacco giants
have purchased (at virtually no cost to themselves) the ability to exclude
competitors. The deal works like this: Philip Morris, Reynolds, Lorillard,
and Brown & Williamson knew they would have to raise prices substan-tially
to cover their MSA obligations. Accordingly, they were concerned
that smaller domestic manufacturers, importers, and new tobacco compa-nies
that didn't sign the agreement would gain market share by underpricing
cigarettes. To guard against that likelihood, the big four and their state
collaborators added three provisions to the MSA:
First, if the aggregate market share of the four majors were to decline
by more than two percentage points, then their '' damages'' payments

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would decline by three times the excess over the two-percentage-point
threshold. Any reduction would be charged against only those states that
did not adopt a '' Qualifying Statute, '' attached as an exhibit to the MSA.
Naturally, because of the risk of losing enormous sums of money, all of
the states have enacted the statute.
Second, the Qualifying Statute requires all tobacco companies that did
not sign the MSA to post pro rata damages— based on cigarette sales—
in escrow for 25 years to offset any liability that might hereafter be
assessed! That's right— no evidence, no trial, no verdict, no injury, just
damages. That was the stick. Then came the carrot.
Third, if a nonsettling tobacco company agreed to participate in the
MSA, the Qualifying Statute would not apply. In fact, the new participant
would be allowed to increase its market share by 25 percent of its 1997
level. Bear in mind that no nonsettling company in 1997 had more than
1 percent of the market, which, under the MSA, could grow to a whopping
1.25 percent. Essentially, the dominant companies guaranteed themselves
virtually all of the market in perpetuity.
Perhaps as troubling, the settlement has led to massive and continuing
shifts of wealth from millions of smokers to concentrated pockets of the
bar. Predictably, part of that multi-billion-dollar booty has started its
roundtrip back into the political process— to influence state legislators,
judges, attorneys general, governors, city mayors, maybe some federal
officials. With all that money in hand, trial lawyers have seen their politi-cal
influence grow exponentially. Every day that passes more firmly
entrenches the MSA as a fait accompli, and more tightly cements the
insidious relationship between trial attorneys and their allies in the public
sector. The billion-dollar spigot must be turned off before its corrupting
effect on the rule of law is irreversible.
An obvious way to turn off the spigot is to abrogate the MSA. If it is
allowed to stand, the MSA will create and finance a rich and powerful
industry of lawyers who know how to manipulate the system and are not
averse to violating the antitrust laws. Congress should dismantle the MSA
to restore competition. That's a tall order, but the stakes are immense.

Reject Proposed Legislation to Regulate Cigarette Manufacturing and Advertising

Under legislation introduced in June 2002 by Sens. Edward Kennedy
(D-Mass.), Mike DeWine (R-Ohio), and Richard Durbin (D-Ill.), the Food
and Drug Administration would be authorized to regulate cigarette ads and

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ingredients, including nicotine— or to ban nicotine altogether. Lamentably,
Philip Morris— the industry leader with the most to gain from restrictions
on would-be competitors— quickly chimed in to support many of the
proposals. Yet, if tobacco is to be regulated as a drug, Congress will
simply be guaranteeing a pervasive black market in tobacco products.
FDA regulation that makes cigarettes taste like tree bark, coupled with
higher prices, will inevitably foment illegal dealings dominated by criminal
gangs hooking underage smokers on an adulterated product freed of all
the constraints on quality that competitive markets usually afford.
The war on cigarettes, like other crusades, may have been well-inten-tioned
at the beginning; but as zealotry takes hold, the regulations become
foolish and ultimately destructive. Consider the current attempt to control
tobacco advertising. Not only are the public policy implications harmful,
but there are obvious First Amendment violations that should concern
every American who values free expression. Our Constitution protects
Klan speech, flag burning, and gangsta rap, which, by the way, directly
targets teenagers. But if Tiger Woods showed up in an ad for Camel
cigarettes, the anti-tobacco crowd would bring the boot of government
down hard on the neck of R. J. Reynolds.
Industry critics point to the impact of tobacco ads on uninformed and
innocent teenagers. But the debate is not about whether teens smoke; they
do. It's not about whether smoking is bad for them; it is. The real question
is whether tobacco advertising can be linked to increases in aggregate
consumption. There's no evidence for that link. The primary purpose of
cigarette ads, like automobile ads, is to persuade consumers to switch
from one manufacturer to another. Six European countries that banned
all tobacco ads have seen overall sales increase— probably because health
risks are no longer documented in the banned ads.
In 1983, the Supreme Court held that government may not '' reduce
the adult population . . . to reading only what is fit for children. '' Thirteen
years later, the Court affirmed that even vice products like alcoholic
beverages are entitled to commercial speech protection. Most recently,
the Court threw out Massachusetts regulations banning selected cigar and
smokeless tobacco ads. Those ads are not the problem. Kids smoke because
of peer pressure, because their parents smoke, and because they are rebel-ling
against authority.
If advertising were deregulated, newer and smaller tobacco companies
would vigorously seek to carve out a bigger market share by emphasizing
health claims that might bolster brand preference. In 1950, however,

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the Federal Trade Commission foreclosed health claims— such as '' less
smoker's cough''— as well as tar and nicotine comparisons for existing
brands. To get around that prohibition, aggressive companies created new
brands, which they supported with an avalanche of health claims. Filter
cigarettes grew from roughly 1 percent to 10 percent of domestic sales
within four years.
Then in 1954, the FTC tightened its restrictions by requiring scientific
proof of health claims, even for new brands. The industry returned to
promoting taste and pleasure; aggregate sales expanded. By 1957, scientists
had confirmed the benefit of low-tar cigarettes. A new campaign of '' Tar
Derby'' ads quickly emerged, and tar and nicotine levels collapsed 40
percent in two years. To shut down the flow of health claims, the FTC
next demanded that they be accompanied by epidemiological evidence,
of which none existed. The commission then negotiated a '' voluntary''
ban on tar and nicotine comparisons.
Not surprisingly, the steep decline in tar and nicotine ended in 1959.
Seven years later, apparently alerted to the bad news, the FTC reauthorized
tar and nicotine data but continued to proscribe associated health claims.
Finally, in 1970 Congress banned all radio and television ads. Overall
consumption has declined slowly since that time. In today's climate, the
potential gains from health-related ads are undoubtedly greater than ever—
for both aggressive companies and health-conscious consumers. If, how-ever,
government regulation expands, those gains will not be realized.
Instead of '' healthy'' competition for market share, we will be treated to
more imagery and personal endorsements— the very ads that anti-tobacco
partisans decry.
If the imperative is to reduce smoking among children, the remedy lies
with state governments, not the U. S. Congress. The sale of tobacco products
to youngsters is illegal in every state. Those laws need to be vigorously
enforced. Retailers who violate the law must be prosecuted. Proof of age
requirements are appropriate if administered objectively and reasonably.
Vending machine sales should be prohibited in areas such as arcades and
schools where children are the main clientele. And if a minor is caught
smoking or attempting to acquire cigarettes, his parents should be notified.
Parenting is, after all, primarily the responsibility of fathers and mothers,
not the government.
Instead, government has expanded its war on tobacco far beyond any
legitimate concern with children's health. Mired in regulations, laws, taxes,
and litigation, we look to Congress to extricate us from the mess it helped

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create. Yet if Congress authorizes the FDA to regulate cigarette ads and
control the content of tobacco products, it will exacerbate the problem.
Equally important, Congress will have delegated excessive and ill-advised
legislative authority to an unelected administrative agency, and set the
stage for significant intrusions on commercial free speech.

Suggested Readings
Bulow, Jeremy, and Paul Klemperer. '' The Tobacco Deal. '' In Brookings Papers on Economic Activity: Microeconomics 1998. Washington: Brookings Institution, 1998.

Calfee, John E. '' The Ghost of Cigarette Advertising Past. '' Regulation, Novem-ber– December 1986.
Levy, Robert A. '' Tobacco-Free FDA. '' Administrative Law & Regulation News 2, no. 3 (Winter 1998).
. '' Tobacco Medicaid Litigation: Snuffing Out the Rule of Law. '' Cato Institute Policy Analysis no. 275, June 20, 1997.
O'Brien, Thomas C. '' Constitutional and Antitrust Violations of the Multistate Tobacco Settlement. '' Cato Institute Policy Analysis no. 371, May 18, 2000.

—Prepared by Robert A. Levy

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17. The War on Drugs
Congress should
repeal the Controlled Substances Act of 1970,
repeal the federal mandatory minimum sentences and the man-datory
sentencing guidelines, direct the administration not to interfere with the implementation

of state initiatives that allow for the medical use of mari-juana, and
shut down the Drug Enforcement Administration.

Ours is a federal republic. The federal government has only the powers
granted to it in the Constitution. And the United States has a tradition of
individual liberty, vigorous civil society, and limited government. Identifi-cation
of a problem does not mean that the government ought to undertake
to solve it, and the fact that a problem occurs in more than one state does
not mean that it is a proper subject for federal policy.
Perhaps no area more clearly demonstrates the bad consequences of
not following such rules than does drug prohibition. The long federal
experiment in prohibition of marijuana, cocaine, heroin, and other drugs
has given us crime and corruption combined with a manifest failure to
stop the use of drugs or reduce their availability to children.
In the 1920s Congress experimented with the prohibition of alcohol.
On February 20, 1933, a new Congress acknowledged the failure of alcohol
prohibition and sent the Twenty-First Amendment to the states. Congress
recognized that Prohibition had failed to stop drinking and had increased
prison populations and violent crime. By the end of 1933, national Prohibi-tion
was history, though many states continued to outlaw or severely
restrict the sale of liquor.
Today Congress confronts a similarly failed prohibition policy. Futile
efforts to enforce prohibition have been pursued even more vigorously in

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the 1980s and 1990s than they were in the 1920s. Total federal expenditures
for the first 10 years of Prohibition amounted to $88 million— about $733
million in 1993 dollars. Drug enforcement costs about $19 billion a year
now in federal spending alone.
Those billions have had some effect. Total drug arrests are now more
than 1.5 million a year. Since 1989 more people have been incarcerated
for drug offenses than for all violent crimes combined. There are now
about 400,000 drug offenders in jails and prisons, and more than 60 percent
of the federal prison population consists of drug offenders.
Yet, as was the case during Prohibition, all the arrests and incarcerations
haven't stopped the use and abuse of drugs, or the drug trade, or the crime
associated with black-market transactions. Cocaine and heroin supplies
are up; the more our Customs agents interdict, the more smugglers import.
And most tragic, the crime rate has soared. Despite the good news about
crime in the past few years, crime rates remain at unprecedented levels.
As for discouraging young people from using drugs, the massive federal
effort has largely been a dud. Despite the soaring expenditures on anti-drug
efforts, about half the students in the United States in 1995 tried an
illegal drug before they graduated from high school. Every year from
1975 to 1995, at least 82 percent of high school seniors said they found
marijuana '' fairly easy'' or '' very easy'' to obtain. During that same period,
according to federal statistics of dubious reliability, teenage marijuana use
fell dramatically and then rose significantly, suggesting that cultural factors
have more effect than the '' war on drugs. ''
The manifest failure of drug prohibition explains why more and more
people— from Nobel laureate Milton Friedman to conservative columnist
William F. Buckley Jr., former secretary of state George Shultz, Minnesota
governor Jesse Ventura, and New Mexico governor Gary Johnson— have
argued that drug prohibition actually causes more crime and other harms
than it prevents.

Repeal the Controlled Substances Act
The United States is a federal republic, and Congress should deal with
drug prohibition the way it dealt with alcohol prohibition. The Twenty-First
Amendment did not actually legalize the sale of alcohol; it simply
repealed the federal prohibition and returned to the several states the
authority to set alcohol policy. States took the opportunity to design diverse
liquor policies that were in tune with the preferences of their citizens.

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The War on Drugs
After 1933 three states and hundreds of counties continued to practice
prohibition. Other states chose various forms of alcohol legalization.
The single most important law that Congress must repeal is the Con-trolled
Substances Act of 1970. That law is probably the most far-reaching
federal statute in American history, since it asserts federal jurisdiction
over every drug offense in the United States, no matter how small or local
in scope. Once that law is removed from the statute books, Congress
should move to abolish the Drug Enforcement Administration and repeal
all of the other federal drug laws.
There are a number of reasons why Congress should end the federal
government's war on drugs. First and foremost, the federal drug laws are
constitutionally dubious. As previously noted, the federal government
can exercise only the powers that have been delegated to it. The Tenth
Amendment reserves all other powers to the states or to the people.
However misguided the alcohol prohibitionists turned out to have been,
they deserve credit for honoring our constitutional system by seeking a
constitutional amendment that would explicitly authorize a national policy
on the sale of alcohol. Congress never asked the American people for
additional constitutional powers to declare a war on drug consumers.
That usurpation of power is something that few politicians or their court
intellectuals wish to discuss.
Second, drug prohibition creates high levels of crime. Addicts commit
crimes to pay for a habit that would be easily affordable if it were legal.
Police sources have estimated that as much as half the property crime in
some major cities is committed by drug users. More dramatic, because
drugs are illegal, participants in the drug trade cannot go to court to settle
disputes, whether between buyer and seller or between rival sellers. When
black-market contracts are breached, the result is often some form of
violent sanction, which usually leads to retaliation and then open warfare
in the streets.
Our capital city, Washington, D. C., has become known as the '' murder
capital'' even though it is the most heavily policed city in the United
States. Make no mistake about it, the annual carnage that accounts for
America's still shockingly high murder rates has little to do with the mind-altering
effects of a marijuana cigarette or a crack pipe. It is instead one
of the grim and bitter consequences of an ideological crusade whose
proponents will not yet admit defeat.
Third, since the calamity of September 11, 2001, U. S. intelligence
officials have repeatedly warned us of further terrorist attacks. Given that

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danger, it is a gross misallocation of law enforcement resources to have
federal police agents surveilling marijuana clubs in California when they
could be helping to discover sleeper cells of terrorists on U. S. territory.
The Drug Enforcement Agency has 9,000 agents, intelligence analysts,
and support staff. Their skills would be much better used if those people
were redeployed to full-time counterterrorism investigations.
Fourth, drug prohibition is a classic example of throwing money at a
problem. The federal government spends some $19 billion to enforce the
drug laws every year— all to no avail. For years drug war bureaucrats
have been tailoring their budget requests to the latest news reports. When
drug use goes up, taxpayers are told the government needs more money
so that it can redouble its efforts against a rising drug scourge. When drug
use goes down, taxpayers are told that it would be a big mistake to curtail
spending just when progress is being made. Good news or bad, spending
levels must be maintained or increased.
Fifth, drug prohibition channels more than $40 billion a year into
the criminal underworld occupied by an assortment of criminals, corrupt
politicians, and, yes, terrorists. Alcohol prohibition drove reputable compa-nies
into other industries or out of business altogether, which paved the
way for mobsters to make millions in the black market. If drugs were
legal, organized crime would stand to lose billions of dollars, and drugs
would be sold by legitimate businesses in an open marketplace.
Drug prohibition has created a criminal subculture in our inner cities.
The immense profits to be had from a black-market business make drug
dealing the most lucrative endeavor for many people, especially those
who care least about getting on the wrong side of the law.
Drug dealers become the most visibly successful people in inner-city
communities, the ones with money and clothes and cars. Social order is
turned upside down when the most successful people in a community are
criminals. The drug war makes peace and prosperity virtually impossible
in inner cities.
Students of American history will someday ponder the question of how
today's elected officials could readily admit to the mistaken policy of
alcohol prohibition in the 1920s but recklessly pursue a policy of drug
prohibition. Indeed, the only historical lesson that recent presidents and
Congresses seem to have drawn from Prohibition is that government
should not try to outlaw the sale of booze. One of the broader lessons
that they should have learned is this: prohibition laws should be judged
according to their real-world effects, not their promised benefits. If the

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The War on Drugs
108th Congress will subject the federal drug laws to that standard, it will
recognize that the drug war is not the answer to problems associated with
drug use.

Respect State Initiatives
The failures of drug prohibition are becoming obvious to more and
more Americans. A particularly tragic consequence of the stepped-up war
on drugs is the refusal to allow sick people to use marijuana as medicine.
Prohibitionists insist that marijuana is not good medicine, or at least that
there are legal alternatives to marijuana that are equally good. Those who
believe that individuals should make their own decisions, not have their
decisions made for them by Washington bureaucracies, would simply say
that that's a decision for patients and their doctors to make. But in fact
there is good medical evidence of the therapeutic value of marijuana—
despite the difficulty of doing adequate research on an illegal drug. A
National Institutes of Health panel concluded that smoking marijuana may
help treat a number of conditions, including nausea and pain. It can be
particularly effective in improving the appetite of AIDS and cancer patients.
The drug could also assist people who fail to respond to traditional
remedies.
More than 70 percent of U. S. cancer specialists in one survey said they
would prescribe marijuana if it were legal; nearly half said they had urged
their patients to break the law to acquire the drug. The British Medical
Association reports that nearly 70 percent of its members believe marijuana
should be available for therapeutic use. Even President George Bush's
Office of National Drug Control Policy criticized the Department of Health
and Human Services for closing its special medical marijuana program.
Whatever the actual value of medical marijuana, the relevant fact for
federal policymakers is that in 1996 the voters of California and Arizona
authorized physicians licensed in those states to recommend the use of
medical marijuana to seriously ill and terminally ill patients residing in
the states, without being subject to civil and criminal penalties.
It came as no surprise when the Clinton administration responded to the
California and Arizona initiatives by threatening to bring federal criminal
charges against any doctor who recommended medicinal marijuana or any
patient who used such marijuana. After all, President Clinton and his
lawyers repeatedly maintained that no subject was beyond the purview
of federal officialdom.

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President Bush, on the other hand, has spoken of the importance of the
constitutional principle of federalism. Shortly after his inauguration, Bush
said, '' I'm going to make respect for federalism a priority in this administra-tion.
'' Unfortunately, the president's actions have not matched his words.
Federal police agents and prosecutors continue to raid medical marijuana
clubs in California and Arizona. And both of the president's drug policy
officials, Drug Czar John Walters and DEA Chief Asa Hutchinson, have
been using their offices to meddle in state and local politics. If it is
inappropriate for governors and mayors to entangle themselves in foreign
policy— and it is— it is also inappropriate for federal officials to entangle
themselves in state and local politics. In the 107th Congress, Reps. Barney
Frank (D-Mass.), Dana Rohrabacher (R-Calif.), and Ron Paul (R-Tex.)
jointly proposed the States' Rights to Medical Marijuana Act, which would
have prohibited federal interference with any state that chose to enact a
medical marijuana policy. The 108th Congress should enact a similar bill
without delay.
One of the benefits of a federal republic is that different policies may
be tried in different states. One of the benefits of our Constitution is that
it limits the power of the federal government to impose one policy on the
several states.

Repeal Mandatory Minimums
The common law in England and America has always relied on judges
and juries to decide cases and set punishments. Under our modern system,
of course, many crimes are defined by the legislature, and appropriate
penalties are defined by statute. However, mandatory minimum sentences
and rigid sentencing guidelines shift too much power to legislators and
regulators who are not involved in particular cases. They turn judges into
clerks and prevent judges from weighing all the facts and circumstances
in setting appropriate sentences. In addition, mandatory minimums for
nonviolent first-time drug offenders result in sentences grotesquely dispro-portionate
to the gravity of the offenses.
Rather than extend mandatory minimum sentences to further crimes,
Congress should repeal mandatory minimums and let judges perform their
traditional function of weighing the facts and setting appropriate sentences.

Conclusion
Drug abuse is a problem for those involved in it and for their families
and friends. But it is better dealt with as a moral and medical than as a

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The War on Drugs
criminal problem—'' a problem for the surgeon general, not the attorney
general, '' as former Baltimore mayor Kurt Schmoke puts it.
The United States is a federal republic, and Congress should deal with
drug prohibition the way it dealt with alcohol prohibition. The Twenty-First
Amendment did not actually legalize the sale of alcohol; it simply
repealed the federal prohibition and returned to the several states the
authority to set alcohol policy. States took the opportunity to design diverse
liquor policies that were in tune with the preferences of their citizens.
After 1933 three states and hundreds of counties continued to practice
prohibition. Other states chose various forms of alcohol legalization.
Congress should repeal the Controlled Substances Act of 1970, shut
down the Drug Enforcement Administration, and let the states set their
own policies with regard to currently illegal drugs. They would do well
to treat marijuana, cocaine, and heroin the way most states now treat
alcohol: It should be legal for stores to sell such drugs to adults. Drug
sales to children, like alcohol sales to children, should remain illegal.
Driving under the influence of drugs should be illegal.
With such a policy, Congress would acknowledge that our current drug
policies have failed. It would restore authority to the states, as the Founders
envisioned. It would save taxpayers' money. And it would give the states
the power to experiment with drug policies and perhaps devise more
successful rules.
Repeal of prohibition would take the astronomical profits out of the
drug business and destroy the drug kingpins who terrorize parts of our
cities. It would reduce crime even more dramatically than did the repeal
of alcohol prohibition. Not only would there be less crime; reform would
also free federal agents to concentrate on terrorism and espionage and free
local police agents to concentrate on robbery, burglary, and violent crime.
The war on drugs has lasted longer than Prohibition, longer than the
Vietnam War. But there is no light at the end of this tunnel. Prohibition
has failed, again, and should be repealed, again.

Suggested Readings
Benjamin, Daniel K., and Roger Leroy Miller. Undoing Drugs: Beyond Legalization.
New York: Basic Books, 1991.
Boaz, David. '' A Drug-Free America— Or a Free America? '' U. C. Davis Law Review
24 (1991).
Boaz, David, ed. The Crisis in Drug Prohibition. Washington: Cato Institute, 1991.
Buckley, William F. Jr., et al. '' The War on Drugs Is Lost. '' National Review, February
12, 1996.

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Luna, Erik. '' The Misguided Guidelines: A Critique of Federal Sentencing. '' Cato Institute Policy Analysis, no. 458, November 1, 2002.
Lynch, Timothy, ed. After Prohibition: An Adult Approach to Drug Policies in the 21st Century. Washington, Cato Institute, 2000.
Masters, Bill. Drug War Addiction. St. Louis: Accurate Press, 2002. McNamara, Joseph. '' The Defensive Front Line. '' Regulation (Winter 2001): 19– 21.
Ostrowski, James. '' The Moral and Practical Case for Drug Legalization. '' Hofstra Law Review 18 (1990).
Pilon, Roger. '' The Medical Marihuana Referendum Movement in America: Federalism Implications. '' Testimony before the House Crime Subcommittee, October 1, 1997.

—Prepared by David Boaz and Timothy Lynch

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18. Restoring the Right to Bear Arms
Congress should
use its constitutional authority over the District of Columbia
to overturn D. C. 's handgun ban and enact a '' shall issue'' concealed carry licensing statute,

repeal the Gun Control Act of 1968, and
enact legislation that would authorize airlines to arm pilots
who volunteer and complete appropriate training.

For decades, the Second Amendment was consigned to constitutional
exile, all but erased from constitutional law textbooks and effectively
banished from the nation's courts. But no more. Recent developments in
the law and in political culture have begun the process of returning the
amendment to its proper place in our constitutional pantheon. The 108th
Congress now has a historic opportunity, not simply to stave off new gun-control
proposals, but to begin restoring Americans' right to keep and
bear arms.

Emergence from Exile
Ideas have consequences, and so does constitutional text. Though elite
opinion reduced the Second Amendment to a constitutional inkblot for a
good part of the 20th century, gun enthusiasts and grassroots activists
continued to insist that the amendment meant what it said. And slowly,
often reluctantly, legal scholars began to realize that the activists were
right. Liberal law professor Sanford Levinson conceded as much in a 1989
Yale Law Review article titled '' The Embarrassing Second Amendment. ''
UCLA Law School's Eugene Volokh took a similar intellectual journey.
After a 1990 argument with a nonlawyer acquaintance who loudly main-tained
that the Second Amendment protected an individual right, Volokh
concluded that his opponent was a '' blowhard and even a bit of a kook. ''

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But several years later, as he researched the subject, he discovered to his
'' surprise and mild chagrin, that this supposed kook was entirely right'':
the amendment secures the individual's right to keep and bear arms.
That's also what the Fifth Circuit Court of Appeals concluded in October
2001 when it decided United States v. Emerson. It held that the Constitution
'' protects the right of individuals, including those not then actually a
member of any militia . . . to privately possess and bear their own firearms
. . . that are suitable as personal individual weapons. ''
U. S. Attorney General John Ashcroft has endorsed the Emerson court's
reading of the amendment. First, in a letter to the National Rifle Associa-tion,
Ashcroft stated his belief that '' the text and the original intent of the
Second Amendment clearly protect the right of individuals to keep and
bear firearms. '' That letter was followed by Justice Department briefs
before the Supreme Court in the Emerson case and in United States v.
Haney.
For the first time, the federal government argued in formal court
papers that the '' Second Amendment . . . protects the rights of individuals,
including persons who are not members of any militia . . . to possess and
bear their own firearms, subject to reasonable restrictions designed to
prevent possession by unfit persons or . . . firearms that are particularly
suited to criminal misuse. ''

The Right of the People
What's driving the new consensus? Let's look at the amendment's text:
'' A well regulated Militia, being necessary to the security of a free State,
the right of the people to keep and bear Arms, shall not be infringed. ''
The operative clause ('' the right of the people to keep and bear Arms,
shall not be infringed'') secures the right. The explanatory clause ('' A
well regulated Militia, being necessary to the security of a free State'')
justifies the right. That syntax was not unusual for the times. For example,
Article I, section 8, of the Constitution gives Congress the power to grant
copyrights in order to '' Promote the Progress of Science and useful Arts. ''
Yet copyrights are also granted to Hustler, to racist publications, even to
literature that expressly seeks to retard science and the arts. The proper
understanding of the copyright provision is that promoting science and the
arts is one justification— but not the only justification— for the copyright
power. Analogously, the militia clause helps explain why we have a right
to bear arms, but it's not necessary to the exercise of that right.
As George Mason University law professor Nelson Lund puts it, imagine
if the Second Amendment said, '' A well-educated Electorate, being neces-180 181
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Restoring the Right to Bear Arms
sary to self-governance in a free state, the right of the people to keep and
read Books shall not be infringed. '' Surely, no rational person would
suggest that only registered voters have a right to read. Yet that is precisely
the effect if the text is interpreted to apply only to a well-educated electorate.
Analogously, the Second Amendment cannot be read to apply only to
members of the militia.
The Second Amendment, like the First and the Fourth, refers explicitly
to '' the right of the people. '' Consider the placement of the amendment
within the Bill of Rights, the part of the Constitution that deals exclusively
with rights of individuals, not powers of the state. No one can doubt
that First Amendment rights (speech, religion, assembly) belong to us as
individuals. Similarly, Fourth Amendment protections against unreason-able
searches and seizures are individual rights. In the context of the
Second Amendment, we secure '' the right of the people'' by guaranteeing
the right of each person. Second Amendment protections are not for the
state but for each individual against the state— a deterrent to govern-ment
tyranny.
And not just against government tyranny. The Second Amendment also
secures our right to protect ourselves from criminal predators. After all,
in 1791 there were no organized, professional police forces to speak of
in America. Self-defense was the responsibility of the individual and the
community, and not, in the first instance, of the state. Armed citizens,
responsibly exercising their right of self-defense, are an effective deterrent
to crime.
Today, states' incompetence at defending citizens against criminals is
a more palpable threat to our liberties than is tyranny by the state. But
that incompetence coupled with a disarmed citizenry could well create
the conditions that lead to tyranny. The demand for police to defend us
increases in proportion to our inability to defend ourselves. That's why
disarmed societies tend to become police states. Witness law-abiding inner-city
residents, many of whom have been disarmed by gun control, begging
for police protection against drug gangs— despite the terrible violations
of civil liberties that such protection entails, such as curfews and anti-loitering
laws. The right to bear arms is thus preventive— it reduces the
demand for a police state. George Washington University law professor
Robert Cottrol put it this way: '' A people incapable of protecting them-selves
will lose their rights as a free people, becoming either servile
dependents of the state or of the criminal predators. ''
Over the years, our elected representatives have adopted a dangerously
court-centric view of the Constitution: a view that decisions about constitu-181 182
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tionality are properly left to the judiciary. But members of Congress also
swear an oath to uphold the Constitution. Congress can make good on
that oath by taking legislative action to restore our right to keep and bear
arms. To that end, Congress should take the following steps.

Repeal D. C. 's Handgun Ban and Enact Concealed Carry
No jurisdiction in the United States works as doggedly to disarm citizens
as does the District of Columbia, our nation's capital and on-again, off-again
murder capital. Yes, the city council grudgingly legalized pepper
spray in 1993 (provided, of course, that it's properly registered), but that
brief concession to self-defense hasn't led to any revision of the District's
gun laws, which are still among the most restrictive in America. D. C.
bans the possession of unregistered handguns and prohibits, with very
few exceptions, the registration of any handgun not validly registered in
the District prior to 1976.
In the wake of the Emerson decision and Attorney General Ashcroft's
endorsement of the individual right to keep and bear arms, the District's
federal public defender decided that D. C. 's sweeping gun ban was vulnera-ble.
In May 2002, the Washington Post reported that D. C. 's federal
defender had filed motions challenging the gun ban on behalf of several
clients accused of violating the ban and the District's law against carrying
firearms. In all, roughly three dozen challenges to the D. C. law have been
filed thus far.
Because the District is not a state, felonies under D. C. law are prosecuted
by the U. S. attorney for the District of Columbia, an employee of the
Justice Department— the same Justice Department that is now on record
as favoring an individual rights theory of the Second Amendment. To be
sure, Ashcroft had declared in an internal memorandum that the Justice
Department '' will continue to defend the constitutionality of all existing
federal firearms laws. '' But D. C. law, although enacted pursuant to con-gressional
delegation, is not federal law. Therefore, the U. S. attorney might
have been expected to support a motion to drop the handgun possession
charges pending in these cases.
Instead, the U. S. attorney argued that the D. C. handgun ban must be
upheld in light of binding precedent from the D. C. Court of Appeals in
a 1987 case, Sandidge v. United States. That case flatly repudiates the
individual right to bear arms. The Sandidge court stated baldly that '' the
right to keep and bear arms is not a right conferred upon the people by
the federal constitution''— a statement that's rather hard to square with

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the Second Amendment, which speaks of the '' right'' of the '' people''
to '' keep and bear arms. ''
It's one thing for Attorney General Ashcroft to endorse the individual
right to bear arms in a letter to a friendly interest group, or to affirm it
in a footnote in a legal brief. It's quite another to follow up words with
action. As Julie Leighton of the District's Public Defender Service puts
it, Ashcroft's Justice Department '' is currently prosecuting individuals
solely for 'bearing' a pistol, even though many of those individuals have
no prior convictions and are adult citizens of full mental capacity. Thus
the United States persists in prosecuting District of Columbia residents
for conduct that the Attorney General has expressly deemed protected by
the United States Constitution. ''
Whatever the reasons for Attorney General Ashcroft's perplexing deci-sion
to continue prosecuting gun-ban violations, Congress has the constitu-tional
authority to protect District residents' right to bear arms. Article I,
section 8, clause 17, of the Constitution gives Congress the power '' to
exercise exclusive legislation in all cases whatsoever'' over the District
of Columbia. Congress can and should use that authority to repeal the
District's gun ban and enact a '' shall-issue'' concealed carry licensing
statute. Such statutes mandate that handgun permits be issued to citizens
who satisfy certain objective criteria such as citizenship, mental compe-tence,
lack of a criminal record, and completion of a firearms training
course. Thirty-one states have shall-issue laws, and, as exhaustive research
by American Enterprise Institute scholar John R. Lott Jr. has shown, they
deter crime. Lott found that '' the reductions in violent crime are greatest
in the most crime prone, most urban areas. Women, the elderly and blacks
gained by far the most from this ability to protect themselves. ''
In contrast, for more than 25 years, D. C. residents have served as guinea
pigs in a public-policy experiment in near-total gun prohibition. That
experiment has failed catastrophically. Congress can and should end that
illegitimate experiment and restore District residents' right to keep and
bear arms.

Repeal the Gun Control Act of 1968
The Gun Control Act of 1968, with subsequent amendments, is bad
law and bad public policy. It ought to be repealed. Full repeal is not a
radical step; Ronald Reagan endorsed it in 1980. But until that can be
accomplished, Congress should, at a minimum, repeal the most oppres-sive
sections:

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The 1994 Ban on So-Called Assault Weapons
Those guns do not fire faster than other guns, nor are they more powerful.
Indeed, they fire smaller bullets at lower velocities than do most well-known
rifles used for hunting big game. The assault weapons statute is
purely cosmetic— banning guns because of politically incorrect features
such as bayonet lugs (as if drive-by bayoneting were a problem) or a rifle
grip that protrudes '' conspicuously'' from the gun's stock. Police statistics
from around the nation show that such guns are rarely used in crime. The
federal ban will sunset in 2004, but Congress should repeal it immediately.

The 1994 Ban on Possession of Handguns by Persons under 18
Assuming that such a ban could survive Second Amendment scrutiny,
it is a topic that should be addressed by state, not federal, law. The statute
does include some exceptions— for example, a parent may take a child
target shooting— but, even if the child is under direct and continuous
parental supervision, the parent commits a federal crime unless she writes
a note giving the child permission to target shoot and the child carries
the note at all times. The 1994 prohibition usurps traditional state powers,
is overbroad, and encroaches on parental rights, despite a paucity of
empirical evidence that the ban will reduce gun accidents or gun-related
violence.

The Ban on Gun Possession by Specified Adults
When adult behavior is regulated, the Second Amendment weighs more
heavily than when restrictions are imposed on minors. Even if Second
Amendment constraints are somehow satisfied, the federal government
has no constitutional authority in this area. Particularly unfair, whether
imposed by federal or state law, is the ban on gun possession by anyone
who is subject to a domestic restraining order, routinely issued by divorce
courts without any finding that the subject of the order is a danger to
another person. Such provisions ought not to be allowed to stand.

Arm the Pilots
Just as armed citizens can deter aggression on our city streets, they can
do so in our nation's skies. On September 11, 2001, a few hijackers armed
with box cutters were able to hold scores of airline passengers at bay,
secure in the knowledge that American airplanes are gun-free zones. But
when we turn planes, airports, schools, and workplaces into gun-free zones,

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Restoring the Right to Bear Arms
we also turn them into criminal-safe zones. If on the other hand we make
it nearly certain that someone will be armed on every commercial flight,
the enemies of liberty will have second thoughts about using American
aircraft as weapons of mass destruction.
Imagine that you are a terrorist deciding whose plane to use as your
next weapon. One airline boasts in its ads, '' Our Planes Are Gun-Free
Zones. '' A second, with somewhat less self-righteousness, admonishes
that '' One or More Employees Will Be Armed on Every Flight. '' Not
much question which one you'd fly. Now picture yourself as a safety-conscious
passenger. Still not much question, but the choice won't be the
same. That's the case in a nutshell for armed sky marshals and armed pilots.
Let's start with sky marshals. Having an armed federal marshal on
every flight would certainly deter terrorists. But the problem is cost. Just
one marshal per daily flight would require 35,000 officers— more than
twice the number employed by the Federal Bureau of Investigation, the
Secret Service, and U. S. Marshals Service combined. Yes, a marshal might
be able to average three to four flights each day. Then again, most proposals
call for more than one marshal per flight. Put it all together and we're
talking about roughly 15 thousand to 20 thousand new employees, salaried
at $30,000 and up per year, plus the cost of training.
Transportation Secretary Norman Mineta, hostile to the idea of anyone
but federal marshals carrying firearms on U. S. flights, has worked to
greatly expand the federal air marshal program. About 6, 000 new marshals
have been hired since September 11. That rapid expansion has reduced
the quality of new hires and left the air marshal program in disarray,
according to an August 2002 USA Today expose´. According to one disillu-sioned
former marshal, the program has become '' like security-guard
training at the mall. ''
Instead of going on a federal hiring binge, why not rely on the talented
people the airlines already have? Why not allow pilots to be armed?
'' These men and women operate $100 million pieces of equipment. They
can sure learn to operate a .38 snub-nose if they want to, '' says aviation
consultant Michael Boyd. The Airline Pilots Association, with overwhelm-ing
support from its members, wants armed pilots in cockpits. So do the
public and Congress. The airlines are opposed only because they fear the
trial lawyers.
'' Under the old model of hijackings, '' said a union spokesman, the
'' strategy was to accommodate, negotiate and do not escalate. But that
was before. The cockpit has to be defended at all costs. '' In a crisis, a

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pilot's gun would never leave the cockpit because the pilot never would.
And if a terrorist were able to penetrate the cockpit, shooting him within
the cockpit's door frame would not require a sniper's skill.
An armed pilots program would be strictly voluntary. It would require
extensive background screening and psychological testing, as well as
classroom and practical training, roughly equivalent to what sky marshals
would receive. After all, we now allow weapons on planes if they're
carried by sheriffs, FBI and Secret Service agents, postal inspectors, and
bodyguards of foreign dignitaries. If those risks are acceptable, then let's
arm pilots who can protect all passengers' lives. Better yet, leave it up
to the individual airlines. They own the property and they can set the rules.
The broader principle is this: On September 11, the United States
government failed at its single most important function— protecting Ameri-can
citizens against foreign aggression. Armed civilians can deter aggres-sion.
That means safer planes, shopping malls, schools, and other public
places. Law enforcement officers can't be everywhere, but an armed,
trained citizenry can be.
For too long, elite opinion in America has been implacably opposed
to armed self-defense. The underlying philosophy, expressed by Pete
Shields, former president of Handgun Control, is that '' the best defense
is . . . no defense— give them what they want. '' After September 11, that
philosophy is no longer valid, if it ever was. It's time for the 108th
Congress to repudiate it.

Suggested Readings
Halbrook, Steven P. '' Second Class Citizenship and the Second Amendment in the District of Columbia. '' George Mason University Civil Rights Law Journal 5 (1995).

Kopel, David B. The Samurai, the Mountie, and the Cowboy: Should America Adopt the Gun Controls of Other Democracies? Amherst, N. Y.: Prometheus Books, 1992.
Lott, John R. Jr. More Guns, Less Crime: Understanding Crime and Gun-Control Laws. 2d ed. Chicago: University of Chicago Press, 2000.
Lund, Nelson. '' A Primer on the Constitutional Right to Keep and Bear Arms. '' Virginia Institute for Public Policy Report no. 7, June 2002.
Snyder, Jeffrey R. '' Fighting Back: Crime, Self-Defense, and the Right to Carry a Handgun. '' Cato Institute Policy Analysis no 284, October 22, 1997.
United States v. Emerson, 270 F. 3d. 203 (5th Cir. 2001).
—Prepared by Gene Healy and Robert A. Levy

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19. Guns and Federalism
Congress should
defund Project Safe Neighborhoods and
reject efforts to bar municipal lawsuits against gun manufac-turers.

Members of Congress who support gun rights are currently engaged
in a dubious tradeoff: to save the Second Amendment, they've decided
to undermine the Tenth. For two years running, Congress has appropriated
funds for President Bush's key crime-fighting program, Project Safe Neigh-borhoods,
which is designed to ward off calls for additional gun control
by ramping up enforcement of the gun laws already on the books. But
the program illegitimately federalizes the prosecution of gun possession
crimes ordinarily left to the states. Meanwhile, members of Congress who
support gun rights want to use federal power to reform state tort law.
They're pushing legislation that would shield firearms manufacturers and
sellers from ongoing municipal lawsuits over gun violence. Both of those
efforts rely on an expansive interpretation of federal authority that has no
constitutional basis; the 108th Congress should abandon both.

Defund Project Safe Neighborhoods
Project Safe Neighborhoods is the public-policy embodiment of the
National Rifle Association sound bite '' we don't need any new gun control
laws; we need to enforce the gun laws on the books. '' The program funds
more than 800 new prosecutors (around 200 federal, 600 state level) who
will do nothing but pursue gun-law violations full time.
The federal prosecutors hired under PSN focus on a narrow section of
the federal criminal code that duplicates state criminal statutes relating to
gun possession. Those provisions prohibit things that are already illegal
in all 50 states, such as possession of a handgun by a convicted felon or

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a drug user or an illegal alien. The problem with federal enforcement of
those laws is that most of them ought not to be on the books in the first
place. They're based on an overbroad interpretation of Congress's power
to regulate commerce among the states. The Commerce Clause was
designed to create the original North American free-trade zone by promot-ing
and regularizing commerce among the states. It was never intended to
give the federal government general police powers. Indeed, by enumerating
only three federal crimes, treason, piracy, and counterfeiting, the Constitu-tion
makes it clear that the federal role in criminal law enforcement is
narrow. As Alexander Hamilton put it in Federalist no. 17, '' the ordinary
administration of criminal justice'' belongs to the states.
PSN takes over the ordinary administration of criminal justice from the
states by increasing federalization of crime and dictating state prosecutorial
priorities. And if the federal government has the power to prosecute local
handgun crimes, it's hard to see why it doesn't also have the power to
punish ordinary assault, drunk driving, traffic violations, or anything else
we've traditionally left to the states.
More disturbing still is the prospect that PSN will lead to a mindless
'' zero tolerance'' policy for technical infractions of gun laws. Federal
prosecutors already operate under an incentive structure that George Wash-ington
University Law School professor Jonathan Turley compares with
'' the body count approach in Vietnam.... They feel a need to produce
a body count to Congress to justify past appropriations and secure future
increases. ''
This '' body count'' mentality may help explain the fact that recent
federal firearms prosecutions have included Katica Crippen, a Colorado
woman who was convicted under the felon-in-possession statutes for
posing nude on the Internet with a gun, and Dane Yirkovsky, an Iowa
man who was sent to federal prison for 15 years for possession of a single
.22-caliber bullet.
We can expect more of the same as PSN ramps up firearms prosecutions
because, unlike that of a regular prosecutor, a PSN prosecutor's full-time
job is pursuing gun offenders. A PSN prosecutor will not be able to turn
to other areas of the criminal code after the worst gun-law violators have
been prosecuted. Add to that the fact that a job as a full-time gun prosecutor
is likely to appeal disproportionately to attorneys with an ideological
hostility toward gun ownership, and PSN begins to sound like something
dreamed up by Sarah Brady herself.
Moreover, the program threatens to open a Pandora's box leading to
the further politicization of criminal justice. The model set up by PSN

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Guns and Federalism
practically invites special interest groups to drive prosecutorial priorities
via federal funding. What are PSN supporters in Congress going to say
when demands are made for federal dollars for local, full-time domestic
violence prosecutors or hate crime prosecutors? So long as Congress
continues to fund PSN, it will be hard-pressed to say that local crime is
not a federal issue.

Leave Tort Reform to the States
Led by the city of Chicago, a number of municipalities have filed suit
against gun manufacturers for damages incurred due to the misuse of guns
by criminals. Some of the suits allege '' negligent marketing''— charging
that gun manufacturers flood the suburbs with more guns than legitimate
customers will buy, knowing that dealers will sell the excess supply
illegally to criminals from the inner city. Others assert that guns are
defective and unreasonably dangerous products because manufacturers
design their guns without safety features that are purportedly easy and
economical to install. At bottom, both legal theories rest on the outlandish
proposition that gun makers are responsible for the criminal misconduct
of certain of their customers.
A broad coalition of gun-rights supporters in Congress wants to quash
those suits with federal tort reform. Two bills moving through the House
and Senate provide that gun manufacturers and distributors cannot be sued
for damages (or other relief) if someone is injured when a gun is used
unlawfully.
It's easy to understand the concerns that spurred those bills. Federal
tort reform supporter Rep. Chris John (D-La.) is correct when he calls
the gun lawsuits '' frivolous'' and warns that they '' jeopardize a legitimate,
legal business that is worth billions of dollars to our national economy. ''
But not every national problem is a federal problem. Advocates of gun
rights who back federal tort reform have forgotten the Tenth Amendment's
admonition that powers not delegated to the federal government in the
Constitution remain with the states or the people. The power to control
frivolous lawsuits belongs to the states.
Where in the Constitution could the federal government find authority
to ban state and local lawsuits against the gun industry? According to the
tort reform bills pending in both the House and the Senate, the answer is
the all-purpose Commerce Clause. As the bills' supporters see it, the
lawsuits interfere with interstate commerce, and therefore Congress has
the authority to stop them.

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But the Commerce Clause, properly interpreted, does not give Congress
blanket authority to regulate any activity that might affect commerce.
Rather, the purpose of the Commerce Clause was functional: to secure
the free flow of commerce among the states. That means Congress may
act only when actual or imminent state regulations impede free trade
among the states, or when it's clear that uniform national regulations are
essential for that purpose. Even then, Congress's power ought properly
extend no further than to the regulation of (1) channels and vehicles of
interstate commerce (such as waterways, airways, and railroads);
(2) discrimination by a state against out-of-state interests (for example,
restrictions on imported goods); and (3) attempts by a state to exercise
sovereignty beyond the state's borders (such as state rules governing
national stock exchanges, telecommunications, banking, and broadcast or
Internet advertising). Under no credible theory of the commerce power
can Congress use that power to regulate noncommercial activities like
lawsuits, which are designed to prevent and redress injuries, not to regulate
interstate trade.
Yes, lawsuits against gun companies affect commerce. But so does just
about any state regulation or any court decision. The Commerce Clause
could not prevent California, for example, from requiring catalytic convert-ers
on cars sold in the state. The Commerce Clause would not permit the
federal government to override state minimum wage laws, or state safety
regulations on power plants or even on firearms. Yet all of those state
rules affect interstate commerce.
Companies have a remedy when state courts permit phony lawsuits.
They can stop doing business in a state that has an oppressive tort regime.
And that remedy honors the federalist idea that the states serve as 50
experimental laboratories. For example, physicians and insurance compa-nies
are leaving Mississippi because outrageous damage awards have
driven the price of malpractice insurance prohibitively high. Ultimately,
the voters in oppressive states will have to choose between access to
products and extortionate tort law. As more businesses leave, the choice
will become obvious. Yes, there's an effect on commerce when out-of-state
companies leave. But the effect is not related to the interstate aspect
of commerce. There's a similar effect when in-state companies shut down.
In Mississippi, in-state and out-of-state insurance companies, or gun com-panies
for that matter, are all exposed to the same tort regime. That's why
the Commerce Clause should not apply.
Those supporters of gun rights who would have it otherwise are asking
for trouble. Ronald Reagan once noted that a government big enough to

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Guns and Federalism
give you everything you want is big enough to take it all away. A similar
dynamic exists with constitutional interpretation: a Commerce Clause
broad enough to solve every national problem is too broad not to be
abused. When Congress's authority to regulate commerce is misused to
impose federal rules that restrict state gun lawsuits, we should not be
surprised that it will also be misused to impose federal rules that restrict
gun possession and ownership.

Suggested Readings
Epstein, Richard A. '' The Proper Scope of the Commerce Power. '' Virginia Law Review 73 (1987).

Healy, Gene. '' There Goes the Neighborhood: The Bush-Ashcroft Plan to 'Help' Local-ities Fight Gun Crime. '' Cato Institute Policy Analysis no. 440, May 28, 2002.
Levy, Robert A. '' Pistol Whipped: Baseless Lawsuits, Foolish Laws. '' Cato Institute Policy Analysis no. 400, May 9, 2001.
Reynolds, Glenn Harlan. '' Kids, Guns and the Commerce Clause: Is the Court Ready for Constitutional Government? '' Cato Institute Policy Analysis no. 216, October
10, 1994. United States v. Lopez, 514 U. S. 549 (1995).

—Prepared by Gene Healy and Robert A. Levy

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20. The Limits of Monetary Policy
Congress should
uphold its constitutional duty to maintain the purchasing power
of the dollar by enacting legislation that makes long-run price stability the primary objective of Federal Reserve monetary

policy; recognize that the Fed cannot fine-tune the real economy but
can achieve price stability by limiting the growth of base money to a noninflationary path;
hold the Fed accountable for achieving expected inflation of
0– 2 percent a year; abolish the Exchange Stabilization Fund, since the Fed's role

is to stabilize the domestic price level, not to stabilize the foreign exchange value of the dollar by intervening in the foreign
exchange market; and offer no resistance to the emergence of digital currency (money
stored in digital form on microchips embedded in computer hard drives or in '' smart cards'') and other substitutes for Fed-eral
Reserve notes, so that free-market forces can help shape the future of monetary institutions.

History has shown that monetary stability— money growth consistent
with a stable and predictable value of money— is an important determinant
of economic stability. Safeguarding the long-run purchasing power of
money is also essential for the future of private property and a free society.
In the United States, persistent inflation has eroded the value of money
and distorted relative prices, making production and investment decisions
more uncertain. In the early 1970s, wage-price controls were imposed that
attenuated economic freedom and increased government discretion, thus
undermining the rule of law. Although those controls have been removed

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and inflation appears to be under control, there is no guarantee of future
price-level stability.
Current law specifies no single objective for monetary policy and lacks
an enforcement mechanism to achieve monetary stability. The multiplicity
of goals and the absence of an appropriate penalty-reward structure to
maintain stable money are evident from section 2A of the amended Federal
Reserve Act:

The Board of Governors . . . and the Federal Open Market Committee
shall maintain long-run growth of the monetary and credit aggregates
commensurate with the economy's long-run potential to increase produc-tion,
so as to promote effectively the goals of maximum employment,
stable prices, and moderate long-term interest rates.... Nothing in this Act
shall be interpreted to require that the objectives and plans with respect to
the ranges of growth or diminution of the monetary and credit aggregates
disclosed in the reports submitted under this section be achieved.

From 1975 to 1999, the Federal Reserve reported its monetary targets
to Congress. It no longer does. Alan Greenspan has done a commendable
job of keeping inflation relatively low since he took office in 1987, but
his performance is no guarantee of future success in achieving money of
stable value.
The U. S. monetary system continues to be based on discretionary gov-ernment
fiat money, with no legally enforceable commitment to long-run
price stability as the sole objective of monetary policy. Clark Warburton's
1946 characterization of U. S. monetary law as '' ambiguous and chaotic''
still rings true.
The large amount of discretion exercised by the Fed and the uncertainty
it entails reflect Congress's failure to provide an adequate legal framework
for stable money, as intended in Article I, section 8, of the Constitution.
If the Fed were subject to a monetary rule, stop-go monetary policy— an
extremely important factor in generating business fluctuations— could be
halted. There is a growing consensus among economists and Fed officials
that long-run price stability should be the focus of monetary policy, but
Congress has yet to enact legislation that would bind the Fed to that
objective and hold the chairman accountable for erratic changes in the
quantity of money and persistent rises in the price level.
In his July 2000 '' Monetary Report to the Congress, '' Greenspan stated:
'' Irrespective of the complexities of economic change, our primary goal
is to find those policies that best contribute to a noninflationary environment
and hence to growth. The Federal Reserve, I trust, will always remain

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The Limits of Monetary Policy
vigilant in pursuit of that goal. '' But will it? And should the public trust
the discretionary power of an '' independent'' central bank not bound by
any rule?
William Poole, president of the Federal Reserve Bank of St. Louis and
a proponent of zero inflation, has pointed to the market disruption caused
by the lack of a clear monetary rule to guide Fed policy:

The fact that markets so often respond to comments and speeches by Fed
officials indicates that the markets today are not evaluating monetary policy
in the context of a well-articulated and well-understood monetary rule. The
problem is a deep and difficult one.

Congress should face that problem and retain the power to regulate the
value of money by mandating that maintaining price stability is the Fed's
primary duty.

Mandate Price Stability as the Fed's Primary Duty
The 108th Congress should amend the Federal Reserve Act to make
long-run price stability— i. e., expected inflation of 0– 2 percent a year—
the sole goal of monetary policy. (If price indexes correctly measured
inflation, zero expected inflation would be the preferred target. But since
price indexes typically understate the extent of quality improvement, zero
expected inflation can be in fact deflation.)
The Fed's function is not to set interest rates or to target the rate of
unemployment or real growth. The Fed cannot control relative prices,
employment, or output; it can directly control only the monetary base
(currency held by the public and bank reserves) and thereby affect money
growth, nominal income, and the average level of money prices. In the
short run, the Fed can affect output and employment, as well as real
interest rates, but it cannot do so in the long run.
The tradeoff between unemployment and inflation that is the basis for
the Phillips curve is not a viable monetary policy option for the Fed.
Market participants learn quickly and will revise their plans to account
for the inflationary impact of faster money growth designed to reduce
unemployment below its so-called natural rate. The results of those revi-sions—
such as demanding higher money wages to compensate for
expected inflation— will frustrate politicians intent on using monetary
policy to stimulate the real economy. Cato Institute chairman William
Niskanen, in a recent empirical study, made the following points.

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'' There is no tradeoff of unemployment and inflation except in the
same year. '' '' In the long term, the unemployment rate is a positive function of

the inflation rate. '' '' The minimum sustainable unemployment rate is about 3.7 percent
and can be achieved only by a zero steady-state inflation rate. ''
Evidence also shows that inflation and long-run growth are inversely related (Figure 20. 1). Inflation introduces distortions in the financial system

and impedes the efficient allocation of resources. Those distortions and others have a negative impact on economic growth. Since inflation is
primarily a monetary phenomenon (caused by excess growth of the money supply over and above long-run output growth), it cannot increase real
growth— but it can decrease it. That is why monetary stability and, hence, price-level stability are so important.
The Fed cannot attain more than one policy target with one policy instrument. The only instrument the Fed has direct control over is the

Figure 20.1 Real Growth and Inflation Move in Opposite Directions

–2
0
2
4

6
8
10

66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00
Percent
Real GDP Growth Inflation

SOURCE: Alan Reynolds, '' The Fed's Whimsical Monetary Tinkering, '' Figure 1, as updated.
NOTE: Inflation is calculated from the GDP chain-type index.

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The Limits of Monetary Policy
monetary base; the surest target is long-run price stability. The Fed could
use either an adaptive feedback rule, such as that proposed by Carnegie
Mellon economist Bennett McCallum, or an inflation-targeting rule, such
as New Zealand has successfully used. With the feedback rule, the Fed
would adjust the growth of the monetary base to keep nominal GDP (or
domestic final sales) on a smooth noninflationary growth path. With an
inflation target, the Fed would adjust the monetary base so that the growth
rate of the price level was approximately zero in the long run. There
would be some rises and falls in the price level due to supply-side shocks,
either positive or negative, but expected inflation would remain close to
zero (in the 0– 2 percent range) over time.
Congress need not dictate the exact rule for the Fed to follow in its
pursuit of long-run price stability, but Congress should hold the Fed
accountable for achieving that goal— and not require the Fed to respond
to supply shocks that would lead to one-time increases or decreases in
the price level.
The public's trust and confidence in the future purchasing power of
the dollar can be permanently increased by a legal mandate directing the
Fed to adopt a monetary rule to achieve long-run price stability. According
to Poole:

The logic, and the evidence, both suggest that the appropriate goal for
monetary policy should be price stability, that is, a long-run inflation rate
of approximately zero.... Acentral bank's single most important job is
preserving the value of the nation's money. Monetary policy has succeeded
if the public can reasonably trust that a dollar will buy tomorrow what it
will buy today. . . . I am confident that our economy's long-run performance
would be enhanced by a monetary policy that aims at, achieves, and
maintains a zero rate of inflation.

That institutional change— from a fully discretionary monetary authority
to one bound by law to a single target— not only would bolster the Fed's
reputation but would enhance the efficiency of the price system and allow
individuals to better plan for the future. People's property rights would
be more secure as a result. Congress should not miss the opportunity to
return to its original constitutional duty of maintaining the value of money
and safeguarding property rights.

Recognize the Limits of Monetary Policy
The Fed cannot permanently increase the rate of economic growth or
permanently lower the rate of unemployment by increasing money growth,

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nor can it permanently lower real interest rates. But it can throw the
economy off track by policy errors— that is, by creating either too much
or too little money to maintain stable expectations about the long-run
value of the currency. The most grievous error of discretionary monetary
policy, as Milton Friedman and Anna Schwartz have shown in A Monetary
History of the United States,
was the Fed's failure to prevent the money
supply from shrinking by one-third between 1929 and 1933, which turned
a sharp but otherwise ordinary recession into the Great Depression.
Economics, like medicine, is not an exact science. The guiding principle
of economic policy should be the great physician Galen's (A. D. 160)
admonition to '' first do no harm. '' Instead of pursuing in vain an activist
monetary policy designed to fine-tune the economy and achieve all good
things— full employment, economic growth, and price stability— Fed pol-icy
ought to be aimed at what it can actually achieve.
Three questions Congress must contemplate in its oversight of monetary
policy are (1) What can the Fed do? (2) What can't it do? (3) What should
it do?

What the Fed Can Do
The Fed can
control the monetary base through open market operations, reserve
requirements, and the discount rate;
provide liquidity quickly to shore up public confidence in banks
during a financial crisis;
influence the level and growth rate of nominal variables, in particular
monetary aggregates, nominal income, and the price level;
control inflation and prevent monetary instability in the long run; and
influence expectations about future inflation and nominal interest
rates.

What the Fed Cannot Do
The Fed cannot
target real variables so as to permanently reduce the rate of unemploy-ment
or increase economic growth;
determine real interest rates;
peg the nominal exchange rate and at the same time pursue an
independent monetary policy aimed at stabilizing the price level,
without imposing capital controls;

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fine-tune the economy; or
make accurate macroeconomic forecasts.

What the Fed Should Do
The Fed should
keep the growth of nominal GDP on a stable, noninflationary path
so that expected inflation is close to zero by controlling the mone-tary
base;
let market forces determine exchange rates so that the dollar and
other key currencies are free to find their equilibrium value in the
foreign exchange market; and
avoid predicating monetary policy on stock market performance.

By recognizing the limits of monetary policy, Congress will also recog-nize
the importance of enacting a law that establishes a clear framework
for such policy. Mandating long-run price stability as the Fed's sole
objective is a goal the public can understand and a target the Fed can
achieve and be held accountable for.

Hold the Fed Accountable
If a law making price stability the sole aim of monetary policy is to
be effective, the Fed must be held responsible for failure to meet that
target. That means the law must clearly state the price-stability target
while letting the Fed choose how best to achieve it.
The New Zealand inflation-targeting law is instructive. The Reserve
Bank Act of 1989 states that the sole objective of monetary policy is price
stability. A target range is set for inflation, as measured by the consumer
price index, which the governor of the Reserve Bank must achieve within
a specified time horizon, with exceptions made for supply shocks. The
governor is required to sign a contract, the Policy Targets Agreement,
with the finance minister, in which the governor agrees to a target range
for inflation set by the finance minister, the period for achieving it, and
the penalty of dismissal for failing to meet the target. That arrangement
has served New Zealand well in terms of achieving a low rate of inflation
while letting its currency float on the foreign exchange market. Unlike
countries with pegged exchange rates and no monetary rule, New Zealand
sailed through the Asian financial crisis quite smoothly.

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Congress should draw on the experience of New Zealand to create a
credible monetary law that holds the chairman of the Fed accountable for
achieving long-run price stability.

Abolish the Exchange Stabilization Fund
If the Fed is to focus solely on maintaining the purchasing power of
the dollar, then it cannot also use monetary policy to peg the foreign
exchange, or external, value of the dollar. The dollar must be free to float
without exchange market intervention. Halting such intervention requires
that Congress abolish the Exchange Stabilization Fund, which was created
in 1934 by the Gold Reserve Act. The ESF has been used by the Treasury
to try to '' stabilize'' the external value of the dollar, but without success.
It has also been used to make dollar loans to support the currencies of
less-developed countries. It is time to get rid of this relic of the New Deal
and let markets, not the state, determine the relative price of the dollar.

Welcome the Evolution of Alternatives to Government Fiat Money
While Congress should hold the Fed responsible for maintaining the
value of money, in terms of its domestic purchasing power, Congress
should also welcome the emergence of alternatives to government fiat
money, such as digital cash. New monetary institutions should be allowed
to evolve as new technology and information become available.
The growth of electronic commerce will increase the demand for new
methods of payment, methods that economize on paper currency. As
consumers' trust in electronic cash grows, the demand for the Fed's base
money may decrease. That may actually make it easier for a monetary
rule to be implemented because the Fed need not worry about complications
arising from changes in the ratio of currency to deposits, according to
University of Georgia economist George Selgin. Indeed, Milton Fried-man's
simple rule of zero growth of the monetary base may work quite
well in the information age, and it may be a step toward private competing
currencies, as advocated by F. A. Hayek. Consumers would have greater
monetary freedom and money with the best record of stable purchasing
power as a result.
A concrete measure to promote greater monetary choice would be for
Congress to repeal the 1 percent tax on bank-issued notes that is still on

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the books (U. S. C., title 12, section 541), as suggested by Kurt Schuler,
an economist with the Joint Economic Committee.

Conclusion
Monetary disturbances have been either a major cause of or a key
accentuating factor in business fluctuations. Reducing uncertainty about
the future path of nominal GDP and the price level would help remove
erratic money as a disrupting influence in economic life. As Friedman
has pointed out, one of the most important things monetary policy can
do is '' prevent money itself from being a major source of economic
disturbance. ''
It is time for Congress to accept its constitutional responsibility by
making the Fed more transparent and holding it accountable for long-run
price stability. In testimony before the Joint Economic Committee of the
U. S. Congress in March 1995, economist David Meiselman summed up
the case for limiting Fed discretion and mandating a stable price-level rule:

It is . . . dangerous folly to expect or depend on the Fed to achieve what
is beyond its power to attain. The best possible monetary policy cannot
create jobs or production. It can only prevent the instability, the uncertainty,
and the loss of employment and income resulting from poor monetary
policy. In my judgment, the best possible monetary policy aims to achieve
a stable and predictable price level.

Congress should now heed that advice and create an institutional frame-work
that recognizes the limits of monetary policy and sets a firm basis
for a credible long-run commitment to stable money in the post-Greenspan
era. Monetary policy should not depend on any one individual. It should
depend on rules that limit discretion, mandate price stability, and hold the
Fed chairman accountable for failing to achieve money of stable value.
Financial markets will then show less anxiety upon the departure of the
'' wise one. ''
The Greenspan record can be extended by moving from discretion to
a clear rule for price stability, thereby converting trust in a particular
individual into confidence in a rule that will long outlast any single Fed
chairman. Ending stop-go monetary policy will generate social benefits
by reducing the uncertainty due to erratic money, making it easier to plan
long-term investment projects and increasing the efficiency of resource
allocation. Economic growth will be more robust as a result.

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The major thrust of this chapter has been to call on Congress to make
the Fed accountable for maintaining the long-run value of the currency.
But Congress should not limit its vision to a monetary system dominated
by a government-run central bank, even if that institution is limited by a
monetary rule. Rather, Congress should welcome the vision of a future
in which the free market plays an important role in supplying money of
stable value, in competition with the Fed. The choice of monetary institu-tions
should ultimately be a free choice, made by the market, not dictated
by law.

Suggested Readings
Dorn, James A. '' Alternatives to Government Fiat Money. '' Cato Journal 9, no. 2 (Fall 1989): 277– 94.

Dorn, James A., ed. The Future of Money in the Information Age. Washington: Cato Institute, 1997.
Dorn, James A., and Anna J. Schwartz, eds. The Search for Stable Money. Chicago: University of Chicago Press, 1987.
Friedman, Milton. '' The Role of Monetary Policy. '' American Economic Review 58 (1968): 1– 17.
Gwartney, James, Kurt Schuler, and Robert Stein. '' Achieving Monetary Stability at Home and Abroad. '' Cato Journal 21, no. 2 (Fall 2001): 183– 203.
Keleher, Robert E. '' A Response to Criticisms of Price Stability. '' Study for the Joint Economic Committee of the U. S. Congress, September 1997, www. house. gov/ jec.
McCallum, Bennett T. '' Choice of Target for Monetary Policy. '' Economic Affairs (Autumn 1995): 35– 41.
Meiselman, David I. '' Accountability and Responsibility in the Conduct of Monetary Policy: Mandating a Stable Price Level Rule. '' Testimony before the Joint Economic
Committee of the U. S. Congress on the Humphrey-Hawkins Act. 104th Cong., 1st sess., March 16, 1995.
Niskanen, William A. '' On the Death of the Phillips Curve. '' Cato Journal 22, no. 2 (Fall 2002).
. '' A Test of the Demand Rule. '' Cato Journal 21, no. 2 (Fall 2001): 205– 9. Poole, William. '' Is inflation Too Low? '' Cato Journal 18, no. 3 (Winter 1999): 453– 64.
. '' Monetary Policy Rules? '' Federal Reserve Bank of St. Louis Review 81 (March– April 1999): 3– 12.
Reynolds, Alan. '' The Fed's Whimsical Monetary Tinkering. '' Outlook: Ideas for the Future from Hudson Institute 1, no. 4 (April 1997): 1– 16.
. '' The Fiscal Monetary Policy Mix. '' Cato Journal 21, no. 2 (Fall 2001): 263– 75. Schuler, Kurt. '' Note Issue by Banks: A Step toward Free Banking in the United States? ''
Cato Journal 20, no. 3 (Winter 2001): 453– 65.
Schwartz, Anna J. '' Time to Terminate the ESF and the IMF. '' Cato Institute Foreign Policy Briefing no. 48, August 26, 1998.

Walsh, Carl E. '' Accountability in Practice: Recent Monetary Policy in New Zealand. '' FRBSF Economic Letter no. 96-25, September 9, 1996.

—Prepared by James A. Dorn

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21. Financial Deregulation
Congress should
repeal the Community Reinvestment Act of 1977,
reject the Federal Deposit Insurance Reform Act of 2002 (H. R.
3717) that calls for increasing the deposit insurance limit to $130, 000 and gives the Federal Deposit Insurance Corpora-tion

greater discretion in the setting of insurance premiums, enact the Bankruptcy Abuse Prevention and Consumer Protec-tion
Act of 2002 with stronger provisions, and revoke Fannie Mae's and Freddie Mac's federal charters and
fully privatize those two government-sponsored enterprises.

With the passage of the Depository Institutions Deregulation and Mone-tary
Control Act of 1980, which removed ceilings on deposit interest rates,
Congress began a gradual dismantling of the regulatory barriers that, since
the Great Depression, had made the financial services industry among the
most regulated sectors of the U. S. economy and the U. S. financial sector
among the most regulated in the world. That regulatory burden also made
the financial services industry unnecessarily fragile. The deregulatory trend
continued with the Federal Deposit Insurance Improvement Act of 1991,
which introduced some risk sensitivity to deposit insurance premiums; the
Neal-Riegle Interstate Banking Act of 1994, which established nationwide
banking networks by removing the geographic restrictions on branching;
and the Gramm-Leach-Bliley Act of 1999, which repealed much of the
Glass-Steagall Act of 1933 and the Bank Holding Company Act of 1956,
created financial holding companies, and ended the artificial separation of
insurance companies and commercial and investment banks. Some changes
were just the legal recognition of something that was already happening
in the marketplace. For instance, the computer and telecommunications
revolution made geographic branching restrictions obsolete. Other changes,

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such as the ones to the FDICIA, were a reaction to crises precipitated
by the existence of previous regulations. But while Congress deserves
to be congratulated for its past efforts, there is much work left to do
to eliminate the inefficiencies and risks created by previous regulations
and to allow U. S. financial firms to give consumers the full range of
financial services they demand.

The Community Reinvestment Act
One of the major shortcomings of the Gramm-Leach-Bliley Act is that
it did not end the Community Reinvestment Act of 1977, a law enacted to
encourage banks to help meet the credit needs of their entire communities,
including low-and moderate-income neighborhoods, consistent with the
safe and sound operation of banks. To the contrary, it gave the CRA more
'' teeth'' by requiring that institutions have a satisfactory CRA rating before
a merger involving those institutions can take place or before they engage
in any of the new financial activities authorized under that law.
At present, federally insured lending institutions such as banks and
thrifts are required to collect data on the loans they make and how those
loans are allocated. Federal regulators then evaluate those data in a subjec-tive
and arbitrary manner to determine how well the financial institutions
are meeting the credit needs of the neighborhoods from which they gather
deposits. After all the work is done at considerable expense to the institu-tions
that are rated and taxpayers who fund the agencies that conduct the
examinations, about 98 percent of banks receive a satisfactory or better
rating. (Banks receive one of four ratings: Outstanding, Satisfactory, Needs
Improvement, and Substantial Non-Compliance.)
Some supporters of the CRA maintain that banks are lending in low-income
neighborhoods because of the legislation. Others claim that the
high percentage of banks that obtains a satisfactory rating or better is an
indication that the current legislation is too lax and that it needs to be
strengthened. But the fact is that there is no evidence that the CRA
has had any discernible effects on lending in low-income or distressed
neighborhoods, nor is there evidence that a stronger CRA would benefit
low-income neighborhoods. Where profitable investment opportunities
exist, banks are already lending. Where they do not, banks are not lending
and should not be required to do so.
If the CRA had a real impact, we should expect financial institutions
subject to its requirements to lend more aggressively in low-income com-204 205
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munities than lending institutions that are not subject to the law. But
Jeffery W. Gunther, an economist at the Federal Reserve Bank of Dallas,
and others have shown the opposite to be true. Financial institutions subject
to the CRA are actually lending less in low-income communities than
institutions not subject to the CRA. The elimination of branching restric-tions,
financial innovations, the new technology that has allowed lenders
to screen potential borrowers better (and thus differentiate between good
and bad credit risks in the same neighborhoods), and increased competition
have increased the availability of financial services to low-income commu-nities.
In this new and more competitive environment, banks are unlikely
to forgo profitable lending opportunities to otherwise creditworthy borrow-ers—
regardless of race, location, or any other noneconomic characteristic
of those borrowers.
There is evidence, however, that the CRA has had at least four negative
effects on the communities that it seeks to help. First, outside banks seeking
mergers or an expansion of their activities will provide subsidized loans
in low-income neighborhoods to avoid CRA-related problems, thus misal-locating
capital and driving customers away from local institutions that
would have otherwise provided credit to local borrowers. Second, the
CRA makes it difficult for banks to close branches in distressed areas.
The unintended consequence is that other banks that might consider open-ing
new branches in low-income neighborhoods may choose not to do so
lest they be unable to close them at a future date. In the end, there is less
competition in those areas and consumers suffer. Third, the CRA prevents
banks from specializing in servicing specific groups because the banks
do not want to be accused of discriminating against other groups. Finally,
by increasing the costs to banks of doing business in distressed communi-ties,
the CRA makes banks likely to deny credit to marginal borrowers
that would qualify for credit if costs were not so high. Chief among those
costs is the hundreds of millions of dollars in CRA loans that community
activists obtain from banks to give their approval of bank mergers and
other bank expansions of activities, in an exercise that can be characterized
as legalized extortion.
In the final analysis, the CRA provides few benefits to those it is
meant to help, while imposing substantial compliance costs to banks and
taxpayers. In addition, there is conclusive evidence that the problem that
the CRA was intended to correct— lack of adequate access to credit in
low-income neighborhoods— no longer exists. For those reasons, the CRA
should not be reformed; it should be repealed.

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Deposit Insurance Reform
The House of Representatives passed by a vote of 408 to 18 the Federal
Deposit Insurance Reform Act of 2002 (H. R. 3717), a bill introduced by
Rep. Spencer Bachus (R-Ala.). Among other things, that legislation would
increase the coverage limit for insured deposits from the current $100, 000
to $130,000, index the new limit to inflation, and adjust it every five
years. It would also give the Federal Deposit Insurance Corporation greater
discretion in the way it charges premiums on banks and allow it to charge
premiums on banks at all times, regardless of the risk individual banks
pose for the FDIC fund or of the size of the fund.
The increase in the coverage limit is the measure that has received the
most attention in the press and from policymakers. Higher limits would
weaken market discipline by making depositors more indifferent to the
risks taken by their banks without improving the welfare of consumers
(who already have many opportunities to get FDIC insurance equal to
several times $100, 000) or the competitive position of small banks (the
strongest proponents of the increase) vis-a `-vis large banks.
Both the Federal Reserve and the U. S. Treasury are vigorously opposed
to the increase. Indeed, in remarks before the Senate Banking Committee
in the spring of 2002, Peter Fisher, under secretary of the Treasury for
domestic finance, said, '' We see no sound public policy purpose that
would be served by an increase in current and future coverage limits. ''
Alan Greenspan concurred with that statement, noting that '' it is unlikely
that increased coverage, even by indexing, would add measurably to the
stability of the banking system today. ''
Sen. Richard Shelby (R-Ala.), the ranking Republican on the Senate
Banking Committee, also opposes the increase to $130,000. In an interview
with the American Banker, Shelby stated his opposition to raising the
current limit by saying, '' Let's roll [that limit] back to $10,000. '' Reducing
the limit makes sense for at least two reasons. First, depositors would
become more vigilant about the risks taken by banks, thus increasing
market discipline. That discipline would be even stronger if the limit were
to apply to depositors instead of accounts or deposits. Second, depositors
can already obtain risk-free U. S. Treasury bills that are equivalent to cash
in terms of their liquidity. Thus the coverage limit for insured deposits
should be no greater than the minimum denomination for short-term
Treasury bills. Today, for instance, the minimum denomination for a four-week
Treasury bill is $1,000. Any coverage amount above that represents
a potential taxpayer subsidy of the risk-taking activities of banks.

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From the point of view of the taxpayer, however, an increase in the
coverage limit is not the most dangerous provision of the reform proposals.
Giving the FDIC more discretion in the way it charges premiums on banks
is the most dangerous provision, because it could very well mean that
taxpayers could again be liable for any losses that occurred to the deposit
insurance fund, just as they were in the 1980s when the savings-and-loan
crisis cost them approximately $150 billion. All four banking regulators
are unfortunately in favor of that measure.
Under the current structure, which has been in place since 1991, banks
are responsible for any losses to the deposit insurance fund through a
system of rapid required ex post premiums. If losses to the insurance fund
reduce the FDIC's ratio of reserves to insured deposits below 1.25 percent,
the FDIC is required to automatically increase premiums to at least 23
basis points if the 1.25 percent ratio is not achieved within one year.
Although many observers consider that system too harsh, because it
imposes the highest premiums when banks are the least likely to be able
to afford them, it has worked reasonably well in preserving the stability
of the banking system— and the pocketbooks of taxpayers. As Loyola
University banking and finance professor George Kaufman has written in
a recent Cato Institute study, '' The threat of a premium increase of 23
basis points serves to encourage banks to pressure the FDIC to resolve
insolvencies more quickly and efficiently'' and thus avoid regulatory
forbearance or negligence.
Giving the FDIC more discretion over premium policy is undesirable
because, as Kaufman says, '' The longer premiums are not increased . . .
the more likely the fund is to go into deficit and the taxpayer to again
become liable. '' Indeed, it is likely that discretion will lead to regulatory
forbearance because regulators will be under tremendous pressure from
banks and politicians alike to delay the imposition of higher premiums,
if and when banks get into trouble.
Furthermore, regulators may view bank failures as a black mark on
their records and thus have an incentive to delay the imposition on failed
banks of sanctions or even resolution proceedings. In short, regulators
have often been poor guardians of the interests of taxpayers.
For that reason, it is important to consider the benefits of private, market-based
regulation of banking. Federal deposit insurance is not market priced,
despite FDICIA's mandate that the FDIC set premiums according to
risk, and so the moral hazard of a government guarantee of deposits
remains. To encourage the use of market discipline in the bank supervisory
process, Congress should consider establishing a subordinated-debt

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requirement, so that the holders of that debt provide the main monitoring function in the supervisory process. A subordinated-debt requirement
would align the interest of subordinated-debt holders with those of the deposit insurance fund (and hence taxpayers), because they do not profit
from a bank's risky investments if those investments turn out to be profit-able, but they stand to lose their money if those investments are not
profitable. For that reason, holders of subordinated debt would have a very strong incentive to monitor closely the activities of banks. At the
same time, yields on subordinated debt provide the market's assessment of the risks taken by banks. Indeed, the interest paid on subordinated debt
could serve as a market-determined risk-adjusted insurance premium. At the very least, the current system of rapid required ex post premium
increases to fund losses to the FDIC fund should be maintained with a reduction— not an increase— in the coverage limit, lest we compromise
the safety and soundness of the U. S. banking system and revert to a system of unlimited taxpayer liability. Beyond that, Congress should consider
moving toward a system of voluntary, privately funded and managed deposit insurance.

Real Bankruptcy Reform Needed Now More Than Ever
The 107th Congress passed bankruptcy reform legislation by wide margins in both the House and the Senate, just as the 106th Congress had

done. This time, however, the House and Senate bills were reconciled in a conference committee to produce the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2002, which had the support of President Bush. Unfortunately, an abortion-related provision in the bankruptcy reform bill
once again prevented Congress from enacting a much-needed reform that would curb somewhat the abuses that occur under the existing bankruptcy
code, a code that makes filing for bankruptcy very attractive for many debtors, including those who can easily pay their debts.
At present, individual debtors can file for bankruptcy under Chapter 7 or Chapter 13 once every six years. Consumers who file under Chapter
13 agree to a court-approved plan for repaying their debts from future earnings over three to five years. Chapter 13 filers, however, do not have
to liquidate their current assets to repay creditors. Consumers who file under Chapter 7, on the other hand, must use all
their present wealth above an exemption to repay their debts, but their postbankruptcy earnings remain untouched. The exemption includes per-sonal
items, equity in owner-occupied housing, retirement accounts, and cars. The justification for exempting those items and all future income is
that it provides filers with a '' fresh start'' in life after bankruptcy.
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Financial Deregulation
But, because the exemption levels are usually very high or filers have
few nonexempt assets, in more than 90 percent of Chapter 7 cases, there
is no property to be liquidated. The result: creditors get nothing. Conse-quently,
most consumers who file for bankruptcy do so under Chapter 7
rather than Chapter 13.
Under current law, the benefits of filing for bankruptcy greatly outweigh
the costs for many households. The costs include the filing fee (usually
a few hundred dollars), any attorneys' fees, the amount of debt repaid,
and the tarnished reputation that comes from filing. That last item is
becoming less significant, however, as the stigma associated with filing
for bankruptcy continues to lessen. The benefit is the debt discharged,
which, given the leniency of Chapter 7, usually is a large percentage of
the total unsecured debt owed. The net financial gain, then, is the difference
between the benefits and the costs— a figure that is often substantial.
Indeed, Michelle White, an economist at the University of California at
San Diego, estimates that about 15 percent of U. S. households could
benefit from filing for bankruptcy under the current system.
From a policy perspective, a problem arises because lenders, who have
a hard time distinguishing between good and poor credit risks, increase
interest rates for all consumers to recoup the losses that they incur from
unpaid loans. As more and more consumers file for bankruptcy and dis-charge
their debts, interest rates for consumer credit increase to compensate
lenders for their losses. White estimates that the average borrower pays
$500 a year in extra charges to compensate lenders for those unpaid loans.
Thus, to the extent that innocent consumers are paying for the sins of the
guilty, the current system works against honest borrowers.
The proposed legislation would reduce the perverse incentives of the
current system by introducing a means test for bankruptcy. Consumers
who earn more than the median income in their state and have enough
disposable income to repay, over a five-year period, at least one-quarter
of their debts, or $6,000, whichever is greater, would have to file under
Chapter 13. The likely effect is that more people would file under Chapter
13 or refrain altogether from filing after the legislation is implemented.
The legislation, however, would not affect individuals whose incomes
are below the regional median. For that reason, the current system, with
all its problems, would remain unchanged for a great number of consumers.
Indeed, it is estimated that fewer than 15 percent of the people who would
otherwise file under Chapter 7 would be forced to file under Chapter 13
under the reform plan. A better reform would require those whose incomes

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are below the median to pay a (smaller) percentage of their debts based
on their ability to pay— but to pay something nonetheless.
The reform legislation also leaves many loopholes, such as the home-stead
exemption (albeit with tighter limits), contributions of up to 15
percent of gross income to charities, allowances of up to $1,500 per child
per year for schooling, contributions to ERISA-approved retirement plans,
and an exemption for all tax-free retirement accounts (with a $1 million
cap for IRAs), that make it easier for filers not to pay their debts. The
legislation does not put in place a minimum level of debt below which
debtors should not be able to file for bankruptcy. The establishment of
such a threshold would make the system more cost-effective. The 108th
Congress has an opportunity to correct those shortcomings.
A bankruptcy system, no matter how stringent, will always allow some
debtors to abuse it to the detriment of honest consumers. Those consumers
and creditors, however, will likely welcome a reform bill that protects
their property rights, enforces contracts more vigorously, and reduces the
incentives some people have to cheat. The 108th Congress should put
politics aside and get the job done.

Time to Privatize Fannie Mae and Freddie Mac
The Federal National Mortgage Association (Fannie Mae) and the Fed-eral
Home Loan Mortgage Corporation (Freddie Mac), the two most
important government-sponsored enterprises (GSEs), are an anomaly in
today's vibrant and innovative financial markets. GSEs are created by
congressional charter and combine characteristics of public and private
organizations. Fannie Mae and Freddie Mac are privately owned, publicly
traded corporations that have a congressional mandate to provide liquidity
in the secondary markets for residential mortgages. They do so mostly
by purchasing mortgages from lenders, bundling those mortgages into
mortgage-backed securities (MBS), and selling those securities to investors.
Since the early 1980s, but especially in the last few years, they have also
started to hold directly many of the mortgages they buy and to hold MBS
themselves. In the process they have become two of the most profitable
and dominant companies in the United States today.
If that success were due to their ability to provide goods and services
that consumers want under the same rules as other market participants
but at a lower price, then there would be no public policy concerns about
Fannie Mae and Freddie Mac. Unfortunately, Fannie Mae and Freddie
Mac do not operate under the same rules as other market participants.

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They enjoy government-granted benefits and subsidies that give them an
unfair advantage over their competitors, create distortions in the allocation
of capital, and pose an unnecessary risk to taxpayers.
In exchange for serving a public mission, Fannie Mae and Freddie Mac
enjoy an implicit government (taxpayer) subsidy to cover their liabilities.
The subsidy results from, among other things, the perception that the
government stands behind the obligations of those two companies, which
allows Fannie Mae and Freddie Mac to have lower costs of capital than
their competitors. The Congressional Budget Office has estimated that in
2000 the implicit subsidy provided by the government amounted to $10.6
billion, of which 37 percent went directly to their shareholders, not to
homebuyers. Other government benefits include a $2.25 billion line of
credit from the U. S. Department of the Treasury, exemption from Securities
and Exchange Commission securities registration requirements, exemption
from local and state taxes, and lower capital requirements than are imposed
on other financial institutions, which allows them to operate with much
greater leverage and earn a higher return on capital than their competitors.
While most public and congressional attention in recent months has
concentrated on the fact that the two GSEs are not subject by law to the
same disclosure and registration requirements as other publicly traded
companies, that criticism should not be the main focus of attention for at
least two reasons. First, Fannie Mae and Freddie Mac already disclose
voluntarily enough information about their financial activities and condi-tion.
Furthermore, they agreed in July 2002 to file quarterly and annual
statements and proxies with the SEC (although they did not agree to
register their debt and mortgage-backed securities). Second, in this case,
what matters is not so much disclosure; after all, Fannie and Fred could
disclose that they intend to keep all profits from a very risky investment,
if that investment is successful, and to pass most losses on to taxpayers,
if it is not, and that disclosure would not make them any less risky. What
matters is whether Fannie Mae and Freddie Mac have capital levels that
are adequate for the degree of risk they are taking and for the amount of
debt they have, because, if they do not, the government will most surely
step in and bail them out at a very high cost to taxpayers.
Today that does not seem to be the case, and the two GSEs have no
incentive to raise their capital levels or diminish their risk profiles (nor
do investors have an incentive to require those actions from them) because
of the government guarantee. Fannie Mae and Freddie Mac had a total
debt outstanding of $1.3 trillion at the end of 2001 and had guaranteed

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an additional $1.8 trillion of MBS. Capital levels stood at roughly 3.5
percent of total assets, about a third of the capital levels held by commercial
banks in the United States. In addition, they have in recent years begun
to hold directly the mortgages they purchase, which exposes them to
interest rate risk as well as credit risk, and to enter the subprime mortgage
markets, where the credit risk is much higher.
The combination of the high-risk profile of their portfolios, low capital
levels, and high levels of debt makes Fannie Mae and Freddie Mac
potentially very vulnerable. For that reason, and given that the secondary
market for mortgages works very well, Congress should initiate steps—
including revoking their federal charters, terminating their Treasury lines
of credit, and the presidential appointment of five members to their board
of directors— toward the full privatization of Fannie Mae and Freddie Mac.

Conclusion
Technological change and financial innovation have radically trans-formed
the financial services marketplace in the last few years to the
benefit of financial services firms and consumers alike. More important,
the transformation will likely continue in the coming years and financial
regulations are unlikely to be able to keep up with market developments,
which could prevent an efficient and sound modernization of the U. S.
financial system. Although the process of modernization will not necessar-ily
be smooth, regulators and Congress must resist temptations to go back
to the old, rigid structure that came undone with the Gramm-Leach-Bliley
Act. Market forces, if allowed to do so, can be very effective in exerting
the discipline necessary to minimize conflicts of interest and in correcting
any shortcomings that may come along the way. Congress should continue
with the elimination of the regulatory burden to which financial services
firms are subject and let the shape of the financial marketplace be deter-mined
by buyers and sellers of financial services.

Suggested Readings
Benston, George J. '' The Community Reinvestment Act: Looking for Discrimination That Isn't There. '' Cato Institute Policy Analysis no. 354, October 6, 1999,

www. cato. org/ pubs/ pas/ pa-354es. html. Congressional Budget Office. '' Federal Subsidies and the Housing GSEs. '' 2001, ftp://
ftp. cbo. gov/ 28xx/ doc2841/ GSEs. pdf. Gunther, Jeffery W. '' Should the CRA Stand for 'Community Redundancy Act'? ''
Regulation 23, no. 3 (2000): 56– 60.
Kaufman, George G. '' FDIC Reform: Don't Put Taxpayers Back at Risk. '' Cato Institute Policy Analysis no. 432, April 16, 2002, www. cato. org/ pubs/ pas/ pa-432es. html.

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Financial Deregulation
Poole, William. '' Financial Stability. '' Remarks made at the Council of State Govern-ments, Southern Legislative Conference Annual Meeting, New Orleans, August 4,
2002, www. stlouisfed. org/ news/ speeches/ 2002/ 08 04 02. html. Rodri ´guez, L. Jacobo. '' International Banking Regulation: Where's the Market Discipline
in Basel II? '' Cato Institute Policy Analysis no. 455, October 15, 2002. Wallison, Peter J., and Bert Ely. Nationalizing Mortgage Risk. Washington: American
Enterprise Institute, 2000.
—Prepared by L. Jacobo Rodri´guez

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22. Enron, WorldCom, and Other Disasters
Congress should
clarify that the criminal penalties in the Sarbanes-Oxley Act
require proof of malign intent and personal responsibility for some illegal act,

repeal the Williams Act of 1968,
approve the deduction of one-half of dividend payments from

the earnings subject to the corporate income tax, and eliminate the limit on salaries that may be deducted from the

earnings subject to the corporate income tax.

The collapse of the Enron Corporation in late 2001 led to two broad
concerns:

There may be more '' Enrons'' out there, because many other firms
share the characteristics that led to the Enron collapse. This concern
was reenforced by the subsequent collapse of Global Crossing, World-Com,
and some other large corporations and was reflected by the
general weakness of the stock markets and the dollar, even though
most of the subsequent economic news was better than expected.
The revelation of gross accounting violations by these and other firms
and the continued weakness of the financial markets have undermined
both popular and political support for free-market policies. This effect
has already led to the increased regulation of accounting and auditing
authorized by the Sarbanes-Oxley Act, proposals for even more regu-lation,
and increased criticism of any proposal for privatization. Any
number of critics have been quick to blame many of the problems
of the modern world on the corporate culture, with a potential effect
similar to that of the muckrakers in shaping and promoting the early
progressive legislation.

While these issues deserve further study, some lessons can be drawn now.

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Enron Is a Symbol of a Broader Problem
Enron filed for bankruptcy protection on December 2, 2001, a conse-quence
of the combination of too much debt and some unusually risky
major investments. Such conditions are characteristic of firms that declare
bankruptcy and, by themselves, are not sufficient evidence of a broader
problem. The optimal number of bankruptcies is not zero because our
broader interests are served by corporations using some amount of debt
finance and taking some risks. Moreover, Enron did not collapse because
it broke the accounting rules, although it apparently broke some rules to
cover up its financial weakness. The collapse of Enron led to huge losses
to Enron investors, creditors, and employees but, by itself, had little effect
on other parties. The conditions specific to Enron will be adequately sorted
out by the market and the courts.
As expressed by one blunt-speaking investment manager, however,
'' Enron ain't the problem.... The unremarked gut issue today is that
over the past decade there was a landslide transfer of wealth from public
shareholders to corporate managers. Enron was just the tip of the iceberg
ready to happen. '' For the larger community, the important issue is not
the specific reasons why Enron collapsed but whether the general rules
affecting all corporations lead managers to use too much debt and to incur
too many risks. Another important issue raised by the Enron collapse is
why these conditions either escaped notice or were not acted upon by any
link in the audit chain.
The broader pattern of financial developments since the mid-1990s is
clearly more consistent with a description of Enron as '' the tip of the
iceberg'' than with a view that the collapse of Enron was merely a random
observation from a stable distribution of potential corporate failures. Some-thing
is seriously wrong in corporate America. General shareholders,
now a majority of Americans, have a financial interest in correcting the
conditions that led to these problems. Those of us who are concerned
about maintaining the necessary popular and political support for a market
economy have a special political stake in correcting these conditions.

Some Corrective Actions Have Been Taken
The collapse of Enron proved to be a valuable wake-up call to a number
of affected groups. The following actions have already been taken by
private organizations:

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Enron, WorldCom, and Other Disasters
The Business Roundtable, composed of the chief executives of about
150 large firms, urged corporations to adopt a number of voluntary
changes in corporate governance rules, including that a '' substantial
majority'' of corporate boards be independent '' both in fact and
appearance. ''
The New York Stock Exchange and the National Association of
Securities Dealers approved major additions and changes in the rules
for accounting, auditing, and corporate governance as necessary con-ditions
for listing of a corporation's stock for trade on the exchange.
The major continuing uncertainty is how the exchanges will monitor
and enforce these rules.
The International Corporate Governance Network, institutional
investors that control about $10 trillion in assets, has approved a set
of international standards for corporate governance that its members
would use their voting power to promote.
Merrill Lynch, the nation's largest retail broker, signed an agreement
with the New York State attorney general that its stock market analysts
'' will be compensated for only those activities and services intended
to benefit Merrill Lynch investor clients, '' as determined by their
superiors in the research department. This agreement was designed
to reduce any conflict of interest between the market analysis and
investment banking activities of Merrill Lynch and is expected to be
adopted by other major brokerage firms.
Standard and Poor's, one of the three major credit-rating agencies,
has developed a new concept of '' core earnings'' as a measure of
earnings from a company's primary lines of business. Compared with
earnings as defined by the generally accepted accounting principles
(GAAP), for example, the S& P measure will exclude gains and losses
from a variety of financial transactions. S& P plans to report this
measure of earnings for all publicly held U. S. companies.

Most important, the long bear market has changed the attitude of many
corporate managers and directors. In good times, no one manages the
store in firms that make an adequate rate of return, even though other
firms may have a significantly higher rate of return. Over the past two years,
however, corporate managers have been quicker to reduce employment and
close plants in response to weak demand, productivity growth has contin-ued
to be high as a consequence, and corporate boards appear to have been
more cautious about approving new investments and increased executive

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compensation. The important test is whether the costly lessons of this
period will survive a recovery of demand and another long bull market.
In the meantime, after much sound and fury, Congress approved the
Sarbanes-Oxley Act by an overwhelming margin. As is too often the case,
Congress responded to a new problem that it does not understand by
creating a new bureau, in this case a Public Company Accounting Oversight
Board to oversee public accountants. The act also authorized a 64 percent
increase in the budget of the Securities and Exchange Commission, a
strange reward for the failure of the SEC to uncover any of the major
recent accounting violations. The act also makes some minor changes in
audit rules and authorizes a substantial increase in criminal penalties for
a broader array of white-collar crimes.
The Sarbanes-Oxley Act is a result of a political demand to '' do some-thing''
about a problem of shared concern. The act was unnecessary, in
that the SEC had the authority and had already implemented most of the
prescribed actions. The act is expensive, in that the huge increase in the
SEC budget is not likely to improve accounting and auditing very much.
More disturbing, the major potential problem is an awesome threat that
senior corporate managers may be held liable for an illegal action by some
subordinate that the senior manager did not direct, condone, or even
know about. Congress has wisely refrained from applying this standard
to government managers, even though the General Accounting Office
reported in 1998 that '' significant financial systems weaknesses . . . prevent
the government from accurately reporting a large portion of its assets,
liabilities, and costs. '' On first hearing of the Enron breakup, my reaction
was that someone ought to go to jail as a consequence; that is an understand-able
but not very nuanced reaction. Unfortunately, Congress does not
seem to have thought much beyond that first reaction. At a minimum,
Congress should clarify that the criminal penalties in the Sarbanes-Oxley
Act require proof of malign intent and personal responsibility for some
illegal act.

Unfinished Business
Most important, the corrective actions taken to date will not be sufficient
to reduce the frequency and magnitude of corporate bankruptcies. Enron
and other large corporations failed by making unusually bad business
decisions, not by violating the accounting standards. A blatant violation
of accounting rules and auditing procedures clearly offends the general
public and the political community, but the losses to a corporation's

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Enron, WorldCom, and Other Disasters
shareholders, creditors, employees, and local communities are more
directly related to the failure of the corporation than to the measures its
managers may have taken to delay recognition of its financial weakness.
Without changes in the policy-related conditions that contribute to corpo-rate
failure, improved accounting and auditing procedures would accelerate
bankruptcies with little effect on their frequency or magnitude. Almost
all of the public and press attention, however, has focused on reducing
the accounting violations, not on those policies that contribute to busi-ness
failure.
The major lesson from the collapse of Enron and other large corporations
is that the rules of corporate governance do not adequately protect the
interests of the general shareholders against the increasingly divergent
interests of corporate managers. In other words, '' the agency problems''
that result from the separation of ownership and control posed by Berle
and Means in 1932 have not yet been fully solved and may have recently
increased. The rules of corporate governance— in effect the '' constitution''
of a corporation— are a complex combination of federal securities law,
the conditions for listing on some stock exchange or for access to credit,
the corporate regulations and court decisions of the state in which the
firm is incorporated, and company-specific rules.
Over time, moreover, there has been some drift from rules that protect
shareholders to rules that protect corporate managers. The first major
policy change in this direction was the federal Williams Act of 1968,
which substantially increased the cost for outsiders to organize a successful
tender offer and entirely removed the potential for surprise. More important
were decisions by state legislatures and state courts in the 1980s in response
to demands by corporate managers. And the superstar CEOs of the 1990s
were able to persuade their passive boards to agree to almost any rule.
Over this period, in addition, the major outside shareholder in an increasing
number of firms was some pension or mutual fund that had interests so
diversified that its management had little interest in the performance of
any one stock in the fund's portfolio; these funds very rarely use their
voting power to place a representative on a corporate board. Very few
corporate boards now include a member with a sufficient portion of
the total shares to be a credible threat to incumbent management. As a
consequence, according to the leading scholar of the market for corporate
control, '' it should come as no surprise that, as hostile takeovers declined
from 14 percent to 4 percent of all mergers, executive compensation started
a steep climb, eventually ending for some companies with bankruptcy

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and management scandal. . . . Enron is a predictable consequence of rules
that inhibit the efficient functioning of the market for corporate control. ''
The most important policy lesson from the collapse of Enron is to repeal or
reverse those laws, regulations, and court decisions that restrict successful
tender offers. The probable results would be a reduction in executive
compensation, less pressure to cook the books, an improved allocation of
capital, and an increase in the rate of return to general shareholders.
Congress should start this process by repealing the Williams Act of 1968.
Another major issue that has been broadly ignored in discussions about
the policy lessons from the Enron collapse is that the current U. S. tax
code increases the conditions that lead to bankruptcy. The corporate
earnings subject to tax, for example, exclude interest payments but not
dividends; this leads corporations to use more debt finance than would
be the case if the tax treatment of interest and dividends were the same.
The combined federal and state corporate income tax rate in the United
States is now the fourth highest among the industrial nations, so one
should expect American corporations to be relatively dependent on debt
finance. Second, for most investors, the tax rate on dividend income is
much higher than the rate on long-term capital gains; this leads corporations
to rely more on retained earnings and capital gains than on dividends as
the return to equity. And third, an obscure provision of the 1993 tax law
limits to $1 million a year the direct compensation of corporate executives
that may be deducted, unless the compensation is '' performance based. ''
These biases in the tax code also lead to several other adverse effects—
reducing the cash-flow discipline to meet dividend payments, increasing
the role of corporate managers relative to investors in the allocation of
capital, increasing the use of stock options to compensate corporate execu-tives,
and increasing the incentive to inflate the stock price.
Reducing the bias in favor of debt requires reducing the effective tax
rate on corporate earnings. Reducing the bias in favor of retained earnings
and capital gains requires deducting some amount of dividends from the
earnings subject to the corporate income tax or reducing the difference
between the personal income tax rate on dividends and long-term capital
gains. The simplest direct way to reduce both of the first two of these
tax-related biases is to allow corporations to deduct one-half of their
dividend payments from the earnings subject to the corporate income tax.
This would make the combined corporate and personal tax rate on capital
gains and dividends about the same for most investors without changing
any other feature of the corporate or personal income tax code, roughly

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Enron, WorldCom, and Other Disasters
eliminating those adverse conditions attributable to the current difference
in these rates. Over the past several years, in addition, this would have
reduced corporate income tax liability by about $60 billion a year, substan-tially
reducing the bias in favor of debt finance. Other tax revenues, of
course, would increase due to an improved allocation of capital, increased
corporate investment, and higher personal income tax revenues from
increased dividend payments. For those who would otherwise be opposed
to reducing corporate income tax liability or considering any supply-side
benefits of lower tax rates, Cato has long maintained a list of federal
corporate welfare spending, the elimination of which would more than
offset the reduction of corporate income tax liability. The most important
simple change in the federal tax code, thus, would be to authorize corpora-tions
to deduct one-half of their dividend payments from the earnings
subject to the corporate income tax. The third tax bias in favor of stock-based
compensation should be eliminated by the simple repeal of the 1993
limit on the amount of direct compensation that may be deducted. A full
elimination of the bias in favor of debt finance would require a more
comprehensive tax reform that would either eliminate the corporate income
tax or any personal taxes on capital gains and dividends.
In summary, Congress should not rest on the faded laurels of the
Sarbanes-Oxley Act. More needs to be done to reduce the conditions that
lead to corporate failure and to restore American corporations to financial
health and integrity. The policy changes recommended in this chapter
may be the most important, but other changes are likely to be suggested
by completion of Cato's project on the major policy lessons from the
collapse of Enron.

Suggested Readings
Gompers, Paul A., Joy Ishii, and Andrew Metrick. '' Corporate Governance and Equity Prices. '' NBER Working Paper no. 8449, August 2001.

Manne, Henry G. '' Bring Back the Hostile Takeover. '' Wall Street Journal, June 26, 2002. Niskanen, William A. '' A Preliminary Perspective on the Major Policy Lessons from
the Collapse of Enron. '' Cato Institute white paper, www. cato. org. Sosnoff, Martin T. '' Enron Ain't the Problem. '' Directors and Boards, Spring 2002.

—Prepared by William A. Niskanen

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23. The Federal Budget
Congress should
reduce discretionary spending from 7.1 percent of gross
domestic product to 5 percent with programterminations, priva-tization, management reforms, and transfer of programs to the

states (see proposed cuts in the Appendix to this chapter); reform Social Security by moving toward a system of individual
savings accounts; reform Medicare and Medicaid to cut costs and increase effi-ciency;
not add a prescription drug benefit to Medicare unless there is a full one-for-one cost reduction elsewhere in the
program; establish a '' sunset'' commission to automatically review all
federal programs on a rotating basis and propose major reforms and terminations;
privatize all government-operated businesses, including
Amtrak, the U. S. Postal Service, the Tennessee Valley Authority, and the four power marketing administrations;

privatize activities in all federal agencies that are commercial
in nature, such as air traffic control, marketing support for agriculture, loan and insurance programs for exporters, and

research for the energy industry; sell excess asset holdings (land, buildings, and inventories) of
federal departments such as Interior, Agriculture, and Defense; and
support aggressive management reforms in the federal bureauc-racy,
including expanding authority to fire poorly perform-ing workers.

Less Is More
The federal government will spend more than $2,100,000,000, 000
in fiscal year 2003. After taking out the government's core functions

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CATO HANDBOOK FOR CONGRESS
of national defense and justice, it will still spend more than
$1,700,000, 000,000. That amounts to roughly $16,000 for every household
in the United States. Clearly, the federal government has taken on a huge
range of spending programs beyond its basic responsibilities.
Indeed, the government is so large that the activities of hundreds of
federal agencies are beyond the knowledge and understanding of most
citizens. The government has become too large even for our representatives
in Congress to adequately oversee and control, as scandal after scandal
attests. Congress has shown itself to be incapable of running a $2 trillion
organization with an adequate degree of competence. For example, the
General Accounting Office has not been able to certify as correct the
federal government's financial statements five years in a row because
of weak accounting controls and widespread mismeasurement of assets,
liabilities, and costs.
Modernist architects told us that '' less is more'' in building design.
The same is true in government design. Americans would receive more
benefit from the federal government if its size and scope were greatly
reduced and they instead received a limited range of much better quality
services. The federal government is like a bloated conglomerate corporation
that is involved in too many different schemes for the CEO to properly
oversee. The government does too much and does few things very well.
Reforms must begin to shed all noncore functions of the federal government
so that Congress and the administration can focus on delivering high-quality
basic services, such as national security.

Short-Term Budget Outlook
The culture of spending in Washington that caused the Democrats to
lose control of Congress in 1994 has triumphed again under the Republi-cans.
The spending virus has spread throughout Congress with few mem-bers
showing immunity. The struggles of fiscal conservatives to bring
reforms to federal spending in the mid-1990s have been lost.
In 1994, there was a $203 billion deficit and red ink as far as the eye
could see. The president's FY95 and FY96 budgets included no plans to
balance federal finances. Ultimately, Congress forced the president's hand,
and a plan to end the tide of red ink was passed. Spending constraint, a
falling defense budget, and a strong economy produced the first budget
surplus in 29 years in FY98.
But fiscal responsibility did not last long, and a gaping deficit appeared
just four years later in FY02. Rapid discretionary spending growth averag-224 225
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The Federal Budget
ing more than 7 percent annually between FY98 and FY02 busted the
budget (Figure 23.1). The modest fiscal restraint shown in the mid-1990s
evaporated, and no lasting lessons on spending discipline were learned
by lawmakers.
One way to see how discretionary spending has ballooned is to compare
current estimates for FY03 outlays with prior estimates of FY03 outlays.
Actual FY03 outlays will be about $788 billion— that is a stunning $193
billion, or 32 percent, more than President Clinton's $595 billion proposal
for FY03 in his FY99 budget. There has been a pattern of constant upward
revisions in out-year spending in both the defense and nondefense budget
categories (Figure 23.2).
Each year, Congress and the administration up the ante on each other's
spending plans. Administrations often try to get as much spending as they
can for the next budget year but then low-ball the out-years to make the
long-term budget plan seem '' fiscally responsible. '' President Bush has
presided over huge increases in defense and nondefense discretionary
outlays in his first two years (7.4 and 11.7 percent for defense, and 8.9
and 5. 3 percent for nondefense, not including the emergency response
fund). Yet the administration's July 2002 midsession review would have
us believe that discretionary spending will be held to 3. 1 percent annual
growth from 2003 to 2007. Surely, the only real measure of fiscal responsi-Figure

23.1 Discretionary Outlays: Defense and Nondefense

$150
$200
$250

$300
$350
$400

$450

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Billions
of
Dollars

Defense
Nondefense

SOURCE: Office of Management and Budget, Mid-Session Review, July 2002. Includes emergency response fund.
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CATO HANDBOOK FOR CONGRESS
Figure 23.2 Proposed Discretionary Outlays for FY03

$200
$250

$300
$350
$400

$450

$290 $306 $305
$332
$308

$357
$322

$390 $379 $409

Clinton FY 1999 Budget Clinton FY 2000 Budget Clinton FY 2001 Budget Bush FY 2002 Budget Bush FY 2003 Session Review
Billions
of
Dollars

Defense
Nondefense

SOURCE: Office of Management and Budget, Mid-Session Review, July 2002, and prior budgets of the U. S.
government. FY03 midsession review data include emergency response fund.

bility is how much money is being spent right now, not promises of
restraint sometime in the future.
It should be obvious to every member of Congress that discretionary
spending growth anywhere near recent high rates is not sustainable. The
best course would be an immediate hard freeze on discretionary spending
followed by large cuts. That is necessary because of the deep fiscal hole
that entitlements will dig as health care costs rise and baby boomers
begin retiring in a few years. Ultimately, discretionary spending should
be reduced from today's 7.1 percent of gross domestic product to no more
than 5 percent (see Appendix to this chapter for recommended cuts).

Long-Term Budget Outlook
In the late 1990s, a number of factors lulled Congress into complacency
about the need for spending control. First, government revenues expanded
rapidly as the economic boom filled federal coffers with income and
capital gains tax revenues. Those inflows allowed Congress to increase
spending rapidly while still balancing the budget and appearing to be
fiscally prudent. That boom in revenues has now ended.
Second, growth of spending on the three major entitlements (Social
Security, Medicare, and Medicaid) slowed during the late 1990s. Average
annual Social Security growth slowed from 5.4 percent (1991– 96) to
4.3 percent (1996– 2001); Medicare growth slowed from 10.9 percent to
4.5 percent; and Medicaid growth slowed from 11.9 percent to 7.2 percent.

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The Federal Budget
That slowdown has come to an end. Medicaid is expected to grow at
an average annual rate of 8. 4 percent during the next decade. For Social
Security and Medicare, recent budget growth slowdowns are a brief respite
before the spending explosion expected when baby boomers begin retiring
in 2008.
All in all, Congressional Budget Office projections show that, under
current law, spending on Social Security, Medicare, and Medicaid will
increase from 8.3 percent of GDP in 2002 to 15.6 percent by 2040. That
7.3 percentage point increase would be equivalent to about a $750 billion
per year tax increase today. By comparison, President Bush's tax rebates
saved taxpayers just $40 billion in 2001. Therefore, unless entitlements
are reformed, taxpayers will face an added burden rising to almost 20
times the size of the benefit received from the tax rebate in 2001.
Even if one assumed that all other government programs got no larger
relative to GDP, the three main entitlements would push federal spending
up from 20 percent of GDP today to 27 percent by 2040. State and local
governments add about 10 percentage points to that burden, for a total of
at least 37 percent of GDP by 2040. Thus without major entitlement
reforms, the United States will have a government about as big as many
European countries do today. And that outlook will be very optimistic if
discretionary spending continues growing at the irresponsible 7 percent
rate it has averaged since 1998.
If Americans want to limit the federal government to its current share
of GDP, let alone shrink it, then entitlement programs must be thoroughly
overhauled and Congress must begin shedding noncore government func-tions.
If reforms are not made, the uniqueness of the United States as a
limited-government country will be gone.
At the end of this chapter is a list of $309 billion in proposed spending
cuts. These programs should be either terminated immediately, privatized,
or transferred to state and local responsibility. It would be a major govern-ment
reform if the whole list of cuts were made. But even that annual
saving of $309 billion represents just 3 percent of GDP. Given that the
three main entitlements are projected to impose at least a 7 percentage
point cost increase on future taxpayers, these cuts must be paired with
major entitlement reforms to solve tomorrow's huge budget problems.

Reform the Entitlements
A special analysis by the CBO in July 2000 found that federal spending
on the elderly (through Social Security, Medicare, and other programs)

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will rise from 35 percent of total federal spending in 2000 to 43 percent
by 2010, under baseline assumptions. Spending on the elderly will continue
rising rapidly and surpass half the budget by about 2020.
Despite these dramatic cost increases under current law, Congress con-tinues
to consider expensive add-ons to programs for the elderly. Most
recently, lawmakers have pushed for costly Medicare prescription drug
plans. But adding new burdens for taxpayers to pay for programs for the
elderly is very unfair. The elderly have had their whole lives to save for
their own retirement, yet the massive programs already provided for them
create growing tax hurdles for young families trying to make ends meet
and save for their own retirement. Victor Fuchs of Stanford University
has found that 56 percent of the broadly measured income of the elderly
now comes from transfers from the young.
Medicare prescription drug plans will cost hundreds of billions of dollars.
In the 107th Congress, the 10-year cost of bills introduced in the Senate
ranged from $295 billion for the Hagel-Ensign bill to $594 billion for the
Graham-Miller bill. Of course, new programs usually end up costing much
more than original estimates. Expanding Medicare when programs for the
elderly are already going to blast a huge hole in future budgets is like
'' putting more people aboard the Titanic, '' as Sen. Phil Gramm (R-Tex.)
observed. A prescription drug plan should be a nonstarter unless the
package includes a full one-for-one offset in other Medicare costs.
Unfortunately, it seems difficult to have a sober, nonpartisan debate
about entitlement reforms. Even modest reform plans by Democrats, such
as Senator Breaux's Medicare plan in the late 1990s, are shot down.
Nonetheless, the budgetary and economic necessity of reform is compel-ling,
and ultimately reformers will prevail.
The key piece of the reform solution for Social Security and Medicare
is prefunding of future benefits. The only sensible way to do that is through
individual savings accounts. Prefunding will allow individuals to begin
planning now to help pay for their own retirement, so as to avoid imposing
crushing tax hikes on their children and grandchildren. (Medicare reforms
are discussed in Chapter 26; Social Security reforms are discussed in
Chapter 25.)

Reform Federal Management
A major fiscal theme of the Bush administration is reforming govern-ment
management. The administration has begun grading federal programs
and proposes to move funding away from '' ineffective'' activities. In

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The Federal Budget
addition, each federal agency is being scored with green, yellow, and red
grades for performance on various parameters. Of 130 grades given in
the baseline scores for 2001, 110 were red for '' unsatisfactory. '' By mid-2002,
the administration reported that there were still 109 red grades.
It is to be hoped that these efforts are the start of a major overhaul of
the federal bureaucracy. As noted, the federal government has failed five
years in a row to produce comprehensive financial statements that could
be certified by the General Accounting Office. The sloppiest bookkeeper
is probably the $370 billion Defense Department. The GAO has found
that the department has '' serious financial management problems that are
pervasive, complex, longstanding, and deeply rooted in virtually all busi-ness
operations throughout the department. '' The Pentagon loses track of
assets, mismanages and wastes inventory, deliberately low-balls project
costs, and makes billions of dollars of erroneous contractor payments.
New '' carrots'' should be used to get better performance from federal
agencies. For example, pay raises should be contingent on passing grades
on the president's new management scorecard. Managers in agencies that
receive red grades for '' unsatisfactory'' should not receive pay raises until
they fix problems.
In addition, new '' sticks'' need to be introduced to the bureaucracy. In
the private sector, everyone from CEOs to mailroom clerks faces firing
for bad performance. The Washington Post reported on August 18, 2002,
that 37 percent of departing CEOs of the largest U. S. companies in recent
years were fired. By contrast, data from the Office of Personnel Manage-ment
show that the federal firing rate is stunningly low at just 1 in 4,000
per year. For example, the State Department has fired only 6 employees
during the past 18 years. Yet it is hard to believe that there were not more
poor performers deserving firing in this 29,000-person agency. Indeed,
the State Department has been known for mishandling secret documents,
allowing unauthorized people to wander its hallways, and letting Russian
spies bug a meeting room down the hall from the former secretary's office.
Americans deserve better performance than that, and Congress is sup-posed
to ensure it through executive branch oversight. But the reality is
that the government's size and scope have become so vast that it is
probably impossible for Congress to adequately safeguard taxpayer funds.
The solution is to greatly cut the size of the government so it can focus
on its core mission of national security. Both Ronald Reagan and the
Republicans who stormed in to take control of Congress in 1994 sought
major program terminations. So far, that understanding of real reform has

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not sunk into the Bush administration and has been absent from Congress
for years. Lawmakers need to regain their commitment to a federal govern-ment
that works— that means cutting out all the stuff that the government
should not be doing and overhauling management of the rest.

Devolve Federal Programs to the States
Congress and the Bush administration seem to have accepted the idea
that taxing citizens to send money to Washington and then routing funds
back to state officials provides Americans with good government. That
is a triumph of hope over experience. Experience shows that when the
federal government gains more power over state functions, it results in
bureaucratic waste and new layers of regulations for states to deal with.
Greater federal fiscal power also results in unfair redistributions of
taxpayer money among the states on the basis of political pull rather than
objective need. Some states get swindled by the federal money-go-round
year after year in terms of federal taxes paid versus federal spending
received. By comparing taxes paid by residents of each state with Census
Bureau data on federal spending by state (which include everything from
defense to transportation programs), you find that states such as New
Jersey, Connecticut, and New Hampshire routinely get less than 75 cents
on every dollar sent to Washington.
The federal redistribution of citizens' money gets worse as the federal
government amasses more power over state and local functions, such as
transportation and education. Aside from the unfairness and inefficiency
involved in channeling money through Washington, it is clear that, if the
government is spending its time worrying about potholes in Pittsburgh
and SAT scores in St. Louis, then it is not devoting full attention to
national security and other crucial concerns.
We have seen the most aggressive recent federal expansion of spending
on education, which was traditionally a local function. In 1995, the House
Republicans had slated the Department of Education for closing. Under
President Clinton, education outlays rose fairly modestly from $30 billion
in FY93 to $36 billion in FY01. But under President Bush, the department's
outlays skyrocketed to $56 billion in FY03.
Much of the Department of Transportation's activities are properly state
and private-sector responsibilities. It makes no sense to collect gasoline
taxes from citizens, send them to Washington, then dole the money back
to the states— minus the costs of the 100,000-plus-person DOT bureauc-racy
and its meddlesome rules. For example, federal funds come with

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Davis-Bacon strings attached requiring union-level wages on highway
projects. Moreover, Congress uses the DOT budget to deliver pork-barrel
projects of dubious value. The federal government should end the federal
gasoline tax and cease its highway, road, and mass transit spending
functions.
In FY03, the federal government will pay out about $376 billion in
grants in aid to state and local governments for health care, transportation,
housing, education, and other programs. Congress should begin transferring
these programs back to the states and reduce federal taxes by an equal
amount. State and local governments are in a much better position to
determine whether citizens are receiving value for their tax money on
roads, schools, and other items. By federalizing such spending we are
asking the U. S. Congress to do the impossible— to accurately balance in
a neutral and selfless way the competing needs of a massive and diverse
country of 280 million individuals.

Privatize Federal Assets
The federal government owns about one-third of the land in the United
States and continues to accumulate more holdings. Yet only a fraction of
federal land is of environmental significance, and the government has
proven itself to be a poor land custodian. The process of federalizing the
nation's land should be reversed by identifying low-priority holdings to
sell back to citizens.
In addition to excess land, the federal government owns billions of
dollars worth of other excess assets, including mineral stockpiles and
buildings. For example, the Department of Defense operates large numbers
of excess supply and maintenance depots, training facilities, medical facili-ties,
research labs, and other installations that should be closed. In a
positive move, DoD has begun to dispose of 80 million square feet of
excess buildings it owns.
The federal government should also sell the operating businesses that
it owns, including the U. S. Postal Service, Amtrak, electric utilities, and
other agencies. Privatization has swept the world as governments abroad
have recognized the superiority of private competitive markets. If a private
postal system works in Germany and private air traffic control works in
Canada, those industries ought to be private here, too (for further informa-tion,
see Chapter 32).

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Establish a Federal Sunset Commission
To structure the process of terminating federal agencies, Congress should
establish a federal '' sunset'' commission. Sunsetting is a process of auto-matically
terminating government agencies and programs after a period
of time unless they are specifically reauthorized. Sunset legislation was
introduced in the 107th Congress by Rep. Kevin Brady (R-Tex.). A sunset
commission would review federal programs on a rotating basis and recom-mend
major overhauls, privatization, or elimination.
Since the 1970s, numerous state governments have adopted the sunset
process, and it is currently used in about 16 states. In the late 1970s, there
was strong bipartisan support to pass a federal sunset law introduced by
Sen. Edmund Muskie (D-Maine) that would have sunset most federal
programs every 10 years. Supporters at the time ranged from Jesse Helms
(R-N. C.) to Edward Kennedy (D-Mass.). Although it gained strong support
in the Senate, the legislative effort failed in the House.
Today, sunsetting is needed more than ever. There is no structured
method for reforming or terminating agencies when they no longer serve
a public need or when better private alternatives become available. As a
result, government agencies rarely disappear. For example, the Rural Utili-ties
Service (formerly the Rural Electrification Administration) was created
in the 1930s to bring electricity to rural homes. Virtually all American
homes have had electricity for 20 years or more, yet the agency still
survives.
A sunsetting process could help eliminate such agencies and add teeth
to the Bush administration's efforts to move funds away from poorly
performing programs. Programs that the administration grades as '' ineffec-tive''
five years in a row could be automatically reviewed by the sunset
commission and subject to termination. An alternative would be a new
congressional procedure requiring a stand-alone vote on terminating an
agency or program if the administration grades it as ineffective for five
years.
Recent corporate scandals have illustrated that poor management and
financial malfeasance can occur in any organization in society. But the
scandals also show that private markets have mechanisms to correct
excesses and rule breaking. In the private sector, poor performers are
weeded out, executives and managers are sacked, and resources are shifted
to better-run competitors. By contrast, the executive branch of government
has no mechanism for creating the renewal that all organizations need in

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our fast-changing modern society. A federal sunset law would help to
create renewal and reform in government.

Other Budget Process Reforms
Congress has done little to reform the budget rules that skew political
decisionmaking in favor of ever-larger outlays. Now that the federal budget
again has huge deficits, it is even more clear that lasting budget process
reforms are needed. There has been much debate about which particular
reforms would best restrain spending. But there is little to lose by experi-menting
with different budget control mechanisms, and any or all of the
following reforms should be pursued.

Discretionary Spending Caps with a Freeze or Cut on Outlays
Caps on discretionary spending enacted in 1990, as extended, expired
at the end of FY02. The caps, while far from perfect, did play a role in
bringing discipline to spending in the 1990s. The caps should be extended
and frozen at today's nominal total for discretionary outlays, or, even
better, outlays should be put on a downward glide path. At the same time,
rules on such items as emergency spending and advance appropriations
need to be tightened to prevent Congress from bypassing the caps.

Tax and Expenditure Limitation
The federal government should implement a cap on overall annual
budget growth, in the manner of the 26 states that have either statutory
or constitutional limits on tax revenue or spending growth. Colorado's
Taxpayer Bill of Rights is probably the most successful budget cap. It
provides an automatic tax refund to citizens when tax revenues grow faster
than the sum of inflation plus population growth. Such limits prevent
governments from overexpanding during boom years, thus making it easier
to balance the budget during recessions.

Balanced-Budget Amendment
Fiscal conservatives have long sought a balanced-budget amendment
(BBA) to the U. S. Constitution. The return to large deficits shows that,
once again, Congress cannot control its spending appetite and that further
constraints are needed. However, there is a concern that a BBA could
cause politicians to raise taxes during economic slowdowns to balance
the budget. For that reason, a BBA should be paired with a supermajority

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tax limitation amendment that makes it more difficult for Congress to
raise taxes.

Supermajority Tax Limitation Amendment
With or without a BBA in place, a supermajority requirement for tax
increases makes sense. Under a supermajority tax limitation, any tax
increase would require a two-thirds vote in the House and Senate for
passage. When the economy grows, federal tax revenues tend to grow
faster than incomes— even without legislated increases. Given this auto-matic
upward tax bias, taxpayers should be provided with the extra protec-tion
of such a limitation against any legislated tax increases. (Note that a
supermajority tax limitation amendment or the BBA would need a two-thirds
vote in Congress and ratification by three-quarters of the states to
become law.)

Reject Spending Programs as Unconstitutional
The U. S. Constitution confines federal spending authority to a few
limited areas. Article I, section 8, allows for spending mainly on basic
functions, such as establishing courts, punishing crime, and maintaining
an army and navy. The General Welfare Clause in section 8 is said to
provide a justification for much of today's $2.1 trillion in federal spending.
But much of federal spending is not for '' general welfare'' at all. Rather,
it is for the benefit of particular groups and individuals. For example,
federal export loans of more than $1 billion to Enron, and other corporate
welfare spending, are aimed at narrow interests, not the general interest.
Members of Congress take an oath to uphold the Constitution. They should
start taking that oath seriously. When a dubious program comes before
them, they should ask whether there is proper constitutional authority for
it given the limited role that is reserved for federal spending power.

Conclusion: Time for Bold Reforms
Bold fiscal reforms need to be pursued at both ends of Pennsylvania
Avenue. The administration is under the shortsighted illusion that it can
have bigger government in the selected areas it wants, such as defense,
agriculture, education, and Medicare prescription drugs, but have tight
limits on spending elsewhere. But that strategy leads to larger government
everywhere because Congress is spurred to demand higher spending for
all its favorite programs. Both Congress and the administration must
end their shortsighted jostling for more taxpayer cash. Not only is the

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government running huge deficits again, but the looming explosion in
entitlement costs demands that all aspects of the federal spending empire
be overhauled.

Appendix: Proposed Program Terminations, Privatizations, and Transfers to the States (FY02 outlays in $ millions)
Department of Agriculture
Economic Research Service $70
National Agricultural Statistics Service $118
Agricultural Research Service $1, 104
Cooperative State Research, Educ., and Extension Serv. $1,069
Agricultural Marketing Service $770
Risk Management Agency $2, 978
Farm Services Agency (subsidies, loans, insurance) $23,732
Rural Development $946
Rural Housing Service $287
Rural Business Cooperative Service $76
Rural Utilities Service $106
Foreign Agricultural Service $1,167
Food and Nutrition Services $38,003
Land Acquisition Programs $101
Forest Service, State and Private Forestry $441
Total Department of Agriculture $70,968

Department of Commerce
Economic Development Administration $493
International Trade Administration $342
Export Administration $80
Minority Business Development Agency $25
National Ocean Service $435
National Marine Fisheries Service $675
National Environmental Satellite, Data, & Info. Serv. $147
Advanced Technology Program $187
Manufacturing Extension Program $111
Other Nat. Inst. of Standards & Tech. Programs $361
National Telecommunications & Info. Admin. $112
Total Department of Commerce $2,968

Department of Defense (see Chapter 48)

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Department of Education
Total— terminate, privatize, or transfer to states all programs $47,587

Department of Energy
General Science, Research, and Development $3,240
Energy Supply $695
Fossil Energy, Research and Development $544
Energy Conservation $831
Strategic Petroleum Reserve $166
Energy Information Administration $80
Clean Coal Technology $75
Power Marketing Administration subsidies $145
FreedomCAR $150
Total Department of Energy $5,926

Department of Health and Human Services
Indian Health Service $2,874
Substance Abuse and Mental Health Serv. Admin. $2,918
Agency for Health Care Research and Quality $91
Temporary Assistance for Needy Families $18,334
Payments to States for Family Support Programs $3,558
Low-Income Home Energy Assistance $1,831
Promoting Safe and Stable Families $300
Child Care Entitlements to States $2,536
Block Grants to States for Child Care and Dev. $1,917
Social Services Block Grant $1,803
Payments to States for Foster Care and Adoption $6,098
Violent Crime Reduction Programs $25
Administration on Aging $1,137
Total Department of Health and Human Services $43,422

Department of Housing and Urban Development
Total— terminate, privatize, or transfer to states all programs $30,948

Department of the Interior
Bureau of Indian Affairs $2,217
Bureau of Reclamation $999
U. S. Geological Survey $923
Sport Fish Restoration Fund $312
Land Acquisition Programs $271
Total Department of the Interior $4,722

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Department of Justice
Juvenile Justice Programs $208
Community Oriented Policing Services $1, 057
State and Local Law Enforcement Assistance $1,722
Weed and Seed Program $41
Drug Enforcement Administration $1,537
Interagency Crime and Drug Enforcement $335
Total Department of Justice $4,900

Department of Labor
Training & Employment Services $5, 860
Welfare to Work $491
Community Service Employ. for Older Americans $469
Trade Adjustment Assistance $415
Total Department of Labor $7,235

Department of State/ International Assistance Programs
United Nations Organizations $595
United Nations Peacekeeping Activities $1,565
United Nations Arrearage Payments $826
Inter-American Organizations $126
North Atlantic Treaty Organization $42
Org. for Economic Cooperation & Dev. $49
Migration and Refugee Assistance $762
Int. Narcotics Control & Law Enforcement $350
Andean Counterdrug Initiative $409
Economic Support Fund $2,955
Foreign Military Financing Program $4,237
Total Department of State/ International Assistance Programs $11,916

Department of Transportation
Federal Railroad Administration $1,089
Federal Transit Administration $6,112
Grants-in-Aid for Airports $2,801
Essential Air Service program $53
Air Traffic Control operations $5, 792
Maritime Administration $651
Federal Highway Administration $28,729
Total Department of Transportation $45,227

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Department of the Treasury
Customs Service, Air and Marine Interdiction $198
Community Development Financial Institutions $115
Interagency Crime and Drug Enforce. Task Force $92
Total Department of the Treasury $405

Department of Veterans Affairs
V. A. Health Care Facilities Construction $398
Total Department of Veterans Affairs $398

Other Agencies and Activities
Agency for International Development $3, 390
Assistance for Eastern Europe $402
Assistance for Former Soviet Union $484
African Development Fund $57
Appalachian Regional Commission $109
Commission on Civil Rights $9
Corporation for National and Community Service $433
Corporation for Public Broadcasting $375
Corps of Engineers $4,975
Equal Employment Opportunity Commission $331
Cargo Preference Program $673
Export-Import Bank $1,044
Federal Drug Control Program $457
Federal Labor Relations Board $29
International Assistance Programs (multilateral) $2, 089
Legal Services Corporation $329
NASA $14,484
National Endowment for the Arts $113
National Endowment for the Humanities $125
National Labor Relations Board $238
Neighborhood Reinvestment Corp. $105
Overseas Private Investment Corporation $207
Peace Corps $284
Selective Service System $25
Small Business Administration $1, 439
Trade and Development Agency $55
Total Other Agencies and Activities $32,261

Total Proposed Budget Savings $308,883
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Suggested Readings
Congressional Budget Office. '' Federal Spending on the Elderly and Children. '' July 28, 2000, www. cbo. gov.

. '' A 125-Year Picture of the Federal Government's Share of the Economy, 1950 to 2075. '' July 3, 2002, www. cbo. gov.
Edwards, Chris. '' Controlling Defense Costs. '' Cato Institute Tax & Budget Bulletin no. 8, May 2002.
. '' Sunsetting to Reform and Abolish Federal Agencies. '' Cato Institute Tax & Budget Bulletin no. 6, May 2002.
Moore, Stephen, and Stephen Slivinski. '' The Return of the Living Dead: Federal Pro-grams That Survived the Republican Revolution. '' Cato Institute Policy Analysis no.
375, July 24, 2000. New, J. Michael. '' Limiting Government through Direct Democracy: The Case of State
Tax and Expenditure Limitations. '' Cato Institute Policy Analysis no. 420, December 13, 2001.
Penny, Tim, and Major Garrett. The Fifteen Biggest Lies in American Politics. New York: St. Martins, 1998.

—Prepared by Chris Edwards

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24. Tax Reform
Congress should
make permanent and accelerate the phase-in of tax cuts
enacted in 2001, including rate reductions, estate tax repeal, and pension liberalization;

repeal the individual and corporate alternative minimum taxes;
reduce the taxation of capital by lowering personal taxes on
capital gains and dividends, which are currently taxed at both the corporate and individual levels;

expand Roth individual retirement accounts by greatly increas-ing
contribution and income limits and repealing withdrawal restrictions to create a large all-purpose savings account avail-able

to every American; index individual income tax brackets to nominal income growth
rather than inflation to prevent hidden tax increases caused by '' real bracket creep'';
make permanent the 30 percent expensing provision for capital
investment enacted in 2002, and expand it to ultimately allow 100 percent expensing;

ensure that all tax cuts are consistent with replacing the income
tax with a low-rate consumption-based tax, such as a Hall-Rabushka flat tax, a savings-exempt income tax, or a national

retail sales tax; and generally make all federal taxes lower, flatter, and simpler.

Introduction
At the beginning of the 20th century, federal taxes accounted for just
3 percent of the nation's gross domestic product, and the tax code and

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related regulations filled just a few hundred pages. Today, federal taxes
account for more than 18 percent of GDP (after peaking at about 21
percent in 2000), and federal tax rules span 45,662 pages.
The annual extraction of $2 trillion in federal taxes from families and
businesses comes at an enormous cost. The most obvious cost is that
Americans are left with less money to meet their needs for food, clothing,
housing, and other items, and businesses are left with fewer funds to
reinvest to build the economy. Today's huge tax burden exacerbates every
problem of the federal tax code, including the bias against saving and
investment, complexity, unequal treatment, and wasteful tax avoidance
and evasion.
Reducing the overall tax burden should be the top priority for Congress
(Chapter 23 provides federal budget reduction ideas). The tax system can
be redesigned to greatly reduce its high costs. That is particularly true of
the income tax on individuals and corporations. The current high-rate
income tax is excessively complex, discourages saving and investment,
and creates large inefficiency costs that stunt economic growth. Any of
those problems alone should give Congress a strong motive for major
reforms. Taken together, they make major tax reform a necessity.
This chapter looks first at problems inherent in the current income tax
that would be greatly reduced by a low-rate consumption-based tax. Short-term
reform options are then proposed to make the tax code simpler
and less burdensome. Finally, long-term consumption-based tax reforms
are discussed.

Excessive Complexity
In 1976, president-to-be Jimmy Carter called for '' a complete overhaul
of our income tax system. I feel it's a disgrace to the human race. '' Since
Carter's attack, the number of pages of federal tax rules has more than
doubled. And now, Treasury Secretary Paul O'Neill calls the tax system
an '' abomination. '' Clearly, reform is long overdue.
The income tax's complexity creates a huge compliance burden, requires
high enforcement costs, causes high error rates, impedes economic deci-sionmaking,
leads to inequitable treatment of citizens, and promotes tax
avoidance and evasion.

Compliance Burden
Estimates reported by the Office of Management and Budget show that
Americans spend more than 6 billion hours each year filling out tax forms,

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keeping records, and learning tax rules. The complexity of the tax system
has spawned a huge public and private '' tax industry'' to perform adminis-trative,
planning, and enforcement activities. Those activities represent a
pure loss to the economy since they consume resources and human effort
that could otherwise be used to create useful goods and services. The
costs of complying with federal income taxes are estimated to be roughly
$200 billion per year. That huge burden falls on individuals both directly
and indirectly through the burdens imposed on businesses. For example,
a large corporate tax filing with related paperwork can run more than
10,000 pages. All Americans would gain if businesses spent less time on
such paperwork and tax avoidance strategies and more time creating
better products.

Enforcement Costs
In addition to the basic compliance costs of filing returns and tax
planning, taxpayers incur large costs responding to IRS audits, notices,
liens, levies, and seizures. The IRS assesses about 30 million penalties each
year, thus imposing more costs on taxpayers. Because of the complexity of
the tax system, many penalties are erroneous and thus a waste of effort
all around.

Errors
Tax complexity causes taxpayers, the IRS, and tax experts to make
frequent and costly errors. The IRS routinely gets up to half the answers
to taxpayer phone inquiries wrong. Money magazine's annual test of
tax experts, who are asked to compute taxes for a hypothetical family,
consistently shows wide variations in experts' answers as a result of tax
law complexity.

Economic Decisionmaking
Tax complexity impedes efficient decisionmaking by families and busi-nesses.
For example, the growing number of saving vehicles under the
income tax, including 401( k) s and individual retirement accounts (IRAs),
greatly confuses family financial planning. The wrong saving choice could
result in lower returns, less liquidity, and payment of withdrawal penalties.
Today's complex savings choices would be vastly simplified under a low-rate
consumption-based tax.
The continual change in tax rules injects great uncertainty into long-term
economic decisions, such as planning for business investment or

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retirement. The 2001 tax cut law alone had 85 major provisions and
created 441 separate changes to the tax code. Each change in the law sets
off changes in tax regulations, requests for IRS guidance, changes to tax
forms, and higher error rates. Income tax complexity also creates taxpayer
confusion about the effects of current laws, let alone future changes. With
regard to disagreements on business tax items, audits, appeals, and litigation
with the IRS can drag on for years with no clear answer as to the correct
tax payment amount.

Inequity and Unfairness
The many complex features of the income tax create unfairness because
similar families end up paying different tax amounts. As Congress has
larded up the income tax code with special preferences, inequities have
increased. Tax incentives for education, home ownership, and savings
plans reward some families but not others. Polls have found that most
Americans believe that the income tax is '' unfair. '' No doubt such feelings
have been fueled by the many special preferences carved into the tax
code. A consumption-based tax would be simpler and fairer.

Avoidance and Evasion
Tax complexity leads to noncompliance with the tax system caused by
both confusion and a desire to evade taxes. Complexity fosters multiple
interpretations of the law and aggressive tax planning. Taxpayers take
risks on their tax returns in the hope that complexity will hide their
strategies from the IRS. The economy would be better off if tax rules
were simple and transparent so that businesses could spend their energies
on their operations, not playing cat-and-mouse games with the IRS.

Bias against Saving
The income tax system distorts the crucial economic tradeoff between
consumption and saving. Saving is a primary source of economic growth
because it provides businesses with the investment funds they need to
expand and modernize the nation's capital stock. It is widely recognized
that the income tax system is biased against saving because the returns
to saving can face high tax rates, whereas current consumption does not.
That income tax bias has contributed to much of the interest in funda-mental
tax reform in recent years. Nearly all recent tax reform proposals
would adopt a consumption base in order to eliminate saving and invest-ment
disincentives and to boost capital formation and growth. Also, a

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consumption tax base would increase economic efficiency by equalizing
the treatment of all types of capital income. By contrast, the current tax
system distorts corporate financing. For example, interest payments are
deductible at the corporate level, but dividend payments are not. Many
experts believe that this disparate treatment has led American companies
to take on too much debt relative to equity. That causes greater numbers
of bankruptcies and exacerbates economic instability.
At the individual level, removing tax barriers to all types of saving
would allow families to gain greater financial security. With larger pools
of savings, families could better plan for their future and guard against
unforeseen financial problems. Consumption-based tax plans would treat
personal saving under rules similar to those that govern either regular
IRAs or Roth IRAs. In the first case, saving is initially deducted but
withdrawals are later taxed. In the second case, no deduction is given for
saving initially but qualified withdrawals are not taxed. The Hall-Rabushka
flat tax adopts savings treatment similar to that of the Roth IRA by taxing
initial wage earnings but exempting dividends, interest, and capital gains
from taxation at the individual level. If made universal for all types of
savings and for all families, that treatment would greatly increase saving
incentives and remove large paperwork headaches that taxpayers face
under the current plethora of different savings vehicles, each with unique
rules and limitations.

Economic Inefficiency
A $1 million government spending program does not cost taxpayers
just $1 million. It costs them much more. That is because taxes cause
large distortions in the efficient functioning of the market economy by
changing prices and altering behavior. Those distortions are called '' dead-weight
losses. '' For example, consider a woman with a wage job who is
considering launching a small business on the side to earn more income.
If the government hikes marginal tax rates and dissuades her from those
entrepreneurial plans, the nation loses the additional production and the
innovative ideas that she could have added to the economy.
High marginal tax rates greatly increase the economic damage or dead-weight
losses of income taxes. That is because deadweight losses increase
more than proportionally to increases in tax rates. In particular, deadweight
losses rise by the square of the increased tax wedge between pre-and
posttax income for income taxes. For example, a doubling of the tax
wedge causes deadweight losses to quadruple. As a consequence, a flatter

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tax rate structure would be much more efficient than today's highly gradua-ted
tax rate structure.
Economic research indicates that deadweight losses represent at least
25 percent of each additional dollar of federal income tax revenue. Indeed,
the Office of Management and Budget incorporates a 25 percent dead-weight
loss measure into federal cost/ benefit analyses. That means that
for new government spending projects to even begin making economic
sense, they must generate benefits at least 25 percent greater than their
explicit tax costs because of the extra 25 cents on the dollar damage
created by raising taxes.
Conversely, tax rate reductions benefit taxpayers by substantially more
than the amount by which taxpayers' explicit liabilities are reduced. For
example, an estimate of President Bush's original tax cut plan by Harvard
professors Martin Feldstein and Daniel Feenberg in 2001 found that it
would reduce deadweight losses by 38 percent of the value of the $1.6
trillion tax reduction, or about $600 billion over 10 years.
Tax rate cuts reduce deadweight losses by increasing rewards for work,
savings, entrepreneurial activity, and business investment and by shifting
economic activity into more productive areas. For example, a series of
statistical studies by tax economists Robert Carroll, Douglas Holtz-Eakin,
Mark Rider, and Harvey Rosen has found that personal income tax rate
cuts, such as occurred in 1986, have a substantial positive effect on small
business hiring, investment, and growth.

Short-Term Reforms
In 2001, Congress enacted the Economic Growth and Tax Relief Recon-ciliation
Act based on the outline of President Bush's tax reduction plan.
The 2001 tax law took a number of very positive steps, including reducing
individual statutory tax rates, liberalizing the tax rules on retirement sav-ings,
and repealing the estate tax. However, all those provisions are set
to expire on December 31, 2010, which would impose a massive tax hike
on Americans at that time. The tax law also included absurdly extended
phase-in periods for tax reductions such that taxpayers will experience
the benefits of some tax cuts for just a year or two before having them
snatched away at the end of 2010. The first priority of the 108th Congress
should be to fix the severe shortcomings of the 2001 tax law.

Make 2001 Tax Cuts Permanent and Effective Immediately
Under the 2001 tax law, individual tax rate cuts are not fully phased
in until 2006, the estate tax is fully repealed for only one year in 2010, and

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IRA liberalization is not fully phased in until 2008. Most other provisions in
the law also have delayed effective dates. Congress should make all
provisions in the 2001 tax law effective immediately. After all, the law's
provisions help to solve long-standing problems with the tax code and
help to spur economic growth. It makes sense to provide taxpayers with
those promised future benefits today.

Expand and Make Permanent New Capital Expensing Rules
In 2002, Congress enacted a tax cut designed to stimulate the economy
by allowing companies a 30 percent first-year tax write-off ('' expensing'')
for investment in qualified business equipment. That provision is effective
for only three years. Yet expensing has long been proposed as a permanent
tax code fix to spur investment and long-term economic growth. The
expensing provision should be made permanent and ultimately expanded
to allow 100 percent expensing. Full expensing would be the treatment
received by capital investment under most major tax reform plans, such
as the Hall-Rabushka (or Dick Armey) flat tax and the USA tax plan of
Rep. Phil English (R-Pa.). Such treatment would not only boost economic
growth; it would also greatly simplify the tax code by ridding it of all the
complex depreciation rules.

Greatly Liberalize the Roth IRA
Individual-level taxes on capital income need to be reduced all around.
One promising approach to that end would be to liberalize the Roth IRA.
The Roth IRA, created in 1997, has become a popular way to save; 12
million U. S. households now hold accounts, according to the Investment
Company Institute. Contributions to Roth IRAs are from after-tax earnings,
but investment returns and qualified withdrawals are tax-free. But Roth
IRAs have strict limitations that should be greatly liberalized so that
families can build up larger pools of savings to achieve more financial
security.
Roth IRAs have income limits, low caps on annual contributions, and
restrictions on withdrawals before retirement age. Under the 2001 Bush
tax cut, the annual contribution limit for Roth IRAs rises from $3,000 in
2002 to $5,000 by 2008. That limit should be raised to at least $20, 000
immediately. Another key problem is that because a 10 percent penalty
is placed on most withdrawals prior to retirement, the liquidity of these
savings vehicles is greatly reduced. The result is that individuals save
much less because they fear that they may need their money before the

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government permits them penalty-free access. Thus, Roth IRAs should
be liberalized and turned into universal-purpose savings accounts allowing
withdrawals for any reason, not just for purposes specified by the
government.
As currently designed, Roth IRAs are aimed at encouraging retirement
savings. But tax code barriers to all types of savings, not just retirement
savings, should be removed. Not only would that stimulate economic
growth, it would encourage individuals to build up larger financial pools
that could be used for any family contingency, such as medical expenses,
home buying, unemployment, college, or unexpected crises. All individual
savings are beneficial to long-term economic growth, and all savings
contribute to individual financial stability.
Congress should create a universal savings account by removing income
limits, contribution limits, and withdrawal restrictions on Roth IRAs. There
would be no tax on dividends, interest, and capital gains earned within
these new accounts because initial contributions would come from after-tax
earnings. The revenue loss to the government in the short term would
be small. Such a plan would greatly simplify the individual tax code by
steering much of future individual savings into these simple accounts, and
away from all the current complex and special-purpose savings plans.

Fix Real Bracket Creep
During economic expansions, individual taxes are steadily and stealthily
increased by the phenomenon of '' real bracket creep. '' Much of the
individual income tax code is indexed for inflation but not for real economic
growth. As a consequence, increasing shares of Americans' incomes are
moved into higher tax brackets each year as the economy expands. That
occurs because of the steeply graduated rate structure of the income tax
and provisions such as the standard deduction that are also not indexed
for real economic growth.
A substantial share of the benefits from the 2001 tax cut may be eaten
away by real bracket creep. Congress should index individual income tax
brackets and other tax code provisions to nominal income growth, rather
than inflation, to prevent real bracket creep. Implementing a low flat-rate
tax would also eliminate the problem.

Reduce Taxation of Dividends and Capital Gains
Congress should follow a general policy of steadily reducing the exces-sive
taxation of capital income. Top tax cut priorities include reducing

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Tax Reform
the corporate income tax rate and reducing individual taxes on dividends
and capital gains. The United States is out of step with many of its major
trading partners who have reduced capital income taxation in recent years.
In fact, the United States has the fourth highest corporate income tax rate
among the 30 major nations of the Organization for Economic Cooperation
and Development. The average rate across the 30 OECD countries fell
from 37.6 percent in 1996 to 31.4 percent in 2002 (including national and
subnational taxes).
Regarding dividends, the United States has the fourth highest corporate
plus individual tax burden on earnings distributed as dividends among
OECDcountries. About two-thirds of OECDcountries— but not the United
States— partially or fully relieve the double taxation of dividends, typically
by providing shareholders with a tax reduction on dividends received.
The United States also lags behind on capital gains taxation. For exam-ple,
Austria, Belgium, the Czech Republic, Germany, Greece, Hong Kong,
Mexico, the Netherlands, New Zealand, Poland, and Switzerland all have
a tax rate of zero on individual capital gains (holding periods or other
conditions apply in some cases).

Enact Simplification Measures
Congress has taken a few very small steps to deal with the tax complexity
problem. In April 2001, the Joint Committee on Taxation released a 1,300-
page report on the topic. The study cataloged the excessive complexity
of federal taxes and proposed more than 100 specific reforms. There is
no reason why Congress should not move forward with these reforms,
most of which are not controversial.
Congress should also move forward on tax reforms for international
businesses. Many good reforms were proposed by House Ways and Means
Committee chairman Bill Thomas (R-Calif.) in the 107th Congress. The
U. S. tax rules on multinational corporations are perhaps the most complex
in the world. The complexity of the rules causes U. S. companies to spend
far too much time and energy on tax planning activities rather than more
productive pursuits. Glenn Hubbard, chairman of the Council of Economic
Advisers, and James Hines have in the past concluded that '' the present
U. S. system of taxing multinationals' income may be raising little U. S.
tax revenue, while stimulating a host of tax-motivated financial transac-tions.
'' It is time to move ahead on both business and individual tax
simplification reforms.

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Reform U. S. International Business Taxation
Not only are U. S. tax rules on international businesses complex, many
experts agree that they put U. S.-based companies at a competitive disadvan-tage
in world markets. Consumption-based taxes, including the flat tax,
would eliminate most international tax rules because they are '' territorial''
taxes, which do not tax the foreign operations of U. S. businesses. About
half of OECD countries have territorial business tax systems. Moving to
a territorial system would allow U. S. companies to compete on a level
playing field in foreign markets with corporations headquartered in
other countries.

Repeal the Alternative Minimum Tax
The corporate and individual alternative minimum taxes (AMTs) are
complex income tax systems that operate parallel to the ordinary income
tax systems. There is broad agreement that the ill-conceived AMTs should
be repealed. For example, AMT repeal has been recommended by the
Joint Committee on Taxation and the American Bar Association. Former
IRS national taxpayer advocate Val Oveson called the AMT '' absolutely,
asininely stupid'' in a speech in 2000. Under JCT projections, 36 million
taxpayers will be subject to the '' asinine'' individual AMT by 2010 unless
Congress acts to repeal it.

Reform the Tax Policy Process
When Congress is considering raising or cutting taxes, expected changes
in revenues are officially estimated by the JCT. The Treasury's Office of
Tax Analysis performs a similar function for the administration. Those
estimates are very important in policy debates about the desirability of
tax changes, yet they are often erroneous and incomplete. Unfortunately,
tax reforms that are desirable because they would raise Americans' incomes
are often held up because of faulty estimates of the federal budgetary
impact and because broad economic benefits are not taken into account.
The current tax policy process in Washington stacks the deck against pro-growth
tax reforms.
Revenue estimates by the JCT and OTA generally assume that tax
changes will not affect the overall economy; thus they are termed '' static''
estimates. Yet major reductions in marginal tax rates, for example, would
substantially boost economic activity and individual incomes, thus generat-ing
an offsetting increase in federal revenues. Revenue estimates that
include such economic feedbacks are called '' dynamic'' estimates. Con-250 251
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Tax Reform
gress should introduce procedures to present dynamic revenue estimates
alongside current static estimates for major tax bills.
Other aspects of the tax policy process also need reform. The current
process is closed to public scrutiny and is resistant to change. Information
provided to policymakers is based on particular economic and tax theories
that should be more open to peer review. In addition, the presentation
of tax information to policymakers and the general public needs to be
overhauled. For example, politically important presentations on the '' distri-butional''
effects of proposed tax changes (effects presented by income
groups) can be very misleading. Congress should reexamine the way such
information on tax changes is presented to ensure fairness and accuracy.

Long-Term Reforms
Raising the bulk of federal revenue from broad-based individual and
corporate income taxes was a historic mistake. It has led to excessive
complexity, a powerful bias against saving and investment, economic
inefficiency, and a reduction in U. S. economic growth. To correct those
problems, nearly all major tax reform proposals of recent years would
replace the individual and corporate income taxes with a low-rate
consumption-based tax.

Current System Has Complex and Damaging Tax Base
The key economic differences between income and consumption-based
taxes regard the treatment of saving and investment. The federal income
tax is loosely based on a very broad measure of income called Haig-Simons
income. That basis results in heavy taxation of saving and investment. For
example, a full Haig-Simons-based tax would tax all capital gains accrued
on paper every year, whether or not those gains were actually received.
It would also tax items that individuals would not normally think of as
income, such as the implicit rent received from owning one's home and
the buildup of wealth in life insurance policies.
Many tax policy experts traditionally supported taxing an expansive
Haig-Simons income base. Yet there is no good economic argument for
such a tax base. For example, the accrual taxation of capital gains would
result in double taxation of investment. (A rise in an asset's projected
future return would lead to an immediate taxable capital gain. Then, the
return would be taxed again as the asset generated revenues in future
years.) The attraction of a Haig-Simons income tax base seems to stem

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mainly from the egalitarian impulse to impose a heavy load of taxation
on those with high incomes.
Taxing a broad income base is very impractical and complex. As a
result, the current income tax has fallen back on an array of ad hoc
and inconsistent rules for defining individual and business income. Some
income is exempt from tax, some income is taxed once, and other income
is taxed multiple times. There is no consistent standard under present tax
policy for what constitutes income or when it should be taxed.
In addition, inflation wreaks havoc with broad-based income taxes,
making items such as capital gains and depreciation very difficult to
measure properly. The many jury-rigged fixes under the income tax create
decisionmaking difficulties and paperwork burdens for individuals and
businesses. For example, the current income tax treats capital gains on a
realization basis, which adds a great deal of planning difficulties for
investors who must try to optimally time asset sales and offset gains
with losses.
There is a growing realization among economists, tax experts, and
taxpayers that the current income-based system cannot be made simple.
What is needed is a fundamental overhaul that would create a simple and
transparent consumption-based tax, in place of the complex and uncompeti-tive
federal income tax.

Reforming Taxation with a Low-Rate Consumption-Based Tax
Congress should begin replacing the individual and corporate income
taxes with a low-rate consumption-based tax. That goal can be reached
gradually by following the short-term reforms listed above, or it can be
implemented by an immediate replacement combined with various transi-tion
rules. Leading consumption-based tax proposals have included the
Hall-Rabushka flat tax, a national retail sales tax, and variants of a con-sumed-
income tax. The flat tax was originally proposed by Robert Hall
and Alvin Rabushka of the Hoover Institution and was most recently
championed by former house majority leader Dick Armey. Leading retail
sales tax proposals have included a plan by Rep. Billy Tauzin (R-La.) to
replace income taxes and the estate tax with a 15 percent retail sales tax;
Rep. John Linder's (R-Ga.) plan would replace those taxes plus federal
payroll taxes with a 23 percent sales tax called the '' FairTax. '' Rep. Phil
English (R-Pa.) has introduced a plan based on the consumed-income
tax approach.
Those plans are similar in economic thrust as they all would reduce
the taxation of saving and investment. They would, however, differ in

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Tax Reform
Table 24.1 Advantages of a Low-Rate Consumption-Based Tax
Economic and simplification advantages of a Hall-Rabushka-style tax compared with the current income tax

Advantages for Individuals
Low tax rate:
Increased incentives for working, saving, and entrepreneurial activities.
With lower rates, more than 20 million small businesses and the self-employed who file
under the personal tax system would have added incentives to hire and invest.

Personal savings: No taxation of interest, dividends, and capital gains. That would
greatly enhance financial privacy and increase the ability and incentive for families to
save for their own retirement and other future expenses. No need for half a billion 1099s
and other IRS forms.

Capital gains: Eliminating capital gains taxation would get rid of multiple tax rates and
holding periods and complexities such as the timing of realizations, matching gains with
losses, and calculating basis. Great boon for entrepreneurial growth companies, which
rely on investors who earn returns through capital gains.

Interest: Interest income and interest expense complications and distortions eliminated,
such as the municipal bond preference.

Savings vehicles: Current plethora of savings vehicles, including 401( k) s and IRAs,
would be phased out as tax hurdles were removed for all types of savings. Families
would save for reasons of their own choosing, would withdraw funds without penalties,
and would not have to sort through pages of rules to make savings decisions. Saving would
become individually based instead of being tied to the risks of company pension plans.

Social engineering: Fairness would be increased as items that specially favor some
taxpayers were eliminated, such as the five different current education tax preferences
related to savings and interest.

Advantages for Businesses
Low tax rate:
Increased incentives for all businesses to hire and invest. Greater attraction
of foreign investment would help build the U. S. economy. Reduced efforts put into
wasteful tax avoidance, evasion, compliance, and enforcement activities.

Capital income: All types of capital income would receive the same neutral treatment
and be taxed only once. Distortions that change business and financial structure, such
as the current corporate bias in favor of debt financing, would be eliminated.

(continued)

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Table 24.1 (continued)

Depreciation: Complex and distortionary tax rules for capital purchases eliminated.
Business investment would receive a huge boost, which would spur long-term eco-nomic
growth.

Capitalization issues: Aside from depreciation, other tax rules that relate to the timing
of income and deductions would be eliminated, such as the complex rules for busi-ness
inventory.

Capital gains: Elimination of corporate capital gains would reduce complexities of
business reorganizations and investment activities.

Inflation: Distortions caused by inflation under the income tax for such items as for
depreciation, inventory, and capital gains would be eliminated under a consumption-based
tax.

International tax rules: Businesses would be taxed on a territorial basis under a consump-tion-
based tax, thus eliminating many complex tax provisions, such as the foreign tax
credit.

Business structure: Uniform business taxation would replace C and S corporations,
LLCs, sole proprietorships, and partnerships. Business and financial planning would be
greatly simplified, as would be the tax treatment of mergers and acquisitions.

their mechanics and pose trade-offs with regard to administration, simplic-ity,
and civil liberties. Nonetheless, they would all represent major improve-ments
on the current federal income tax mess.
Table 24.1 summarizes the dramatic economic and simplification gains
that could be achieved under a structure like the Hall-Rabushka flat tax,
which would incorporate simple and low-rate business and individual-level
taxes. Similar gains may be achieved under other low-rate consump-tion-
based tax plans.

Conclusion
Consumption-based tax proposals have gained widespread support
because they would reduce the tax burden on saving and investment and
spur greater economic growth. In addition, replacing the current income
tax with a consumption-based tax promises vast simplification of the
complicated federal tax code.

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Tax Reform
Given the nine-decade reign of the income tax, it is surprising what a
weak case there is for it compared with a consumption-based tax. In
congressional testimony a few years ago, the current chairman of the
Council of Economic Advisers, Glenn Hubbard, called the income tax
'' fundamentally flawed'' because of its inefficiency, complexity, and
unfairness. It is time to replace the flawed income tax with a lower, flatter,
simpler alternative.
As discussed, there are many good short-term reforms that Congress
should pursue, such as reducing overall marginal tax rates, eliminating
the AMT, and cutting taxes on dividends and capital gains. All changes
should aim for the ultimate goal of enacting a low-rate consumption-based
system in place of the fundamentally flawed income tax.

Suggested Readings
Adams, Charles. Those Dirty Rotten Taxes: The Tax Revolts That Built America. New York: Free Press, 1998.

Burton, David. '' Reforming the Federal Tax Policy Process. '' Cato Institute Policy Analysis no. 463, December 17, 2002.
Burton, David, and Dan R. Mastromarco. '' Emancipating America from the Income Tax: How a National Sales Tax Would Work. '' Cato Institute Policy Analysis no.
272, April 15, 1997. Edwards, Chris. '' Economic Benefits of Personal Income Tax Rate Reductions. '' U. S.
Congress, Joint Economic Committee, April 2001. . '' New Data Show U. S. Has Fourth Highest Corporate Tax Rate. '' Cato Institute
Tax & Budget Bulletin no. 3, April 2002. . '' Simplifying Federal Taxes: The Advantages of Consumption-Based Taxa-tion.
'' Cato Institute Policy Analysis no. 416, October 17, 2001. . '' Top Ten Civil Liberties Abuses of the Income Tax. '' Cato Institute Tax &
Budget Bulletin no. 4, April 2002. Hall, Robert, and Alvin Rabushka. The Flat Tax. 2d ed. Stanford: Hoover Institution
Press, 1995. McCaffery, Edward. '' Grave Robbers: The Case against the Death Tax. '' Cato Institute
Policy Analysis no. 353, October 4, 1999. Metcalf, Gilbert. '' The National Sales Tax: Who Bears the Burden? '' Cato Institute
Policy Analysis no. 289, December 8, 1997. Moore, Stephen, and John Silvia. '' The ABCs of the Capital Gains Tax. '' Cato Institute
Policy Analysis no. 242, October 4, 1995.
—Prepared by Chris Edwards

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25. Social Security
Congress should
allow young workers to redirect their payroll taxes to individually owned, privately invested retirement
accounts.

The debate over Social Security reform was poorly served by the 2002
congressional elections. With a declining stock market as a backdrop for
dueling attack ads, too many candidates became embroiled in a pointless
debate over the meaning of the word '' privatization. '' The public was left
without a clear presentation of the problems facing Social Security or of
the pros and cons of various solutions. But as campaigning gives way to
governing, Congress must recognize that Social Security is facing serious
problems and must be reformed.

Why Reform Social Security?
There are five main reasons to reform Social Security.

Keeping Social Security Solvent
Social Security is going bankrupt. The federal government's largest
spending program, accounting for nearly 22 percent of all federal spending,
faces irresistible demographic and fiscal pressures that threaten the future
retirement security of today's young workers. According to the 2001 report
of the Social Security system's Board of Trustees, in 2017, just 14 years
from now, the Social Security system will begin to run a deficit (Figure
25.1) That is, it will begin to spend more on benefits than it brings
in through taxes. Anyone who has ever run a business— or balanced a
checkbook— understands that when you are spending more than you are
bringing in, something has to give: you need to start either earning more
money or spending less to keep things balanced. For Social Security, that
means either higher taxes or lower benefits.

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Figure 25.1 Social Security Cost and Income

20

17.5
15
12.5
10

7.5
Income/

Cost
as
Percentage

of
Taxable

Payroll

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2080 2075

Cost
Income

Payroll tax deficits
2002: 10.8 percent 1970:
8.1

2025: 16 percent
Payroll tax surpluses

2080: 20.1 percent

In theory, Social Security is supposed to continue paying benefits after
2017 by drawing on the Social Security Trust Fund. The trust fund is
supposed to provide enough money to guarantee benefits until 2041, when
it will be exhausted. But one of Washington's dirty little secrets is that
there really is no trust fund. The government spent that money long ago
to finance general government spending and hide the true size of the
federal budget deficit. The trust fund now consists only of IOUs— promises
that at some time in the future the government will replace that money,
which can only be done by collecting more taxes or issuing even more debt.
Even if Congress can find a way to redeem the bonds, the trust fund
surplus will be completely exhausted by 2041. At that point, Social Security
will have to rely solely on revenue from the payroll tax. But that revenue
will not be sufficient to pay all promised benefits.
There are limited options available. Former president Bill Clinton
pointed out the choices: (a) raise taxes, (b) cut benefits, or (c) get a higher
rate of return through investment in real capital assets. Henry Aaron

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Social Security
of the Brookings Institution, a noted opponent of privatization, agrees.
'' Increased funding to raise pension reserves is possible only with some
combination of additional tax revenues, reduced benefits, or increased
investment returns from investing in higher yielding assets, '' he told
Congress in 1999.
The tax increases and benefit cuts would have to be large. To maintain
benefits after the system starts running a deficit in 2017, the government
must acquire new funds equivalent to $103 per worker. By 2030, the
additional tax burden increases to $1,543 per worker, and it continues to
rise thereafter. Functionally, that would mean an increase in payroll taxes
of roughly 50 percent, or an equivalent increase in income or other taxes.
If both individual accounts and tax increases are off the table, then, by
law,
benefits will have to be cut. Current estimates suggest that benefits
may have to be reduced by as much as a third. That would have a
devastating effect on those Americans most dependent on Social Security
for retirement income. Studies indicate that as many as 20 percent of
American seniors receive nearly all their retirement income from Social
Security.
It is important to realize that doing nothing is the same as endorsing
benefit cuts. Since, by law, once Social Security no longer has enough
revenue to pay benefits, without reform, benefit cuts are inevitable. In this
case, not to act is to act.

A Better Deal for Young Workers
Even if Social Security did somehow manage to pay all its promised
benefits, the taxes paid by today's young workers are already so high that
promised benefits would be a bad deal in return for those taxes. Those
benefits represent a low, below-market rate of return, or effective interest
rate, on the taxes workers and their employers have to pay into the system
throughout their careers (Table 25.1). Studies show that investing those
tax funds instead in private savings and insurance would likely yield three
or more times the benefits Social Security promises to today's young
workers. In fact, retiring workers will receive returns from Social Security
that are below those of risk-free government bonds.
Look at it another way: A single worker born in 1965, paying the
maximum in Social Security taxes, and retiring in 2030 would have to
live to over age 90 just to get back what he or she had paid into the
system (Table 25.2). This means that entire generations will lose money
under the current Social Security system.

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Table 25.1 Real Rates of Return Falling for All Retirees
(assumes no change in law, retirement at age 65)
Single-Earner
Single Male Single Female Couple Two-Earner
Birth (medium (medium (medium Couple
Year wages) wages) wages) (medium/ low wages)

1970 1.13 1.59 3.42 2.24
1980 0.91 1.36 3.31 2.08
1990 0.88 1.29 3.14 1.97
2000 0.86 1.25 3.02 1.88

SOURCE: Social Security Office of the Actuary calculations, May 27, 2001.

Table 25.2 What Age Must You Reach to Get Back What You've Paid In?

Total Life Expectancy for Age an Average Earner Gets
Individual Reaching Back Taxes Paid into the
Age 65 Year of Retirement Portion of

Birth Social Security Male Female
1875 65.2 77.7 79.7
1895 66.1 78.2 82.4
1915 67.8 79.7 83.9
1936 81.8 81.3 84.6
1945 85.2 81.9 85
1955 89.7 82.5 85.6
1965 91.9 83 86.1

SOURCE: Congressional Research Service, '' Social Security: The Relationship of Taxes and Benefits for Past,
Present, and Future Retirees, '' June 22, 2001; updated via telephone conversation with author. Under the
intermediate assumptions of the 2001 Trustees Report and taking into account benefit increases and continued
accrual of interest after retirement but not the taxation of benefits. The retirees are assumed to begin work at
age 22 and retire in January of the year in which they turn 65. Assumes contributions earn interest equal to
the long-term government bond rate.

Moreover, this may understate the problem since it assumes that Social
Security will continue to pay promised benefits without increased taxes.
But, as we have seen above, that is impossible.

Savings and Economic Growth
Social Security operates on a pay-as-you-go basis; almost all of the
funds coming in are immediately paid out to current beneficiaries. This

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Social Security
system displaces private, fully funded alternatives under which the funds
coming in would be saved and invested for the future benefits of today's
workers. The result is a large net loss of national savings, which reduces
capital investment, wages, national income, and economic growth. More-over,
by increasing the cost of hiring workers, the payroll tax substantially
reduces wages, employment, and economic growth as well.
Shifting to a system of individual accounts, with hundreds of billions
of dollars invested in private capital markets, could produce a large net
increase in national savings, depending on how the government financed
the transition. This would increase investment, productivity, wages, and
jobs. Replacing the payroll tax with private retirement contributions would
also improve economic growth, because the required contributions would
be lower and those contributions would be seen as part of a worker's
direct compensation, stimulating more employment and output.

Helping the Poor
Low-income workers would be among the biggest winners under a
private system. The higher returns and benefits of a system that relies on
private investment would be most important to low-income families, as
they most need the extra funds. The funds saved in the individual retirement
accounts, which could be left to the children of the poor, would also
greatly help families break out of the cycle of poverty. Similarly, the
improved economic growth, higher wages, and increased jobs that would
result from reforming Social Security would be most important to the
poor. Moreover, if we continue on our current course, low-income workers
will be hurt the most by the higher taxes or reduced benefits that will be
necessary. Averting a financial crisis and its inevitable results would
consequently be most important to low-income workers.
In addition, with average-and low-wage workers accumulating large
sums in their own investment accounts, the distribution of wealth through-out
society would become far broader than it is today. That would occur,
not through the redistribution of existing wealth, but through the creation
of new wealth, far more equally held. Because Social Security investment
accounts would make every worker a stockowner, the old, senseless divi-sion
between labor and capital would be eroded. Every laborer would
become a capitalist. The socialist dream of the nation's workers owning
its businesses and industries would be effectively achieved. At the same
time, as the nation's workers became capitalists, support for free-market,
pro-growth economic policies would increase in all sectors of society.

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That social effect is one of the least cited but most important reasons for
giving workers more control over their retirement savings.

Ownership and Control
After all the economic analysis, however, perhaps the single most
important reason for privatizing Social Security is that it would give
American workers true ownership of and control over their retirement
benefits.
Many Americans believe that Social Security is an earned right. That
is, because they have paid Social Security taxes they are entitled to receive
Social Security benefits. The government encourages this belief by refer-ring
to Social Security taxes as '' contributions, '' as in the Federal Insurance
Contributions Act. However, the U. S. Supreme Court has ruled, in Flem-ming
v. Nestor,
that workers have no legally binding contractual or property
right to their Social Security benefits, and those benefits can be changed,
cut, or even taken away at any time.
As the Court stated, '' To engraft upon Social Security a concept of
'accrued property rights' would deprive it of the flexibility and boldness
in adjustment to ever changing conditions which it demands. '' That deci-sion
built on a previous case, Helvering v. Davis, in which the Court had
ruled that Social Security is not a contributory insurance program, stating
that '' the proceeds of both the employer and employee taxes are to be
paid into the Treasury like any other internal revenue generally, and are
not earmarked in any way. ''
In effect, Social Security turns older Americans into supplicants, depen-dent
on the political process for their retirement benefits. If they work
hard, play by the rules, and pay Social Security taxes their entire lives,
they earn the privilege of going hat in hand to the government and hoping
that politicians decide to give them some money for retirement.
In contrast, under a system of individual accounts, workers would have
full property rights in their private accounts. They would own their accounts
and the money in them the same way they own their individual retirement
accounts (IRAs) or 401( k) plans. Their retirement benefits would not
depend on the whims of politicians.

The President's Commission
In May 2001, President Bush appointed former senator Daniel Patrick
Moynihan and AOL/ Time Warner executive Richard Parsons to co-chair
the President's Commission to Strengthen Social Security. The 16-member

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Social Security
bipartisan commission was charged with devising Social Security reform
proposals according to the following principles: modernization must not
change Social Security benefits for retirees or near retirees; the entire
Social Security surplus must be dedicated to Social Security only; Social
Security payroll taxes must not be increased; the government must not
invest Social Security funds in the stock market; modernization must
preserve Social Security's disability and survivors' components; and mod-ernization
must include individually controlled, voluntary personal retire-ment
accounts, which will augment the Social Security safety net.
Three members of the commission, Lea Abdnor, Sam Beard, and former
representative Tim Penny (D-Minn.), have worked with Cato's Project on
Social Security Choice. Cato Social Security analyst Andrew Biggs served
as a staff member to the commission.
In August 2001 the commission released its interim report, which out-lined
the demographic pressures on the current pay-as-you-go program
and argued that the current trust fund financing mechanism did not effec-tively
save today's payroll tax surpluses to fund future benefit obligations.
Over the remainder of the year, the commission held a number of public
hearings and meetings, which often became the target of protests from
opponents of personal retirement accounts.
Nevertheless, in December the commission delivered its recommenda-tions
to the president. Those included three proposals illustrating how
personal retirement accounts could be integrated into the current Social
Security program, strengthening the system for the future while giving
workers ownership of and control over at least a part of their payroll taxes.
The commission's Plan 1 did nothing other than add voluntary personal
accounts to Social Security. Workers could choose to invest 2 percent of
their wages in a personal account. In return, workers with accounts would
give up a portion of their traditional retirement benefits. While Plan 1 did
not bring the system back to solvency, it illustrated that individual accounts
could increase benefits for all retirees while improving the financing health
of the program.
The commission's Plan 2 allowed workers to divert 4 percentage points
of their payroll taxes to a personal account, up to an annual maximum of
$1,000 (which would be indexed annually to the growth of wages). To
bring the traditional program back to financial balance, Plan 2 would
increase the initial benefits each cohort of new retirees receives by the
rate of price growth, rather than wage growth as under current law. This
'' price indexing'' of initial benefits would bring the program back to

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solvency and eventually deliver substantial payroll tax surpluses. In addi-tion,
Plan 2 contained new protections for low-wage workers and lower-income
widows. Plan 2 would be substantially cheaper than the current
system, requiring general revenue transfers 68 percent smaller (measured
in today's dollars).
The commission's Plan 3 would allow workers to divert 2.5 percentage
points of their payroll taxes to a personal account (up to an annual maxi-mum
of $1,000), provided they voluntarily deposited an additional 1
percent of their wages in the account. Plan 3 would pay all retirees a
larger benefit than that promised by the current program— and at a substan-tially
lower cost over the long term. Measured in today's dollars, the
general revenue cost of Plan 3 was less than half that of maintaining the
current program. Like Plan 2, Plan 3 contained new protections for low-wage
retirees and lower-income widows.
Together, the three commission plans show that personal accounts
enable a reformed Social Security program to pay higher benefits at lower
cost than the current pay-as-you-go method of financing.

Principles for Reform
As it approaches the historic debate over Social Security reform, Con-gress
should keep in mind five basic principles.

Solvency Is Not Enough
Workers deserve the best possible deal for their dollar. With Social
Security facing a financial crisis— it will begin running a deficit in just
14 years— much attention has been focused on ways to keep the program
solvent. Theoretically, that could be accomplished by raising taxes or
cutting benefits. But Social Security faces a second crisis as well: Young
workers will receive a negative rate of return from the program. They
will get less back in benefits than they pay in taxes. That low return,
and other inequities, particularly disadvantages women, the poor, and
minorities. Any Social Security reform must reverse this trend, raising the
rate of return and providing higher retirement benefits.

Individuals, Not Government, Should Invest
The only way to increase Social Security's rate of return is to invest
Social Security taxes in real capital assets. This should be done through the
creation of individually owned accounts, not by allowing the government to
directly invest payroll taxes. Individual accounts would give workers

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Social Security
ownership of and control over their retirement funds, allowing them to
accumulate wealth and pass that wealth on to their heirs; it would also
give them a greater stake in the American economic system. Government
investment would allow the federal government to become the largest
shareholder in every American company, posing a potential threat to
corporate governance and the specter of social investing.

Maximize Consumer Choice
Workers should be given as wide a range of investment opportunities as
possible, consistent with regulatory safeguards against fraud or speculation.
While investing in '' Singapore derivatives'' is clearly not envisioned, there
is no reason to limit workers to only two or three index funds. As much
as possible, the existing retirement savings infrastructure should be used,
meaning workers would have a large number of safe and secure options.
Moreover, a safety net would guarantee that no senior would end up in
poverty as a result of bad investments.

Don't Touch Grandma's Check
Benefits to the currently retired and nearly retired should not be reduced.
Indeed, by explicitly recognizing benefits owed to current retirees, Social
Security reform would guarantee those benefits in a way that the current
political system does not. Making the transition to a new system while
guaranteeing current benefits means that the government will have to issue
debt, cut current spending, or sell assets, but those '' transition costs'' will
be substantially less than the costs of maintaining the current system.

More Investment Is Better Than Less
You don't cut out half a cancer. Given the advantages of individual
accounts, there is no excuse for stopping at only 2– 3 percent of payroll
taxes. Once Congress has conceded that private capital investment can
provide better and more secure retirement benefits, it should press on
and allow workers to control the maximum feasible amount of their
retirement income.

Answering the Objections
The Transition
The most difficult issue associated with any proposed reform of Social
Security is the transition. Put quite simply, regardless of what system we

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CATO HANDBOOK FOR CONGRESS
choose for the future, we have a moral obligation to continue benefits to
today's recipients. But if current workers divert their payroll taxes to
individual accounts, those taxes will no longer be available to pay benefits.
The government will have to find a new source of funds.
However, it should be understood that this is not a new cost. It is really
just making explicit an already existing unfunded obligation. The federal
government already cannot fund as much as $25 trillion of Social Security's
promised benefits. Reforming Social Security, therefore, will actually
reduce the amount of debt we owe.
The tradeoffs in refinancing a home mortgage provide a useful analogy.
There are costs associated with achieving a lower interest rate, such as
points, title insurance, a title search, attorneys' fees, a credit report, and
the like. The decision to refinance is based not only on the lower interest
rate but on those costs as well. If the present value of the costs and the
lower interest expense is less than the present value of the existing mortgage
interest expense, then there is a net benefit from refinancing even though
costs are incurred to achieve it. With Social Security, the cost of paying
for the transition to a system of individual accounts will be less than the
cost of preserving the current system.
Of course there will be a temporary cash flow problem while we make
the transition. We will have to find the revenues to pay benefits to current
retirees. Any financing mechanismwill be political, involving some combi-nation
of debt, transfers from general revenues, asset sales, and the like.
If both parties are willing to forgo new spending programs and junk tax
cuts, we can begin the transition to a new, improved Social Security system.
There are several methods of financing the transition. For example, a
small portion of the payroll tax could be continued temporarily. Workers
could be allowed to invest their half of the payroll tax (6.2 percentage
points of 12. 4 percent) with the remainder temporarily being used to fund
a portion of continued benefits. Congress could also identify additional
spending cuts and use the funds saved to finance the transition. Because
much federal government spending is wasteful or counterproductive, such
cuts would not be any sacrifice for society— indeed, the cuts themselves
might provide many benefits. A list of potential cuts can be found in
Chapter 23. The government could also sell many assets that it currently
owns. Finally, the government could issue bonds to spread the cost of
transition over several generations. It is important to understand that this
is not new debt; it is simply the explicit recognition of an existing implicit
debt under the current system.

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Social Security
Risk
Last year's turmoil in the stock market provided ample evidence that
in any given year stocks can go down as well as up. But, in truth, the
year-to-year fluctuations of the stock market are irrelevant. What really
counts is the long-term trend of the market over a person's entire working
lifetime, in most cases 40 or 45 years. Given that long-term perspective,
there is no period during which the average investor would have lost
money by investing in the U. S. stock market. In fact, during the worst
20-year period in U. S. history, which included the Great Depression, the
stock market produced a positive real return of more than 3 percent.
As Figure 25. 2 shows, even with the recent stock market decline, a
worker investing only in stocks would receive benefits 2.8 times higher
than he would had he '' invested'' the same amount of money in the
current program.
Put another way, the recent decline in stock prices means the worker's
personal account would be worth the same today as it was worth in 1997.
But that worker's Social Security '' savings'' would be worth today only
what the personal account was worth in the late 1980s. It would take a

Figure 25.2 Value of Personal Accounts and Social Security Benefits

$100,000
$200,000
$300,000
$400,000
$500,000
$600,000

$700,000
$800,000

1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001
Accumulated

Value
of
Contributions

Personal account, S& P 500
Social Security, notional wealth

Assumptions: single male, average wage, retiring 2002. Employee
share of payroll tax (6.2 percent) paid into account, versus same tax
paid into current program.

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CATO HANDBOOK FOR CONGRESS
Figure 25.3 Total Benefits

$7,000
$8,000
$9,000
$10,000

$11,000
$12,000
$13,000
$14,000

$15,000

2002 2009 2016 2023 2030 2037 2044 2051 2058 2065 2072
Low-
Wage

Worker,

Annual
Benefit
(in
$2001) Reform plan total benefit,

including account

Current program payable benefit
much larger decline than the one we have seen for a personal account to
be a worse deal than the current program.

Benefit Cuts
Many opponents of individual accounts charge that creating such
accounts would lead to benefit cuts. However, that claim is based on two
faulty premises. First, opponents compare privatization proposals with
current law and suggest that those proposals will provide lower benefits,
or at least lower government-provided benefits. Second, they suggest that
transition costs to a privatized system will require tax increases.
But as Charles Blahous, executive director of the President's Commis-sion
to Strengthen Social Security, has pointed out, '' The essential problem
with comparing reform plans with 'current law' is that 'current law' allows
the system to go bankrupt. '' Or, as David Walker, comptroller of the
United States, warned: '' There's a lot of people that want to compare
Social Security reform proposals to promised benefits. That is fundamen-tally
flawed and unfair because all of funded benefits are not funded. ''
A fair test of Social Security reform proposals, including those that include

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Social Security
Experts Speak Out on the Trust Fund
Congressional Budget Office: '' The size of the balance in the Social
Security Trust Funds— be it $2 trillion, $10 trillion, or zero— does
not affect the obligations that the federal government has to the
program's beneficiaries. Nor does it affect the government's ability
to pay those benefits. ''

General Accounting Office: Social Security's '' Trust Funds are not
like private Trust Funds. They are simply budget accounts used to
record receipts and expenditures earmarked for specific purposes. A
private Trust Fund can set aside money for the future by increasing
its assets. However, under current law, when the Trust Funds' receipts
exceed costs, they are invested in Treasury securities and used to
meet current cash needs of the government. These securities are an
asset to the Trust Fund, but they are a claim on the Treasury. Any
increase in assets to the Trust Funds is an equal increase in claims
on the Treasury. ''

Congressional Research Service: '' What often confuses people
[about the Trust Funds] is that they see these securities as assets for
the government. When an individual buys a government bond, he
or she has established a financial claim against the government. When
the government issues a security to one of its own accounts, it hasn't
purchased anything or established a claim against some other person
or entity. It is simply creating an IOU from one of its accounts
to another. ''

Clinton Administration 2000 Budget: ''[ Trust Fund] balances are
available to finance future benefit payments and other Trust Fund
expenditures— but only in a bookkeeping sense. . . . They do not
consist of real economic assets that can be drawn down in the future
to fund benefits. Instead, they are claims on the Treasury that, when
redeemed, will have to be financed by raising taxes, borrowing from
the public, or reducing benefits or other expenditures. The existence
of large Trust Fund balances, therefore, does not, by itself, have any
impact on the government's ability to pay benefits. ''

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CATO HANDBOOK FOR CONGRESS
individual accounts, is to compare them, not to promised benefits, but to
benefits that can actually be paid. By that standard, proposals to create
individual accounts come out far ahead.
Moreover, opponents of individual accounts frequently omit the funds
accumulating in those accounts when making comparisons. They compare
only government-provided benefits with government-provided benefits.
But that omits half the story. When total benefits under individual account
plans, that is benefits from the accounts plus government-provided benefits,
are considered, these plans provide benefits in excess of what Social
Security has promised, let alone what it can pay (Figure 25.3).

Conclusion
The American people have shown themselves ready for fundamental
Social Security reform. Now is the time for Congress to act. There is little
that the 108th Congress could do that would have a more profound impact
on the lives of the American people.

Suggested Readings
Biggs, Andrew. '' Personal Accounts in a Down Market: How Recent Stock Market Declines Affect the Social Security Reform Debate. '' Cato Institute Briefing Paper

no. 74, September 10, 2002. . Perspectives on the President's Commission to Strengthen Social Security. ''
Cato Institute Social Security Paper no. 27, August 22, 2002. Ferrara, Peter, and Michael Tanner. A New Deal for Social Security. Washington: Cato
Institute, 1998. . Common Cents, Common Dreams: A Layman's Guide to Social Security Privati-zation.
Washington: Cato Institute, 1998. O'Neill, June. '' The Trust Fund, the Surplus, and the Real Social Security Problem. ''
Cato Institute Social Security Paper no. 26, April 9, 2002. Pin~ era, Jose´. '' Empowering Workers: The Privatization of Social Security in Chile. ''
Cato's Letters no. 10, May 1996.
Rounds, Charles. '' Property Rights: The Hidden Issue of Social Security Reform. '' Cato Institute Social Security Paper no. 19, April 19, 2000.

Tanner, Michael. '' No Second Best: The Unappetizing Alternatives to Individual Accounts. '' Cato Institute Social Security Paper no. 24, January 29, 2002.

—Prepared by Michael Tanner

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26. Public Health Care
Congress should
fundamentally restructure Medicare to expand competitive pri-vate
health plan choices; not add comprehensive prescription drug benefits to Medicare

unless and until it enacts structural reform of the entire program; encourage states to adjust Medicaid eligibility criteria and
covered benefits to serve fewer nondisabled, lower-income individuals— but then provide remaining beneficiaries with
higher-quality core health services and make greater use of cost-sharing incentives; and
facilitate state efforts to adapt defined-contribution-style financ-ing
as an option for Medicaid beneficiaries.

Over the past two years, Congress has again backed away from taking
on necessary restructuring of Medicare while private health options under
the Medicare Choice program have continued to shrink rather than
expand. Meanwhile, efforts to add a new runaway entitlement program
for prescription drug benefits came up short in the Senate after the House
narrowly approved its own flawed measure that strained to preserve the
appearance, but not the reality, of competitive and privately managed
Medicare drug insurance.
Congress also entertained proposals to expand eligibility for Medicaid
coverage to uninsured lower-income workers, to increase the federal
matching payments to state Medicaid programs, and to begin a federal
takeover of certain subsidy payments to '' dual eligible'' Medicare/ Medi-caid
beneficiaries; none of those measures became law.
In short, the status quo prevailed. Congress refrained from doing more
harm in both programs, but it also failed to make any progress toward
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dence on two aging Great Society entitlement programs born in 1965 that
suffer from their own sets of worsening chronic conditions and disabilities.

Medicare's Midlife Crisis
Despite a few recent years of improved financial performance, Medicare
remains fundamentally flawed after 37 years in operation, and it is unsus-tainable
on a long-term basis. The Balanced Budget Act of 1997 launched a
new round of arbitrary price controls, regulatory complexity, and overzeal-ous
'' fraud and abuse'' enforcement that temporarily slowed the rate of
growth of Medicare spending. But Medicare's Hospital Insurance (Part
A) trust fund will resume spending more than it collects in taxes in 2016,
and it faces a long-term actuarial deficit of 2 percent of taxable payroll.
The Supplementary Medical Insurance (Part B) side of Medicare will
continue to grow faster than both Part A and the overall economy. It will
double its share of gross domestic product within 30 years.
The 2001 Financial Report of the United States Government, prepared
by the Financial Management Service of the Department of the Treasury,
provides a more comprehensive viewof the mounting burden that Medicare
will impose on current and future taxpayers. Medicare spending exceeded
the program's tax receipts and premiums by $59 billion in fiscal 2000,
and the annual gap will grow to an estimated $216 billion (using constant
dollars) in 2020. In 2002, Medicare program actuaries at the Centers
for Medicare and Medicaid Services conservatively projected that the
discounted net excess of cash spending over cash income during the next
75-year period would be $5. 1 trillion (even after including Medicare trust
funds' balances and future interest income, as well as general revenue
transfers to Part B). However, the Financial Report calculations from one
year earlier, using accrual accounting under generally accepted accounting
principles and therefore excluding interest payments and other intragovern-mental
transfers, estimated that the net present value of negative cash flow
(funds needed to cover projected shortfalls) was $4.7 trillion for Part A
and an additional $8.1 trillion for Part B (Table 26.1).
Working Americans remain on the hook for a rising share of the
imminent cost explosion. Federal general revenues already finance 25
percent of Medicare spending; that share will rise to more than half within
30 years. More than 37 years after it began in 1965, Medicare remains
one of the most volatile and uncontrollable programs in the federal budget.
Its unrestrained appetite will squeeze out other national priorities and
jeopardize opportunities for future generations.

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Public Health Care
Table 26.1 U. S. Government Statement of Social Insurance
Present Value of Long-Range Actuarial Projections
1
Benefit
Payments
in Excess of
Contributions Contributions
and and
Earmarked Benefit Earmarked
Taxes 2 Payments 3 Taxes

2001 2000 2001 2000 2001 2000
Participants Who Are Currently Receiving Benefits:

Federal Hospital Insurance 113 97 1,693 1,681 1,580 1,584
(Medicare Part A)

Federal Supplementary 258 234 1,159 1,051 901 817
Medical Insurance
(Medicare Part B)

Participants Who Are Not Currently Receiving Benefits:
Federal Hospital Insurance 4,136 3,757 8,568 6,702 4,432 2,945
(Medicare Part A)

Federal Supplementary 1,845 1,527 7,415 6,094 5,570 4,567
Medical Insurance
(Medicare Part B)

Future Participants: 4
Federal Hospital Insurance 3,507 3,179 2,225 1,349 (1,282) (1,830)
(Medicare Part A)

Federal Supplementary 593 404 2,206 1,514 1,613 1,110
Medical Insurance
(Medicare Part B)

(continued)

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Table 26.1 (continued)

Net Present Value
Valuation of Negative
Valuation Period Date Cash Flow 5

Federal Hospital Insurance 1/ 1/ 2000– 12/ 31/ 2074 1/ 1/ 2000 2,699
(Medicare Part A) 2000
Federal Hospital Insurance 1/ 1/ 2001– 12/ 31/ 2075 1/ 1/ 2001 4,730
(Medicare Part A) 2001
Federal Supplementary 1/ 1/ 2000– 12/ 31/ 2074 1/ 1/ 2000 6,494
Medical Insurance
(Medicare Part B) 2000
Federal Supplementary 1/ 1/ 2001– 12/ 31/ 2075 1/ 1/ 2001 8,084
Medical Insurance
(Medicare Part B) 2001

SOURCE: Financial Report, United States Government Stewardship Information for the Years Ended September
30, 2001, and September 30, 2000 (unaudited).
Note: figures are billions of dollars. 1
Present values are computed based on the economic and demographic assumptions believed most likely to
occur (the intermediate assumptions) as set forth in the related Trustees' reports. 2
Contributions and earmarked taxes consist of payroll taxes from employers, employees, and self-employed
persons; revenue from Federal income taxation of OASDI; and monthly Medicare Part B premiums paid by,
or on behalf of, beneficiaries. Contributions and earmarked taxes for the Medicare Part B program presented
in this report are presented on a consolidated perspective. Interest payments and other intergovernmental
transfers have been eliminated. The Centers for Medicare & Medicaid Services' (CMS), formerly known as
the Health Care Financing Administration (HCFA), 2001 Annual Report presents income from the trust fund's
perspective, not a Government-wide perspective. Therefore, CMS's Annual Report includes $8,084 billion for
the present value of transfers from the general fund of the Treasury to the Medicare Part B Trust Fund that
have been eliminated in this Financial Report. 3
Benefit payments include administrative expenses. 4
Includes births during the period and individuals below age 15 as of January 1 of the valuation year. 5
The net present value of negative cash flow is the current amount of funds needed to cover projected shortfalls,
excluding trust fund balances, over the 75-year period. The trust fund balances at the beginning of the valuation
period that were eliminated for this consolidation were: $177 billion— Medicare Part A and $44 billion—
Medicare Part B. The projection period for new entrants covers the next 75 years for the Medicare program.
The projection period for current participants (or '' closed group'') would theoretically cover all of their working
and retirement years, but as a practical matter, the present values of future payments and contributions for/
from current participants beyond 75 years are not material. The actuarial present value of the excess of future
benefit payments to current participants (that is, to the closed group of participants) over future contributions
and tax income from them or paid on their behalf is calculated by subtracting the actuarial present value of
future contributions and tax income by and on behalf of current participants from the actuarial present value
of the future benefit payments to them or on their behalf.

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Public Health Care
Moreover, simply struggling to preserve the current Medicare program,
without substantial improvements and structural change, would ignore the
needs of current and future beneficiaries. Medicare's basic benefit package
has become increasingly outdated and inflexible. Traditional coverage fails
to protect seniors against catastrophic medical bills or against almost any
outpatient prescription drug expenses at all. Resolution of many coverage
and reimbursement issues is hampered by inefficient, interminable, and
inconsistent administrative determinations. For example, Medicare admin-istrators
took an average of 383 days to make and implement a national
coverage decision in FY01. But, according to the Advanced Medical
Technology Association, it then may take the Centers for Medicare and
Medicaid Services an additional two years or more to assign codes and
set payment rates for a new technology or service.
Physicians face mounting burdens of Medicare paperwork and incom-prehensible
regulatory edicts that reduce the time they can spend with
their patients. Doctors also fear unwarranted accusations of fraud and harsh
sanctions by Medicare enforcement officials, according to the Medicare
Payment Advisory Commission. On top of that, Medicare reimbursement
formulas cut payments to doctors by more than 5 percent in 2002. Current
law requires overall reductions of 17 percent in Medicare fees paid for each
medical service from 2002 to 2005. Not surprisingly, growing numbers of
physicians are refusing to take new Medicare patients.
Although the 1999 bipartisan commission on Medicare sketched out
some promising structural reforms, further actions to follow up on them
and overhaul Medicare have languished, at best, in Congress. Instead,
Congress has preferred to debate to a standstill an expanded Medicare
entitlement to prescription drug coverage.
The next round of Medicare reform should emphasize structural change
over short-term budget savings targets. The bungled experiment in Medi-care
Choice must be repaired. Although the M C program aimed at
offering consumers more choice, a smaller percentage (14 percent) of
Medicare beneficiaries was enrolled in private plans during 2001 than
before the program was launched in 1997. The program has been plagued
by withdrawals of and service reductions by private health plans. Very
few insurers offered non-health-maintenance-organization (HMO) options,
such as preferred provider organizations (PPOs) or private fee-for-service
plans, and no carrier has ever offered a medical savings account
(MSA) plan.
New payment methods established by the Balanced Budget Act largely
failed to achieve their goal of limiting geographic variation in M C

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payment rates, but they had the unintended consequence of paying too
little in the most promising markets for expansion of private plan options.
Early bureaucratic efforts at full risk adjustment in payments to plans were
ineffective and suspended.
Congress needs to begin again with a blank sheet of paper and proceed
to eliminate the uncertainties and excesses of its complex regulatory
requirements, time limits, and payment methodologies for the faltering
M C program. Creation of a sustainable framework for Medicare modern-ization
requires moving from an antiquated defined-benefit structure
(which covers a specific set of health services) to a defined-contribution
model, under which seniors could choose among competing packages of
health benefits with taxpayers' costs capped at preset levels.
It is crucial that the traditional Medicare fee-for-service coverage pro-gram
be required to improve by competing for market share on a level
playing field. Many Medicare reformers emphasize the enhanced benefits
and higher-quality care that new private plan options might make available
to beneficiaries, but they tend to underplay, if not neglect, the key ingredi-ents
needed to make those improvements affordable. One necessary ele-ment
includes a payment system under which private plans bid to provide
required benefits, beneficiaries capture the savings from choosing less-costly
options, and the government's share of Medicare funding reflects
the enrollment-weighted average costs of the mandatory benefits provided
in all plans (including traditional Medicare).
Seniors seeking additional supplemental benefits would pay higher
premiums for them that would reflect their marginal costs. Because the
same insurer would provide both the required benefits and the supplemental
benefits, separate Medigap insurers that currently remove cost-sharing
incentives within basic coverage would no longer be able to pass on to
taxpayers the higher costs of additional spending. Medicare beneficiaries
who accepted greater individual responsibility would be rewarded with
broader health coverage choices and possible cash rebates.
Defined-contribution payments must be determined by competitive mar-ket
prices, instead of remaining linked to the politically driven and bureau-cratically
administered price controls of the traditional Medicare program.
Competitive bidding mechanisms and reasonable ground rules for periodic
open enrollment choices offer great promise for ending distorted prices
and poor information.
Other fundamental Medicare reforms include scrapping the mirage of
trust fund financing, particularly the arbitrary shell game distinctions

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Public Health Care
between the Part A trust fund (financed by payroll taxes) and the Part B
trust fund (financed approximately three-quarters by general revenues and
one-quarter by beneficiary premium payments).
Adding prescription drug benefits to Medicare should accompany, not
precede, such structural reform. An updated M C program and a restruc-tured
version of traditional Medicare could offer a range of enhanced drug
options to beneficiaries willing to pay for them, perhaps through greater
cost sharing for other covered benefits. Encouraging insurers to assemble
packages of linked benefits would provide the greatest value by coordinat-ing
tradeoffs between drugs, surgery, hospitalization, and outpatient care
as treatment options.
Congress must continue to resist the impulse to spread a wide and thin
layer of visible, first-dollar drug subsidies to all Medicare beneficiaries,
regardless of need, rather than target them more narrowly to support more
generously those seniors most in need of assistance. Simply adding a new
round of underfunded, irresponsible promises to Medicare will stimulate
beneficiary demand for '' cheap'' drugs and overuse of those benefits. It
is sure to be followed by exploding budgetary costs and increases in the
'' unsubsidized'' price of Medicare's prescription drugs. Next will come
waves of drug coverage rollbacks, regulatory restrictions, tighter drug
formularies, and price controls that chill future innovative research and
snuff out the next round of life-saving drugs.
It's the same old dead-end path to the Medicare Money Pit that we've
already traveled down for hospital and physician services. The full costs
of government-mandated '' price discounts'' eventually include reduced
access to quality care and destabilized health care markets.
If Congress cannot resist the urge to add drug benefits without tackling
fundamental Medicare reform, it should at least do less harm by emphasiz-ing
higher deductibles and catastrophic loss protection for prescription
drug coverage, targeted assistance to lower-income seniors, and reformed
coverage for individual Medigap purchasers. Under no circumstances
should the door be opened to universal subsidies to seniors for routine,
manageable drug expenses.
The average out-of-pocket drug expenditure for all Medicare enrollees
in 2001 was about $650. Let's place the prescription drug issue in perspec-tive
by first dealing effectively with the small slice of Medicare beneficiar-ies
(fewer than 10 percent) that faces more than $2,000 a year in out-of-pocket
drug expenses, as well as with lower-income beneficiaries just
beyond the eligibility limits for Medicaid drug assistance.

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An initial round of the intermediate reform measures suggested above
would help realign the current Medicare structure to allow its later transfor-mation
into a fully privatized system of health care choices for seniors.
Congress should give careful consideration to eventually making it possible
for younger workers to divert some or all of their Medicare payroll taxes
into savings vehicles that would prefund their purchase of private health
insurance when they reach retirement age. Transitional finance issues may
slow the evolution toward this ultimate objective, but a full return to
individual responsibility and private-sector health care offers the only long-term
hope for surmounting the chronic financial crises and bureaucratic
morasses of Medicare as we know it.

Up and Away from Medicaid Dependence
Over the past 15 years, Medicaid program outlays grew more than any
other area of federal entitlement spending. Medicaid trails Social Security
and Medicare as the third largest entitlement program. When Medicaid
spending grew by 11 percent in FY01, it marked the fifth consecutive
year that the program's spending growth accelerated. The Congressional
Budget Office estimates that the federal share of Medicaid spending will
grow at an average rate of 8. 5 percent over the next 10 years.
Medicaid is a complex, patched-together assortment of four different
types of public insurance programs for various categories of low-income
Americans. It provides medical insurance for low-income women and
their children. It pays medical bills for the low-income disabled. It finances
a large portion of nursing home expenses for the elderly. It also picks up
some of the other health costs of the '' dual eligible'' elderly that are not
covered by Medicare (such as deductibles, coinsurance, Part B premiums,
and outpatient prescription drugs).
The program is not just terribly costly, it is prone to mismanagement as
an unwieldy mix of shared federal and state administrative responsibilities.
More fundamentally, Medicaid is handicapped by its flawed welfare enti-tlement
structure that still largely remains linked to one-size-fits-none sets
of defined benefits. Medicaid continues to be plagued by poor quality
health care and inadequate reimbursement levels. It keeps trying to promise
more yet delivers less and less.
Federal policy encouraged states to expand eligibility for and services
covered by their Medicaid plans over the last decade. State governments
were eager to do so, because federal taxpayers picked up roughly 50 percent
to 83 percent of Medicaid costs under matching formulas, depending

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on the particular state involved. States even exploited program funding
loopholes to funnel more federal dollars into their coffers through such
devices as phony '' tax payments and donations'' from providers and
artificially higher state payments to public medical facilities that qualified
for disproportionate share assistance.
The states belatedly discovered that they had indulged in too much of
a good thing in leveraging their share of Medicaid financing. Over the
last two years in particular, state Medicaid spending exploded at the same
time that state revenue growth first slowed and then declined. Although
state Medicaid program directors are beginning to learn that they cannot
make up their losses on more volume, they have remained reluctant to
cut back on their irrationally exuberant eligibility expansions of the 1990s.
Instead, they generally have preferred to keep provider reimbursement
rates well below market levels, blame pharmaceutical manufacturers for
rising drug costs, and beg for larger federal matching payments.
Congress should resist pressure to expand the Medicaid program to
new classes of beneficiaries, and it should encourage the states to put their
own fiscal houses in order. The Bush administration's aggressive use of
Medicaid waivers has provided more flexibility for state Medicaid pro-grams.
Its Health Insurance Flexibility and Accountability initiative allows
states to reduce benefits and increase cost sharing, but with an unfortunately
one-sided bias toward expanding the number of beneficiaries covered.
The political danger of buying greater '' market share'' for Medicaid at
loss-leader prices is that initial limits on benefits and coverage levels might
not be politically sustainable.
State Medicaid programs need to rethink their policy priorities in balanc-ing
Medicaid spending with other claims on overstretched budget dollars.
They should adjust eligibility criteria and covered benefits to serve fewer
nondisabled and (relatively) higher-income individuals— but then provide
those beneficiaries with higher quality health services. Instead of finding
new ways to pay medical providers even less money per billable charge,
they should focus on paying primary care doctors more adequately, making
greater use of copayments and cost-sharing incentives, and reducing other
optional Medicaid services. It's also more important to maximize coverage
of the lowest-income individuals and families that are eligible for Medicaid
but have few other insurance alternatives than to expand coverage to
relatively higher-income groups.
Benefit payments for low-income adults and children are not major
cost drivers. Those people represent about three-fourths of eligible benefici-279 280
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CATO HANDBOOK FOR CONGRESS
aries, but they account for only about one-fourth of total program costs.
Disabled individuals below age 65 constitute the fastest growing group
eligible for Medicaid and account for the fastest growing slice of Medicaid
spending. Medicaid spending per capita is highest for the low-income elderly,
primarily in the form of payments for long-term care in nursing homes.
Although the cost of Medicaid drug benefits has been growing at eye-popping
rates in recent years, it totaled just 11 percent of Medicaid spending
in 2000. Medicaid beneficiaries who are either elderly or disabled
accounted for almost 80 percent of those drug expenditures. Yet the health
of the elderly has been improving since the early 1980s, particularly in
terms of reduced rates of disability, because of improvements in medical
technology and health knowledge. Given that development of innovative
drug treatments has played a large role in this progress, recent state
efforts to leverage further price rebates out of drug makers through tighter
formularies and '' reference price'' ceilings may end up being penny-wise
and pound-foolish in terms of overall Medicaid costs if they cut off access
to new breakthrough drugs. Greater use of multitiered cost sharing provides
a more flexible mechanism for slowing skyrocketing rates of prescription
drug cost growth without arbitrarily restricting access to therapeutically
necessary medicines.
Ironically, disability rates among younger Americans (and eligibility for
Medicaid benefits) have been growing. This problem is best addressed
by reexamining loosened requirements for disability eligibility; improving
incentives for many disabled beneficiaries to build capital, reenter the work-force,
and regain self-sufficiency; and expanding promising '' Cash and
Counseling'' demonstration projects already under way in several states.
The benefits of more generous state Medicaid policies for nursing home
reimbursement have largely accrued to children who would otherwise
have to support and live with their elderly parents. Eligibility for Medicaid
assistance in paying nursing home costs should be targeted more narrowly
to the genuinely needy in order to provide stronger financial incentives
for aging baby boomers and future generations to purchase private long-term
care insurance.
Despite early enthusiasm on the part of many state governments for
contracting with private HMOs to coordinate medical care for Medicaid
recipients, a recent empirical review by Mark Duggan of the University
of Chicago demonstrated that switching from fee-for-service to Medicaid
managed care was associated with a substantial increase in government
spending but no observable improvement in health outcomes.

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A more ambitious intermediate-range Medicaid reform agenda should
include more efforts to adapt defined-contribution-style financing as an
option for beneficiaries so that they could control more of the content of
their benefits packages and capture the gains from spending less on covered
health services. Health care value is maximized better by '' fixing'' the
total cost of benefits under an insurance model that then allows eligibility,
the scope of benefits, and service quality to vary. Traditional Medicaid
program rules instead concentrate on fixing the scope of benefits and
eligibility criteria under an entitlement model that then focuses on budget
costs as the key variable (and treats quality and access as less important
considerations). Federal waiver authority should allow individual Medicaid
beneficiaries to claim their '' share'' of annualized capitated payments
within state managed care programs as a private health insurance voucher.
Those beneficiaries who chose to opt out of such programs could then
purchase other forms of private insurance coverage, as defined in the
Health Insurance Portability and Accountability Act. States would be
allowed to waive certain mandatory Medicaid benefits requirements to
allow greater cost-sharing and economizing incentives.
Long-term reform will require that states be weaned from the federal
matching rate formula that encourages them to chase their fiscal tails in
search of federal dollars even as their state budgets plummet deeper into
fiscal holes.

Suggested Readings
Blevins, Sue A. Medicare's Midlife Crisis. Washington: Cato Institute, 2001. Ferrara, Peter. '' The Next Steps for Medicare Reform. '' Cato Institute Policy Analysis

no. 305, April 29, 1998. Hyman, David A. '' HIPAA and Health Care Fraud: An Empirical Perspective. '' Cato
Journal
22, no. 1 (Spring– Summer 2002).
Miller, Tom. '' Competitive Alternatives to Medicare. '' In Privatization 2002: 16th Annual Report on Privatization. Reason Public Policy Institute, 2002.

. '' Improving Access to Care without Comprehensive Health Insurance. '' In Covering America: Real Remedies for the Uninsured, Edited by Elliot K. Wickes
and Jack A. Meyer. Washington: Economic and Social Research Institute, 2002. . '' The Medicare Drug War Escalates: Bush Opens Up a New Front— Compre-hensive
Reform. '' Cato Institute White Paper, September 8, 2000. Moses, Stephen. '' LTC Choice: A Simple, Cost-Free Solution to the Long-Term Care
Financing Puzzle. '' Center for Long-Term Care Financing, September 1, 1998. Teske, Richard. '' Abolishing the Medicaid Ghetto: Putting 'Patients First. ''' In The State
Factor.
American Legislative Exchange Council, April 2002.
U. S. Department of the Treasury, Financial Management Service. 2001 Financial Report of the United States Government. Washington: Government Printing Office, 2001,

www. fms. treas. gov/ fr/ index. html.
—Prepared by Tom Miller

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27. Private Health Care
Congress should
offer a simplified set of flexible medical savings account options
to all Americans; provide a tax credit option for taxpayers who choose to pur-chase

health insurance that is not sponsored by their employers; expand consumer choices that increase market-based account-ability
of health plans; and improve access to health care through incentives to purchase
less-comprehensive insurance, expand high-risk pool cover-age, finance charitable safety net care, and deregulate state
insurance regulation.

In the past two years, Congress finally may have exhausted its explora-tion
of incremental health care proposals that lacked any consistent and
coherent vision of free-market health care reform. The 107th Congress
ultimately backed away from reconciling yet another set of different House
and Senate versions of so-called patient's bill of rights legislation. Congress
could not decide whether to herd more low-income uninsured Americans
into Medicaid coverage or to accomplish income redistribution objectives
through refundable tax credits for health insurance. The saving grace for
a '' do-nothing'' Congress was that it did nothing to substantially expand
federal control over the U. S. health care system. However, it also failed
to begin to restore fundamental control of health care decisionmaking to
individual consumers within a competitive free market.

Freeing Medical Savings Accounts from a Regulatory Lockbox
One of the primary factors driving health care costs higher has been
the increased share of medical bills paid by third-party payers such as
private health insurers, employers, and government health program admin-283 284
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istrators. On average, more than three out of every four dollars used to
purchase health care are actually paid by someone other than the consumer
who incurs the bill.
The centerpiece of market-oriented health care that can reverse this
trend remains medical savings accounts (MSAs). MSAs combine two
elements— a savings account controlled by the insured individual to be
used to pay for routine health care expenses and a high-deductible (cata-strophic)
insurance policy to cover more substantial health care needs.
With MSAs, a much smaller share of health care spending is funneled
through third-party insurance. MSAs provide workers strong market incen-tives
to control the costs of their health care, because account holders are
effectively spending their own money for routine health items. That, in
turn, stimulates real cost competition among and price disclosure by doctors
and hospitals.
The 1996 Health Insurance Affordability and Accountability Act author-ized
up to 750,000 '' tax-qualified'' MSAs over a four-year period (later
extended to December 31, 2003). Unlike previous MSAs, those so-called
Archer MSAs featured tax-deductible treatment of MSA deposits and tax-exempt
treatment of investment earnings accumulated with the MSAs.
However, the potential of Archer MSAs has been hampered by eligibility
limits and other design flaws mandated by HIPAA.
The next Congress should authorize MSAs permanently and open MSA
eligibility to anyone covered by qualified high-deductible insurance. Mar-ket-
oriented MSA rules also should provide more flexibility in deductible
levels, contribution amounts, and fund withdrawal options. The best way
to bring down health costs and improve health care quality remains a
simple one— let workers and patients control more of their own health
care dollars.

Facilitating Defined-Contribution Employer Health Benefits
Agrowing number of employers are beginning to offer defined-contribu-tion-
style (DC) health benefits plans, in which the employer purchases
less-comprehensive, high-deductible group insurance coverage for workers
covered by the plan and then makes cash contributions to those workers'
individual health accounts. DC plans help employers cope with rising
health insurance costs by capping their total health benefits contributions,
increasing employee cost sharing, and empowering workers to handle
more routine health care decisions.

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Fewer than half (43 percent) of workers covered by employer-sponsored
insurance (ESI) are satisfied with the overall performance of their current
health plan, according to a Watson Wyatt Worldwide survey in 2001
(Figure 27.1). Fewer than half (48 percent) trust their employer to design
a health plan that will provide the coverage they need, and approximately
the same number of employees think better health plans are available for
the same cost (Figure 27.2). Almost 4 of 10 employees want their employer
to contribute a fixed-dollar amount toward the premium for any health
plan— even if it means the employees have to find their own health plans.
A '' purer'' form of DC plan would allow employees to select their
own individual insurance coverage, with the assistance of their employer's
original contribution. Whether individual employees pay just the extra
cost of additional out-of-pocket health spending or the extra cost of more
generous insurance coverage as well, DC plans provide incentives for

Figure 27.1 Most Employees Are Less Than Satisfied with
Health Plan Performance

Satisfied
43%

Not Satisfied
28%

Neutral
29%

SOURCE: Based on Watson Wyatt, '' Maximizing the Return on Health Benefits: 2001 Report on Best Practices
in Health Care Vendor Management, '' www. watsonwyatt. com/ research/ resrender. asp? id W-446& page3.

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CATO HANDBOOK FOR CONGRESS
Figure 27.2 Employees Want More Options and Greater Involvement in
Selecting a Health Plan

63%
55%
47%

48%

0% 10% 20% 30% 40% 50% 60% 70%

Trust their employer to design a health plan that will provide the
coverage they need

Think better health plans are available for the same cost

Want greater choice of plans
Believe employer primarily considers cost
when deciding which plans to offer

SOURCE: Based on Watson Wyatt, '' Maximizing the Return on Health Benefits: 2001 Report on Best Practices
in Health Care Vendor Management, '' www. watsonwyatt. com/ research/ resrender. asp? id W-446& page3.

people to compare the value of the health care they receive with that of
other goods and services they might want.
DC plans might provide a halfway house in the transition from compre-hensive
ESI to high-deductible MSA plans. Value-conscious employers
and employees could insist that insurers '' spin off'' (not insure) items
about which little uncertainty exists or for which the typical treatment
cost is relatively low compared with the paperwork required to process
the claim. Whereas MSA plans rely on much higher deductible levels for
accompanying catastrophic insurance policies and treat all insured services
equally, two-tiered DC plans could provide certain '' preventive care''
health services with first-dollar coverage, while others might not be covered
at all.
Despite the potential benefits of two-tiered DC plans, as well as recent
tax guidance issued by the Internal Revenue Service clarifying how accu-mulated
balances in an individual employee's health reimbursement

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account may be treated when rolled over at the end of a year, several
regulatory barriers to the future growth of DC plans still need to be
removed.
First, '' pure'' DC plans for fully insured employer groups, in which an
employer distributes defined health benefits contributions to each eligible
employee and allows employees to purchase their own individual or non-employer-
group insurance coverage, run the risk of being regulated incon-sistently.
They might be treated both as employee welfare benefit '' group''
plans and as '' individual'' health plans under state law.
Congress should clarify the regulatory treatment of this kind of DC
plan so that it is not considered an '' employee welfare benefit plan'' for
regulatory purposes under the Employee Retirement Income Security Act.
However, such plans or funds should retain their '' group'' tax exclusion
benefits under the Internal Revenue Code. One possible version of such
hybrid treatment (group for tax purposes, individual for regulatory pur-poses)
was proposed in the Health Care Act of 2001 (H. R. 2658).
Second, the defined contributions that employers make to individual
employees in pure DC plans, to be used to purchase individual health
insurance coverage, should be allowed to vary on the basis of health status
in the event the employer uses an approved risk-adjustment mechanism.
Congress should amend HIPAA rules to allow employers to make larger
contributions to workers with poorer health status to offset the higher
premiums they face when they seek to purchase individual coverage.
Third, recent IRS guidance regarding the tax-free rollover status of
employer contributions to health reimbursement accounts still does not
allow accumulated funds to become vested for other non-health-spending
purposes. Nor does it allow employees to contribute their own money to
such tax-advantaged accounts. To a large extent, allowing annual rollovers
of flexible spending account (FSA) fund balances, or expanding the avail-ability
of MSAs, would bypass most of this problem if Congress does
not address it more directly.

Tax Equity and Efficiency
MSAs and DC health plans provide a foundation for free-market health
reform, but Congress also needs to enact more fundamental changes in
the tax treatment of health care benefits. The tax system should promote
economic efficiency and be perceived as fair. Its compliance and adminis-trative
costs should be kept to a minimum. Tax policy proposals that try

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to target more narrow objectives must be structured to reinforce, not
undercut, those fundamental principles.
Federal tax law excludes the cost of employer-sponsored health insur-ance
benefits from the taxable income of individual workers. Many
employers also offer their employees tax-exempt FSAs for health care
reimbursements. However, those job-based tax benefits for health care
spending put employers, instead of employees, in charge of selecting
health care benefits. Special tax treatment of ESI via the so-called tax
exclusion forces many working Americans to accept the only health plan
offered by their employer or pay higher taxes.
The tax exclusion also raises the comparative after-tax price of other
non-employer-based insurance alternatives. Although similar tax subsidies
are available to the self-employed, the tax exclusion provides no assistance
at all to other individuals (such as Americans working in firms that do
not provide health insurance) who might wish to purchase health insurance
on their own.
The tax exclusion distorts health care purchasing choices by favoring
the financing of medical services through insurance and providing the
greatest tax benefits for the most costly versions of employer-sponsored
coverage. It encourages workers to think that someone else (their employer)
pays for their health care, and it reduces their sensitivity to the cost of
health insurance choices. The tax exclusion disconnects the consumption
decisions of insured workers and their families from the payment decisions
of employers and their insurers. Tax subsidies for health insurance over-stimulate
the demand for health care and, perversely, increase its total
cost, creating net welfare losses estimated at 20 percent to 30 percent of
total insurance spending.
The current tax subsidy for health insurance is inefficient and unfair.
It should be reformed to place individuals, not employers or government,
in charge of choosing something as personal as health care.
The best way to remove tax policy distortions from the health insurance
market would be to eliminate tax subsidies for employment-based health
insurance altogether. Implementing a flat income tax or a national sales
tax would provide the best comprehensive solution. Fundamental tax
reform would render neutral the federal government's tax treatment of all
goods and services, including health care. Employer-paid health benefits
either would be treated as taxable income earned by employees (flat tax)
or would be subject to a sales tax like other goods and services (national
sales tax).

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However, repeal of the tax exclusion would need to be phased in
gradually and be accompanied by offsetting reductions in marginal income
tax rates and increases in income tax bracket thresholds, in order to
minimize economic distortions and return the money to the American
workers who earn it.
Absent a broad restructuring of the tax code, the next-best policy would
be to offer a new federal tax credit option, most likely amounting to 30
percent of the cost of qualified insurance coverage. The tax credit option
would not eliminate the current tax exclusion; it would provide a competi-tive
alternative for workers to choose in place of the tax exclusion. It
would encourage a more gradual transition to other forms of private
insurance coverage. The tax credit option also would be made available
to other individuals and families that currently do not qualify for the tax
exclusion because they lack access to ESI coverage.
Employers that continue to offer ESI should be required to report
the value of the employer-financed share of that coverage to individual
employees on their regular periodic pay statements and annual W-2 forms.
The default setting for such disclosure would assume that workers in
employer-group plans are community rated within the firm and the
employer contributions for coverage are identical for each worker (such
as the periodic equivalent of the firm's per employee COBRA premium).
In the event that employers were allowed to adjust health plan contributions
to reflect factors specific to individual workers, they could report those
different amounts instead.
The new tax credits would be assignable to insurers and advanceable,
but not refundable. The maximum tax credit available to any eligible
individual would be no greater than that individual's total federal income
tax and FICA payroll tax liability (including both the employee and
employer shares) for the previous calendar year. Only taxpayers would
receive tax credit '' relief'' for health insurance costs.
The net effect of the above tax reform would be to encourage workers
and their families either to move from ESI coverage to individually pur-chased
insurance or to ensure that the ESI plan they select represents the
best competitive value they can find.
Congress should consider using the new tax credit option to leverage
other market-opening reforms. In that case, consumers wishing to use the
tax credit would have to purchase an insurance package that covered a
minimum set of health services and included a minimum, but significant,
front-end deductible (along with maximum out-of-pocket '' stop-loss'' lim-289 290
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its). Qualified insurance policies might provide separately priced guaran-teed
renewal options in return for exemption from HIPAA's guaranteed
renewal requirements. Those policies also should be exempt from individ-ual
state benefit mandates. New voluntary purchasing pools could be
authorized to accept tax credit funds to pay for such qualified insurance
in return for federal preemption of state benefit mandates, fictitious group
laws, or rating laws that would otherwise interfere with their operations.
Providing a new tax credit option could jump-start the evolution toward
an employee benefits environment in which workers more directly control
their health care benefits and insurance choices. It would ensure sufficient
consumer demand for individually selected insurance arrangements and
provide a competitive alternative to ESI coverage.

Improving Access to Health Care for the Low-Income Uninsured
Any new tax credits for health care should not try to finance comprehen-sive
insurance for all uninsured, low-income Americans. Most refundable
tax credit proposals are designed to award tax '' cuts'' to individuals who
pay little, or no, federal taxes. But endorsing a new round of income
redistribution and federal spending via the tax code (in the name of health
care) is contradictory and counterproductive. Refundable health tax credits
blur necessary policy distinctions between how to set the appropriate
level of income-based welfare assistance and how to neutralize the many
distortions caused by our complex tax system. The politics of refundable
tax credit proposals also has unfortunately steered recent health care debates
away from broad, individual empowerment tax reforms and toward a
narrow, cramped version of targeted handouts to smaller slices of the low-income
uninsured population. The alternative budgetary end game of
traveling down the road to a universal fixed-dollar tax credit is likely to
involve financing new subsidies for nontaxpayers by reducing the current
health insurance tax benefits available to higher-income Americans (in
other words, the old politics of trying to soak the rich to subsidize the poor).
Refundable tax credits combine bad tax policy, bad welfare policy, and
bad health policy. They reinforce the mistaken stance of those who argue
that cuts in marginal tax rates are somehow '' unfair'' when they provide
most of their benefits to those who pay the largest share of federal income
taxes. Refundable credits also are prone to carrying the lumpy baggage
of complex income-based, phase-out levels; tight restrictions on the con-290 291
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tents of eligible health benefits packages; and narrow rules for eligible
insurers.
Making health tax credits refundable would endorse expansion of current
taxpayer-financed '' entitlements'' to health insurance coverage. It would
adopt the view that health insurance is a '' merit good'' for everyone and
that necessary access to health care cannot be adequately financed without
even greater subsidies from taxpayers for insurance coverage. Many law-makers
who salute the remarkable benefits gained from limiting the magni-tude
and duration of cash assistance to low-income beneficiaries on the
welfare rolls nevertheless appear poised to dole out a new round of
permanent '' welfare'' checks to the working poor, hidden beneath a refund-able
health tax-credit label.
For low-income individuals lacking access to health insurance, the better
policy solutions include safety net reforms that strengthen state high-risk
pools and encourage charitable contributions to provide health services
through nonprofit intermediaries. Dollar for dollar, investing in safety net
assistance that directly delivers care to the uninsured is more effective
and productive than trying to coax them to purchase health insurance with
modest tax subsidies. In the long run, improving the quality of education
that lower-income individuals receive, expanding their personal control
of health care decisions, and reversing regulatory policies that increase
the cost of their health care will yield even greater returns in improved
health outcomes.

Managed Care and Consumer Empowerment
Although the growth of managed care insurance coverage during the
1990s helped to restrain the rate of growth of health care costs, consumers
increasingly became dissatisfied with managed care's limits on covered
treatments and restrictions on their choice of physicians. Various '' patient's
bill of rights'' (PBOR) measures have been proposed in Congress to
respond to (or at least exploit) those cost and quality conflicts.
In the 107th Congress, both House and Senate bills advanced that would
have extended the tentacles of federal regulation more tightly over health
insurance arrangements and health care delivery. A multitude of new
federal commands was buttressed by the usual vague, undefined terms
and weasel words, sure to expand bureaucratic discretion and control in
future rounds of reinterpretation and elaboration. Even without more
explicit rights to sue health plans over coverage denials, approval of PBOR
mandates would have opened the door to federal micromanagement of

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complex health care decisions and provided the foundation for lawsuits
based on alleged violations of mandatory standards.
Ironically, while Capitol Hill politicians again reached a dead end in
negotiations over a final PBOR bill, they were essentially still fighting
the last war. The marketplace had moved on. The pure vision of HMO-style
health care failed several years ago. HMOs reduced costs primarily
by gaining bargaining leverage and squeezing the wallets of providers on
fees, but their claims of evidence-based health care management and cost-saving
preventive care often were more illusion than reality. Other forms of
managed care became more widespread and more attractive to employers.
Employers shifted their health plans to preferred provider organizations
with broad networks and fewer limits on access to care. When workers
insisted on more choices and fewer hassles, their employers generally
responded. However, part of the price of loosened management of health
care services may have been the recent return of annual double-digit
percentage increases in health insurance premiums.
The most immediate victims of PBOR-style regulation would be the
consumers who don't want, or cannot afford to pay for, the type of
minimum contract terms that the legislation would mandate. Raising the
cost of health insurance and regulating away low-cost HMO options will
hurt low-income workers the most. They will either have to pay the higher
price of upper-middle-class medical care expectations or have to go without
any insurance at all. Price-sensitive small employers who could no longer
find low-cost HMO options also would be squeezed out of the insur-ance
market.
Instead of offering consumers another set of unreliable third-party guard-ians
(regulators, independent medical reviewers, and courts), Congress
should emphasize greater tax equity for all health care purchasers and
expanded pooling options outside the workplace so that disgruntled con-sumers
could choose and control the types of health plan and benefits
packages for which they are willing to pay.
A policy environment friendlier to value-driven consumer choice would
hold managed care insurers and self-insured employers more accountable
to their true customers. Consumers would rely on voluntary contracts and
competitive markets, instead of random lawsuits, to stimulate better service,
relevant disclosure, benefits flexibility, and health care innovation. Or they
would switch insurers.
Legitimacy and acceptance of after-the-fact results in health care require
before-the-fact opportunities to choose. Many consumers may not want

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to manage personally most details of their health care decisions, but they
should get to decide who will decide for them.
Insurers or employers that still choose to more actively manage health
care decisions or supervise in-network providers should be exposed to
vicarious liability for medical malpractice and other negligent treatment
decisions. Liability rules should clarify the differences between contractual
obligations (delivering what it promised by the written terms of a health
insurance policy) and tort liability (providing compensation for personal
injuries and other losses arising from care rendered by health care providers
under the contract between a health plan and a purchaser of its coverage).
Augmenting ERISA contract remedies for wrongful denial of coverage
could be handled through early offer settlement incentives and a worker's
compensation– like schedule of recoveries tied to the cost of denied benefits.
For the last six years, Congress has remained both fixated on and
stalemated over how to hold managed care plans more accountable for
adverse medical treatment outcomes but avoid crushing them under an
avalanche of personal injury lawsuits. If the next Congress cannot remain
away from the PBOR bargaining table, it should at least reconsider the
applicable standard that it sets for external review of coverage decisions.
Review should focus on interpreting and enforcing the actual contractual
terms of a particular health plan— rather than on making de novo '' expert''
judgments about what constitutes '' medically necessary'' treatment
according to a uniform standard of care.
Restoring the role of consensual contracts, instead of expanding the
role of adversarial tort lawsuits and political micromanagement, would
improve the range of competitive health care choices for consumers and
encourage better monitoring of health care quality.

Conclusion
We cannot afford to allow the market vision of health care reform to
be dimmed and obscured by cut-rate compromises that lead to a slow,
steady drift toward centralized, politicized control of health spending deci-sions.
Every calculated attack on private health insurance markets should
be resisted before a series of '' small'' proposals steadily accumulates to
make private coverage ever more expensive and difficult to obtain.
Health care costs will remain too high, the value of health insurance
too inadequate, and the quality of health care too low until we restore a
genuine free market in health care, from cradle to grave.

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Suggested Reading
Bunce, Victoria C. '' Medical Savings Accounts: Progress and Problems under HIPAA. '' Cato Institute Policy Analysis no. 411, August 8, 2001.

Miller, Tom. '' Improving Access to Health Care without Comprehensive Health Insurance Coverage. '' In Covering America: Real Remedies for the Uninsured. Edited by Elliot
K. Wicks and Jack A. Meyer. Washington: Economic and Social Research Insti-tute, 2002.
. '' Nickles-Stearns Is Not the Market Choice for Health Care Reform. '' Cato Institute Policy Analysis no. 210, June 13, 1994.
. '' A Regulatory Bypass Operation, '' Cato Journal 22, no 1 (Spring– Summer 2002).
Miller, Tom, and Gregory Conko. '' Getting beyond the Managed Care Backlash. '' Regulation 21, no. 4 (Fall 1998).
Miller, Tom, and Scott E. Harrington. '' Competitive Markets for Individual Health Insurance. '' Health Affairs, October 23, 2002.
Morreim, E. Haavi. '' Defined Contribution: From Managed Care to Patient-Managed Care. '' Cato Journal 22, no. 1 (Spring– Summer 2002).
. '' The Futility of Medical Necessity. '' Regulation 24, no. 2 (Summer 2001). Scandlen, Greg. '' Legislative Malpractice: Misdiagnosing Patients' Rights. '' Cato Insti-tute
Briefing Paper no. 57, April 7, 2000. Tanner, Michael. '' Medical Savings Accounts: Answering the Critics. '' Cato Institute
Policy Analysis no. 228, May 25, 1998.
—Prepared by Tom Miller

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28. Department of Education
Congress should
abolish the Department of Education and
return education to the state, local, or family level, as provided
by the Constitution.

The powers not delegated to the United States by the Constitution, nor
prohibited by it to the States, are reserved to the States respectively, or to
the people.
—Tenth Amendment to the U. S. Constitution

The U. S. Department of Education, formed in 1979 during the Carter
administration, represents an intrusion by the federal government into an
aspect of American society for which there is no constitutional authority.
The U. S. Constitution gives Congress no authority whatsoever to collect
taxes for, fund, or operate schools. Therefore, under the Tenth Amendment,
education should be entirely a state and local matter.
For more than 200 years, the federal government had left education to
those who were in the best position to oversee it— state and local govern-ments
and families. Richard L. Lyman, president of Stanford University,
who testified at the congressional hearings on forming the new department,
pointed out that '' the two-hundred-year-old absence of a Department of
Education is not the result of simple failure during all that time. On the
contrary, it derives from the conviction that we do not want the kind of
educational system that such arrangements produce. ''
Without question, the Framers intended that most aspects of American
life would be outside the purview of the federal government. They never
envisioned that Congress or the president would become involved in
funding schools or mandating policy for classrooms. As constitutional
scholar Roger Pilon has said: '' From beginning to end the [Constitution]
never mentioned the word 'education. ' The people, in 1787 or since, have

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never given the federal government any power over the subject— despite
a concern for education that surely predates the Constitution. ''
Why then was the Department of Education created? President Jimmy
Carter, during whose watch the new department came into being, had
promised the department to the National Education Association. Contem-porary
editorials in both the New York Times and the Washington Post
acknowledged that the creation of the department was mainly in response
to pressure from the NEA. According to Rep. Benjamin Rosenthal (D-N.
Y.), Congress went along with the plan out of '' not wanting to embarrass
the president. '' Also, many members of Congress had made promises to
educators in their home districts to support the new department. The Wall
Street Journal
reported the admission of one House Democrat: '' The idea
of an Education Department is really a bad one. But it's NEA's top
priority. There are school teachers in every congressional district and most
of us simply don't need the aggravation of taking them on. '' Former house
minority leader Bob Michel termed the Department of Education the
'' Special Interest Memorial Prize'' of the year.
The new department started with a $14 billion budget and more than
4,000 employees, all transferred from other departments. Proponents
claimed that cost savings would be realized, but opponents pointed out
that a new department would require not only a new secretary but also
the corresponding assistant secretaries, under secretaries, support staff,
office space, regional offices, cars, and other amenities. All of those would
be necessary for the new department to look and act like a bona fide cabinet
department. Critics of the department also pointed to the Department of
Energy, formed two years earlier, which had been the subject of a tangle
of regulations and confusing policies. Rep. John Rousselot (R-Calif.) said:
'' If you like the Department of Energy, you'll love the Department of
Education. You'll have every bureaucrat in Washington looking at your
school district. ''
Has the Department of Education produced budget savings or a stream-lining
of federal education programs? No. The department's budget has
continually increased, from $14.5 billion in 1979 to $47.6 billion in 2002.
According to analyses of federal education spending before and after the
creation of the Department of Education, after its creation, federal spending
on education increased at twice the rate it had before.
Chester Finn, who served as assistant secretary of education from 1985
until 1988, made the following observation about why education spending
increased faster once we had a Department of Education:

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Department of Education
When budget time rolls around, a department is able to exert more clout
in pressing for larger funding from Congress than can smaller agencies. It
carries a bureaucratic momentum and muscle all its own. Since it no longer
has to compete with health and welfare, as it did under HEW, the new
department will be able to exert the full brunt of the education lobby in
its behalf upon the Congress. Make no mistake about it, the principal reason
the NEA and the administration wanted to elevate the Office of Education
to a full-fledged department was to give it the political power and prestige
to seek bigger budget increases for federal education programs.

Along with the budget, the maze of federal education programs continues
to expand under the Department of Education. Wayne Riddle, representing
the Congressional Research Service, testified before a 1995 congressional
hearing that the potential overlap of Department of Education programs
with those of other federal agencies has probably increased since 1979 in
such areas as vocational education and job training, science education, and
early childhood education. Last year, the House Education and Workforce
Committee reported that there were more than 760 education-related pro-grams
spread across 39 federal agencies costing taxpayers $120 billion
per year. President Bush's 2003 budget calls for federal spending on
myriad education programs that are clearly local in nature— from special
reading and after-school programs to tutoring preschoolers to job training
for their parents.
Also, the Department of Education and its nearly 5,000 employees have
had virtually no positive effect on the performance of schools or the
academic gains of school children. The department's own national history
report card issued in May 2002 found that only 43 percent of the nation's
12th graders had at least a basic understanding of U. S. history, unchanged
from 1994, the last time the test was given. On one question, the majority
of high school seniors chose Germany, Japan, or Italy as a U. S. ally in
World War II. Diane Ravitch, education adviser to the Bush administration
and professor of education at New York University, called the results
'' truly abysmal. '' '' Since the seniors are very close to voting age or have
already reached it, '' she observed, '' one can only feel alarm that they
know so little about their nation's history and express so little capacity
to reflect on its meaning. '' Comparisons of U. S. students with students
in other countries show that U. S. students still lag behind students in
countries such as Finland, Australia, and New Zealand.
It's fair to say that the Department of Education has had no apparent
positive effect on the academic performance of U. S. school children.

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Instead, its major effect has been to move the focus on improving education
from parents and local districts to Washington, D. C. Federal guidelines
now cover topics such as how schools discipline students, the content of
sex education courses, and the gender of textbook authors. Former secretar-ies
of education Lamar Alexander and William Bennett have stated that
the department has '' an irresistible and uncontrollable impulse to stick its
nose into areas where it has no proper business. Most of what it does
today is no legitimate affair of the federal government. The Education
Department operates from the deeply erroneous belief that American
parents, teachers, communities and states are too stupid to raise their own
children, run their own schools and make their own decisions. ''
American taxpayers have spent virtually billions of dollars on the Depart-ment
of Education since its founding in 1979, yet test scores and other
measures indicate no improvement in American education (Figure 28.1).
The benefits promised by the proponents of the department plainly have
not materialized. There is simply no legitimate reason to continue this
failed experiment.

Figure 28.1 Average Student Performance and Cost

0
5
10

15
20
25

198019811982198319841985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Billions
of
Dollars

200
205
210
215
220
225

230
235

240
245
250

Average
Score

Appropriation for elementary and secondary
education (2001 dollars) NAEP reading scores, age 9

SOURCE: U. S. Department of Education, National Center for Education Statistics, National Assessment of
Educational Progress, 1999 Long Term Trend Assessment, www. nces. ed. gov/ nationsreportcard/ reading/ trends-national.
asp; and U. S. Department of Education, Budget Office, Education Department Budget by Major
Program, www. ed. gov/ offices/ OUS/ Budget02/ History. pdf.

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Department of Education
No Child Left Behind Act
The foremost policy initiative of the Bush administration to date has
been the No Child Left Behind Act, a comprehensive plan to encourage
states to improve the performance of American public schools through
mandatory testing and an accountability plan that requires states to deter-mine
which schools are failing. The supporters of the NCLBA assure us
that these actions will improve schools. But the response of public school
districts to the federal mandate thus far shows how resistant the education
establishment is to change. Most districts have designated only a few
schools as alternatives to those schools in their districts categorized as
failing, leaving students with little choice of an alternative. And in many
cases, the designated alternative schools are not much better than the
school the child would be leaving. Some districts, like Washington, D. C.,
have nowhere to send children who wish to leave poorly performing
schools. D. C. School Board president Peggy Cooper Cafritz noted that
all D. C. high schools, except four, '' are generally lousy, so where do we
send the children? '' Few school districts have published user-friendly
information about available schools, and some districts do not even allow
parents to designate on the transfer application where they want their child
to go.
Although the bill requires that schools show '' adequate yearly prog-ress,
'' there is no consensus about what amount of progress is adequate,
so states can formulate a definition that shows most schools as successful,
even if the parents are dissatisfied with the results. In July 2002 Arkansas,
for example, reported zero failing schools, while Michigan reported 1, 513
failing schools. This is a highly dubious situation since Arkansas ranked
42nd in the nation and Michigan ranked 26th on the American Legislative
Exchange Council's recent '' Report Card on American Education, '' which
ranks states on the basis of K– 12 academic achievement.
The NCLBA is also a funding initiative that gives billions of additional
federal dollars to failing schools. The Washington, D. C., school district,
a school system with a long string of documented inefficiencies and a
history of waste and corruption, already spends the second largest amount
per student in the nation. Under the new federal program, the D. C. public
schools will receive $149. 8 million in additional funding. No reasonable
person who is familiar with the D. C. system would expect to see any
benefit result from placing those funds in the hands of the people who
are in charge of running the failing D. C. schools.

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The NCLBA provides the Department of Education with $26. 5 billion
for spending on the program and perpetuates most of the old federal
education programs, most of which are ineffective and wasteful. The total
could climb to $37 billion a year by the end of the six-year authorization
period. If past experience is any guide, those dollars will go primarily to
feeding the hungry bureaucracy and will have little positive impact on
public school students.
Instead of decreasing the role of the federal government in education,
the NCLBA allows the federal government to intervene more than ever
in what should be strictly a local and state matter. While the act provides
school districts with increased flexibility in spending some of their federal
subsidies, mandated testing and staff restructuring represent an unprece-dented
usurpation of the authority of local communities to run their
own schools.
During his presidential campaign, Bush emphasized that he did not
want to become the '' federal superintendent of schools. '' But the NCLBA
gives the president and the federal government far too much power over
local schools and classrooms. Instead of proposing more top-down fixes
for education, the president should use his position to push for the return
of control of education to states and localities and urge state-level reforms
that return the control of education to parents.

New Directions
There is a growing awareness that parents, not distant government
bureaucrats, should have more power over their children's education. After
years of legal battles over school choice in places like Cleveland, Ohio,
and Milwaukee, Wisconsin, the U. S. Supreme Court ruled in June 2002
that school vouchers were constitutional and that parents could use them
at either secular or religious private schools. School choice programs now
exist in Ohio, Wisconsin, Florida, Pennsylvania, Arizona, Maine, Vermont,
and Illinois. Many more states will consider school choice legislation
during the coming two years.
The way for Congress to improve American education is to step aside
and let the states experiment with choice in a variety of ways. Some will
expand charter schools or experiment with private management. Others
will institute scholarship tax credits, parental tax credits, or vouchers either
on a limited basis or open to all students. The most successful policies
and programs will be emulated by other states.

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Department of Education
Nine Reasons to Abolish the Department of Education
1. The Constitution provides no authority whatsoever for the federal
government to be involved in education. Eliminating the department
on those grounds would help to reestablish the original understand-ing
of the enumerated powers of the federal government.
2. No matter how brilliantly designed a federal government program
may be, it creates a uniformity among states that is harmful to
creativity and improvement. Getting the federal government out
of the picture would allow states and local governments to create
better ways of addressing education issues and problems.
3. If education were left at the local level, parents would become
more involved in reform efforts. Differences in school effective-ness
among states and communities would be noted, and other
regions would copy the more effective programs and policies.
4. The contest between Congress and state legislatures to demonstrate
who cares more about education would be over, allowing members
of Congress to focus on areas and problems for which they have
legitimate responsibility.
5. Since most information about the problems and challenges of
education is present at the local level, Congress simply does not
have the ability to improve learning in school classrooms thou-sands
of miles away. These problems are best understood and
addressed by local authorities and parents.
6. The inevitable pattern of bureaucracy is to grow bigger and bigger.
The Department of Education should be eliminated now, before
it evolves into an even larger entity consuming more and more
resources that could be better spent by parents themselves.
7. The $47.6 billion spent each year by the Department of Education
could be much better spent if it were simply returned to the
American people in the form of a tax cut. Parents themselves
could then decide how best to spend that money.
8. The Department of Education has a record of waste and abuse.
For example, the department reported losing track of $450 million
during three consecutive General Accounting Office audits.
9. The Department of Education is an expensive failure that has
added paperwork and bureaucracy but little value to the nation's
classrooms.

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Since Congress has no authority under the Constitution to collect taxes
for, fund, or regulate schools, it should not tax Americans to fund a
huge federal education bureaucracy that exercises dictatorial control over
curriculum, standards, and policy. The only actions that should be taken
at the federal level are those that deregulate education. For example,
Congress should repeal the many regulations and mandates governing
special education and allow states to set up their own programs for educat-ing
special needs children. Instead of mandating tests or other accountabil-ity
measures and subsidizing the public school monopoly, it should free
states from their addiction to federal funds, eliminate the myriad unneces-sary
and unconstitutional federal programs, and allow the states to take
the lead in reforming education.
Except in Washington, D. C., where Congress has constitutional author-ity
over legislative matters, it should not set up demonstration projects or
fund voucher programs. Federal tax credits for parents who use private
schools may seem attractive, but, since Congress has no constitutional
authority to collect taxes for education, it would be better to simply
institute a tax cut for all Americans, eliminate the wasteful and meddlesome
Department of Education, and allow individual Americans to decide how
best to spend that money. We must remember that parents, not politicians,
are in the best position to make decisions about the education of their
children.
James Madison, who proclaimed that the powers of the federal govern-ment
should be few and enumerated, would be shocked at what the
president and Congress are doing today in relation to an aspect of family
life that was never intended to come under the control of Congress, the
White House, or any federal agency. Congress should take the enlightened
view, consistent with that of the nation's Founders, and draw a line in
the sand that won't be crossed. Education is a matter reserved to the
states, period.

Suggested Readings
Boaz, David, ed. Liberating Schools: Education in the Inner City. Washington: Cato
Institute, 1991.
Finn, Chester E. Jr., and Michael J. Petrilli. '' Washington versus School Reform. '' Public
Interest
133 (Fall 1998).
Coulson, Andrew. Market Education: The Unknown History. New Brunswick, N. J.:
Transaction, 1999.
Harmer, David. School Choice: Why You Need It, How You Get It. Washington: Cato
Institute, 1994.

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Department of Education
Lieberman, Myron. Public Education: An Autopsy. Cambridge, Mass.: Harvard University Press, 1993.
Richman, Sheldon. '' Parent Power: Why National Standards Won't Improve Education. '' Cato Institute Policy Analysis no. 396. April 26, 2001.
Subcommittee on Oversight and Investigations of the House Committee on Education and the Workforce. '' Education at the Crossroads: What Works and What's Wasted
in Education Today. '' 105th Cong., 2d sess., July 17, 1998.
—Prepared by David Salisbury

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29. Special Education
Congress should
devolve responsibility for special education to the states,
eliminate federal regulations that waste resources and pit par-ents
against teachers, and refuse to turn the Individuals with Disabilities in Education Act

into an entitlement for state governments.

Since 1975, the law now known as the Individuals with Disabilities in
Education Act has promised a '' free appropriate public education'' to all
children with disabilities. Local public schools have been required to
accept all disabled students and provide them with an educational plan in
compliance with various federal procedural requirements. In return, the
act provides for some discretionary federal funding to assist school districts
in establishing programs and procedures to meet the special needs of
students with disabilities. Students with disabilities must be educated in
the '' least restrictive environment, '' meaning that they should be accommo-dated
in regular classrooms where possible.
IDEA was part of an important effort in the 1970s to end discrimination
against disabled children by states and local school districts. Disabled
students' civil rights are protected by the Equal Protection Clause and
Due Process Clause of the Constitution and by an anti-discrimination law
commonly known as Section 504. When it became clear that disabled
children were not being treated fairly under the law by public school
systems, Congress passed IDEA in an effort to provide a regulatory
framework, or process, as well as some funding to help states ensure that
disabled children would not suffer from further discrimination.
IDEA is often conflated with the constitutional rights of disabled children
by defenders of the status quo. They wrongly argue that changes to IDEA
would amount to a denial of equal protection to students with special

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needs. In fact, IDEA is a regulatory process— a mechanism— for helping
to achieve the goal of equity for disabled students. Although IDEA has
been successful in providing disabled children with greater access to public
schools, it has largely failed to ensure an appropriate education for children
with disabilities.

IDEA's Failed Dispute Resolution Model
IDEA's central failure is the complex and adversarial process required
to determine the size and nature of each disabled child's entitlement to
special services. Recognizing that the educational needs of disabled chil-dren
differ widely, the act mandates that each child's '' individual education
plan, '' or IEP, be created out of whole cloth by his or her local school
district in a series of meetings and due process procedures.
The process mandated by the statute has not only failed to achieve its
purpose of ensuring an appropriate education for each disabled child. It
also has marginalized the parents it was intended to empower and has
created a barrage of compliance-driven paperwork so overwhelming that
special educators are driven to quit the profession. Federal survey results
show that special education teachers spend between a quarter and a third
of each week on IDEA-mandated bureaucratic chores.
Worse, IDEA's adversarial nature has undermined relationships between
parents and educators, pitting parent against school in a bitter struggle over
limited resources. Because the act's procedures require savvy, aggressive
navigation, its benefits flow disproportionately to wealthy families, often
leaving lower-income children poorly served.
IDEA has also encouraged incorrect labeling of many students as learn-ing
disabled. The growth of special education can be attributed largely to
a sharp rise in the number of children categorized as learning disabled.
The number of children identified in this category grew by an extraordinary
242 percent between 1979 and 1997 (Figure 29.1). The number of children
served in all the other disability categories combined increased by only
13 percent during the same period. Today, children diagnosed as learning
disabled account for nearly 50 percent of children in special education.
Although the 1997 amendments to IDEA sought to alleviate this problem
by changing federal fiscal policy, schools will continue to overidentify
children as learning disabled as long as funds that follow a disabled child
into a school are controlled by the school rather than by the child's parents.
Under IDEA's current dispute resolution model for determining benefits,
funds received from state and federal sources for each identified child

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Special Education
Figure 29.1 Number of Children in Federally Supported Programs for the
Disabled, by Category (thousands)

0
500

1,000
1,500
2,000
2,500
3,000

1976–
77
1980-

81

1985–
86
1990–
91
1995–
96

1999–
2000

Specific Learning Disability
Speech or Language Impairments
Mental Retardation
Serious Emotional Disturbance
Hearing Impairments
Orthopedic Impairments
Other Health Impairments
Visual Impairments
Multiple Disabilities
Deafness-Blindness
Autism and Other
Preschool Disabled

SOURCE: National Center for Education Statistics, Digest of Education Statistics, 2001 (Washington: U. S.
Department of Education, 2002), Table 52.

need not actually be spent on that child. If the school can identify a child
in need of few special services, that child's special education funds can
be shifted to other children with more expensive needs, or to cover the
bureaucratic costs of administering the program. Because learning disabili-ties
have no known organic basis and require fewer services than most
other types of disabilities, the label is especially ripe for abuse.
Unsurprisingly, IDEA has precipitated a financial crisis in schools. In
1977 services for disabled students accounted for 16.6 percent of total
education spending. Today the $78. 3 billion spent on special education
students at the local, state, and federal levels accounts for 21. 4 percent of
the $360.2 billion spent on elementary and secondary public education in
the United States. The number of school-age children receiving special
education services also increased during this period, from about 8.5 percent
in 1977– 78 to nearly 13 percent in 1999– 2000.
Regulatory compliance and litigation costs related to IDEA's failed
dispute resolution framework are soaking up precious resources needed for
education. For the year 1999– 2000, the American Institutes for Research
estimates that $6.7 billion was spent at the state and local levels for
'' assessment, evaluation and IEP related activities. '' Moreover, the $6.7
billion estimate does not appear to include many due process and litigation
expenses, nor does it include fee awards to successful plaintiffs' attorneys.

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Choice-Based Reform
The battle between parents and schools over each child's educational
plan must end with a decisive victory for parents in the form of portable
benefits. Special education should be reformed to allow parents to control
how their child's educational dollars are spent in the public or private
school of their choice.
Choice-based reform would improve educational outcomes by allowing
parents to choose their child's very best option, and successful schools
would be those that served parents and children well. Accompanied by
massive deregulation, thoughtful choice-based reform will free teachers
to teach and allow funds currently wasted on administration to be returned
to the classroom.
Devolution of all responsibility for special education to the states would
be optimal. If complete devolution is not immediately possible, Congress
should amend IDEA to allow states to opt into a reformed special education
system, which would eliminate the failed dispute resolution model entirely
in favor of a state-administered, largely state-funded system based on
parental choice.
A state would opt into the program by creating a matrix of disability
categories and monetary contributions designed to represent the total aver-age
cost of both general and special services required to educate a child
in each category of disability. The state would then create a menu of
special education services no less comprehensive than those currently
available in each school district and their estimated cost per child per hour
or per semester, as appropriate.
Parents in a reformed special education system would find themselves
transformed from combatants into customers. Instead of fighting each year
over educational programming, parents would be invited to their local
school to select from the menu of available special services with the advice
of special educators or anyone else the parent felt was appropriate, up to
the amount of the child's defined monetary contribution under the matrix.
Or the parent could take his or her child's total educational allowance to
a private school of choice.
Because parental choice would replace negotiation as the method of
determining a child's educational plan, Congress should exempt states
opting into a reformed system from all of the IEP and due process require-ments
of IDEA, and they should no longer be subject to civil suit under
the act. The sole remaining potential dispute in a reforming state would
be the accuracy of a child's diagnosis and, accordingly, the size of his or

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Special Education
her monetary contribution. Congress should ask those states to create rules
for genuinely independent binding arbitration of disputes related to the
diagnosis of a child covered by IDEA.
The end result for a state opting for reformwould be a state-administered,
largely state-funded portable benefits plan that would avoid IDEA's
worst problems.

Choice-Based IDEA Reform Will Reduce Waste, Empower Parents
States opting for choice-based reform would each save tens of millions
of dollars, now devoted to procedural compliance, legal posturing, and
litigation. If even half of the annual $6.7 billion devoted to '' assessment,
evaluation and IEP related expenditures'' were eliminated, $3. 35 billion
could be saved nationally on those items alone. States and parents would
also save millions more on IDEA attorneys' fees and other legal expenses.
Choice-based reform will also alleviate the problem of overidentification
of children as having disabilities, a phenomenon that has contributed to
IDEA's increasing costs. By tying an agreed level of funding directly to
each disabled child, and giving each family control over how those funds
are spent, reform states will reduce any remaining tendencies of school
districts to compete for extra funds through overdiagnosis.
Choice-based reform should also be effective in increasing the quality
of education available to most disabled children. Choices are particularly
beneficial to special education students because of the variety of disability
types and because significant advances are being made in special education.
Public institutions by their nature change too slowly to keep pace with
rapidly evolving techniques and technologies in special education.
Parents have better information and better incentives than do school
districts to make optimal decisions for their children. Although parents
often lack the professional expertise of special educators, they have an
incentive to seek out the very best sources of information and advice. A
public school district will never be similarly motivated to spend weeks and
months researching educational alternatives for a single child. Accordingly,
choice-based reform should result in better educational outcomes for dis-abled
children.
Choice-based reform will also relieve parents of their current Hobson's
choice— accept an objectionable plan created by the school district or face
the financial and personal costs of a potentially years-long hearing and

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appeals process. Similarly, the elimination of the IEP and due process
regimens will free special educators from the meetings and paperwork
that have come to dominate their days, allowing them to focus once again
on teaching children.
Perhaps most critically, replacement of the dispute resolution model of
IDEA with parental choice will restore trust between parents and educators,
whose interests will no longer be misaligned. With the size of a child's
benefit no longer in question, teachers can collaborate with parents to
determine how the child's allotment might best be spent. If the two cannot
agree, the parent is welcome to find another teacher or school with which
to work. As are other consensual fiduciary relationships— doctor and
patient, attorney and client— the new teacher-parent relationship will be
built on trust, honesty, and results. Successful special educators and schools
will be those that serve parents and children well.

Congress Must Not Create an Entitlement for State Governments
State agencies are pressuring Congress to make an open-ended commit-ment
to cover 40 percent of all costs labeled '' special education'' by
states. Congress must decline to create a new federal entitlement program
for state governments.
In addition to further expanding federal influence in what should be a
state and local matter, education, an entitlement for state governments in
the form of an open-ended funding commitment would provide states
with huge incentives to expand the portion of the state educational system
designated as '' special education. '' That in turn would mean more overiden-tification
of students as disabled, one of the problems lawmakers should
be trying to solve, not worsen.
Moreover, large funding increases would be counterproductive to
state-level reform efforts, because they would discourage states from
turning down federal funds in order to escape IDEA's suffocating
regulatory compliance requirements. Congress would essentially be
bribing states to stick with IDEA's failed dispute resolution model. By
contrast, keeping the federal contribution small (recently around 15
percent of special education costs) would encourage states to reform
their special education programs individually, discarding the federal
money as not worth the compliance and litigation costs associated
with IDEA.

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Special Education
Suggested Readings
American Institutes of Research. What Are We Spending on Special Education Services in the United States, 1999– 2000? Advance Report no. 1, Special Education Expenditure

Project. Washington: American Institutes of Research, March 2002. Bolick, Clint. '' A Bad IDEA Is Disabling Public Schools. '' Education Week, September
5, 2001. Finn, Chester E., et al., eds. Rethinking Special Education for a New Century. Washington:
Thomas B. Fordham Foundation and Progressive Policy Institute, 2001. Gryphon, Marie, and David Salisbury. '' Escaping IDEA: Freeing Parents, Teachers, and
Students through Deregulation and Choice. '' Cato Institute Policy Analysis no. 444, July 10, 2002.
Hettleman, Kalman R. '' Still Getting It Wrong: The Continuing Failure of Special Education in the Baltimore City Public Schools. '' Baltimore: Abell Foundation, 2002.
Kolter, Martin A. '' The Individuals with Disabilities in Education Act: A Parent's Perspective and Proposal for Change. '' University of Michigan Journal of Law Reform
27 (1994). Worth, Robert. '' The Scandal of Special Ed. '' Washington Monthly, June 1999.

—Prepared by Marie E. Gryphon

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30. Agricultural Policy
Congress should
reduce greatly the per farm subsidy cap as a first step to control
the excesses of federal agriculture subsidies; repeal the new crop price supports included in the 2002 farm

law, which are unnecessary add-ons to existing subsidy mechanisms;
phase out other crop subsidies, a process that began under
the 1996 Freedom to Farm Act; move toward a system of private insurance and use of other

financial instruments to protect farmers against market and weather fluctuations; and
eliminate federal controls that perpetuate producer cartels in
markets such as those for milk and sugar.

Reversal of the 1996 Reforms
With strong support from the Bush administration, Congress passed a
huge farm bill in 2002 that moved away from the '' Freedom to Farm''
reforms of 1996. Farm subsidies are now projected to cost taxpayers more
than $180 billion over the next decade. The costs may end up being much
higher; subsidies under the 1996 farm law were expected to cost $47
billion over seven years but ended up costing about $123 billion.
The landmark 1996 farm law aimed to move agriculture away from the
command-and-control regime in place since the 1930s. The law increased
farmers' flexibility to plant and eliminated some crop price supports. The
law was supposed to phase down subsidy levels between 1996 and 2002.
But after enactment, Congress ignored agreed-upon subsidy limits and
passed huge supplemental subsidy bills every year beginning in 1998. As

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a result, direct farm subsidies have soared to more than $20 billion per
year from an average of $9 billion per year in the early 1990s (see Figure
30.1). Since the passage of the 2002 bill, some lawmakers have already
clamored for further supplemental spending because of drought conditions
in some regions.

Politically Favored Crops
Not all farmers receive direct subsidies from the federal government.
Indeed, commodities that get federal payments account for just 36 percent
of U. S. farm production. Commodities, such as fruits and vegetables, that
are not on the federal dole account for 64 percent of U. S. farm production.
More than 90 percent of direct federal subsidies go to farmers of just five
crops— wheat, corn, soybeans, rice, and cotton.
In addition to those direct subsidies, the U. S. Department of Agriculture
runs a massive array of marketing, loan, statistical, research, and other
support programs. Also, legal restrictions and tariffs manipulate markets
for products such as sugar and dairy foods. All in all, about 70,000
employees of the USDA work on farm-related programs. No other industry
in America is so coddled.

Figure 30.1 Direct Federal Farm Subsidies, 1990– 2001

$9.3 $9.2
$7.3 $7.3 $7.5 $8.2

$13.4
$7.9

$22.9 $21.5
$20.7

$12.4

$0
$5
$10
$15
$20

$25

90 91 92 93 94 95 96 97 98 99 00 01
Billions
of
Dollars

SOURCE: Calendar year USDA farm income data at www. ers. usda. gov/ data/ farmincome.
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Agricultural Policy
The Structure of Crop Subsidies
Large-scale federal manipulations of agriculture began as '' temporary''
measures in the 1930s under the New Deal. Farm programs have flourished
ever since, despite a dramatic drop in the importance of agriculture to the
U. S. economy. Crop subsidies have usually been delivered in the form
of price supports, which create chronic problems of crop overproduction,
which necessitate other programs to control output.
Prior to 1996, the main farm subsidy program paid '' deficiency'' pay-ments
based on legislated price levels called target prices. Eligible com-modities
included major field crops, such as wheat, corn, and rice. Farmers
were paid for their base acreage in each particular crop and were stuck
producing certain crops if they wanted to get the full subsidy. To stem
overproduction, the government paid farmers not to farm on set-aside land.
The resulting absence of planting flexibility and land idling created large
'' deadweight'' economic losses or inefficiency costs. The most efficient
selection of crops was not being planted, and farmland was going unused.
Those inefficiencies provided an important justification for the 1996
reforms. At that time, a combination of high commodity prices and the
Republican takeover of Congress created support for reducing government
intervention in the farm sector under the 1996 farm law.

1996 Reforms
The centerpiece of the 1996 farm law was the replacement of price
support payments with production flexibility contracts (PFCs) that were
fixed payments decoupled from market prices. The government set total
PFC subsidy payments on a declining scale from $6 billion in 1996 to
$4 billion in 2002.
The reforms affected farmers of corn, wheat, grain sorghum, barley,
oats, cotton, and rice. Farmers of those crops were now allowed to plant
any crop they chose and their subsidy payment would be at a fixed level
decoupled from planting decisions. The new rules under the 1996 law led
to significant reductions in deadweight economic losses and allowed farm-ers
to better respond to changing market conditions.
Nonetheless, the new PFC subsidies still promote oversupply since they
increase farmer wealth and income, thus encouraging farm expansion.
Also, oversupply incentives continue under programs not reformed in
1996, such as the marketing loan program. That program was designed
to provide short-term financing to farmers before crops were sold, but it

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has morphed into another multi-billion-dollar subsidy program. Eligible
crops include corn, wheat, cotton, rice, sorghum, oats, barley, and soybeans.
The program's cost has exploded to more than $5 billion per year in
recent years.
Yet another major direct subsidy program for farmers is the conservation
reserve program (CRP), which was created to idle millions of acres of
farmland by paying farmers not to farm. The taxpayer cost of the CRP
has averaged about $1.5 billion per year. Almost one-third of land idled
under the CRP is owned by retired farmers, so many recipients do not
even have to work to get subsidies. A simpler way to reduce overproduction
and help the environment would be to eliminate all government farm
subsidies.

Welfare for the Well-to-Do
Politicians love to discuss the plight of the small farmer. Yet the bulk
of direct farm subsidies goes to the largest farms. For example, the largest
7 percent of farms received 45 percent of all farm subsidy payments in
1999. Much of the farm subsidy payout goes to individuals and companies
that clearly do not need taxpayer help. A Washington, D. C., think tank
has posted individual farm subsidy recipients on its Web page at
www. ewg. org to illustrate the unfairness of farm welfare for the well-to-do.
Farm subsidy recipients include Fortune 500 companies, members of
Congress, and millionaires such as Ted Turner.
USDA figures show that, compared with other Americans, farmers are
quite well off. The average farm household income was $61,947 in 2000,
which is 8.6 percent higher than the average U. S. household income of
$57,045. Commercial farms, as defined by the USDA, get about half of
all farm subsidies, had average household incomes of $118,450 in 2000,
and received an average subsidy of $43,379. So even if one accepts the
notion that the government should redistribute wealth from rich to poor,
farm subsidies do the reverse by giving taxpayer money to those with
above-average incomes.

2002 Farm Bill— Taxpayers Take Bipartisan Beating
The 2002 farm bill is expected to cost taxpayers more than $180 billion
in subsidy costs over the next 10 years. The ultimate taxpayer cost will
be higher if Congress doles out further supplemental spending.

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Aside from the taxpayer costs, the 2002 farm bill reverses progress
made in 1996 toward reducing agriculture market distortions by introducing
new price supports. Experts widely agree that price supports are counterpro-ductive.
Indeed, the USDA noted in a major report in September 2001
that '' government attempts to hold prices above those determined by
commercial markets have simply made matters worse time after time''
by encouraging unneeded output and inflating land prices. Nonetheless,
the president signed into law the 2002 farm bill, which added a new price
support, or '' countercyclical, '' program to provide big subsidies when
prices are low. In addition, the marketing loan program, which also acts
as a price support, was expanded in the 2002 bill to cover chickpeas,
lentils, dry peas, honey, wool, and mohair.
The 2002 bill also retains the multi-billion-dollar PFC subsidy program.
The intent of the PFC program introduced in 1996 was to gradually wean
farmers fromsubsidies. Instead, the 2002 farm bill simply turns the program
into yet another long-term handout.
Many other agricultural products received continued support under the
new farm bill. Protectionist sugar measures that cost consumers billions
of dollars are kept in place. Complex milk supports and regulations are
retained, and an additional National Dairy Program is created that will
cost taxpayers millions more dollars. The quota system for peanuts is
being bought out at great taxpayer expense, and peanut farmers are now
eligible for direct subsidies under other farm programs.
A final taxpayer insult of the 2002 bill was the audacious defense of
the law after enactment in a glossy full-color booklet titled '' The Facts
on U. S. Farm Policy, '' published by the House Agriculture Committee.
The propaganda piece attacks the '' myths'' of people who dared question
the bill. Throughout the booklet are pictures of famous Americans from
Thomas Jefferson to Ronald Reagan with assorted quotes meant to imply
that these great men would have supported the profligate farm bill.

Repealing Farm Subsidies Is Economically and Politically Feasible

Despite the reversal in 2002, farm reform efforts will return because
economic reality always intrudes on the best-laid plans of the central
planners. During the debate over the 2002 farm bill, Sen. Richard Lugar
(R-Ind.) offered an interesting alternative to the current system. His plan
would have phased out current subsidies and replaced them with a voucher
system promoting reliance on insurance and other financial instruments.

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While Lugar's reforms would not go far enough, they indicate that with
some innovative thinking and political courage Congress may eventually
come around to real reforms.
The experience of New Zealand in the 1980s shows that complete
subsidy removal makes sense economically and politically. In 1984 New
Zealand's Labour government took the dramatic step of ending all farm
subsidies. That was a remarkably bold policy action since New Zealand's
economy is roughly five times more dependent on farming than is the
U. S. economy.
Subsidy elimination in New Zealand was swift and sure. There was no
extended phaseout of farm payments, as was promised under U. S. reforms
in 1996. Although the plan was initially met with massive protests, the
subsidies were ended and New Zealand farming has never been healthier.
The value of farm output in New Zealand has soared since subsidies were
repealed, and farm productivity has grown strongly.
Forced to adjust to new economic realities, New Zealand farmers cut
costs, diversified their land use, sought nonfarm income, and altered pro-duction
as market signals advised. As a report by the Federated Farmers
of New Zealand noted, the country's experience '' thoroughly debunked
the myth that the farming sector cannot prosper without government
subsidies. '' Reformers in Congress should continue working to eventually
debunk that myth in this country.

Suggested Readings
Edwards, Chris, and Tad DeHaven. '' Farm Reform Reversal. '' Cato Institute Tax & Budget Bulletin no. 2, March 2002.

. '' Farm Subsidies at Record Levels As Congress Considers New Farm Bill. '' Cato Institute Briefing Paper no. 70, October 18, 2001.
Federated Farmers of New Zealand. '' Life after Subsidies. '' www. fedfarm. org. nz/ homepage. html.
McNew, Kevin. '' Milking the Sacred Cow: A Case for Eliminating the Federal Dairy Program. '' Cato Institute Policy Analysis no. 362, December 1, 1999.
Orden, David. '' Reform's Stunted Crop. '' Regulation 25, no. 1 (Spring 2002). Orden, David, Robert Paarlberg, and Terry Roe. Policy Reform in American Agriculture:
Analysis and Prognosis.
Chicago: University of Chicago Press, 1999.
—Prepared by Chris Edwards and Tad DeHaven

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31. Cultural Agencies
Congress should
eliminate the National Endowment for the Arts,
eliminate the National Endowment for the Humanities, and
defund the Corporation for Public Broadcasting.

In a society that constitutionally limits the powers of government and
maximizes individual liberty, there is no justification for the forcible
transfer of money from taxpayers to artists, scholars, and broadcasters. If
the proper role of government is to safeguard the security of the nation's
residents, by what rationale are they made to support exhibits of paintings,
symphony orchestras, documentaries, scholarly research, and radio and
television programs they might never freely choose to support? The kinds
of things financed by federal cultural agencies were produced long before
those agencies were created, and they will continue to be produced long
after those agencies are privatized or defunded. Moreover, the power to
subsidize art, scholarship, and broadcasting cannot be found within the
powers enumerated and delegated to the federal government under the
Constitution.
The National Endowment for the Arts, an '' independent'' agency estab-lished
in 1965, makes grants to museums, symphony orchestras, and
individual artists '' of exceptional talent'' and organizations (including state
arts agencies) to '' encourage individual and institutional development of
the arts, preservation of the American artistic heritage, wider availability
of the arts, leadership in the arts, and the stimulation of non-Federal
sources of support for the Nation's artistic activities. '' Among its more
famous and controversial grant recipients were artist Andres Serrano,
whose exhibit featured a photograph of a plastic crucifix in a jar of
his own urine, and the Institute of Contemporary Art in Philadelphia,
which sponsored a traveling exhibition of the late Robert Mapplethorpe's

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homoerotic photographs. (Thanks to an NEA grantee, the American tax-payers
once paid $1, 500 for a poem, '' lighght. '' That wasn't the title or
a typo. That was the entire poem.) The NEA's fiscal 2002 budget was
$115 million, back up after modest cuts by the 104th and 105th Congresses.
The National Endowment for the Humanities, with a fiscal year 2002
budget of $124.5 million, '' funds activities that are intended to improve
the quality of education and teaching in the humanities, to strengthen the
scholarly foundation for humanities study and research, and to advance
understanding of the humanities among general audiences. '' Among the
things it has funded are controversial national standards for the teaching
of history in schools, the traveling King Tut exhibit, and the documentary
film Rosie the Riveter.
The 35-year-old Corporation for Public Broadcasting— FY02 budget,
$350 million— provides money to '' qualified public television and radio
stations to be used at their discretion for purposes related primarily to
program production and acquisition. '' It also supports the production and
acquisition of radio and television programs for national distribution and
assists in '' the financing of several system-wide activities, including
national satellite interconnection services and the payment of music royalty
fees, and provides limited technical assistance, research, and planning
services to improve system-wide capacity and performance. '' Some of
the money provided local public radio and television stations is used to
help support National Public Radio and the Public Broadcasting Service.
Note that the amount of arts funding in the federal budget is quite small.
That might be taken as a defense of the funding, were it not for the
important reasons to avoid any government funding of something as
intimate yet powerful as artistic expression. But it should also be noted
how small federal funding is as a percentage of the total arts budget in
this country. The NEA's budget is about 1 percent of the $11.5 billion
contributed to the arts by private corporations, foundations, and individuals
in 1996. According to the American Arts Alliance, the nonprofit arts are
a $53 billion industry. Surely they will survive without whatever portion
of the NEA's budget gets out of the Washington bureaucracy and into
the hands of actual artists or arts institutions. Indeed, when the NEA
budget was cut in 1995, private giving to the arts rose dramatically.
The 104th Congress voted to phase out the NEA over three years.
The 108th Congress should revive that commitment and also end federal
involvement with the National Endowment for the Humanities and the
Corporation for Public Broadcasting.

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Poor Subsidize Rich
Since art museums, symphony orchestras, humanities scholarship, and
public television and radio are enjoyed predominantly by people of greater-than-
average income and education, the federal cultural agencies oversee
a fundamentally unfair transfer of wealth from the lower classes up. It's
no accident that you hear ads for Remy Martin and '' private banking
services'' on NPR, not for Budweiser and free checking accounts. News-week
columnist Robert J. Samuelson is correct when he calls federal
cultural agencies '' highbrow pork barrel. '' As Edward C. Banfield has
written, '' The art public is now, as it has always been, overwhelmingly
middle and upper-middle class and above average in income— relatively
prosperous people who would probably enjoy art about as much in the
absence of subsidies. '' Supporters of the NEA often say that their purpose
is to bring the finer arts to those who don't already patronize them. But
Dick Netzer, an economist who favors arts subsidies, conceded that they
have '' failed to increase the representation of low-income people in audi-ences.
'' In other words, lower-income people are not interested in the
kind of entertainment they're forced to support; they prefer to put their
money into forms of art often sneered at by the cultural elite. Why must
they continue to finance the pleasures of the affluent?

Corruption of Artists and Scholars
Government subsidies to the arts and humanities have an insidious,
corrupting effect on artists and scholars. It is assumed, for example, that
the arts need government encouragement. But if an artist needs such
encouragement, what kind of artist is he? Novelist E. L. Doctorow once
told the House Appropriations Committee, '' An enlightened endowment
puts its money on largely unknown obsessive individuals who have sacri-ficed
all the ordinary comforts and consolations of life in order to do their
work. '' Few have noticed the contradiction in that statement. As author
Bill Kauffman has commented, Doctorow '' wants to abolish the risk and
privation that dog almost all artists, particularly during their apprentice-ships.
'Starving artists' are to be plumped up by taxpayers.... Thelikeli-hood
that pampered artists will turn complacent, listless, and lazy seems
not to bother Doctorow. '' Moreover, as Jonathan Yardley, the Washington
Post's
book critic, asked, '' Why should the struggling young artist be
entitled to government subsidy when the struggling young mechanic or
accountant is not? ''

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Politicizing Culture
James D. Wolfensohn, former chairman of the Kennedy Center for the
Performing Arts, decried talk about abolishing the NEA. '' We should not
allow [the arts] to become political, '' he said. But it is the subsidies that
have politicized the arts and scholarship, not the talk about ending them.
Some artists and scholars are to be awarded taxpayers' money. Which
artists and scholars? They can't all be subsidized. The decisions are ulti-mately
made by bureaucrats (even if they are advised by artists and
scholars). Whatever criteria the bureaucrats use, they politicize art and
scholarship. As novelist George Garrett has said: '' Once (and whenever)
the government is involved in the arts, then it is bound to be a political
and social business, a battle between competing factions. The NEA, by
definition, supports the arts establishment. '' Adds painter Laura Main,
'' Relying on the government to sponsor art work . . . is to me no more
than subjecting yourself to the fate of a bureaucratic lackey. ''
Mary Beth Norton, a writer of women's history and a former member
of the National Council on the Humanities, argues that '' one of the great
traditions of the Endowment [for the Humanities] is that this is where
people doing research in new and exciting areas— oral history, black
history, women's history to name areas I am familiar with— can turn to
for funding. '' When the NEH spent less money in the mid-1980s than
previously, Norton complained, '' Now, people on the cutting edge are
not being funded anymore. '' But if bureaucrats are ultimately selecting
the research to be funded, how cutting-edge can it really be? How can
they be trusted to distinguish innovation from fad? And who wants scholars
choosing the objects of their research on the basis of what will win favor
with government grant referees?
Similar criticism can be leveled against the radio and television programs
financed by the CPB. They tend (with a few exceptions) to be aimed at
the wealthier and better educated, and the selection process is inherently
political. Moreover, some of the money granted to local stations is passed
on to National Public Radio and the Public Broadcasting Service for the
production of news programs, including All Things Considered and the
Newshour with Jim Lehrer. Why are the taxpayers in a free society
compelled to support news coverage, particularly when it is inclined in a
statist direction? Robert Coonrod, president of CPB, defends his organiza-tion,
saying that '' about 90 percent of the federal appropriation goes back
to the communities, to public radio and TV stations, which are essentially
community institutions. '' Only 90 percent? Why not leave 100 percent

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Cultural Agencies
in the communities and let the residents decide how to spend it? Since
only 13 percent of public broadcasting revenues now come from the
federal government, other sources presumably could take up the slack if
the federal government ended the appropriation.
It must be pointed out that the fundamental objection to the federal
cultural agencies is not that their products have been intellectually, morally,
politically, or sexually offensive to conservatives or even most Americans.
That has sometimes, but not always, been the case. Occasionally, such as
during the bicentennial of the U. S. Constitution, the agencies have been
used to subsidize projects favored by conservatives. The brief against
those agencies would be the same had the money been used exclusively
to subsidize works inoffensive or even inspiring to the majority of the
American people.
The case also cannot be based on how much the agencies spend. In
FY02 the two endowments and the CPB were appropriated about $590
million total, a mere morsel in a $2 trillion federal budget. (Total federal
support for the arts— ranging from military bands to Education Department
programs to the Kennedy Center for the Performing Arts— amounts to
$2 billion, not a minuscule amount. Congress should critically review all
of those expenditures in light of the lack of constitutional authority for
such programs, the burden they place on taxpayers, and the principle of
subsidiarity or federalism.) The NEA's budget is about 0.2 percent of the
total amount spent on the nonprofit arts in the United States.
No, the issue is neither the content of the work subsidized nor the
expense. Taxpayer subsidy of the arts, scholarship, and broadcasting is
inappropriate because it is outside the range of the proper functions of
government, and as such it needlessly politicizes, and therefore corrupts,
an area of life that should be left untainted by politics.
Government funding of anything involves government control. That
insight, of course, is part of our folk wisdom: '' He who pays the piper
calls the tune. '' '' Who takes the king's shilling sings the king's song. ''
Defenders of arts funding seem blithely unaware of this danger when
they praise the role of the national endowments as an imprimatur or seal
of approval on artists and arts groups. Former NEA chair Jane Alexander
said: '' The Federal role is small but very vital. We are a stimulus for
leveraging state, local and private money. We are a linchpin for the puzzle
of arts funding, a remarkably efficient way of stimulating private money. ''
Drama critic Robert Brustein asks, '' How could the NEA be 'privatized'
and still retain its purpose as a funding agency functioning as a stamp of
approval for deserving art? ''

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The politicization of whatever the federal cultural agencies touch was
driven home by Richard Goldstein, a supporter of the NEH. Goldstein
pointed out:

The NEH has a ripple effect on university hiring and tenure, and on the
kinds of research undertaken by scholars seeking support. Its chairman
shapes the bounds of that support. In a broad sense, he sets standards that
affect the tenor of textbooks and the content of curricula.... Though no
chairman of the NEH can single-handedly direct the course of American
education, he can nurture the nascent trends and take advantage of informal
opportunities to signal department heads and deans. He can '' persuade''
with the cudgel of federal funding out of sight but hardly out of mind.

The cudgel (an apt metaphor) of federal funding has the potential to
be wielded to influence those who run the universities with regard to
hiring, tenure, research programs, textbooks, curricula. That is an enormous
amount of power to have vested in a government official. Surely, it is
the kind of concentration of power that the Founding Fathers intended
to thwart.

Separation of Conscience and State
We might reflect on why the separation of church and state seems such
a wise idea to Americans. First, it is wrong for the coercive authority of
the state to interfere in matters of individual conscience. If we have rights,
if we are individual moral agents, we must be free to exercise our judgment
and define our own relationship with God. That doesn't mean that a free,
pluralistic society won't have lots of persuasion and proselytizing— no
doubt it will— but it does mean that such proselytizing must remain entirely
persuasive, entirely voluntary.
Second, social harmony is enhanced by removing religion from the
sphere of politics. Europe suffered through the Wars of Religion, as
churches made alliances with rulers and sought to impose their theology
on everyone in a region. Religious inquisitions, Roger Williams said, put
towns '' in an uproar. '' If people take their faith seriously, and if government
is going to make one faith universal and compulsory, then people must
contend bitterly— even to the death— to make sure that the true faith is
established. Enshrine religion in the realm of persuasion, and there may
be vigorous debate in society, but there won't be political conflict— and
people can deal with one another in secular life without endorsing the
private opinions of their colleagues.

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Cultural Agencies
Third, competition produces better results than subsidy, protection, and
conformity. '' Free trade in religion'' is the best tool humans have to find
the nearest approximation to the truth. Businesses coddled behind subsidies
and tariffs will be weak and uncompetitive, and so will churches, syna-gogues,
mosques, and temples. Religions that are protected from political
interference but are otherwise on their own are likely to be stronger and
more vigorous than a church that draws its support from government.
If those statements are true, they have implications beyond religion.
Religion is not the only thing that affects us personally and spiritually,
and it is not the only thing that leads to cultural wars. Art also expresses,
transmits, and challenges our deepest values. As the managing director
of Baltimore's Center Stage put it: '' Art has power. It has the power to
sustain, to heal, to humanize . . . to change something in you. It's a
frightening power, and also a beautiful power. . . . And it's essential to a
civilized society. '' Because art is so powerful, because it deals with such
basic human truths, we dare not entangle it with coercive government
power. That means no censorship or regulation of art. It also means no
tax-funded subsidies for arts and artists, for when government gets into
the arts funding business, we get political conflicts. Conservatives
denounce the National Endowment for the Arts for funding erotic photogra-phy
and the Public Broadcasting System for broadcasting Tales of the
City,
which has gay characters. (More Tales of the City, which appeared
on Showtime after PBS ducked the political pressure, generated little
political controversy.) Civil rights activists make the Library of Congress
take down an exhibit on antebellum slave life, and veterans' groups pres-sure
the Smithsonian to remove a display on the bombing of Hiroshima.
To avoid political battles over how to spend the taxpayers' money, to
keep art and its power in the realm of persuasion, we would be well
advised to establish the separation of art and state.

Suggested Readings
Banfield, Edward C. The Democratic Muse. New York: Basic Books, 1984.
Boaz, David. '' The Separation of Art and the State. '' Vital Speeches, June 15, 1995. www. cato. org/ speeches/ sp-as53. html.

Cowen, Tyler. In Praise of Commercial Culture. Cambridge, Mass.: Harvard University Press, 1998.
Gillespie, Nick. '' All Culture, All the Time. '' Reason, April 1999.
Grampp, William. Pricing the Priceless. New York: Basic Books, 1984.
Kauffman, Bill. '' Subsidies to the Arts: Cultivating Mediocrity. '' Cato Institute Policy Analysis no. 137, August 8, 1990.

Kostelanetz, Richard. '' The New Benefactors. '' Liberty, January 1990.

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Lynes, Russell. '' The Case against Government Aid to the Arts. '' New York Times Magazine, March 25, 1962.
Samuelson, Robert J. '' Highbrow Pork Barrel. '' Newsweek, August 21, 1989. Subcommittee on Oversight and Investigations of the House Committee on Education
and the Workforce. The Healthy State of the Arts in America and the Continuing Failure of the National Endowment for the Arts. 105th Cong., 1st sess., September
23, 1997. Serial no. 105-A.
—Prepared by Sheldon Richman and David Boaz

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32. Privatization
Congress should
privatize Amtrak by selling the passenger rail service, including
operations, maintenance, stations, rails, and trains, as a single unit and ending all federal subsidies;

privatize air traffic control by moving all operations to a private
nonprofit corporation similar to Canada's; expand the opt-out program for federal airport security to cover

more airports; allow airport operators in the opt-out program to hire security employees directly or to contract out for security
services; and monitor all airport screening operations to make possible performance comparisons;
privatize federal electric utilities by selling the Tennessee Valley
Authority and the four power marketing administrations to pri-vate investors;

support competitive outsourcing by embracing the Bush admin-istration's
management reforms and adopting the Commercial Activities Panel's recommendations on federal contracting; and

hasten privatization of military support services by allowing
private operation of the entire military housing inventory, accel-erating military utilities privatization, and giving the Pentagon

more flexibility in the contracting-out process.

Amtrak
For 30 years, Amtrak has provided second-rate passenger rail service
to Americans at higher-than-competitive costs while consuming more than
$25 billion in federal subsidies. Today, Amtrak passengers pay a higher
fare per mile than the average airline or bus passenger— and that is on
top of all the taxpayer costs.

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Against the backdrop of rail privatization in numerous foreign countries,
Congress created the Amtrak Reform Council in 1997 to study major rail
reforms. One ARC goal was to assess whether Amtrak could break even
by the end of 2002 with fares covering operating costs. In December
2001, ARC issued a finding that Amtrak could not meet that target.
ARC then developed reform plans that would end Amtrak's monopoly
on passenger service, spin off its Northeast Corridor infrastructure, and
permit states and private entities to bid for Amtrak routes.
Around the world, momentum for rail privatization is strong, although
there have been a few setbacks. For example, Railtrack, the private owner
of British Rail's infrastructure (track and stations), went bankrupt. But
big mistakes were made in the structure of British reforms. British Rail
privatization involved the separation of infrastructure from newly created
private train operating companies. As it turned out, the operating companies
were so successful at increasing passenger and freight volume (up 26
percent and 34 percent, respectively, in four years) that traffic overwhelmed
Railtrack's infrastructure. The infrastructure had suffered decades of low
investment under government ownership. Because 90 percent of Rail-track's
revenue came from fixed charges, it had little incentive to expand
capacity to meet the new demands.
The fatal flaw in Railtrack's privatization was the separation of track
from operations. Most countries that have privatized their rail systems,
including Argentina, Australia, Japan, and New Zealand, have maintained
vertical integration in the rail system (sometimes with separate regional
companies). Australia recently sold two more such regional vertically
integrated rail units. The Japanese government plans to sell its remaining
stakes in three privatized railroad firms: JR East (of which it still owns
13 percent), JR West (32 percent), and JR Tokai (40 percent). The German
government is dropping plans to separate track from train operations as
it prepares to privatize Deutsche Bahn by 2005.
The United States should not fall behind the worldwide trend of rail
privatization. Amtrak should be sold as a single unit including operations,
maintenance, stations, rails, and trains. Americans deserve better rail ser-vice
than the government has provided, and taxpayers deserve an end to
federal subsidies.

Air Traffic Control
President Bush was right in saying that air traffic control (ATC) is not
'' an inherently governmental function'' when he signed Executive Order

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13180. That order is a first step toward ATC privatization in that it sets
up a performance-based federal ATC agency.
During the past 15 years, nearly two dozen countries have partly or
fully privatized ATC services. Some, such as Germany, have created self-supporting
government corporations for ATC. Others, such as Canada,
have created fully private nonprofit corporations. Canada's reforms provide
an excellent model for future U. S. reforms. Nav Canada was set up in
1996 to take over all Canadian ATC responsibilities. As a nonprofit
company, it has a board of directors made up of various aviation stakehold-ers.
It is fully self-supporting from fees and charges paid by aviation users.
The new Canadian system has received rave reviews for investing in the
newest technology and substantially reducing air congestion.
In Britain, ATC has been moved to the National Air Traffic Services
company. NATS has a public-private corporate structure with 46 percent
of shares owned by the Airline Group (a consortium of the U. K. 's main
airlines), 49 percent of shares owned by the government, and 5 percent
of shares owned by employees. Like Canada's system, NATS is self-supporting
from fees and charges.
The cutbacks in air travel following the terrorist attacks in 2001 have
created challenges for the privatized ATC corporations. But Nav Canada
and NATS have responded nimbly by reducing costs and postponing new
expansion projects. Meanwhile, the U. S. government's ATC in the Federal
Aviation Administration has done just the opposite. In response to falling
traffic, it has requested more money from Congress.
The United States should be a leader rather than a follower in air traffic
control, especially given this country's remarkable legacy of aviation
innovation during the past century. Privatized ATC can help reduce trans-portation
congestion, increase cost efficiencies, and provide Americans
with greater safety by speeding the adoption of new technologies.

Opt-Out Program for Federal Airport Security
The federal takeover of airport passenger screening was a big mistake
and has run into serious troubles. After the terrorist attacks in 2001,
legislation was passed allowing the new Transportation Security Adminis-tration
to take over screening of passengers and baggage at all 429 U. S.
commercial airports. The TSA needs to hire and train 33,000 passenger
screeners and 21,600 baggage screeners. The huge hiring demands have
created large problems.

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To ease the problems, a modest pilot program that allows some airports
to opt out of the new government-run passenger screening system should
be expanded. In enacting the new airport security legislation, Congress
compromised between the Senate's bill, which called for 100 percent
federal screening, and the House bill, which would have left to each airport
director the decision of whether to use federal workers or outside security
firms. The compromise permitted five airports to opt out of federal security
as of November 2002 and allowed other airports to opt out as of Novem-ber
2004.
A significant expansion of the initial pilot program is needed for a
number of reasons. First, five airports with private screening are a sample
far too small to provide good comparisons between private and government
screening. Allowing at least 40 airports to opt out would provide far better
comparative information. Second, the more airports that opt to use private
contractors, the smaller the workforce that TSA needs to recruit and train.
Judging by the high demand of airports to get one of the five initial opt-out
chances, a large share of all U. S. airports would choose to opt out if
allowed to.
Airports have important reasons for wanting to opt out of government-run
screening. One is the possibility of obtaining a higher-quality work-force.
For example, New York's JFK International Airport applied for the
opt-out program with a proposal calling for screening by a security firm
staffed by retired law enforcement officers— people with experience in
explosives, weapons, interrogation, and crowd control. Unfortunately,
JFK's proposal was turned down.
Another reason cited by airport directors for favoring private contractors
is greater staffing flexibility. For example, flight activity levels at airports
often change rapidly. Unless the passenger screening system can quickly
staff up and down in response, there are unacceptable delays in screening
passengers.
The United States has nationalized its airport screening, but European
airports have successfully used private contractors for years. Nearly all
large airports in Europe and Israel (32 of 34) have shifted from civil
service workers for passenger and baggage screening to private security
firms in the past decade. In those countries, the government sets training
and performance standards and provides strong oversight of private con-tractors.
By contrast, prior to September 11, 2001, U. S. airports generally
used low-bid contractors for passenger screening instead of focusing on
quality service.

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Congress should also think further about the government's longer-term
role once all airports are allowed to opt out in November 2004. Europe's
experience suggests that airport security works best under a unified
approach controlled by the airport director. That differs from the new U. S.
approach, which has some parts of security under TSA and other parts
under airport responsibility. Note also that a clear conflict of interest exists
in having the TSA be both a provider of airport security and the airport
security regulator.
After 2004, TSA should focus only on standard setting and regulatory
oversight, and airports should adopt privatized security. The TSA has
ample time before 2004 to fine-tune standards and procedures and to
train a high-quality airport screening workforce. That workforce would
eventually go to work for airports, either directly as employees or indirectly
as employees of qualified screening contractors hired by airports.

Federal Electric Utilities
The federal government is the nation's largest electric power organiza-tion,
as owner and manager of the Tennessee Valley Authority and four
power marketing administrations (PMAs), which have operations that span
much of the country outside the Northeast. These electricity businesses,
along with federally subsidized cooperative and municipal utilities, are
poorly managed and out of step with the new environment of electricity
competition.
Government-owned electric power generation originally had two justifi-cations.
First, it was thought that private electricity companies would
not find enough profit in electrifying rural America, thus requiring that
government step in and serve those areas. Second, it was thought that
government could provide power to consumers at lower prices than could
private companies because it could set prices '' at cost'' without worrying
about profit margins.
The first justification is now irrelevant because rural America has been
thoroughly electrified. Moreover, 60 percent of rural America is served
by investor-owned utilities. The second justification— that government
power would be cheap— was socialist pie-in-the-sky thinking. Government
electricity generation has proven to be more costly than private generation.
The United States lags behind other countries in freeing itself from
government-owned power generation. Indeed, between 1990 and 1999 the
value of worldwide electric utility privatization was $65 billion, according
to Reason Foundation figures. Major countries, such as Australia, Britain,

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Canada, and Germany, have launched electricity privatization programs
in recent years.
Other countries have privatized electricity for numerous reasons. One
reason has been to improve the efficiency and performance of backward
electric power systems. Another reason is that countries have sought to
raise funds to reduce government budget deficits. Both objectives are
applicable to the United States. In 1996, the Clinton administration did
propose privatizing the PMAs, but Congress and various anti-reform
groups shot down the proposal.
The sale of all the federal power enterprises could raise between $20
billion and $35 billion to help reduce the federal deficit. The Clinton plan
was estimated to bring in between about $3 billion and $9 billion. The
Congressional Budget Office has estimated that sale of the three smallest
PMAs and related hydropower assets would bring in from $8 billion to
$11 billion. Sale of the Bonneville Power Administration would bring in
about $9 billion. The former head of the TVA estimates that that utility
could sell for as much as $10.5 billion.
Government-owned power generation is a throwback to early 20th-century
thinking that governments could operate business enterprises in
a cost-effective and high-quality manner. Few economists believe that
today, and it is time for the U. S. government to catch up to electricity
reforms made in other countries to establish private competitive electricity
systems for the 21st century.

Federal Competitive Outsourcing
A major fiscal theme of the Bush administration is reform of the federal
bureaucracy to make it work more efficiently. As part of that agenda, the
administration is promoting the contracting out of many federal functions
to private companies. Indeed, surveys of private companies have found that
firms are seeing substantial increases in revenue from federal contracting in
recent years. In addition to the Bush initiatives, earlier legislation, including
the 1994 Federal Acquisition Streamlining Act and the 1998 Federal
Activities Inventory Reform Act, helped increase the level of outsourcing.
As legislation has removed barriers to outsourcing, agency demand for
outsourcing has grown as staffing challenges have increased. For example,
federal spending on information technology is expected to continue climb-ing.
Yet many federal technology workers are expected to retire in coming
years, thus creating difficulty in continuing to provide technology services
in-house. As a result, outsourcing will likely grow in importance.

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The Bush administration is promoting ambitious goals for federal out-sourcing.
The administration plans to have agencies competing 15 percent
of all positions by 2004 and 20 percent per year after that. Under the FAIR
act, agencies in 2001 identified about 850,000 positions as commercial in
nature and possibly subject to outsourcing. President Bush's ultimate goal is
to have agencies put half of those jobs to competition with private providers.
Both the FAIR act and the government's process for outsourcing (under
Office of Management and Budget Circular A-76) have been controversial.
The General Accounting Office has convened a panel to examine outsourc-ing
in general and Circular A-76 and FAIR in particular. The Commercial
Activities Panel held a series of hearings in 2001 and provided recommen-dations
to Congress in May 2002. The recommendations strongly sup-ported
continued emphasis on contracting out.
The president's outsourcing goals do face numerous hurdles. Many
agencies have been slow to embrace the challenge. For example, in January
2002 the Department of Defense announced that it would halt all competi-tions
of its workforce. But soon after, the DoD said that it was back on
board with a plan to outsource roughly 70,000 jobs over the next two years.
Congress should strongly support the administration's goal of reforming the
federal workforce.

Privatization of Military Support Services
Military Housing
Recent efforts have sought to make military service more attractive. At
the top of the list of needed reforms is improved housing. In 1996, the
Department of Defense identified about 177,000 of its 290,000 family
housing units as inadequate. Initial estimates suggested that it would take
30 years to fix the housing problem using traditional military construction.
In a reform spirit, Congress passed new laws to enable DoD to use private-sector
financing and expertise for housing. As a result, DoD believes that
it will have all military families adequately housed by 2008— more than
a decade and a half sooner and more inexpensively than would have been
possible using standard methods.
The fiscal year 1996 defense authorization act granted DoD broad
flexibility to work with the private sector to build and renovate military
housing. The DoD could obtain private capital to leverage government
dollars and to enter into limited partnerships with private developers to

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construct, renovate, and maintain housing. Among other benefits, the new
flexibility allows DoD to deal with variations in local real estate markets.
Fort Carson in Colorado is DoD's largest privatization effort so far,
and it is the first installation to fully privatize all its on-post housing. In
1999, Fort Carson Family Housing, LLC, assumed the operation and
maintenance of 1,823 family housing units. The company agreed to reno-vate
those units by 2005 and to build 840 new units by 2004. The company
will own, operate, and maintain all housing on Fort Carson for at least
the next 50 years. Fort Carson is being heralded as a big success, and
privatization is being seen as a good way to quickly and permanently fix
military housing problems.
Other military housing upgrades being performed by the private sector
include those at the naval station in Everett, Washington, Camp Pendleton
in California, and Elmenorf Air Force Base in Arkansas. Estimates show
that all those projects will cut construction costs substantially and save
federal taxpayers millions of dollars.

Military Utilities
As part of the FY98 defense authorization act, Congress passed a
military utilities privatization initiative. The law allowed military services
to enter into agreements with private utilities for service provision and to
retain any cost savings realized. Those reforms were prompted after
reviews found that DoD was wasting millions of dollars on utilities that
were obsolete and unreliable.
The U. S. military currently has about 2,700 electric, gas, water, and
wastewater systems on bases. About 1,000 of those are leased fromcontrac-tors,
owned by utility companies, or must be operated by the military for
security reasons. As of 2002, only 29 of the other 1,700 systems had been
privatized. The effort has been delayed by the complexity of privatization,
the deregulation of the electric industry, and the California energy crisis.
Also, the military has been releasing too many requests for proposals
simultaneously, thus overwhelming contractors who can bid on only so
many projects at a time. The original plan was to have privatized about
1,600 utilities by September 2003, but that goal has proved to be too
optimistic.
More flexibility needs to be added to the process. Some observers argue
that the slow pace of contracting has resulted from unattractive bids. But
DoD should be able to look beyond initial bid costs and evaluate long-term
benefits from enhanced operational qualities of private utility systems.

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Privatization
Also, new guidelines should allow the different military services to take
different approaches to privatization. Privatization of functions that have
always been performed by the government can be a learning experience,
but the large potential benefits are well worth the hard efforts.

Suggested Readings
Bacon, R. W., and J. Besant-Jones. '' Global Electric Power Reform: Privatization and Liberalization of the Electric Power Industry in Developing Countries. '' Annual

Review of Energy and Environment (2001): 331– 59, http:// energy. annualreviews. org.
Butler, Viggo, and Robert W. Poole Jr. '' Rethinking Checked-Baggage Screening. '' Reason Public Policy Institute Policy Study no. 297, July 2002.

Poole, Robert W. Jr. '' Replacing Amtrak: A Blueprint for Sustainable Passenger Rail Service. '' Reason Public Policy Institute Policy Study no. 235, October 1997.
. '' Revisiting Federalized Passenger Screening. '' Reason Public Policy Institute Policy Study no. 298, August 2002.
Poole, Robert W. Jr., and Viggo Butler. '' How to Commercialize Air Traffic Control. '' Reason Public Policy Institute Policy Study no. 278, February 2001.
U. S. Department of Defense, Office of the Deputy Undersecretary for Installations and Environ-ment. Utilities privatization website, www. acq. osd. mil/ ie/ utilities/ privatization. htm.
U. S. Department of Defense, Office of the Undersecretary for Acquisition, Technology, and Logistics. Military housing privatization website, www. defenselink. mil/ acq/
installation/ hrso. U. S. General Accounting Office. '' Federal Power: The Role of the Power Marketing
Administrations in a Restructured Electricity Industry. '' GAO report AIMD-99-229, June 24, 1999.
Vranich, Joseph, and Edward L. Hudgins. '' Help Passenger Rail by Privatizing Amtrak. '' Cato Institute Policy Analysis no. 419, November 1, 2001.

—Prepared by Geoffrey F. Segal

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33. Corporate Welfare
Congress should
end programs that provide direct grants to businesses,
end programs that provide marketing and other commercial
services to businesses, end programs that provide subsidized loans and insurance to

businesses, eliminate foreign trade barriers that try to protect U. S. industries
from foreign competition at the expense of U. S. consumers, eliminate domestic regulatory barriers that favor particular com-panies
with monopoly power against competitors, and create financial transparency with a detailed listing in the fed-eral
budget of companies that received direct business subsi-dies and the amounts received.

In fiscal year 2002, the federal government spent about $93 billion on
programs that subsidize businesses. There have been numerous efforts to
cut these wasteful and unfair uses of taxpayer money, but total corporate
welfare spending keeps rising. A serious attempt was made after the
Republicans took control of both houses of Congress in the 1990s to
eliminate corporate welfare, but those efforts met with few successes.
The Bush administration has promised a renewed attack on corporate
welfare. Indeed, Budget Director Mitch Daniels stated that it was '' not
the federal government's role to subsidize, sometimes deeply subsidize,
private interests. '' While taxpayers wait for reforms, the government con-tinues
to subsidize private interests directly through such programs as aid
to farmers and subsidized loans for exporters. And private interests continue
to receive billions of dollars of indirect subsidies through programs such
as those for federal energy research. With the federal budget again in
deficit by more than $100 billion, corporate welfare is the perfect place
to start cutting excess spending.

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What Is Corporate Welfare?
Corporate welfare consists of government programs that provide unique
benefits or advantages to specific companies or industries. Corporate wel-fare
includes programs that provide direct grants to businesses, programs
that provide indirect commercial support to businesses, and programs that
provide subsidized loans and insurance.
Many corporate welfare programs provide useful services to private
industry, such as insurance, statistics, research, loans, and marketing sup-port.
Those are all functions that many industries in the private sector do
for themselves. If the commercial activities of government are useful and
efficient, then private markets should be able to support them without
subsidies.
In addition to spending programs, corporate welfare includes barriers
to trade that attempt to protect U. S. industries from foreign competition
at the expense of U. S. consumers and U. S. companies that use foreign
products. Corporate welfare also includes domestic legal barriers that favor
particular companies with monopoly power over free-market competitors.
Corporate welfare sometimes supports companies that are already highly
profitable. Such companies clearly do not need any extra help from taxpay-ers.
In other situations, corporate welfare programs prop up businesses
that are failing in the marketplace. Such companies should be allowed
to fail because they weigh down the economy and reduce overall U. S.
income levels.

Which Agencies Dish It Out and Who Receives It?
The federal budget supports a broad array of corporate welfare programs.
The leading corporate welfare providers are the Departments of Agricul-ture,
Health and Human Services, Transportation, and Energy (Table 33. 1).
Many smaller independent federal agencies, such as the Export-Import
Bank, also dole out corporate welfare.
Corporate welfare is a multiagency problem, so any one congressional
committee cannot reduce the corporate welfare budget across the board.
Indeed, congressional committees try to maximize corporate welfare hand-outs
within their jurisdictions. For example, the agriculture committees
appeal to farm voters with farm pork. Leadership to cut corporate welfare
in the broader public interest must come from the budget committees, the
senior congressional leadership, and the president.

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Corporate Welfare
Table 33.1 Corporate Welfare Spending by Department
(budget authority, $ millions)
Department FY02 Share (%)
Agriculture $35, 049 38
Health & Human Services $9,156 10
Transportation $10, 702 12
Energy $5,873 6
Housing & Urban Dev. $7,802 8
Defense $4,003 4
Interior $1,967 2
Commerce $1,967 2
All other agencies $16, 144 17

Total $92, 663 100

SOURCE: Cato estimates based on the Budget of the U. S. Government, FY 2003.

Many corporate welfare recipients are among the biggest companies in
America, including the Big 3 automakers, Boeing, Archer Daniels Midland,
and now-bankrupt Enron. Most of the massive handouts to agricultural
producers go to large farming businesses. Once companies are successful
in securing a stream of taxpayer goodies, they defend their stake year
after year with the help of their state's congressional delegation. But with
corporate governance reform currently in vogue, it would seem to be a
good time for Congress to cut off this unjustified source of corporate profit.

A Sampler of Corporate Welfare Programs to Cut
The following are some corporate welfare programs that are long over-due
for cutting. Spending totals given are budget authority for FY02.

Direct Subsidies
Agriculture Department— Market Access Program ($ 90 million).
This program gives taxpayer dollars to exporters of agricultural prod-ucts
to pay for their overseas advertising campaigns.
Commerce Department— Advanced Technology Program ($ 187 mil-lion).
This program gives research grants to high-tech companies.
Handouts to successful firms make no sense because they could have
relied on private venture capital instead. Handouts to unsuccessful
firms with poor ideas also make no sense because taxpayers end up
paying for economic waste.

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Foreign Military Financing ($ 3. 7 billion). U. S. taxpayers fund weapons
purchases by foreign governments through this program. That seems
contrary to weapons nonproliferation policy, and the program runs the
risk that weapons recipients may not be U. S. allies in the future.
Amtrak ($ 621 million). The federal passenger rail company should
be fully privatized to allow it to compete fairly with other modes of
transportation.

Subsidized Loans and Insurance
Export-Import Bank ($ 1.2 billion). This program uses taxpayer dollars
to subsidize the financing of foreign purchases of U. S. goods. It
makes loans to foreigners at below-market interest rates, guarantees
the loans of private institutions, and provides export credit insurance.
Overseas Private Investment Corporation ($ 188 million). OPIC pro-vides
direct loans, guaranteed loans, and risk insurance to U. S. firms
that invest in developing countries. Enron, a top beneficiary of both
OPIC and Ex-Im programs in the late 1990s, provides a glaring
example of corporate welfare waste.
Maritime Administration— guaranteed loan program ($ 250 million).
Provides loan guarantees for purchases of ships from U. S. shipyards.
The United States has vast and liquid financial markets making credit
available to all businesses that have reasonable risks. It makes no
sense to use taxpayer funds to duplicate functions of private finan-cial
markets.

Indirect Subsidies to Businesses
Agriculture Department— research and marketing services ($ 2 bil-lion).
Agricultural research and marketing programs aim to improve
product quality, find new uses for products, generate market data,
and support promotions for a variety of agriculture products. In
most industries, such commercial activities are carried out by private
businesses.
Energy Department— energy supply research ($ 670 million). This
program aims to develop new energy technologies and improve exist-ing
ones. The energy industry itself and private research institutes
should fund such work.
The Small Business Administration ($ 1.6 billion). The SBA provides
subsidized loans and loan guarantees to small businesses and has a
poor record of selecting businesses to support since its loans have a
very high delinquency rate.

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What Is Wrong with Corporate Welfare?
As some of the above examples illustrate, there are many problems
with corporate welfare programs. Here are seven:

1. Corporate welfare is a big drain on the taxpayer. In FY02, $93
billion of taxpayer money was spent on programs that subsidize businesses.
By eliminating these programs, Congress could provide every household
in the country with an $860 per year tax cut.
2. Corporate welfare creates an uneven playing field. By giving
selected businesses and industries special advantages, corporate subsidies
put businesses that are less politically connected at an unfair disadvantage.
3. Corporate welfare programs are anti-consumer. By helping par-ticular
businesses, the government often damages consumers. For example,
the protectionist federal sugar program costs consumers several billion
dollars per year in higher product prices.
4. The government does a poor job of picking winners. Federal loan
programs, such as those operated by the SBA, have high delinquency
rates, indicating that the difficult job of analyzing business risks should
be left to the private sector. With regard to technology subsidies, the
federal government has a long history of wasting money on failed ideas.
It is the role of private entrepreneurs and investors to take technology
risks through institutions such as '' angel'' financing, venture capital, and
stock markets. Government should not use taxpayer money on risky
schemes.
5. Corporate welfare fosters corruption. Corporate welfare generates
an unhealthy— sometimes corrupt— relationship between business and
the government. For example, a Maritime Administration program aided
shipbuilders by guaranteeing a $1. 1 billion loan to build cruise ships in
Sen. Trent Lott's hometown. Before the ships were completed, the com-pany
went bankrupt and left taxpayers with a $200 million tab. Steering
taxpayer funds into risky private schemes in important politicians' districts
should be stopped.
6. Corporate welfare depletes private-sector strength. While '' mar-ket
entrepreneurs'' work hard to create new businesses, corporate welfare
helps create '' political entrepreneurs'' who spend their energies seeking
government handouts. Corporate welfare draws talented people and firms
into wasteful subsidy-seeking activities and away from more productive
pursuits. Besides, companies receiving subsidies usually become weaker
and less efficient, not stronger.

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7. Corporate welfare is unconstitutional. Corporate subsidy programs
lie outside Congress's limited spending authority under the U. S. Constitu-tion.
Nowhere in the Constitution is the government granted the authority
to spend taxpayer dollars on boondoggles such as subsidizing Enron to
build power plants in India.

Congress Needs to Work with the Administration to Achieve Cuts

The Bush administration has launched an effort to grade the effectiveness
of federal activities and move funds away from poorly performing pro-grams.
As part of that effort, the FY03 budget proposed some modest
corporate welfare cuts. Overall, it proposed reducing corporate welfare
from $93 billion in FY02, to $86 billion in FY03, according to Cato
estimates.
The administration has proposed reductions in the Manufacturing Exten-sion
Partnership and the Advanced Technology Program. The Corps of
Engineers has also been slated for budget reductions. Unfortunately, Con-gress
usually ignores such cut proposals unless the administration presses
hard and starts to veto spending bills to gain leverage.
The administration did zero out the failed Partnership for a New Genera-tion
of Vehicles subsidy program for U. S. automakers in its FY03 budget.
Despite $1.5 billion in subsidies over eight years, U. S. carmakers did not
deliver a promised hybrid car to consumers. Meanwhile, unsubsidized
Honda and Toyota did introduce successful models. Unfortunately, the
administration replaced PNGV with a new carmaker subsidy called Free-domCar
at $150 million per year.
There are many good corporate welfare targets for Congress to cut. In
the wake of the Enron scandal, reformers should push for elimination of
the Ex-Im Bank and OPIC. These federal entities loaned Enron more than
$1 billion for far-flung schemes around the world from which taxpayers
did not get their money back. Also, reformers should get on board with
the administration and cut the Community Development Block Grant
program, which was criticized in the FY03 budget for doling out pork
projects to high-income communities.

Eliminating Corporate Welfare
Atwo-pronged attack should be made to overcome the political difficulty
of ending corporate welfare. Because corporate welfare is doled out by

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dozens of federal agencies, it is difficult for taxpayers to find out which
firms are receiving what amounts of money. A first reform step should
be financial transparency. The administration should begin providing a
detailed cross-agency listing of companies that received direct business
subsidies and the amounts received in its annual budget documents.
In addition to full disclosure, a corporate welfare termination commis-sion
should be established, akin to the successful military base closing
commissions of the 1990s. The commission would present a list of cuts
to Congress, which would be required to vote on all the cuts together
with no amendments allowed. As an added way for members to gain
support for the measure, the full value of savings could go to immediate
tax rebates for all taxpayers.

Suggested Readings
Congressional Budget Office. '' Federal Financial Support of Business. '' July 1995. Edwards, Chris, and Tad DeHaven. '' Corporate Welfare Update. '' Cato Institute Tax &

Budget Bulletin, no. 7, May 2002. Hartung, William. '' Corporate Welfare for Weapons Makers: The Hidden Costs of
Spending on Defense and Foreign Aid. '' Cato Institute Policy Analysis no. 350, August 12, 1999.
Lukas, Aaron, and Ian Va´squez. '' Rethinking the Export-Import Bank. '' Cato Institute Trade Briefing no. 15, March 12, 2002.
Moore, Stephen, and Dean Stansel. '' Ending Corporate Welfare As We Know It. '' Cato Institute Policy Analysis no. 225, May 12, 1995.
Rodgers, T. J. '' Silicon Valley versus Corporate Welfare. '' Cato Institute Briefing Paper no. 37, April 27, 1998.
. '' Why Silicon Valley Should Not Normalize Relations with Washington, D. C. '' Cato Institute monograph, February 9, 2000.
Slivinski, Stephen. '' The Corporate Welfare Budget: Bigger Than Ever. '' Cato Institute Policy Analysis no. 415, October 10, 2001.

—Prepared by Chris Edwards and Tad DeHaven

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34. Labor Relations Law
Congress should
eliminate exclusive representation, or at least pass a national
right-to-work law, or codify the U. S. Supreme Court's decisions in NLRB v. General Motors (1963) and Communications Work-ers

of America v. Beck (1988); repeal section 8( a) 2 of the National Labor Relations Act, or
at least permit labor-management cooperation that is not union-management cooperation only;
codify the Supreme Court's ruling in NLRB v. Mackay Radio
& Telegraph
(1938) that employers have an undisputed right to hire permanent replacement workers for striking workers in

economic strikes; overturn the Supreme Court's ruling in U. S. v. Enmons (1973)
that prohibits federal prosecution of unionists for acts of extor-tion and violence when those acts are undertaken in pursuit
of '' legitimate union objectives"; overturn the Supreme Court's ruling in NLRB v. Town & Country
Electric
(1995) that forces employers to hire paid union organiz-ers as ordinary employees;
protect the associational rights of state employees by overriding
state and local laws that impose NLRA-style unionism on state and local government employment;

proscribe the use of project labor agreements on all federal
and federally funded construction projects; and repeal the 1931 Davis Bacon Act and the 1965 Service Con-tract

Act.

In a market economy it makes little sense to distinguish between produc-ers
and consumers because most people are both. It also makes no sense,

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outside discredited Marxist theory, to distinguish between management
and labor because both are employed by consumers to produce goods and
services. Management and labor are complementary, not rivalrous, inputs
to the production process. Unfortunately, U. S. labor relations law is based
on the mistaken ideas that management and labor are natural enemies;
that labor is at an inherent bargaining power disadvantage relative to
management; and that only unions backed by government power, which
eliminate competition among sellers of labor services, can redress that
situation. The National Labor Relations Act, as amended, is based on
ideas that might have seemed sensible in the 1930s but do not make any
sense in today's information age. That act is an impediment to labor
market innovations that are necessary if the United States is to continue
to be the world's premier economy. The NLRA ought to be scrapped, or
at least substantially amended so it reflects modern labor market realities.

The Labor Front Today
Unions represent a small and declining share of the American labor
market. In 2001 only 9.0 percent of the private-sector workforce was
unionized. That figure has been declining since 1953 when it was 36
percent, and soon it will be no higher than 7 percent— exactly where it
was in 1900. Unions, at least in the private sector, are going the way of
the dinosaur. They are institutions that cannot succeed in the competitive
global economy of the future. Firms and workers must be more innovative
and have the freedom to adjust to changing market conditions if they are
to reap the rich rewards of a more prosperous world economy.
Further, nearly half of union members now work for federal, state,
and local governments. In 2001, 37. 4 percent of the government-sector
workforce was unionized. Even that number has declined from its 1995
peak of 38.8 percent. Yet, despite the decline of unions, the old regime
that supports them is still in place.

Exclusive Representation and Union Security
The principle of exclusive representation, as provided for in sec. 9( a)
of the NLRA, mandates that if a majority of employees of a particular
firm vote to be represented by a particular union, that union is the sole
representative of all workers whether an individual worker voted for or
against it or did not vote at all. Individual workers are not free to designate
representatives of their own choosing. While workers should be free, on

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an individual basis, to hire a union to represent them, they should not be
forced to do so by majority vote. Unions are not governments; they are
private associations. For government to tell individual workers that they
must allow a union that has majority support among their coworkers to
represent them is for government to violate those workers' individual
freedom of association. Freedom of religion is not subject to a majority
vote; neither should freedom of association be.
Union security is the principle under which workers who are represented
by exclusive bargaining agents are forced to join, or at least pay dues to,
the union with monopoly bargaining privileges. In the 22 right-to-work
states such coercive arrangements are forbidden by state law. (Sec. 14[ b]
of the NLRA gives states the right to pass such laws.) The union justifica-tion
for union security is that some workers whom unions represent would
otherwise get union-generated benefits for free. But if exclusive representa-tion
were repealed, only a union's voluntary members could get benefits
from the union because the union would represent only its voluntary
members. The right-to-work issue would be moot. Forced unionism would,
at long last, be replaced by voluntary unionism.
The NLRA serves the particular interests of unionized labor rather than
the general interests of all labor, and it abrogates one of the most important
privileges and immunities of U. S. citizens— the right of each individual
worker to enter into hiring contracts with willing employers on terms that
are mutually acceptable. Unfortunately, no court has had the courage to
take up the issue since the 1930s. It is time for Congress to do so.
Congress has three options for remedying the current situation:

Eliminate exclusive representation. Ideally, the current restrictions
on the freedom of workers to choose who if anyone represents them
should be eliminated. The 1991 New Zealand Employment Contracts
Act would be an excellent model to follow. Although 85 percent of
that country's population opposed that approach in 1991, in 1999,
73 percent of employees reported that they were '' very satisfied'' or
'' satisfied'' with their working conditions and terms of employment.
Still, initially it might be politically difficult to pass a similar act in
the United States. Thus, several short-term options are available.
Adopt a national right-to-work law. Under this option workers would
still be forced to let certified unions represent them, but no worker
would be forced to join, or pay dues to, a labor union. This is a poor
second best to members-only bargaining.

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Codify the U. S. Supreme Court's decisions in NLRB v. General
Motors
(1963) and Communications Workers of America v. Beck
(1988) by passing a federal '' payroll protection'' statute that guaran-tees
that union members as well as nonmember agency-fee payers
can opt out of union political activities. This is a third-best alternative
to members-only bargaining.

In General Motors the Court declared that the only permissible form
of compulsory union membership under the NLRA is the payment of
union dues. Neither unions nor employers are allowed to compel '' full
membership in good standing. '' Notwithstanding this decision, the NLRB
and the Court still allow unions and employers in non-right-to-work states
to include union security clauses in collective bargaining contracts that
assert that workers must become and remain members of unions in good
standing as a condition of continued employment.
On November 3, 1998, a unanimous Supreme Court, in Marquez v.
Screen Actors Guild,
decided that union security clauses may continue to
state that '' membership in good standing'' is required as a condition of
employment. It remains true that, in this context, '' membership in good
standing'' does not mean what almost everyone thinks it means. It means
only that '' members'' must pay some money to the union that represents
them in order to keep their jobs. But unions and employers are now
free to continue to deceive workers into thinking that ordinary union
membership is required as a condition of employment. Only Congress
can put this travesty right.
In Beck the Court declared that the compulsory dues and fees collected
by unions from workers they represent could not be used for purposes
not directly related to collective bargaining, principally for political contri-butions.
Many unions have effectively nullified Beck by creative bookkeep-ing.
In 1996 the NLRB turned a blind eye to such deceit in its California
Saw and Knife Works
decision. In that case the board accepted the union's
own staff accountants' categorization of expenditures on activities related
to and not related to collective bargaining. It stated that, under Beck,
dissenting workers had no right to an independent audit of the union's
books. In this regard, Congress should incorporate, for private-sector work-ers,
the procedural and substantive protections that were granted to govern-ment
workers who are forced dues payers in Chicago Teachers Union
v. Hudson
(1986). Among them is an indisputable right of dissenting
government workers to independent audits in all cases involving disputes
over union uses of forced dues and fees. The Supreme Court is eventually

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likely to take up the issue of the applicability of Hudson to the private
sector because of a conflict between two circuit courts of appeal. The
D. C. Circuit, in Ferriso v. NLRB (1997), ruled that Hudson does apply,
and the Seventh Circuit, in Machinists v. NLRB (1998), ruled that it
does not.
A related problem concerns whether union expenditures for organizing
union-free workers are chargeable to private-sector agency-fee payers. In
Ellis v. Railway Clerks (1984), the Supreme Court explicitly said that
organizing expenses are not chargeable to agency-fee payers under the
Railway Labor Act, which sets the rules of unionism for workers in the
railroad and airline industries. Until October 7,1999, most experts assumed
that the Ellis rule would also apply to workers under the NLRA. However,
on that date the NLRB ruled in two cases (United Food and Commercial
Workers,
andMeijer, Inc.) that the Ellis rule does not apply. In June 2001
a three-judge panel of the Ninth Circuit Court of Appeals overruled the
NLRB in Meijer, but in April 2002 that same court, sitting en banc,
reversed the panel and sided with the NLRB.
The issue of which procedural rules apply and which union expenses
are and are not chargeable to nonmember agency-fee payers is a morass.
It keeps a lot of judges, lawyers, arbitrators, and accountants busy, but
not in the public interest. Congress must act to establish fair labor laws.
A '' paycheck protection'' statute that codifies Beck, Ellis, and Hudson
protections for nonmember agency-fee payers does not go far enough.
Because of exclusive representation, individual union members should
also be protected by requiring unions annually to get written permission
from a dues payer before spending any of his or her dues on politics.
Under exclusive representation many workers may choose to be union
members to get to vote on the collective bargaining agreements that affect
them. Those workers also deserve to be able to opt out of union political
activities. Not even a national right-to-work act would protect those work-ers
against misuse of their dues for politics. Without exclusive representa-tion
no worker would be subject to the terms of a collective bargaining
agreement unless he or she chose to be a union member. Union membership
would be genuinely voluntary. If Congress abolished exclusive representa-tion,
and protected individual workers from union violence, there would
be no need for payroll protection.
The history of attempts to enforce Beck and related cases demonstrates
how complicated the issues are and how expensive it is to litigate them.
Congress created these problems, and only Congress can eliminate them.

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Repeal Section 8( a) 2 of the NLRA
This is the section that outlaws so-called company unions. More impor-tant,
it is the section that unions have discovered they can use to block any
labor-management cooperation that is not union-management cooperation.
Labor-management cooperation is crucial to America's ability to compete
in the global market. The Employment Policy Foundation in Washington,
D. C., has found that employee involvement plans increase productivity
by from 30 percent to more than 100 percent. Under existing law union-free
firms in America are not allowed to implement such plans unless
they agree to take on the yoke of NLRA-style unions, and doing so usually
reduces productivity in other ways.
Workers who want to have a voice in company decisionmaking without
going through a union should be free to do so. A 1994 national poll of
employees in private businesses with 25 or more workers, conducted by
Princeton Survey Research Associates, revealed that 63 percent preferred
cooperation committees to unions as a way of having a voice in decision-making.
Only 20 percent preferred unions.
In the 1992 Electromation case, the NLRB declared that several volun-tary
labor-management cooperation committees, set up by management
and workers in a union-free firm to give employees a significant voice in
company decisionmaking, were illegal company unions. The Teamsters,
who earlier had lost a certification election at the firm, then argued that
the only form of labor-management cooperation the government would
allow was union-management cooperation. On the basis of that argument,
the Teamsters won a slim majority in a second certification election. As
a result of the Electromation decision, Polaroid Corp. was forced to disband
voluntary labor-management cooperation committees that had been in
existence for 40 years.
In the 1993 DuPont case, the NLRB ruled that labor-management
cooperation committees in a unionized setting were illegal company unions
because they were separate from the union. The voluntary committees
were set up to deal with problems with which the union either could not
or would not deal. Under exclusive representation, management must deal
only with a certified bargaining agent in a unionized firm. The solution
is simply to abolish exclusive representation.
The report that was issued by the Dunlop commission on January 9,
1995, recommends '' clarifying'' rather than doing away with sec. 8( a) 2.
It says that voluntary worker-management cooperation programs '' should
not be unlawful simply because they involve discussion of terms and

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conditions of worker compensation where such discussions are incidental
to the broad purposes of these programs. '' That will do little to solve the
problem. What is '' incidental"? Who will decide? Answer: the NLRB
that has already given us the Electromation decision.
It is time for Congress to state unequivocally that employers and workers
may formulate and participate in any voluntary cooperation schemes they
like so long as any individual worker may join and participate in any
union he or she chooses without penalty.
Short of repealing sec. 8( a) 2 outright, Congress should amend it to permit
labor-management cooperation that is not union-management cooperation.
The Teamwork for Employees and Managers Act (H. R. 473 and S.
295), passed by Congress but vetoed by President Clinton in 1996, is an
excellent second-best model. Unions supported Clinton's veto because
they do not wish to compete on a level playing field with alternative types
of labor-management cooperation.

Codify the Supreme Court's Ruling in NLRB v. Mackay Radio & Telegraph (1938)

Once and for all, it should be made clear that, although strikers have
a right to withhold their own labor services from employers who offer
unsatisfactory terms and conditions of employment, strikers have no right
to withhold the labor services of workers who find those terms and
conditions of employment acceptable. Strikers and replacement workers
should have their constitutional right to equal protection of the laws
acknowledged in the NLRA.

Overturn the Supreme Court's Ruling in U. S. v. Enmons (1973)
The federal Anti-Racketeering Act of 1934 was enacted to cope with
the violence, intimidation, and injury to persons and property associated
with organized crime. For example, it prohibits the use of violence, intimi-dation,
and injury to extort money or other things of value from people
or to force individuals to join or make payments to organizations they
don't like. While this legislation was wending its way through Congress,
the American Federation of Labor noticed that its provisions could apply
just as well to many union activities as to the activities of the mob. To
forestall that use of the law, the AFL lobbied to exempt union activities
from the provisions of the statute. Congress obliged by adding a clause
that says, '' No court of the United States shall construe or apply any of

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the provisions of this act in such a manner as to impair, diminish or in
any manner affect the rights of bona-fide labor organizations in lawfully
carrying out the legitimate objects thereof, as such rights are expressed
in existing statutes of the United States'' (emphasis added). Notwithstand-ing
that the clear language of the statute protected only lawful actions of
the unions, courts soon interpreted the act to protect violence and intimida-tion
by unions during strikes on the preposterous grounds that strikes are
legal and they are undertaken to achieve legal ends such as improvements
in the terms and conditions of employment for strikers. The Supreme
Court made this interpretation of the law official in United States v. Local
807, International Brotherhood of Teamsters
(1942).
Congress reacted swiftly to the Local 807 decision by enacting the
Hobbs Act amendments to the Anti-Racketeering Act over President Tru-man's
veto in 1946. The clear intent of Congress was to proscribe acts
of violence and intimidation by unions as well as organized crime. How-ever,
the federal judiciary refused to go along. They continued to apply
the Local 807 decision in most cases of union violence and intimidation
during strikes. Unions continued to get away with egregious attacks against
persons and property, including robbery and arson, whenever any case
could be made that such aggression was in pursuit of '' legitimate union
objectives. '' The Supreme Court removed all doubt concerning union
immunity to federal anti-racketeering laws in 1973 with its ruling in U. S.
v. Enmons.
By a 5– 4 decision the Court upheld the right of strikers
under federal law to fire high-powered rifles at three utility company
transformers, to drain oil from and thus ruin a transformer, and to blow
up a transformer substation. The Court said it was up to state and local
officials to prosecute such behavior. The federal government had to stay
out of it because it involved a legal strike under the NLRA.
Congress must try again to make it clear that violence and intimidation
are not acceptable no matter who initiates them and no matter for what
purpose they are initiated. Equal protection of the laws is an important
constitutional principle. Victims of union thuggery deserve as much protec-tion
as victims of mob thuggery. The Freedom from Union Violence Act
(S. 764) proposed in the 106th Congress is a good model for the 108th
Congress to adopt.

Overturn the Supreme Court's Ruling in NLRB v. Town & Country Electric (1995)

Sec. 8( a) 3 of the NLRA makes it an unfair labor practice for an employer
to discriminate against a worker on the basis of union membership. Accord-352 353
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ing to the Supreme Court, that means that an employer cannot refuse to
hire or cannot fire any employee who is a paid union organizer. Unions
send paid organizers (salts) to apply for jobs at union-free firms and, if
employed, to foment discontent and promote pro-union sympathies. In
the Town & Country Electric decision the Court said that employers could
not resist that practice by firing or refusing to hire salts. In other words,
employers must hire people whose main intent is to subvert their business
activities. That is like telling a homeowner that it is illegal to exclude
visitors whose principal intent is to burglarize his home. Congress should
allow employers to resist this practice. The Truth in Employment Act
(H. R. 758), which was quashed by the threat of a filibuster in the 105th
Congress, is a good model for the 108th Congress to adopt.

Protect the Associational Rights of State Employees with a Federal Statute

Congress has constitutional authority under the Fourteenth Amendment
to protect the privileges and immunities of citizens of the United States.
Thus it is not necessary to undo the harm of government employee union-ism
state by state.
The principles of exclusive representation and union security abrogate
the First Amendment rights of government employees who wish to remain
union free. Government is the employer; hence there is sufficient govern-ment
action to give rise to Bill of Rights concerns.
Under the Bill of Rights, government is not supposed to intrude on an
individual citizen's right to associate or not associate with any legal private
organization. A voluntary union of government employees is a legal private
organization. But forcing dissenting workers to be represented by, join,
or pay dues to such an organization is an abridgment of those workers'
freedom of association.
Moreover, in government employment, mandatory bargaining in good
faith (a feature of the NLRAincorporated into 31 state collective bargaining
statutes) forces governments to share the making of public policy with
privileged, unelected private organizations. Ordinary private organizations
can lobby government, but only government employee unions have the
privilege of laws that force government agencies to bargain in good faith
with them. Good-faith bargaining is conducted behind closed doors. It
requires government agencies to compromise with government employee
unions. Government agencies are forbidden to set unilaterally terms and
conditions of government employment (questions of public policy) without

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the concurrence of government employee unions. Not even the Sierra
Club has that special access to government decisionmakers or that kind of
influence over decisionmaking. In short, government employee unionism,
modeled on the NLRA, violates all basic democratic values. It should be
forbidden. That is why Title VII of the 1978 Civil Service Reform Act
greatly restricts the scope of bargaining with federal employee unions and
forbids union security in federal employment. It ought also to forbid
exclusive representation and mandatory good-faith bargaining in federal
employment.
Incredibly, in the 106th Congress there was bipartisan support for a
statute (S. 1016 and H. R. 1093) that would force all states to give exclusive
representation, mandatory bargaining, and union security privileges to
unions representing police and firefighters. That same measure was pro-moted
by many members of the 107th Congress under cover of the
September 11, 2001, terrorist attacks. It is a measure to benefit union
leaders, not firefighters and police on the front lines. The record of disaster
in the states that already give public safety unions such privileges is clear.
Firefighters who are prohibited by union leaders from fighting fires and
police who are prohibited by union leaders from maintaining order and
preventing crimes during strikes undermine civil society. The public safety
strikes in San Francisco during the 1970s prove the point. The proposed
legislation would expose the 20 states that now deny NLRA-style privileges
to public safety unions to the same predation. It proscribes strikes by
public safety personnel, but the record is clear. Public-sector unions with
NLRA-style privileges are almost never deterred by laws that make strikes
illegal. Moreover, once states are forced to give public safety unions such
privileges, the teachers' unions and other public-sector unions will demand
equal treatment. The 108th Congress should drive a stake through the
heart of this idea as soon as possible.

Proscribe the Use of Project Labor Agreements on All Federal and Federally Funded Construction Projects

A project labor agreement (PLA) is a device used by unions in the
construction industry to make it extremely difficult for union-free contrac-tors
to bid successfully for construction projects funded by taxpayer money.
In 1947 construction unions had an 87 percent market share nationwide. In
2001 that figure was only 18.4 percent. Failing the market test, construction
unions have turned to politics at all levels. Construction unions lobby
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ments to operate according to union rules before they are permitted to
bid on any project funded, in whole or in part, with taxpayer money.
An open-shop contractor that signs a PLA in order to be able to bid
agrees to (1) force all its employees to either join, or pay dues to, the
unions specified in the PLA; (2) do all new hiring associated with the
PLA through designated union hiring halls; (3) operate according to union
work rules and craft jurisdiction definitions; and (4) force its employees
to pay (or agree to pay on their behalf) into union welfare, benefits, and
pension funds. Since it usually takes at least five years for workers to
become vested in such funds, and most projects last less than five years,
the money is forfeited to the unions when the projects are completed.
Moreover, unless employees are to lose their regular benefits and pension
plans, payments to them must be maintained during the life of the PLA
project.
PLAs should not be confused with '' prevailing wage'' regulations in
taxpayer-funded construction. The federal Davis-Bacon Act (see below)
forces successful union-free bidders to pay their employees union wages
on taxpayer-funded projects. But even when forced to pay union-scale
wages, union-free contractors have cost advantages over union-impaired
contractors that enable them to bid lower to get contracts. The unions'
restrictive work rules and job classifications drive up costs substantially.
The obvious solution from the unions' point of view is, through PLAs,
to remove all union-free cost advantages.
Unions claim that PLAs are a way of ensuring safe, on-budget quality
work without labor disputes and project delays. Facts belie those claims.
A nationwide study in 1995 by Charles Culver, a former Occupational
Safety and Health Administration official, revealed that on-the-job fatalities
were significantly lower in union-free construction than in comparable
unionized construction in every year from 1985 through 1993. Moreover,
the quality of union-free work is usually just as good as unionized work,
and it is often better. It is revealing to note that union-free contractors
deemed unqualified to do a job all of a sudden are deemed well qualified
when they sign a PLA.
PLAs are not even effective guarantees against strikes by the unions
on the jobs they win. For example, the San Francisco Airport PLA includes
a no-strike pledge that has been violated at least three times. And PLAs
are not effective guarantees against project completion delays. The Boston
'' Big Dig'' PLA has resulted in substantial delays. The project was sup-posed
to be completed in 1998; now the earliest possible completion date

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is 2004. As for on-budget performance, the original budget for the Big
Dig was $2.5 billion. Best estimates now put the cost at $15 billion.
On February 17, 2001, President Bush signed Executive Order 13202,
which prevents federal government agencies from including PLAs as bid
specifications on federal construction projects. Under the executive order,
union-free firms can use their cost advantages to try to win the bid, but
if a contractor submits a winning bid for a federal construction project
he is thereafter free to agree with construction unions that he and his
subcontractors will work on a union-only basis. The reason the executive
order permits union-only agreements after bids are won is that after a
contract is awarded all subsequent labor relations questions are controlled
by the NLRA, which clearly permits union-only agreements among private
parties. All the president can do is prohibit federal agencies from requiring
PLAs as a condition for bidding.
The legality of PLAs at the state level was affirmed in 1993 by the
U. S. Supreme Court in the Boston Harbor case. This involved a massive
cleanup of Boston Harbor. The Massachusetts Water Resources Authority
said that no union-free contractors could bid on the project unless they
first agreed to the terms of a PLA. Opponents of the PLA argued that the
NLRA preempted state authority to impose a PLA. The Court upheld the
PLA on the grounds that MWRA was acting as an owner-developer of
the project, not the employer of the employees who actually worked the
project. The NLRA controls relations among employers, employees, and
unions, not relations between owner-developers and the employers with
whom they contract. So, under Boston Harbor, a state agency is free to
choose whether or not to impose a PLA as a bid qualification.
Labor unions and their logrolling partner, the Sierra Club, immediately
challenged the legality of Bush's executive order in federal district court,
and on November 7, 2001, Judge Emmet Sullivan declared, on the basis
of the Boston Harbor case, that the executive order was preempted by
the NLRA. This was a manifestly silly ruling because in Boston Harbor
the Supreme Court ruled that the NLRA does not preempt state PLAs if
the state agency involved is an owner-developer rather than an employer.
If Boston Harbor says anything about federal PLAs, it says that the
president, as owner-developer of federal projects, is free to permit or forbid
PLAs. Judge Sullivan's decision was overturned by the D. C. Circuit Court
of Appeals on July 15, 2002.
Congress should settle this issue by enacting legislation that goes beyond
Bush's executive order to preserve open competition at all stages of federal

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construction projects including subcontracting. Primary contractors should
not be permitted to discriminate against subcontractors on the grounds of
whether they are unionized or not. The rule in federal contracting should
be that the lowest bidder who is capable of doing the specified job always
wins. That would save taxpayers millions of dollars each year, and it
would set a good model for states to follow.
Union-only agreements between private parties would be unobjection-able
if labor union participation were a matter of free choice for all
individual workers. However, as long as we have compulsory unionism
(exclusive representation, union security, and mandatory good-faith bar-gaining),
taxpayers need protection against the inflated costs that inevita-bly
follow.

Repeal the 1931 Davis-Bacon Act and the 1965 Service Contract Act
The Davis-Bacon Act, passed at the beginning of the Great Depression,
had two purposes: to stop prices and wages from falling and to keep
blacks from competing for jobs that had previously been done by white
unionized labor. Both of its purposes were wrong. Falling wages and
prices were precisely what were needed to reverse the collapse of real
income and employment in the early 1930s. (Both fell from 1929 to 1933,
but prices fell by more than wages. Thus the real cost of hiring workers
increased during that time period.) The purchasing power fallacy that
misled first Herbert Hoover and later Franklin Roosevelt (e. g., the National
Industrial Recovery Act) did as much to deepen and prolong the Great
Depression as did the Smoot-Hawley tariff.
The racist motivation behind the legislation is plain for anyone who
reads the Congressional Record of 1931 to see. For example, Rep. Clayton
Allgood, in support of the bill, complained of '' cheap colored labor'' that
'' is in competition with white labor throughout the country. ''
While most current supporters of Davis-Bacon are not racists, the law
still has racist effects. There are very few minority-owned firms that can
afford to pay union wages. As a result, they rarely are awarded Davis-Bacon
contracts, and many of them stop even trying for those contracts.
Moreover, Davis-Bacon adds over a billion dollars each year directly
to federal government expenditures, and billions more to private expendi-tures
on projects that are partially funded with federal funds, by making
it impossible for union-free, efficient firms to bid on construction contracts

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financed in whole or in part with federal funds. Today Davis-Bacon serves
no interest whatsoever other than protecting the turf of undeserving, white-dominated
construction trade unions.
The claim, on January 6, 1995, by Robert A. Georgine, president of
the AFL-CIO Building and Construction Trades Department, that Davis-Bacon
has long been supported by the GOP because it adheres to '' free
market principles by recognizing existing wages within each community
set by the private marketplace, not by imposing an artificial standard or
deleterious government interference, '' is self-serving nonsense. Prices set
by the free market do not need any government enforcement at all. They
are the prices at which the production and exchange plans of buyers and
sellers of inputs and outputs are coordinated with each other. They are
the prices that would exist in the absence of any government involvement.
The AFL-CIO and its constituent unions want government to impose
prices that are more favorable to their members and officers than the
marketplace would produce. The '' prevailing wage'' or '' community
wage'' set by the Department of Labor under the Davis-Bacon Act is
almost always the union wage— not the free-market wage. After all, unions
insist that they make wages higher than market-determined wages. Only
members of the GOP in thrall to unions' in-kind and financial bribes
would support Davis-Bacon. No member of Congress, of either party,
who supports the free market can be against repealing Davis-Bacon.
Several states have their own '' little Davis Bacon Acts. '' In 1994 a
federal district court in Michigan found that state's prevailing wage law
violated federal Employee Retirement Income Security Act regulations.
As a result the Michigan law was suspended between 1994 and 1997
when an appellate court reinstated it. According to a study done for the
Mackinac Center for Public Policy, as a direct result of the suspension
more than 11, 000 new jobs were created. Comparing the costs of state
government construction projects during the suspension with their costs
under the prevailing-wage rules suggests that those regulations add at least
$275 million per year.
The Service Contract Act does for federal purchases of services what
the Davis-Bacon Act does for federally funded construction. It wastes
billions of taxpayer dollars for the sole purpose of attempting to price
union-free service providers out of the market. Both acts should be placed
in the dustbin of history along with the syndicalist sympathies that
inspired them.

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Conclusion
The more integrated global economy of the new millennium offers
greater opportunities for American enterprises and workers to prosper.
Greater productivity worldwide means more wealth for those who can
exchange their services with willing customers. But to do so, American
workers and the enterprises that employ them must be empowered to act
quickly to meet market demands. That means eliminating the laws and
regulations that destroy jobs and make workers a burden rather than an
asset to employers. The outmoded perceptions of the 1930s should not
be allowed to shackle the American economy of the 21st century.

Suggested Readings
Baird, Charles W. '' Are Quality Circles Illegal? Global Competition Meets the New Deal. '' Cato Institute Briefing Paper no. 18, February 10, 1993.

. '' Outlawing Cooperation: Chapter Two. '' Regulation, no. 3 (1993). . '' The Permissible Uses of Forced Union Dues: From Hanson to Beck, '' Cato
Institute Policy Analysis no. 174, June 30, 1992. . '' The PLA Hustle. '' Ideas on Liberty, August 2002.
. '' Right to Work before and after 14( b). '' Journal of Labor Research 19, no. 3 (Summer 1998).
. '' Salt without Savor. '' Freeman, May 1998. . '' Toward Voluntary Unionism. '' Journal of Private Enterprise 17, no. 1
(Fall 2001). . '' Unchaining the Workers. '' Regulation 24, no. 3 (Fall 2001).
Bernstein, David. '' The Davis-Bacon Act: Let's Bring Jim Crow to an End. '' Cato Institute Briefing Paper no. 17, January 18, 1993.
Culver, Charles A. Comparison of Nonunion and Union Contractors Construction Fatali-ties. Gainesville, Fla.: National Center for Construction Education and Research, 1995.
Deavers, Ken, Anita Hattiangadi, and Max Lyons. The American Workplace 1998. Washington: Employment Policy Foundation, 1998.
Moore, Cassandra Chrones. '' Blocking Beck. '' Regulation, Spring 1998. Nelson, Daniel. '' The Company Union Movement, 1900– 1937: A Reexamination. ''
Business History Review 56 (Autumn 1982).
Reynolds, Morgan O. Making America Poorer: The Cost of Labor Law. Washington: Cato Institute, 1987.

Summers, Robert S. Collective Bargaining and Public Benefit Conferral: A Jurispruden-tial Critique. Ithaca, N. Y.: Cornell University, Institute of Public Employment, 1976.
Theiblot, Armand J., Thomas R. Haggard, and Herbert R. Northrup. Union Violence: The Record and the Response by Courts, Legislatures, and the NLRB. Fairfax, Va.:
George Mason University Press, 1999. Vedder, Richard. Michigan's Prevailing Wage Law and Its Effects on Government
Spending and Construction Employment.
Midland, Mich.: Mackinac Center for Public
Policy, 1999.

—Prepared by Charles W. Baird

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35. Health and Safety Policy
Congress should
eliminate goals of zero risk in statutes governing occupational
and environmental health and establish the purpose of safety and health agencies as the

identification of opportunities to improve safety and health at costs that are much less than the market value of the benefits.

Before the 1970s, the health and safety regulations that we now take
for granted were completely absent from the American economy, with
the exception of selected regulations for food safety and prescription drugs.
The rise of the consumer movement and environmental concerns led to
the establishment of the National Highway Traffic Safety Administration
in 1966, the Occupational Safety and Health Administration in 1970, the
Environmental Protection Agency in 1970, the Consumer Product Safety
Commission in 1972, and the Nuclear Regulatory Commission in 1974.
Scholarly assessment of the more than three decades of experience with
regulation and government oversight concludes that health and safety
regulations have largely failed to fulfill their initial promise, but many of
the initial promises were infeasible goals. There continue to be major
opportunities to improve regulatory performance by targeting existing
inefficiencies and using market mechanisms (rather than strict command-and-
control mechanisms) to achieve regulatory goals.

Why Should the Government Regulate Risk?
Government action in the health and safety arena can be justified when
there are shortcomings in risk information. The goal of regulatory agencies
that address health and safety risks should be to isolate instances in which
misinformation about health risks prevents people from making optimal

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tradeoffs and to isolate instances in which health risks are not internalized
in market decisions.
The existence of a health risk does not necessarily imply the need for
regulatory action. For example, as long as workers understand the risks
they face in various occupations, they will receive wage compensation
through normal market forces sufficient to make them willing to bear the
risk; the health risk is internalized into the market decision.
In situations in which the risks are not known to workers, as in the
case of dimly understood health hazards or situations in which the labor
market is not competitive, market forces might not operative effectively
to internalize the risk. Those cases provide an opportunity for constructive,
cost-effective government intervention.

Zero vs. Optimal Risk
Unfortunately, the rationale of correcting market failures has never been
a major motivation of regulatory intervention. The simple fact that risks
exist has provided the impetus for the legislative mandates of the health
and safety regulatory agencies. To this day, very few regulatory impact
analyses explore in any meaningful way the role of potential market failure
in the particular context and the constructive role that market forces may
already play in that context.
The conventional regulatory approach to health and safety risks is to
seek a technological solution either through capital investments in the
workplace, changes in the safety devices in products, or similar kinds of
requirements that do not entail any additional care on the part of the
individual. Stated simply, the conventional view is that the existence of
risks is undesirable and, with appropriate technological interventions, we
can eliminate those risks. That perspective does not recognize the cost
tradeoffs involved; the fact that a no-risk society would be so costly as
to make it infeasible does not arise as a policy concern of consequence.
The economic approach to regulating risk is quite different. The potential
role of the government is not to eliminate the risk but rather to address
market failures that lead to an inefficient balance between risk reduction
and cost. The task of government regulatory agencies is to identify cases
in which regulation can generate benefits to society that are worth more
than the costs that are incurred and to address market failures using a
cost-effective approach. To achieve those goals, the focus should not
simply be on rigid technological standards but on flexible regulatory
mechanisms that meet the performance goals.

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Health and Safety Policy
How Should Risks Be Evaluated?
Because government policies reduce risks of death rather than eliminate
certain death for identified individuals, the correct benefit value is society's
willingness to pay for the reduction in risk. For example, if a regulation
would reduce risk by 1 in 1 million to everyone in a population of 1
million, then the regulation would save 1 statistical life. If the average
willingness to pay for that risk reduction is $6 per person, then the value
of a statistical life is $6 million.
Using detailed data on wages and prices, economists have estimated
people's tradeoffs between money and fatality risk, thus establishing a
value of statistical lives based on market decisions. For workers in jobs
of average risk, the estimates imply that, in current dollars, workers receive
premiums in the range of $600 to face an additional annual work-related
fatality risk of 1 chance in 10,000. Put somewhat differently, if there were
10,000 such workers facing an annual fatality chance of 1 in 10,000, there
would be 1 statistical death. In return for that risk, workers would receive
total additional wage compensation of $6 million. The compensation estab-lishes
the value of a statistical life, based on workers' own attitude
toward risks.
The estimates suggest that in situations in which there is an awareness
of the risk, market forces are enormously powerful and create tremendous
safety incentives. Thus, we are not operating in a world in which there
are no constraints other than regulatory intervention to promote our safety.
Powerful market forces already create incentives for safety that should
not be overridden by intrusive regulations. We should define the overall
economic framework in which regulatory interventions can potentially
complement the already significant market forces at work.

Assessing Regulatory Performance
Although many agencies use reasonable measures of the value of a
statistical life for the purpose of assessing benefits, the cost per life saved
by the regulations actually promulgated often far exceeds the estimated
benefits. The restrictive nature of agencies' legislative mandates often
precludes consideration of costs in the regulatory decision.
Table 35.1 lists various health and safety regulations and their estimated
cost per life saved. The table also lists the cost per normalized life saved
(in 1995 dollars), which accounts for the duration of life lost and the
existence of discounting of future lives. Because the legislative mandate

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Table 35.1 A Sample of U. S. Health and Safety Regulations and
Their Cost per Life Saved
Cost per
Cost per Normalized
Life Saved Life Saved
(millions of (millions of
Regulation Year Agency 1990 $) 1995 $)

Unvented space heater ban 1980 CPSC 0.1 0.1
Aircraft cabin fire protection 1985 FAA 0.1 0.1
standard
Seatbelt/ air bag 1984 NHTSA 0.1 0.1
Steering column protection 1967 NHTSA 0.1 0.1
standard
Underground construction 1989 OSHA 0.1 0.1
standards
Trihalomethane in drinking 1979 EPA 0.2 0.6
water
Aircraft seat cushion 1984 FAA 0.5 0.6
flammability
Alcohol and drug controls 1985 FRA 0.5 0.6
Auto fuel system integrity 1975 NHTSA 0.5 0.5
Auto wheel rim servicing 1984 OSHA 0.5 0.6
Aircraft floor emergency 1984 FAA 0.7 0.9
lighting
Concrete and masonry 1988 OSHA 0.7 0.9
construction
Crane-suspended personnel 1988 OSHA 0.8 1.0
platform
Passive restraints for trucks 1989 NHTSA 0.8 0.8
and busses
Auto side-impact standards 1990 1990 1.0 1.0
Children's sleepwear 1973 1973 1.0 1.2
flammability ban
Auto side-door supports 1970 NHTSA 1.0 1.0
Low-altitude windshear 1988 FAA 1.6 1.9
equipment
Metal mine electrical 1970 MSHA 1.7 2.0
equipment standards
Trenching and excavation 1989 OSHA 1.8 2.2
standards
Traffic alert/ collision 1988 FAA 1.8 2.2
avoidance systems

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Health and Safety Policy
Cost per
Cost per Normalized
Life Saved Life Saved
(millions of (millions of
Regulation Year Agency 1990 $) 1995 $)

Hazard communication 1983 OSHA 1.9 4.8
standard
Truck, bus, and MPV side-1989 NHTSA 2.6 2.6
impact standard
Grain dust explosion 1987 OSHA 3.3 4.0
prevention standards
Rear lap/ shoulder belts for 1989 NHTSA 3.8 3.8
cars
Stds for radionuclides in 1984 EPA 4.1 10.1
uranium mines
Benzene NESHAP (original) 1984 EPA 4.1 10.1
Ethylene dibromide in 1991 EPA 6.8 17.0
drinking water
Benzene NESHAP (revised) 1988 EPA 7.3 18.1
Asbestos occupational 1972 OSHA 9.9 24.7
exposure limit
Benzene occupational 1987 OSHA 10.6 26.5
exposure limit
Electrical equipment in coal 1970 OSHA 11.0 13.3
mines
Arsenic emissions from glass 1986 MSHA 16.1 40.2
plants
Ethylene oxide occupational 1984 EPA 24.4 61.0
exposure limit
Arsenic/ copper NESHAP 1986 EPA 27.4 68.4
Petroleum sludge hazardous 1990 EPA 32.9 82.1
waste listing
Cover/ move uranium mill 1983 EPA 37.7 94.3
tailings (inactive)
Benzene NESHAP (revised) 1990 EPA 39.2 97.9
Cover/ move uranium mill 1983 EPA 53.6 133. 8
tailings (active)
Acrylonitrile occupational 1978 OSHA 61.3 153. 2
exposure limit
Coke ovens occupational 1976 OSHA 75.6 188. 9
exposure limit

(continued)

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Table 35.1 (continued)
Cost per
Cost per Normalized
Life Saved Life Saved
(millions of (millions of
Regulation Year Agency 1990 $) 1995 $)

Lockout/ tagout 1989 OSHA 84.4 102. 4
Arsenic occupational 1978 OSHA 127. 3 317. 9
exposure limit
Asbestos ban 1989 EPA 131. 8 329. 2
Diethylstilbestrol cattle feed 1979 FDA 148. 6 371. 2
ban
Benzene NESHAP (revised) 1990 EPA 200. 2 500. 2
1,2-Dichloropropane in 1991 EPA 777. 4 1,942.1
drinking water
Hazardous waste land 1988 EPA 4,988.7 12,462.7
disposal ban
Municipal solid waste 1988 EPA 22,746.8 56,826.1
landfills
Formaldehyde occupational 1987 OSHA 102, 608.5 256, 372.7
exposure limit
Atrazine/ alachlor in drinking 1991 EPA 109, 608.5 273, 824.4
water
Wood preservatives hazardous 1990 EPA 6,785,822.0 16,952,364.9
waste listing

SOURCE: W. Kip Viscusi, Jahn K. Hakes, and Alan Carlin, '' Measures of Mortality Risks, '' Journal of Risk
and Uncertainty
14 (1997): 213– 33.

varies across regulations, one sees great variance in the cost per life
saved. Indeed, the cost varies even within certain regulatory agencies. For
example, EPA's regulation of trihalomethane in drinking water has an
estimated cost per normalized life saved of $600, 000, whereas the regula-tion
of atrazine/ alachlor in drinking water has an estimated cost per normal-ized
life saved of $274 billion. A regulatory system based on sound
economic principles would reallocate resources from the high-to the low-cost
regulations. That would result in more lives saved at the same cost
to society (or, equivalently, shifting resources could result in the same
number of lives saved at lower cost to society).
The focus of policy debates should not be on whether regulations that
cost $7 million per life saved or $12 million per life saved are desirable.
Rather, policy debates should emphasize the enormous opportunity costs

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Health and Safety Policy
associated with regulations that cost hundreds of millions of dollars or
even billions of dollars per statistical life saved.

Effect of Regulation on Accident Rates
What has been the overall effect of health and safety regulations since
the early 1970s? One yardstick of performance is to see whether accident
rates have declined. Figure 35.1 summarizes fatality rates of various kinds,
including motor vehicle accidents, work accidents, home accidents, public
no-motor-vehicle accidents, and an aggregative category of all accidents.
Since the 1970s, accidents of all kinds have declined. Improvements
in safety over time typically lead to annual press releases on the part of
the regulatory agencies in which they take credit for the improvements
and attribute the gains to their regulatory efforts. There are exceptions, as

Figure 35.1 Accidental Death Rates

0.0
10.0
20.0

30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0

1928 1931 1934 1937 1940 1943 1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000
Year

Deaths
per
100,000

People

All Accidents
Motor Vehicle
Work
Home
Public (Nonmotor Vehicle)

SOURCE: National Safety Council, Accident Facts (Itasca, Ill.: NSC, 2001), pp. 34– 35.
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there are some years in which accident rates increase— and regulatory
officials typically blame cyclical factors for such trends.
The basic message of Figure 35.1 is that accident rates have been
declining throughout the past 100 years. The improvement in our safety
is not a new phenomenon that began with the advent of regulatory agencies
commissioned to protect the citizenry. There is, for example, no significant
downward shift in Figure 35.1's trend for job fatality risk after the establish-ment
of OSHA.
Perhaps the main exception has been motor vehicle accidents, but
assessments of annual death rates associated with motor vehicles are
complicated by the fact that many more people drive than did in previous
years, and there have been considerable changes in the amount of driving,
traffic congestion, and highway design.
Figure 35.2 provides an explanation of motor vehicle accident rates
that attempts to adjust to some of the aspects of driving intensity rather
than simply tallying the motor vehicle fatality rate per person. As can be
seen from the figure, deaths per 10, 000 motor vehicles as well as deaths
per 100 million vehicle miles have declined steadily throughout the last
100 years. As in the case of the other accident statistics, there is no
evidence of a sharp, discontinuous break in the downward trend occurring
with the advent of regulatory policies.
Although regulation may play a beneficial safety-enhancing role, the
steady decrease in risk throughout the century supports the hypothesis
that improvements in societal wealth have greatly increased our demand for
safety over time. Coupling that wealth with technological improvements—
many of which have been stimulated by the greater demand for safety—
has led to dramatic improvements in our individual well-being. Market
forces rather than regulatory policy have likely been the most important
contributor to safety improvements since early last century.

Reform Agenda
Almost from its inception, health and safety regulation has been the
target of proposed reform. Some policy improvements have occurred, such
as elimination of some of the nitpicking of safety standards, the increased
use of informational approaches to regulation, and enhanced enforcement
efforts. However, health and safety regulations have fallen short of any
reasonable standard of performance.
The underlying difficulty can be traced to the legislative mandates of
the regulatory agencies. Instead of focusing regulations on instances of

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Health and Safety Policy
Figure 35.2 Motor Vehicle Death Rates

0.00
2.00

4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00

1928 1931 1934 1937 1940 1943 1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000
Year

Death
Rate

Deaths per 10,000 Motor Vehicles
Deaths per 100,000,000 Vehicle Miles

SOURCE: National Safety Council, Accident Facts (Itasca, Ill.: NSC, 2001), pp. 108– 9.
market failure, the emphasis is on reductions of risk irrespective of cost.
The regulatory approach has also been characterized by an overly narrow
conceptualization of the potential modes of intervention. The emphasis
has been on command-and-control regulations rather than performance-oriented
standards. More generally, various forms of injury taxes that
would parallel the financial incentives created by workers' compensation
or various environmental tradable permits programs could establish incen-tives
for safety while at the same time offering firms leeway to select the
most cost-effective means of risk reduction. A glaring omission from the
regulatory strategy has been adequate attention devoted to the role of
consumer and worker behavior and the potential for exploiting the benefits
that can derive from promoting safety-enhancing actions by individuals
rather than relying simply on technological controls.

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Defenders of the current regulatory approach have long seized the
moral high ground by claiming that their uncompromising efforts protect
individual health; less consequential concerns such as cost should not
interfere with that higher enterprise. The fallacy of such thinking is that
high-cost, low-benefit safety regulations divert society's resources from
a mix of expenditures that would be more health enhancing than the
allocations dictated by the health and safety regulations. Agencies that
make an unbounded financial commitment to safety frequently are sacrific-ing
individual lives in their symbolic quest for a zero-risk society. It is
unlikely that this situation will be remedied in the absence of fundamental
legislative reform.

Suggested Readings
Adams, John. '' Cars, Cholera, and Cows: The Management of Risk and Uncertainty. '' Cato Institute Policy Analysis no. 335, March 4, 1999.

Hahn, Robert W., and Jason K. Burnett. '' A Costly Benefit. '' Regulation 24, no. 3 (2001). Kniesner, Thomas J., and John D. Leeth. '' Abolishing OSHA. '' Regulation 18, no.
4 (1995). Miller, Henry I., and Peter VanDoren. '' Food Risks and Labeling Controversies. '' Regula-tion
23, no. 1 (2000). Niskanen, William A. '' Arsenic and Old Facts. '' Regulation 24, no. 3 (2001).
Scalia, Eugene. '' OSHA's Ergonomics Litigation Record: Three Strikes and It's Out. '' Cato Institute Policy Analysis no. 370, May 15, 2000.
Viscusi, W. Kip, and Ted Gayer. '' Safety at Any Price? '' Regulation 25, no. 3 (2002). Wilson, Richard. '' Regulating Environmental Hazards. '' Regulation 23, no. 1 (2000).
. '' Underestimating Arsenic's Risk. '' Regulation 24, no. 3 (2001).
—Prepared by Peter VanDoren

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36. Transportation Policy
Congress should
close the U. S. Department of Transportation;
eliminate the federal gasoline tax;
end all federal transportation subsidies;
entrust states and municipalities with maintaining infrastructure
such as highways, roads, bridges, and subways; repeal the Urban Mass Transit Act of 1964;

repeal the Railway Labor Act of 1926 and the Railroad Retire-ment
Act of 1934; privatize Amtrak;

privatize the air traffic control system;
eliminate all federal regulations that prevent airports from being
privately owned or operated; repeal laws that prevent foreign airlines from flying domestic

routes in the United States; and repeal the Jones Act.

Historically, the federal government regulated the U. S. transportation
system with a heavy hand. Beginning in the 1950s, a series of academic
studies showed that regulation protected incumbent firms rather than the
public. The result was higher prices and poorer service.

Deregulation of the Airlines
Congress passed the Airline Deregulation Act in October 1978. This
legislation eliminated federal control over routes by December 1981 and
over fares by January 1983. The Civil Aeronautics Board, which directed
much of federal regulation of air transportation, was abolished at the end
of 1984. The new law authorized airlines to abandon routes but established

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an Essential Service Air Program to provide subsidies for service to small
communities.
The effect of this legislation on the market value of the various airlines
has been remarkable. Southwest has gone from virtually '' zero'' to a
market capitalization of more than $14 billion. On the other hand, United's
market value declined in real terms from $2 billion to less than three-quarters
of a billion dollars at the end of 2001. However, the total valuation
of the major airlines today is more than double that of all the trunk and
regional carriers together in 1976, before any deregulation. It is even 45
percent more than in 1983. Although some of the carriers, such as United,
Northwest, TWA, and Pam Am, have suffered or even gone out of business,
the industry has done well.
The percentage of passengers traveling on discount fares has increased
dramatically. In 1976, on long flights, only 27 percent of those flying in
coach between major metropolitan areas managed to get discount tickets;
by 1983, 73 percent were getting special fares. Virtually all passengers
today, except for a handful of business travelers, are paying less than the
full coach fare. From 1977 to 1996, after adjusting for inflation, airfares
fell some 40 percent. Figure 36.1 shows how the average fare has declined

Figure 36.1 Average Fare per Mile Adjusted for Inflation
(systemwide operations, 1996 dollars)

$0.22
$0.20

$0.18
$0.16
$0.14
$0.12

$0.24
$0.26

Yield

Year
1970 1975 1985 1980 1990 1995

SOURCE: Steven A. Morrison, Statement before House Committee on the Judiciary, November 5, 1997.
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Transportation Policy
since the early 1970s. The Federal Trade Commission estimated in 1988
that, after adjusting for fuel costs, the flying public was paying 25 percent
less because of deregulation. Stephen Morrison, professor of economics
at Northeastern University, calculated that deregulation produced a net
benefit, in 2001 dollars, of about $15 billion, most of which was in the
form of lower prices for consumers.
Lower fares have boosted load factors— from 49 percent in 1976 to 58
percent in 2000— which means that travelers are finding planes and airports
far more crowded. Higher load factors, however, make it possible for the
airlines to make money at lower prices. Over the quarter of a century
since deregulation, the number of passengers flying has roughly doubled
while passenger-miles have nearly tripled, proving the success of
deregulation.

Deregulation of Air Freight
While passenger airlines were receiving greater authority to compete,
Federal Express was lobbying to open up freight air traffic. The Civil
Aeronautics Board had granted it only a commuter license that limited
FedEx to small aircraft, restricting its ability to compete. It wanted authori-zation
to fly large aircraft to and from any state or city in the country. In
1976 the CAB recommended that air freight transportation be largely
deregulated. With support for less federal control fromother freight carriers
and no visible opposition, President Jimmy Carter, in November 1977,
signed H. R. 6010, which deregulated air freight transportation.
Although little attention has been paid to the abolition of air freight
regulation, it has been hugely successful. Prior to deregulation, air freight
had been growing around 11 percent per year. In the first year of decontrol,
1978, revenue ton-miles jumped by 26 percent. That early success helped
build support for exempting passenger transportation from control.

Deregulation of Rail Freight
In the fall of 1980 Congress passed the Staggers Act to provide additional
pricing and route abandonment freedoms to the railroad industry. The
Staggers Act gave railroads the ability to set prices within wide limits.
Rail lines could enter into contracts with shippers to carry goods at agreed-upon
rates. Tariffs could not be considered unreasonable, even for '' cap-tive''
shippers, unless they exceeded 180 percent of variable costs. To
qualify as '' captive, '' shippers also had to prove that there was no effective

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competition, a provision designed to protect coal, chemical, and other
bulk commodity shippers. Railroads were also given new authority to
abandon routes.
The Interstate Commerce Commission was abolished and the Surface
Transportation Board established on January 1, 1996, as an independent
body housed within the U. S. Department of Transportation, with jurisdic-tion
over certain surface transportation economic regulatory matters. Its
authority is largely confined to railroad pricing and merger issues. This
act also effectively deregulated intrastate controls on motor carriers, which
had been blocking a fully competitive trucking industry.
The Staggers Act was highly beneficial for carriers as well as for
shippers. The rail industry withstood well the sharp recession of 1981– 82
and enjoyed record profit levels in 1983, notwithstanding a sharp drop in
revenue per ton-mile. By 1988 railroad rates had fallen from 4.2 cents
per ton-mile in the 1970s to 2.6 cents. After 1984 rail rates continued to
fall, declining over the following 15 years by 45 percent. Competition
and the Staggers Act have been a great success.

Deregulation of Trucking
Deregulation of the trucking industry, completed only in the 1990s,
resulted in lower rates and better service to shippers. It also resulted in
lower wages for truck drivers as the Teamsters Union lost power. The
price of trucking licenses, which had been as much as millions of dollars,
declined significantly to a few thousand dollars as the ICC made new
licensing relatively simple and easy. Even though bankruptcies increased,
the number of licensed trucking firms increased sharply in the first few
years of deregulation.
Standard & Poor's found that the cost of shipping by truck had fallen
by $40 billion from the era of regulation to 1988. Improved flexibility
enabled business to operate on the basis of '' just-in-time delivery, '' thus
reducing inventory costs. The Department of Transportation calculated
that the outlays necessary to maintain inventories had plummeted in today's
dollars by more than $100 billion.

Further Reform
Although great progress has been made in reducing regulation of trans-portation,
further steps would improve the U. S. system. Currently, the
motor carrier industry is subject to no economic controls; consequently

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Transportation Policy
there need be no change in policy. The restrictions on Mexican truckers
should be lifted, but that is mainly a trade and protectionism issue.
Railroads are still subject to some price controls, limits on abandonment,
and control over mergers. Rail passenger service, particularly Amtrak, has
been a problem ever since it was established in the 1970s.
Government limits on air passenger transportation continue through
cabotage restrictions, federal administration of air traffic controllers, and
government ownership of airports. Finally, as a result of the September
11, 2001, attacks, security considerations have burgeoned, making air
travel more expensive, more time-consuming, and perhaps safer.
Water transportation regulation and subsidies have not been a part of
the regulatory reforms of the last 25 years and remain stubbornly resistant
to change.

Rail Freight
Today, the rail industry remains the most closely supervised mode of
transport with limits on abandonment; mergers; labor usage; ownership
of other modes; and even, in certain situations, pricing. The Surface
Transportation Board oversees the rail industry and administers the Stag-gers
Act, under which the board must ensure that rates charged to '' captive
shippers'' are fair.
Under federal law, the STB can exempt railroad traffic from rate regula-tion
whenever it finds such control unnecessary to protect shippers from
monopoly power or wherever the service is limited. Congress has legalized
individual contracts between shippers and rail carriers, allowing competi-tive
pricing. The Staggers Act authorizes railroads to price their services
freely, unless a railroad possesses '' market dominance. '' Congress contin-ues
a prohibition on intermodal ownership and requires the maintenance
of labor protection.
All rail mergers, for example, require STB approval; once given the
green light, however, those mergers are relieved from challenge under the
antitrust laws or under state and local legal barriers. Railroads face a
stringent review by the STB that, in addition to general antitrust considera-tions,
includes the effect on other carriers, the fixed charges that would
arise, and the effect on employees. In particular, the board must provide
protection in any consolidation for employees who might be adversely
affected. That provision is very popular with rail labor unions; the industry
views it as employment protection, which makes achieving significant
savings from mergers difficult.

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Under current law, railroads must seek STB permission to abandon
lines, build new track, or sell any service. Because users and other interested
parties employ the law to slow or even block change, which adds to costs,
those rules should be repealed.
Federal law also enjoins the STB to regulate rates charged '' captive
shippers''— those that can ship by only one line and enjoy no satisfactory
alternative. Coal and grain companies have exploited this provision to
gain lower rates. The markets for coal and grain are highly competitive,
so the producers cannot sell their output at more than the market price.
Consequently, a railroad that drives shipping costs up to the point where
the cost of producing the coal or grain and then moving it exceeds the
competitive price will find that it has no traffic. In other words, although
the railroad has no direct competition, it, too, is constrained by the market.
If a coal company enjoys significantly lower costs because of a favorable
location or a rich and easily exploited mine, it could reap higher profits
than less favorably sited enterprises. However, if the mine has only one
option for shipping its product, that is, a single railroad, the rail carrier
will be able to secure much of that above-normal profit. In that case, the
stockholders of the railroad will gain at the expense of the stockholders
of the mining corporation. There exists no rationale for the government
to intervene by favoring one company over another. The captive shipper
clause must go.
Congress should also repeal the ban on railroads' owning trucking
companies or certain water carriers. Federal regulations proscribe railroad
ownership of trucking firms, although the STB and the ICC, in earlier
decades, have granted many exceptions. From the time of the building of
the Panama Canal, the Interstate Commerce Act has prohibited railroad
possession of water carriers that ply that waterway. Early in the 20th
century, the public believed that those huge companies needed the competi-tion
of water carriers to keep down transcontinental rates. Like the prohibi-tion
on ownership of water carriers, the ban on owning trucking firms
stems from the unwarranted fear of railroad power. With the plethora of
options available to shippers today, such rules are totally unnecessary.
The restrictions simply limit the ability of railroads, trucking firms, and
water carriers to offer the most efficient multimodal services.
The Staggers Act authorized railroads to negotiate contracts with ship-pers
but only with government approval. In addition, all rates must be
filed with the STB, and tariffs that are either '' too high'' or '' too low'' can
be disallowed. Congress should repeal these vestigial regulatory powers. At

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best, they add to paperwork and to the cost of operation; at worst, they
slow innovation and reduce competition.

Amtrak
The STB retains jurisdiction over passenger transportation by rail. In
particular, it arbitrates between Amtrak and freight railroads, which own
most of the track used by the government-owned passenger railroad.
Ideally, Congress should privatize Amtrak and let it negotiate with freight
railroads over its use of trackage. Assuming that a mutually profitable
arrangement exists, private arrangements will develop.
In 1997, given the dismal financial performance of Amtrak, Congress
gave it $2.2 billion to modernize its system, with the stipulation that it
would be operating without federal aid in five years. Congress established
the Amtrak Reform Council to draw up a plan to reconstitute rail passenger
transportation if the government railroad was unable to eliminate its con-stant
deficits. In November 2001, the ARC determined unanimously that,
in the words of Chairman Carmichael Friday, the passenger train company
had '' failed terribly. It hasn't produced a modern system, it's done a lousy
job of raising money and the Northeast Corridor, the one corridor it
controls, is far behind on maintenance and improvements. ''
The council has recommended to Congress that Amtrak be broken up
and competition be introduced. A new company would own the Northeast
Corridor infrastructure and other Amtrak properties, and a second company
would operate the trains. Amtrak itself would manage rail passenger
franchise rights, secure funding from Congress, and oversee performance.
Eventually, certain corridors would be franchised to private companies or
to the states. There would be no expectation that passenger transportation
could be made profitable. In fact, the ARC's plan would simply waste
more of the taxpayers' money.
Over 30 years, Amtrak has already spent some $25 billion in an effort
to turn itself into a self-sustaining enterprise. In 2001 Amtrak asked for
$3.2 billion to cope with new business. Even this money, the ARC believes,
will not result in a company that can pay its bills without subsidy. The
report of the council to Congress finds that instead of moving toward self-sufficiency,
Amtrak is weaker financially today than it was in 1997. It
singles out long-haul passenger trains as inherent money losers that under
any circumstances will have to be subsidized or abandoned.
Congress should face the facts: passenger rail transportation cannot be
made profitable, except in a few corridors, such as between Washington

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and New York and perhaps Boston. That portion of the system can probably
cover its operating costs but most likely will be unable to cover its
capital costs. With a few minor exceptions, passenger rail is not profitable
anywhere in the world; there is no reason to believe it can be made
profitable here. The appropriate policy would be to auction off the assets
of the current system, favoring investors who would attempt to continue
some passenger service. It seems likely that the East Coast corridor between
Washington and points north would survive, albeit with a lower paid
workforce. If all union contracts and employees are kept, as the ARC
recommends, the system can survive only with taxpayers' funds.

Air Travel
Although airline deregulation has been a great success, the industry has
been plagued with crowding; delays; and, on some routes, dominance of
a single carrier. The causes lie in the failure to deregulate other essential
features of the industry. The air traffic control system, in particular, remains
a ward of the FAA. Government entities own virtually all airports. The
recent move to federalize airport security will add more government
bureaucracy without adding more security.

Air Traffic Control. The FAA runs the current air traffic control (ATC) system. Because the FAA is a government agency, annual congressional

appropriations control its finances. Its rules follow normal bureaucratic
practices with congressional committees looking over its actions. More-over,
the FAA must regulate itself— a major conflict of interest.
As a government agency, the FAA has been unable to bring on line
quickly new technologies that would improve safety and reduce delays.
While computer technology changes every year or two, the FAA's procure-ment
processes require five to seven years to complete. It still has 1960-
era mainframe computers, equipment that depends on vacuum tubes, and
obsolete radars. As a consequence, equipment breaks down frequently
and planes must be spaced farther apart than would be necessary with
state-of-the-art computers and radars.
Congress has held numerous hearings and put great pressure on the
FAA to modernize, but it has been unable to improve matters significantly.
To create and maintain a modern system, air traffic controls must be
separated from the FAA. The Clinton administration recommended a
government corporation to run the ATC system; but another government
corporation, such as the post office or Amtrak, although it would probably
be an improvement over the current arrangement, is not the solution.

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A number of other countries— Canada, the Czech Republic, Germany,
Latvia, New Zealand, South Africa, Switzerland, Thailand, and the United
Kingdom— have wrestled with this problem and have found that separating
the ATC system from government oversight while maintaining government
safety regulations works well.
Although no country has fully privatized its ATC system, Canada has
created a private nonprofit corporation owned by the users. Its system has
successfully reduced delays. The other freestanding ATC systems are at
least partially government owned. Given the restrictions that the federal
government puts on its government-owned corporations, such as Amtrak
and the post office, it would be preferable to follow Canada's example
by establishing a nonprofit corporation owned and controlled by airlines
and other users of the ATC system.
Most ATC systems are funded through user fees. The problem that
arises is what to charge general aviation. Because the FAA currently
subsidizes general aviation, owners and pilots oppose any notion of a
freestanding corporation dependent on user fees. Nevertheless, client pay
is a good rule. Noncommercial general aviation pilots, who typically fly
single-engine planes, should be charged only when they file a flight plan
or land at an airport with a control tower. Commercial general aviation
planes, such as corporate jets, should pay their share of the costs of
the system.

Airline Cabotage. It is time for the United States to drop its restric-tions on foreign ownership and operation of air carriers. Under current
law, non-Americans can own no more than 25 percent of the voting stock
of U. S. airlines. America has no similar restrictions on investment in steel,
autos, or most other industries. There is no reason to make an exception
for the airlines. Other private carriers should be free to invest in the United
States. At the moment, several U. S. carriers are in financial difficulties.
Purchase by a healthy foreign airline would make great sense, bringing
new capital and new competition to the American market. Virgin Atlantic
Airways, for example, is interested in building a low-cost U. S. carrier to
feed its international service.
At the same time, the longstanding policy of negotiating '' open skies''
agreements with other governments should be based not on what U. S.
carriers get out of the agreement but on the benefits to American travelers.
Cathay Pacific, based in Hong Kong, could offer improved service and
competition both in the domestic market and internationally. British Air

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might invest in US Air to provide nationwide connections to Europe. The
introduction of such foreign carriers would strengthen competition in the
American market, bringing additional benefits to travelers.

Airport Privatization. Because the Airport and Airways Trust Fund moneys have been available only to government-owned airports, private

airports are ineligible for any of the funds that are raised from taxes on
fuel and passengers. Because those airports eligible for grants are subject
to federal appropriations, even state-and local government– owned airports
cannot plan and count on money from the trust fund. Repealing the federal
taxes on aviation and allowing airports to impose their own fees, which
could vary by time of day to reflect peak use, would give airports incentives
to expand their capacity and introduce technologies that would reduce
delays.

Airport Security. September 11, 2001, sharply increased the public's demand for greater security at airports. The federal government responded,

after considerable wrangling in Congress, by federalizing the security
personnel at all major airports. The bill passed requires all airports, except
for five participating in a pilot program, to use federal employees, who
must be American citizens, to screen passengers and luggage. Those
security personnel would be employed by the Department of Transportation
but presumably would not enjoy the security of civil service workers. One
airport from each of five size categories, from biggest to smallest, will
experiment with private screeners supervised by federal employees. After
three years, all airports could opt out of the government employee system
and use private screeners overseen by federal agents.
Federalizing the screeners may produce less security than we enjoyed
before September 11. Although the legislation specified that the new
federal employees would not have the same civil service protections as
other Department of Transportation employees, there will be a tendency
over time to give them more employment security. Already, there are
efforts to allow aliens to remain as security guards. Firing incompetent
workers will be much more difficult under this legislation than it was
when private companies managed security. What is changing is not the
nature of the security personnel but their employer.

Maritime Policy
Unlike the regulations affecting other transportation sectors, maritime
regulations and subsidies have been strikingly resistant to reform. A hodge-380 381
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Transportation Policy
podge of conflicting and costly policies— subsidization, protectionism,
regulation, and taxation— unnecessarily burdens the U. S.-flag fleet, forces
U. S. customers to pay inflated prices, and curbs domestic and international
trade. The list of rules and regulations governing shipping is too exhaustive
to catalog here, but one thing is clear: shipping policies must be thoroughly
reviewed and revamped. Congress should pay special attention to deregula-tion
of ocean shipping and other trade-and consumer-oriented reforms.
In particular, Congress should repeal the Jones Act (sec. 27 of the
Merchant Marine Act of 1920). The Jones Act prohibits shipping merchan-dise
between U. S. ports '' in any other vessel than a vessel built in and
documented under the laws of the United States and owned by persons
who are citizens of the United States. '' The act essentially bars foreign
shipping companies from competing with American companies. A 1993
International Trade Commission study showed that the loss of economic
welfare attributable to America's cabotage restriction was some $3.1 billion
per year. Because the Jones Act inflates prices, many businesses are
encouraged to import goods rather than buy domestic products.
The primary argument made in support of the Jones Act is that we
need an all-American fleet on which to call in time of war. But during
the Persian Gulf War, only 6 vessels of the 460 that shipped military
supplies came from America's subsidized merchant fleet. Repealing the
Jones Act would allow the domestic maritime industry to be more competi-tive
and would enable American producers to take advantage of lower
prices resulting from competition among domestic and foreign suppliers.
Ships used in domestic commerce could be built in one country, manned
by citizens of another, and flagged by still another. That would result in
decreased shipping costs, with savings passed on to American consumers
and the U. S. shipping industry. The price of shipping services, now
restricted by the act, would decline by an estimated 25 percent.

Highway Infrastructure, Mass Transit, and Gasoline Taxes
This final section analyzes highway and transit infrastructure, which is
owned and operated by government. The U. S. Department of Transporta-tion
should be abolished and public roads, national highways, and urban
mass transit systems returned to the states and municipalities and the
private sector. Whatever justification there may once have been for a
national transportation department has disappeared; the goal of creating
a national road network was achieved long ago.

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If states were allowed to assess and fund their own infrastructure needs,
they would be able to select the transportation systems that best suited
local conditions. If necessary, they could reintroduce gasoline taxes at the
current level, or at higher or lower levels, to pay for their systems. But
that is unlikely to be necessary. Ken Small and his colleagues demonstrated
more than a decade ago that efficient congestion and axle-weight-related
fees on trucks could finance an interstate highway system without the use
of a gasoline tax. And the Chilean experience described by Eduardo Engel
and his coauthors provides a blueprint for private road franchise contracts
that could be used in the United States.
The Urban Mass Transit Act of 1964 should be repealed. Transit
accounted for fewer than 2. 0 percent of total daily trips in 1995 and 3.2
percent of work trips. Average transit load (passenger-miles divided by
available seat-miles) is only 16 percent. Only New York City rail transit
has more passenger-miles per route-mile (approximately 40,000) than
average urban freeway passenger-miles per lane-mile (approximately
25,000). And light rail transit is only 18 percent as productive (4,523/
25,385) as urban freeways. Most of the time, buses and subways are
running empty.
The net result is that even though government spent $70 billion on new
mass transit projects in the 1990s, the number of people using transit to
go to work actually decreased slightly from 1990 to 2000 according to
the 2000 census. Yet the outdated transit act provides incentives to local
governments to build urban rail and subway systems by providing up to
75 percent of construction funds.

Conclusion
Transportation is inherently competitive. Since elimination of most of
the economic controls on trucking, railroads, and airlines, those industries
have flourished. Although the performance of those sectors has improved
greatly since the 1970s when the federal government controlled entry,
rates, and routes, problems remain. The difficulties stem in part from the
success of deregulation, which, for example, has democratized air travel
while the infrastructure has remained in government hands. Decontrol has
demonstrated that the market works much better free from government
controls than with government oversight. We need to apply that lesson
to the remaining problems and remove federal ownership and control from
administration of air traffic control, the airports, and the security system.

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Transportation Policy
The government should free the freight railroads from the remaining
constraints on that industry. The government should recognize that passen-ger
rail transport is never going to be profitable, especially when run by
the government. Only the private sector can possibly run a profitable
passenger train system and then only if free from government controls on
labor and pricing.
Unlike other transportation policies, maritime, highway, and mass transit
policies have been resistant to reform and thus should receive the immediate
attention of reform-minded members of Congress.

Suggested Readings
Button, Kenneth. '' Toward Truly Open Skies. '' Regulation 25, no. 3 (2002). Engel, Eduardo, Ronald Fischer, and Alexander Galetovic. '' A New Approach to Private

Roads. '' Regulation 25, no. 3 (2002). Moore, Thomas Gale. '' Moving Ahead. '' Regulation 25, no. 2 (2002).
Poole, Robert W. Jr., and Viggo Butler. '' Airline Deregulation: The Unfinished Revolu-tion. '' Regulation 22, no. 1 (1999).
Small, Kenneth A., Clifford Winston, and Carol Evans. Road Work. Washington: Brook-ings Institution, 1989.
Vranich, Joseph, Cornelius Chapman, and Edward L. Hudgins. '' A Plan to Liquidate Amtrak. '' Cato Institute Policy Analysis no. 425, February 8, 2002.
Winston, Clifford. Alternate Route. Washington: Brookings Institution, 1998.
—Prepared by Peter VanDoren

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37. Insurance Regulation and Government Insurance
Congress should
keep the federal government out of the business of regulating
insurance companies; authorize tax-deferred treatment of private insurers' catastrophe

reserves; and reduce the scope of current government insurance programs,
terminate the new terrorism reinsurance program within three years (if not sooner), and not launch any other new federal
reinsurance schemes.

In recent years, most congressional efforts to expand the federal role
in insurance regulation and insurance assistance have focused on the
mounting cost of federal outlays for disaster assistance involving earth-quakes,
floods, hurricanes, droughts, and other weather-related events.
When devastating losses from the terrorist attack on the World Trade
Center rocked private insurance markets in the fall of 2001, they also
revived political momentum for even broader federal reinsurance guaran-tees
to cover the depleted reserves of insurers and fill growing gaps in
private reinsurance coverage.
The 107th Congress approved creation of a federal backstop for private-sector
terrorism insurance coverage in response to the events of September
11, 2001. Like other federal insurance programs, that approach to shielding
the private sector from loss runs the risk of creating sizable taxpayer-financed
subsidies that would undermine private-sector incentives for risk
management. The broader, long-run issue is the extent to which the federal
government should provide reinsurance protection for large losses from
disasters, whether natural or man-made, as opposed to taking actions
that would expand private-sector capacity for insuring such losses. The
preferred alternative is to reduce the scope of current federal insurance

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programs with their inherent subsidies and disincentives for risk manage-ment,
avoid creating new federal insurance and reinsurance programs, and
modify the tax code to reduce double taxation of the income from the
large reserves that insurers must hold to credibly insure large losses from
catastrophic events.
Government-provided programs for crop insurance and flood insurance,
as well as other interventions in private disaster insurance markets, often
are justified as necessary to overcome the failure of private markets to
offer adequate and affordable disaster insurance. Defenders of government
insurance programs claim that they reduce dependence on '' free'' disaster
assistance and promote efficient risk management by property owners
and farmers.
But government policies are the cause of, not the cure for, the limited
supply and narrow scope of private-sector disaster insurance. Demand for
private coverage is low in part because of the availability of disaster
assistance, which substitutes for both public and private insurance. More-over,
a government that cannot say no to generous disaster assistance is
unlikely to implement an insurance program with strong incentives for
risk management. The subsidized rates and limited underwriting and risk
classification within current federal government insurance programs aggra-vate
adverse selection, discourage efficient risk management, and crowd
out market-based alternatives.
Federal tax policy reduces supply by substantially increasing insurers'
costs of holding capital to cover very large but infrequent losses. State
governments also intrude on insurance markets by capping rates, mandating
supply of particular types of insurance, and creating state pools to provide
catastrophe insurance or reinsurance coverage at subsidized rates.
By reducing both the supply and demand sides of private insurance
protection, government intervention leads to greater reliance on politically
controlled disaster assistance and higher costs for taxpayers. A clear out-come
is larger government.

Disaster Assistance vs. Government Insurance
The federal government seems unable to withhold disaster assistance
from persons who fail to buy private or government insurance. Government
insurance might be seductive to some efficiency-minded economists
because, unlike free disaster assistance, it should encourage property own-ers
and farmers to reduce risky activities and take loss-limiting measures. In
practice, however, the same political pressures that make disaster assistance

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inevitable prevent the government from offering insurance at prices that
reflect the full costs of coverage. Given low demand, government disaster
insurance must be subsidized heavily or coverage must be compelled.
By subsidizing high-risk properties, adopting loose underwriting and risk
classification rules, and continuing to make disaster assistance widely
available, the federal government discourages efficient risk management.
If the scope of insurance coverage were relatively narrow and the total
cost of subsidies were small, government insurance would reduce costs.
But as coverage and subsidies increase, there is a point at which the total
cost of a subsidy-and-assistance program exceeds that of an assistance-only
program. It is not obvious that a disaster-assistance-only program
would cost more.

Private-Sector Risk Bearing vs. Inefficient Government Insurance

The terrorist attack on the World Trade Center depleted capital reserves
of insurers and reinsurers and contributed to significant short-run turmoil
in property insurance markets. The losses aggravated ongoing price
increases that began in late 1999 following a decade-long '' soft'' insurance
market (marked by low prices and expanded coverage). Insurers subse-quently
filed for and most states approved exclusions of most terror losses
in standard form property-casualty insurance policies, except workers'
compensation insurance. As the events of September 11 were digested
and no new attacks occurred, a substantial amount of new capital flowed
into the sector. A number of new entities were formed to sell property
insurance and reinsurance. Coverage for losses from terror generally is
available, albeit at a steep price in many instances, particularly for large
buildings in major cities. In response to those price increases, many proper-ties
are being insured for lower limits of coverage and in some cases are
going '' bare'' (without any insurance).
After the insurance, banking, construction, and real estate industries
vigorously pressed for federal intervention to create a '' backstop'' for
private-sector coverage for losses from terrorist attacks, the Bush adminis-tration
proposed direct federal reimbursement of a large proportion of
terrorist claims for three years. In November 2001 the House passed a
complicated bill that would advance federal funds to pay a large proportion
of losses above individual insurer and industrywide retentions but would
require insurers to pay back any federal funds with premium-based assess-ments
and possible direct surcharges on policyholders. The House bill

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included stiff tort limitations to prevent profiteering by the plaintiffs' bar.
Last June the Senate passed its own bill, which authorized the federal
government to pay a large proportion of losses above specified individual
insurer and industrywide loss thresholds, without any payback provision
or tort limitations. In November, Congress finally approved final legislation
that reflected most of the Senate bill's approach, with low loss thresholds,
very limited payback provisions, and no significant restrictions on tort law-suits.

The World Trade Center's destruction and the subsequent debate over
federal intervention in terrorism insurance highlight fundamental issues
associated with government insurance or reinsurance. Insurance involves
a basic tension between risk-sharing protections and risk-reducing incen-tives.
The public and policymakers appreciate the benefits of risk sharing;
the dulling of incentives to reduce risky activity and take precautions to
control loss that often accompanies insurance is less visible. Private insur-ance
markets limit that moral hazard by charging premiums that are closely
aligned with a policyholder's risk of loss, thus providing appropriate
incentives to reduce loss. Insurers that fail to price policies accurately suffer
adverse selection and lose money. Insurers also have strong incentives to
settle claims efficiently.
Government insurance operates differently. It invariably results in subsi-dized
rates that are crudely related to the risk of loss, thus aggravating
moral hazard and adverse selection. Incentives for economy in claim
settlement are relatively weak. In the two main federal insurance programs,
crop and flood insurance, the government insures a disproportionate num-ber
of high-risk entities at inadequate rates, thus requiring large taxpayer
subsidies. Rather than lose money and disappear, federal insurance pro-grams
tend to lose money and expand, crowding out viable private-sector
coverage. Risky activity and the amount of losses increase as parties adapt
risk management to the terms of subsidized coverage. Subsidized federal
insurance or reinsurance of large losses that result from disasters— whether
natural or man-made— can make citizens more vulnerable to harm by
discouraging rational responses to those losses and the risk of future loss.
In the wake of the new federal terrorism insurance program, pressure
for Congress to enact federal reinsurance for natural disasters will likely
resurface, such as the Homeowners' Insurance Availability Act, which
would authorize the secretary of the treasury to sell '' excess-of-loss''
reinsurance contracts for insured natural catastrophe losses on residential
properties. That pressure should be resisted. There is no need for such a

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federal reinsurance program. Although temporary pressure has been
exerted since the events of September 11, private reinsurance capacity
has expanded substantially since the early 1990s, and the development of
new financial instruments to fund catastrophe coverage has further
expanded the supply of private catastrophe insurance and reinsurance.
The proposed reinsurance program would crowd out much private-sector
coverage and would encourage creation of state insurance programs. As
with federal flood and crop insurance, pressure would likely build for
artificially low prices and program expansion— with similar results: less
private coverage, higher costs for taxpayers, and poorer risk management
by property owners.
Worst-case scenarios can always be imagined that overwhelm the current
capacity of private insurers and capital markets. However, we should not
pretend that levels of catastrophic risks that truly are '' uninsurable'' could
be managed efficiently with hastily constructed public-private '' partner-ships''
that masquerade as insurance and corrupt private markets. To
handle those most unlikely events, it would be better if private insurers
encouraged the federal government to set clearer ex ante guidelines for
the ex post, compassionate relief needed for eligible injured parties and
pressed for removal of tax and regulatory disincentives that impede the
growth of private-sector risk-bearing capacity.

Expanding the Supply of Private Disaster Insurance
Given the past failures of Congress to exercise self-restraint and resist
political demands for more subsidized government insurance, a more
fruitful reform strategy should focus on expanding the supply of prefunded
capital reserves that stand behind private insurance— both to strengthen
the role of insurers as efficient risk managers and to serve as a necessary
'' buffer'' against the risk of insurer insolvencies. Congress should reexam-ine
in particular the counterproductive impact of federal tax policy on
the availability of private insurance coverage for low-probability, high-cost
events.
Federal corporate income taxes increase insurers' costs of holding capital
and, in turn, the premiums they must charge for a given level of disaster
coverage. Because private insurers cannot set up tax-deferred reserves,
they must increase premiums by enough to cover the taxes on investment
income in order to generate returns equivalent to those that investors could
earn elsewhere. This tax disadvantage is especially pronounced for disaster
insurance because insurers must hold huge amounts of capital to pay

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claims that have a low probability of occurrence. Moreover, premium
increases to cover taxes on investment income result in higher expected
before-tax income, thus further increasing expected taxes and premiums.
Loss carry-back and carry-forward provisions in the tax code result in high
taxes in years when disaster claims are low but yield limited deductions in
years with high claims.
The tax loading on premiums is inversely related to the probability of
loss and significantly increases the premium rates needed to cover large
disaster losses that have a low probability of occurrence. Insurers and
reinsurers can reduce the tax loading in disaster insurance premiums by,
for example, substituting debt for equity financing; purchasing reinsurance
from non-U. S. insurers; or, at least for the time being, moving operations
offshore. The tax code nonetheless discourages the private supply of
coverage for relatively rare but potentially large catastrophe losses. It
contributes to possibly severe short-run consequences in the event of a
large disaster, namely, increased insurer insolvency, higher rate increases,
more cancellations and nonrenewals, and pressure for more government
intervention.
A federal reinsurance program would threaten to crowd out much
private-sector coverage, because its coverage thresholds to trigger pay-ments
would be far too low compared to current private-sector capacity.
The federal government also inevitably would extend its reach to the pricing
and underwriting of individual policies backed by federal reinsurance.

Preserve State Regulation of Competitive Insurance Markets
Concern over state regulation of property-casualty insurance rates and
policy forms (contract language) for all types of insurance already has
generated pressure for Congress to enact legislation that would allow
insurers to obtain an optional federal charter and be regulated primarily
by federal regulators. Despite the obvious sins of state regulation as prac-ticed
in some states, the potential efficiencies from optional federal charter-ing
are speculative and small. The risks, however, are large, including the
possibility of inefficient regulation of rates and underwriting at the federal
level, which would undermine incentives for private risk management,
and creation of a broad federal guaranty of insurers' obligations patterned
after federal deposit insurance, which would aggravate moral hazard and
undermine incentives for safety and soundness in private insurance mar-kets.
The preferred alternative to federal chartering and regulation of
insurance is additional reforms at the state level.

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The McCarran-Ferguson Act was enacted in 1945 in response to the
Supreme Court's decision that insurance transacted across state lines was
interstate commerce and subject to federal antitrust law. The ruling chal-lenged
the legitimacy of state regulation and insurers' cooperative arrange-ments
to fix prices through rating bureaus. The act stipulates that state
regulation is in the public interest, that federal law does not apply to
insurance unless specifically indicated, and that federal antitrust law does
not apply to insurance for activities that are regulated by the states and
that do not involve boycott, coercion, or intimidation.
Although the long-term trend in property-casualty insurance regulation
has been toward greater reliance on market competition and less reliance
on rate regulation, progress has been slow. The last decade has seen
significant, albeit uneven, progress toward greater reliance on competitive
pricing. The sporadic movement toward less rate regulation reflects
(1) expanded recognition of rate regulation's inability to make insurance
more affordable and the adverse effects of attempting to do so; (2) increased
concern with the direct and indirect costs of state regulation of prices, policy
forms, and producer licensing; (3) accumulating evidence that competitive
rating works; (4) broader support for competitive rating by insurance com-panies
that have tasted regulatory rate suppression; and (5) favorable trends
in claim costs for auto and workers' compensation insurance in the 1990s,
which allowed deregulation to be accompanied by rate reductions or slower
rate increases.
Prior approval regulation in some states is relatively benign. The main
problem lies in states where regulation materially delays rate and form
changes, chills competition and innovation, produces chronic cross-subsi-dies,
or has more than one of those effects. When it comes to insurance,
some voters are inclined to support command-and-control policies, even
if they reject such policies generally. Sizable rate increases and '' unaf-fordable''
rates create large constituencies that favor rate suppression,
especially when its adverse consequences may be opaque in the short run.
Regulatory bureaucracies resist reform. Interest groups that benefit from
high claim costs may oppose regulatory reform in some states out of fear
that it might increase pressure for public policies to control costs (such
as tort reform).

Problems with Optional Federal Chartering
The enactment of the Graham-Leach-Bliley Act (GLB) in 1999
increased debate over the residual sins of state regulation, in particular

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the direct and indirect costs of state regulation of rates, forms, and producer
licensing in an environment of financial modernization and global competi-tion.
Representatives of many large property-casualty insurers specializing
in business insurance and their main trade association (the American
Insurance Association) advocate optional federal chartering and regulation
as a means of regulatory modernization (that is, of escaping inefficient
state regulation of rates and certain forms). Representatives of many life
insurance and annuity companies and the American Council of Life Insur-ers
favor optional federal regulation as a way to escape inefficient form
regulation and compete more effectively with banks that offer similar
products.
The American Bankers Insurance Association has proposed an optional
federal chartering bill patterned largely after bank regulation. Rep. John
LaFalce (D-N. Y.) and Sen. Charles Schumer (D-N. Y.) also proposed
optional federal chartering bills with a number of similar features. The
American Insurance Association has advanced optional federal chartering
for property-casualty insurers, and the American Council of Life Insurers
has urged chartering legislation for life and annuity insurers.
State responses to increased concern about antiquated regulatory prac-tices
and to the threat of federal chartering include the elimination of prior
approval regulation of rates and policy forms for '' large'' commercial
buyers in many states. Many states also approved laws to meet GLB
provisions dealing with reciprocity for nonresident producer licensing and
to prevent federal licensing of producers. The National Association of
Insurance Commissioners is pressing for an interstate compact for one-stop
approval of policy forms for life, annuity, disability, and long-term-care
insurance and for modernization of rate filing and review processes
for property-casualty insurance.
In theory, optional federal chartering of insurers might enhance competi-tion
by streamlining, centralizing, or eliminating antiquated regulations of
multistate insurers and producers. It might provide federally chartered
insurers with a broad exemption from state rate and form regulation. It
might promote beneficial regulatory competition between federal and state
regulators. It might avoid excessively burdensome consumer protections
and eschew mandates that would force policyholders to subsidize particular
sectors or groups. The problem is that optional federal chartering might
achieve few or none of those results and might instead harm competition,
safety, and soundness.
Because the need for and terms of insurance coverage are closely linked
to substantive state law (for example, workers' compensation and motor

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Insurance Regulation and Government Insurance
vehicle accident reparations law), property-casualty insurance markets
have an inherently local dimension. The scope of possible gains from
centralization is correspondingly limited. Federal chartering would be
unlikely to exempt federally chartered insurers from participation in state
residual markets, given legitimate state interests in ensuring the availability
of mandatory coverage. State regulation of residual market rates might
therefore still be used to cap rates for high-risk buyers and produce chronic
cross-subsidies. More broadly, the temptation to use insurance regulation
to redistribute wealth need not be lower at the federal level.
Misguided state regulation is largely unable to achieve subsidies across
lines of insurance within a state or across states. Federal regulation might
be able to achieve both, especially if redistributive policies were mandated
for state and federal insurers. For politically sensitive insurance coverage,
federal regulation could ultimately lead to restrictions on rates with harmful
effects on private-sector risk management and resource allocation. Past
examples such as the Home Mortgage Disclosure Act, the Community
Reinvestment Act, various consumer group proposals, and recent congres-sional
hearings on sub-prime lending and credit life insurance suggest that
federal insurance regulation would be subject to many of the same pressures
that produce controls on rates and underwriting in some states.
If most insurers could switch charters at relatively low cost, dual charter-ing
could promote regulatory competition, help discipline regulatory
excesses, and provide strong motivation for further state reforms. But, as
long as the threat of tighter federal regulation is credible, additional gains
from actual competition between state and federal regulators may be
modest. Moreover, the largely fixed costs of adopting a federal charter
might discourage many smaller insurers from seeking a federal charter,
and the cost for multistate, federally chartered insurers to return to state
regulation could be large, thereby undermining regulatory competition
for charters.
Federal deposit insurance protects depositors of both federal and state
banks. A federal guaranty covering the obligations of all insurers is likely
to be a precondition for effective regulatory competition on other dimen-sions.
The potential benefits from increased regulatory competition should
be assessed in relation to the disadvantages of an inclusive federal guaranty
program. It is highly probable that federal guarantees of both federally
chartered and state-chartered insurers would be inevitable with dual charter-ing.
Even if initial dual chartering legislation eschewed federal guarantees
and required federally chartered insurers to participate in state guaranty

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funds (as in the insurance trade group proposals) or established a federal
guaranty system for federal insurers (as in the banking group, LaFalce,
and Schumer proposals), predictable political incentives are likely to result
in federal guarantees for all insurers.
An optional chartering system that required federally chartered insurers
to participate in the state guaranty system without a federal guaranty would
be unstable. Insolvency of a federally chartered insurer or a number of
state-chartered insurers would create strong pressure for a federal guaranty
patterned after deposit insurance. In any event, the state guaranty system
would likely be seriously weakened without participation of federally
chartered insurers.
The danger is that federal guarantees would repeat some of the mistakes
of federal deposit insurance. The scope of protection of insurance buyers
against loss from insurer insolvency might be expanded materially (for
example, by reflecting a policy, de facto or de jure, of '' too big to fail'').
Such expansion would materially undermine incentives for safety and
soundness. More regulatory constraints on insurer operations would even-tually
ensue. The ultimate result of optional federal chartering would
therefore be less reliance on market discipline and more reliance on
regulation.
Current proposals for optional federal chartering would eliminate the
antitrust exemption for federally chartered insurers, which could undermine
the integrity and value of current systems of information sharing and thus
reduce competition, increase costs of ratemaking, and reduce safety and
soundness, with disproportionate effects on small insurers. Optional federal
chartering also would involve protracted litigation over the scope of federal
preemption of state insurance law and permissible cooperative practices
for federally chartered insurers.
Regulatory policies in some states that interfere with competitive insur-ance
pricing are clearly inefficient; they reduce gross domestic product
and consumer welfare. Although optional federal chartering might hasten
the demise of such policies, that result is hardly ensured. The unsatisfactory
pace of state reforms does not imply that optional federal chartering
is desirable.

Conclusion
Despite the obvious shortcomings of regulation of insurance rates and
policy forms in some states, optional federal chartering of property-casualty
insurers is not in the best interests of policyholders and taxpayers. The

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Insurance Regulation and Government Insurance
possible benefits from optional federal chartering— a reduction in ineffi-cient
state rate and form regulation, achievement of regulatory scale econo-mies,
and promotion of regulatory competition— are speculative, subject
to real uncertainties, and probably modest at best. The potential risks
and costs are comparatively large, including modifications in insurance
guaranty funds and data-sharing arrangements that would undermine
safety, soundness, and healthy competition. Optional federal chartering
also could ultimately produce broader restrictions on insurance pricing and
underwriting, which would increase cross-subsidies among policyholders,
place taxpayers at risk, and inefficiently distort policyholders' incentives
to reduce the risk of loss. The better and more prudent policy is to reject
federal chartering and encourage and support further modernization of
state regulation.
The recent enactment of terrorism insurance legislation notwithstanding,
Congress should avoid creating new federal insurance and reinsurance
schemes and strive to make existing government programs more efficient.
Although politically difficult, it should encourage better risk management
by requiring current federal government insurance programs to apply
private-sector underwriting and risk classification techniques; increase
private-sector risk bearing; and, if necessary, target any remaining premium
subsidies more narrowly. Congress should also promote the accumulation
of additional private-sector capacity for bearing catastrophic risk. The
most direct approach— apart from fundamental tax reform— is to allow
private insurers to offer more affordable coverage by allowing them to
establish tax-deferred reserves for catastrophic risks.

Suggested Readings
Harrington, Scott E. Optional Federal Chartering of Property/ Casualty Insurance Com-panies.
Downers Grove, Ill.: Alliance of American Insurers, 2002.
. '' Repairing Insurance Markets. '' Regulation 25, no. 2 (Summer 2002).
. '' Rethinking Disaster Policy. '' Regulation 23, no. 1 (2000).
. '' Taxes and the High Cost of Catastrophe Insurance: The Case for Tax-Deferred
Reserves. '' Competitive Enterprise Institute Insurance Reform Project, October 1999.
Harrington, Scott E., and Tom Miller. '' Insuring against Terror. '' National Review Online
Financial,
November 5, 2001.
Harrington, Scott E., and Greg Niehaus. '' Government Insurance, Tax Policy, and the
Availability and Affordability of Catastrophe Insurance. '' Journal of Insurance Regu-lation
19 (Summer 2001).
Skees, Jerry R. '' Agricultural Risk Management or Income Enhancement. '' Regulation
22, no. 1 (1999).

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VanDoren, Peter, Tom Miller, and John Samples. '' A Risky Business: Government Is Not the Cure for Insurance Markets. '' National Review Online Financial, January
25, 2002.
—Prepared by Scott E. Harrington and Tom Miller

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38. Antitrust
Congress should
repeal the Sherman Act of 1890;
repeal the Clayton Act of 1914;
repeal the Federal Trade Commission Act of 1914;
repeal the Robinson-Patman Act of 1936;
repeal the Celler-Kefauver Act of 1950;
repeal the Antitrust Procedures and Penalties Act of 1975;
repeal the Hart-Scott-Rodino Act of 1976; and
pending repeal, strip the states' authority to enforce federal
antitrust laws.

Introduction
Antitrust is thought by some to be the bulwark of free enterprise.
Without the continued vigilance of the Justice Department and the Federal
Trade Commission, so the argument goes, large corporations would ruth-lessly
destroy their smaller rivals and soon raise prices and profits at
consumers' expense. When megamergers grab headlines and a federal
judge decides that the nation's leading software company should be dis-membered,
the importance of vigorous antitrust law enforcement seems
to be obvious.
But antitrust has a dark side. The time for modest reform of antitrust
policy has passed. Root-and-branch overhaul of what Federal Reserve
chairman Alan Greenspan a generation ago referred to as a '' jumble of
economic irrationality and ignorance''— and what modern scholarship has
shown over and over again to be a playground of special pleaders— is
called for.
Here are seven reasons why the federal antitrust laws should be repealed.

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No. 1: Antitrust Debases the Idea of Private Property
Frequently when government invokes the antitrust laws, it transforms
a company's private property into something that effectively belongs to
the public, to be designed by government officials and sold on terms
congenial to rivals who are bent on the market leader's demise. Some
advocates of the free market endorse that process, despite the destructive
implications of stripping private property of its protection against confisca-tion.
If new technology is to be declared public property, future technology
will not materialize. If technology is to be proprietary, then it must not
be expropriated. Once expropriation becomes the remedy of choice, the
goose is unlikely to continue laying golden eggs.
The principles are these: No one other than the owner has a right to
the technology he created. Consumers can't demand that a product be
provided at a specified price or with specified features. Competitors aren't
entitled to share in the product's advantages. By demanding that one
company's creation be exploited for the benefit of competitors, or even
consumers, government is flouting core principles of free markets and
individual liberty.

No. 2: Antitrust Laws Are Fluid, Nonobjective, and Often Retroactive

Because of murky statutes and conflicting case law, companies never
can be quite sure what constitutes permissible behavior. If a company
cannot demonstrate that its actions were motivated by efficiency, conduct
that is otherwise legal somehow morphs into an antitrust violation. Normal
business practices— price discounts, product improvements, exclusive con-tracting—
become violations of law. When they're not accused of monop-oly
price gouging for charging too much, companies are accused of preda-tory
pricing for charging too little or collusion for charging the same!

No. 3: Antitrust Is Based on a Static View of the Market
In real markets, sellers seek to carve out minimonopolies. Profits from
market power are the engine that drives the economy. So what might
happen in a utopian, perfectly competitive environment is irrelevant to
the question of whether government intervention is necessary or appro-priate.
The proper comparison is with the marketplace that will evolve if
the antitrust laws, by punishing success, eliminate incentives for new and
improved products. Markets move faster than antitrust laws could ever

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Antitrust
move. Consumers rule, not producers. And consumers can unseat any
product and any company no matter how powerful and entrenched. Just
ask WordPerfect or Lotus or IBM.

No. 4: Antitrust Remedies Are Designed by Bureaucrats Who Don't Understand How Markets Work

Economic losses from excessive regulation can do great damage to
producers and consumers. But government moves forward in the name
of correcting market failure, apparently without considering at all the
possibility of government failure. Proponents of antitrust tell us that govern-ment
planners know which products should be withdrawn from the market,
no matter what consumers actually prefer. The problem with that argument
is that it leads directly to paternalism, to the idea that an elite corps of
experts knows our interests better than we do— and can regulate our affairs
to satisfy those interests better than the market does.
The real issue is not whether one product is better than another but
who gets to decide— consumers, declaring their preferences by purchases
in the market, or specialists at the Justice Department or the Federal Trade
Commission rating the merits of various goods and services. When we
permit government to make such decisions for us and allow those decisions
to trump the subjective choices of consumers, we abandon any pretense
of a free market. In the process, we reduce consumer choice to a formalistic
appraisal centering on technical features alone, notwithstanding that prod-ucts
are also desired for quality, price, service, convenience, and a host
of other variables.

No. 5: Antitrust Law Is Wielded by Business Rivals and Their Allies in the Political Arena

Instead of focusing on new and better products, disgruntled rivals try
to exploit the law— consorting with members of Congress, their staffers,
antitrust officials, and the best lobbying and public relations firms that
money can buy. Soon enough, the targeted company responds in kind.
Microsoft, for example, once conspicuously avoided Washington, D. C.,
politicking— but no longer. And America's entrepreneurial enclave, Sili-con
Valley, has become the home of billionaire businesspeople who use
political influence to bring down their competitors. That agenda will
destroy what it sets out to protect. Politicians are mostly order takers.
So we'll get the kind of government we ask for— including oppressive

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regulation. Citizens who are troubled by huge corporations dominating
private markets should be even more concerned if those same corporations
decide that political clout better serves their interest— politicizing competi-tion
to advance the private interests of favored competitors.

No. 6: Barriers to Entry Are Created by Government, Not Private Businesses
Under antitrust law, the proper test for government intervention is
whether barriers to entry foreclose meaningful competition. But what is
a '' barrier''? When a company advertises, lowers prices, improves quality,
adds features, or offers better service, it discourages rivals. But it cannot
bar them. True barriers arise from government misbehavior, not private
power— from special-interest legislation or a misconceived regulatory
regimen that protects existing producers from competition. When govern-ment
grants exclusive licenses to cable, electric, and telephone companies,
monopolies are born and nurtured at public expense. When Congress
decrees targeted tax benefits, subsidies, insurance guarantees, and loans
or enacts tariffs and quotas to protect domestic companies from foreign
rivals, that creates the same anti-competitive environment that the antitrust
laws were meant to foreclose. The obvious answer, which has little to
do with antitrust, is for government to stop creating those barriers to
begin with.

No. 7: Antitrust Will Inevitably Be Used by Unprincipled Politicians as a Political Bludgeon

Too often, the executive branch has exploited the antitrust laws to
force conformity by '' uncooperative'' companies. Remember that when
President Nixon wanted to browbeat the three major TV networks, he
used the threat of an antitrust suit to extort more favorable media coverage.
On a widely publicized tape, Nixon told his aide, Chuck Colson: '' Our
gain is more important than the economic gain. We don't give a goddamn
about the economic gain. Our game here is solely political.... Asfaras
screwing the networks, I'm very glad to do it. '' If Nixon were the only
culprit, that would be bad enough. But former New York Times reporter
David Burnham, in his 1996 book, Abuse of Power, shows that presidents
from Kennedy through Clinton routinely demanded that the Justice Depart-ment
bend the rules in pursuit of political ends.

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Antitrust
The lesson is clear. The threat of abusive public power is far larger
than the threat of private monopoly. It's time for Congress to get rid of
the federal antitrust laws. Meanwhile, pending repeal of those laws, Con-gress
must ensure that enforcement by state authorities does not duplicate
federal enforcement. Government must not be given two bites at the
antitrust apple, nor should defendants be exposed to double jeopardy.

Strip the States' Authority to Enforce Federal Antitrust Laws
It's time to rein in the power of state attorneys general. For most of
American history they did vital, but routine and distinctly unglamorous,
legal work for their states. But beginning in the 1980s, some attorneys
general challenged the Reagan administration's policies in antitrust and
environmental law, pursuing their own agendas through litigation. In the
antitrust context, activist attorneys general have relied on their so-called
parens patriae power to sue on behalf of state residents under federal
statutes.
The Microsoft case is perhaps the most egregious example of duplicative
federal and state antitrust enforcement. Nine states— relying on the same
trial, the same facts, the same conclusions of law, and the same injuries
to the same people— want to override a settlement between Microsoft and
the federal government, supported by 41 of the 50 states. In a legal brief
to a federal judge, the Justice Department offered persuasive reasons
why the states should not be allowed an end run around the federal
settlement.
First, '' The United States is the sole enforcer of the federal antitrust
laws on behalf of the American public. '' Second, the states' remedies
would affect competition and consumers outside their borders— raising
'' for the very first time the prospect that a small group of states, with no
particularized interests to vindicate, might somehow obtain divergent relief
with wide-ranging, national economic implications. '' Third, '' The public
interest is best served when federal and state antitrust activity is comple-mentary,
not duplicative or conflicting. '' Fourth, the nine holdout states
had '' neither the authority nor the responsibility to act in the broader
national interest, and the plaintiff with that authority and responsibility
[that is, the United States] has taken a different course. ''
Still worse, continued the Justice Department, the relief sought by
the nonsettling states '' may harm consumers, retard competition, chill
innovation, or confound compliance'' with the federal settlement. Echoing
the Supreme Court, the Justice Department warned that antitrust redress

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requires a showing of '' harm to competition not competitors. '' Remedies
must be crafted for the benefit of the public, not for the private gain of
politically favored rivals.
Consider the remarks of respected Judge Richard Posner of the Seventh
Circuit Court of Appeals, who mediated an abortive Microsoft settlement
two years ago. Posner offered these recommendations in a recent issue
of the Antitrust Law Journal: '' I would like to see, first, the states stripped
of their authority to bring antitrust suits, federal or state, except . . . where
the state is suing firms that are fixing the prices of goods or services that
they sell to the state.... [States] are too subject to influence by . . .
competitors. This is a particular concern when the [competitor] is a major
political force in that state. A situation in which the benefits of government
action are concentrated in one state and the costs in other states is a recipe
for irresponsible state action. ''
Congress is constitutionally authorized to intervene whenever actual or
imminent state practices threaten the free flow of commerce. Congress
should use that power and revoke the parens patriae authority of the states
to enforce federal antitrust laws. Otherwise, some states will continue to
abuse their existing authority— exercising it to impose sovereignty
beyond their borders and catering to the parochial interests of influential
constituents.
Would constraints on state antitrust enforcement powers violate time-honored
principles of federalism? Not at all. Federalism isn't simply a
matter of states' rights. Nor is it exclusively about devolution of power
or promoting efficient government. First and foremost, federalism is about
checks and balances based on dual sovereignty. Most often, the states are
a counterweight to excessive power in the hands of the federal government.
Yet antitrust is an obvious case in which the federal government must
curb excessive power in the hands of the states.

Conclusion
More than two centuries ago, in the Wealth of Nations, Adam Smith
observed that '' people of the same trade seldom meet together . . . but
the conversation ends in a conspiracy against the public or in some contriv-ance
to raise prices. '' Coming from the father of laissez faire, that warning
has been cited ad nauseam by antitrust proponents to justify all manner
of interventionist mischief. Those same proponents, whether carelessly or
deviously, rarely mention Smith's next sentence: '' It is impossible indeed

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Antitrust
to prevent such meetings, by any law which either could be executed, or
would be consistent with liberty and justice. ''
Antitrust is bad law, bad economics, and bad public policy. It deserves
an ignominious burial— sooner rather than later.

Suggested Readings
Armentano, Dominick T. Antitrust and Monopoly: Anatomy of a Policy Failure. New York: Wiley, 1982.

DeBow, Michael. '' Restraining State Attorneys General, Curbing Government Lawsuit Abuse. '' Cato Institute Policy Analysis no. 437, May 10, 2002.
Greenspan, Alan. '' Antitrust. '' In Capitalism: The Unknown Ideal. Edited by Ayn Rand. New York: Signet, 1966.
Levy, Robert A. '' Microsoft Redux: Anatomy of a Baseless Lawsuit. '' Cato Institute Policy Analysis no. 352, September 30, 1999.
Shughart, William F. II. '' The Government's War on Mergers: The Fatal Conceit of Antitrust Policy. '' Cato Institute Policy Analysis no. 323, October 22, 1998.

—Prepared by Robert A. Levy

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39. The Food and Drug Administration
Congress should
modify the Food, Drug and Cosmetics Act of 1938 to allow
pharmaceutical companies to opt out of Food and Drug Admin-istration testing requirements and to use alternative organiza-tions

to certify product safety and efficacy and allow individuals the freedom to use any non-FDA-approved
product.

Under current law, the Food and Drug Administration must approve
all pharmaceuticals and medical devices before they can be marketed.
Although the process is often termed an FDA testing program, that agency
does little if any actual testing. For example, the developer of a new drug
uses its own labs or hires another private company to conduct animal tests
on the drug for safety before proceeding to clinical trials for safety and
efficacy in people. These tests often are conducted by a medical school
department or a consulting firm. When each phase of the testing is com-pleted,
the pharmaceutical company submits the details of the testing
process, evidence of adherence to FDA protocols, and the test results to
the FDA.
FDA officials review the test results at each step, and if they are satisfied,
they give the pharmaceutical company permission to proceed to the next
step in the testing process. When all the tests and trials are complete,
FDA officials review all the information— often measured in hundreds of
pounds or linear feet of reports rather than number of pages— and decide
whether the company can market the drug and advertise it to physicians
for the treatment of specific diseases and conditions. The FDA exercises
very strict authority over what manufacturers can say about their products.
Interestingly, over half of product uses are so-called off-label uses as
physicians discover that products approved to counter one ailment can be

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helpful in preventing or treating other problems. For example, aspirin
designed for pain relief turns out to be effective in preventing heart attacks.
Up to 10 years may be necessary to complete the development, testing,
and approval process. Some estimates suggest that the cost of bringing a
new product from conception to market is on average $400 million.
According to the Office of Technology Assessment, the cost of bringing
a new pharmaceutical to market is so great that most companies will begin
the process only if the market for the drug is expected to be greater than
$100 million a year. As a result, companies focus on drugs expected to
be '' blockbusters, '' which can be used by essentially everyone with a
disease in the expectation that the drug will ameliorate or cure the disease
with a marginal risk of causing adverse side effects.
In response to complaints about constantly increasing delays in the drug
approval process, the federal government devised a method by which
pharmaceutical manufacturers pay FDA to hire and retain additional drug
application reviewers. The user charge system has reduced the time needed
for some phases of the approval process.

The Human Costs of FDA Delays
As an agency, the FDA has a strong incentive to delay allowing products
to reach the market. After all, if a product that helps millions of individuals
causes adverse reactions or even death for a few, the FDA will be subject
to adverse publicity with critics asking why more tests were not conducted.
Certainly, it is desirable to make all pharmaceutical products as safe as
possible. But every day that the FDA delays approving a product for
market, many patients who might be helped suffer or die needlessly.
For example, Dr. Louis Lasagna, director of Tufts University's Center
for the Study of Drug Development, estimates that the seven-year delay
in the approval of beta-blockers as heart medication cost the lives of as
many as 119,000 Americans. During the three and half years it took the
FDA to approve the drug Interleukin-2, 25, 000 Americans died of kidney
cancer even though the drug had already been approved for use in nine
other countries. Eugene Schoenfeld, a cancer survivor and president of
the National Kidney Cancer Association, maintains that '' IL-2 is one of
the worst examples of FDA regulation known to man. ''
In the past two decades patients' groups have become more vocal in
demanding timely access to new medication. AIDS sufferers led the way.
After all, if an individual is expected to live for only two more years,
three more years spent testing the efficacy of a prospective treatment does

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The Food and Drug Administration
that person no good. The advent of the Internet has allowed individuals
suffering from specific ailments and patient groups to use websites and
chat rooms to exchange information and to give them an opportunity to
take more control of their own treatment. They now can track the progress
of possible treatments as they are tested for safety and efficacy and are
quite conscious of how FDA-imposed delays can stand in the way of their
good health and even their lives.

Reforming Access to Drugs
So long as the FDA maintains a monopoly on drug approval, however,
the agency will remain a bottleneck, slowing the advent of new drugs and
the use of '' old'' drugs in new circumstances.
It is time for Congress to break the FDA's monopoly on drug and
medical device approval, and on information dissemination about drugs
and devices, and to allow individuals to take better control of their own
health care.
First, the Food, Drug and Cosmetics Act of 1938 should be changed
to allow drug companies to seek certification of their products from
nongovernmental organizations. Those organizations would have an incen-tive
to move quickly to design and execute the laboratory tests and human
studies that are appropriate for evaluating the safety and efficacy of person-alized
drugs. Instead of the FDA's approval being required before drugs
are marketed, the nongovernmental organizations would be allowed to
certify new drugs for particular uses and new uses of old drugs. Those
certification organizations would have incentives to allow products on the
market as quickly as possible but also incentives to be as honest as possible
in evaluating the safety and efficacy of products. After all, like Underwriters
Laboratory, those organizations are selling their reputations, which, if
damaged, would cause them to lose their customers.
Different kinds and levels of certification should be allowed, with full
disclosure of information on safety and efficacy. For example, a testing
organization might classify a certain drug as '' risky, '' with the recommen-dation
that it be used only in life-threatening situations when no other
therapy is available. Pharmaceutical manufacturers would be permitted to
certify their own products if they chose to forgo the use of an independent
certification organization. As a compromise with a fully free system of
certification, manufacturers as well as private testing organizations might
be required to label their products '' Not FDA Approved. ''

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Some pharmaceutical manufacturers might oppose breaking the FDA's
monopoly. Larger companies especially are used to doing business with
the agency; they are comfortable with the confidence the public has in
FDA-approved drugs; and they could see continuing FDA regulations
imposing costs that they could absorb but that their smaller com-petitors
could not. Those attitudes are even more reason to allow private
certification.
More fundamentally, in a free society individuals should be free to take
care of their physical well-being as they see fit. The advent of the Internet
gives individuals even more access to information about medical products
and treatments. Individuals should be allowed to choose the treatments
they think best. Such liberty does not open the door for fraud or abuse
any more than does a free market in other products. In fact, informed
consent by patients probably will become more sophisticated as the market
for information about medical treatments becomes more free and open.

Suggested Readings
Campbell, Noel D. '' Replace FDA Regulation of Medical Devices with Third-Party Certification. '' Cato Institute Policy Analysis no. 288, November 12, 1997.

Goldberg, Robert M. '' Breaking Up the FDA's Medical Information Monopoly. '' Regula-tion 18, no. 2 (1995).
Higgs, Robert. '' Wrecking Ball: FDA Regulation of Medical Devices. '' Cato Institute Policy Analysis no. 235, August 7, 1995.
Hollis, Aidan. '' Closing the FDA's Orange Book. '' Regulation 24, no 4 (2001). Miller, Henry I. To America's Health: A Proposal to Reform the Food and Drug
Administration.
Stanford, Calif.: Hoover Institution Press, 2000.
Olson, Mary K. '' How Have User Fees Affected the FDA? '' Regulation 25, no. 1 (2002). Tabarrok, Alexander. '' The Blessed Monopolies. '' Regulation 24, no. 4 (2001).

—Prepared by Peter VanDoren

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40. Intellectual Property
Congress should
reject proposals to ban new technologies or business models
to solve copyright problems (examples include file sharing, copy protection, and '' collusion'' among creators);

reject proposals to impose new technologies or business mod-els
to solve copyright problems (examples include federally certified copy protection standards and compulsory licensing);

Phase out compulsory licensing for all communications content
industries and avoid extending it to future services such as online downloading and streaming; and

take the constitutional principle of '' promot[ ing] the progress
of science and useful arts'' seriously, but don't extend copyright protections far beyond reasonable terms.

The '' Napsterization'' of just about everything digitizable— books,
music, movies, and, of course, software itself— has brought copyright
issues to the forefront as never before, reenergizing the debate over ques-tions
such as the following:

Why do we protect intellectual property at all?
Do we really have '' property rights'' to our intangible creations the
same way we do to our homes or the land on which they rest?
Are there more effective market-oriented ways of encouraging artistic
creation and scientific discovery than through the use of copyright
and patent laws that protect a limited monopoly?

Those questions are hardly new, of course. Indeed, the debate over the
nature and scope of intellectual property law is centuries old. More than
200 years ago, these questions concerned our Founding Fathers, who
included a utilitarian compromise within the Constitution to ensure that

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science and the useful arts would be promoted by offering limited protec-tion.
They arrived at the balancing act contained in Article 1, section 8,
clause 8, which gave Congress the power to '' promote the progress of
science and useful arts, by securing for limited times to authors and
inventors the exclusive right to their respective writings and discoveries. ''
But the inclusion of this clause in the Constitution did not answer
specific questions regarding such matters as the lengths of copyright or
patent protections for various artistic or scientific creations, or what '' fair
use'' or '' prior art'' were to mean. These highly subjective legal concepts
didn't yet exist; the question of their meaning was left open to future
generations of jurists, legal theorists, economists, and politicians.
And so today, in the midst of an explosion of digital and online creativity,
the concept of intellectual property (IP) is being challenged as it has never
been before. The current debate pits those who fear file-sharing technolo-gies
such as Napster and Kazaa, against those who are afraid that IP rights
holders will lock up content with new copy protection scheme such as
digital rights management (DRM), which includes a variety of tools and
methods the creative community hopes to use to control access to, and
reproduction of, various forms of entertainment and information content.
In the United States, the extremes manifest themselves in legislative
proposals by file-sharing companies for compulsory licensing, on the one
hand, and government-mandated DRM schemes to prevent file sharing
on the other. But to the extent the market can be capable of self-protection,
it can reduce the sphere of disagreement by minimizing the amount of
legal protection required. For example, the market alternative to shutdown
of file sharing, or targeting individual file swappers, may well be the
improvement of digital rights management technologies to protect intellec-tual
property. Perhaps such private, '' barbed-wire'' solutions can be supe-rior.
Indeed, some people must think so, because they argue that DRM
technologies will be able to lock up content and violate fair use. But not
yet: new copy-protected CDs have already been cracked by users who
found they could use a 99-cent felt-tip pen to mark around the edges of
the disc and defeat the DRM system. So even low-tech hacking techniques
can sometimes cause headaches for industry.
It seems that even with legal protections of IP in the digital age, the
reality of copying has confronted us with a need to find incentives to
encourage artistic creation and scientific innovation if legal protections
no longer work. If the market can do some of its own self-protecting and
provide some incentives, is that enough? Or, paradoxically, is it too much?

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There are certain things Congress should not do as we search for
the answers.

IP and First Principles
Governments exist to protect property rights among other natural rights.
But the property status of intangibles has always been unclear from a
natural law perspective. Novelist-philosopher Ayn Rand wrote, '' Patents
and copyrights are the legal implementation of the base of all property
rights: a man's right to the product of his mind. '' Other theoreticians
claim that there is no right to own intangible ideas, which are not scarce
in the sense that physical property is. To this group, the cost of protecting
IP is just another cost of doing business, so why socialize it?
A good argument can be made, however, that, in a world without any
IP protection, some individuals would be discouraged from producing
important goods or ideas (consider pharmaceuticals or genetically altered
foods to feed hungry populations). Indeed, those who advocate the abolition
of copyright or patent law might ask themselves why the same arguments
and reasoning should not be applied to tangible property.
Nonetheless, it is clear that some creators seek and receive excessive
terms of protection— which, by extending far beyond the life of the author,
seemingly go beyond any reasonable possibility of motivating creators,
who often are deceased. Other people seek to expand what is covered by
copyright and patent law in the first place, such as '' One-Click'' Internet
shopping (which Amazon. com patented) or even hyperlinking itself (which
British Telecommunications claims it patented and on which it therefore
deserves to collect fees).
So, succinctly stated, Congress's problem is balancing artistic and entre-preneurial
incentives to create with the interests of the larger community
of users in an unhindered exchange of ideas and products.

The Internet Changes Things
Previous technological innovations such as photocopiers and VCRs
forced society to reconsider the proper balance of IP protections. Nonethe-less,
the shifts brought about by the modern communications and comput-ing
revolution are more profound because today's copies are perfect repro-ductions.
Thus record companies and Hollywood claim that their intellec-tual
property rights are under attack as never before, threatening their

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economic livelihood and making it less likely they will want to put anything
at all in the public realm.
In response, critics claim that copyright and patent law has been cor-rupted,
that the balance has tilted too far in favor of copyright holders,
and that digital technologies and other market developments have so
fundamentally altered the nature of intellectual property that we need to
radically shorten established terms of protection or eliminate them alto-gether.
Those thinkers hold that information transmitted in electronic or
digital formats should not be '' bottled up'' and controlled by its creators.
They fear that copy protection technologies can go too far— even further
than existing legal protections— and erode fair use rights that individuals
have come to expect, as well as pose a technological threat to free speech.
Thus they want assurances that noninfringing uses of materials and rights
of fair use are preserved in the law.
Under the Digital Millennium Copyright Act of 1998, for example,
one's intent to infringe is not relevant; rather, a person engaged in the
development or distribution of circumvention technology, even for a benign
purpose such as research or archiving, is at risk of being held criminally
or civilly liable. There is no defense under the act even if there is no
underlying copyright infringement. That's too extreme.

Potential Common Ground Solutions
Is there any common ground in this debate? Perhaps. The justification
for copyright law is to create incentives. But if markets can create them,
law may not need to play as great a role. Sometimes a private security
guard and barbed wire may be superior to the policeman and the court.
Then again, when someone breaks into your house and steals your property,
you call the cops.
The first step toward common ground is to take the principle '' To
Promote the Progress of Science and Useful Arts'' more seriously. Many
agree on the concept of the protection of property; the disputes often arise
over such matters as how long property should be protected. Any term
set by law will be unavoidably arbitrary.
But copyright protection that extends far beyond the life of the originator
provides diminishing incentives for that person to innovate (even if one
assumes he is innovating on behalf of yet-unborn descendants). Thus terms
of protection may need to be rethought; indeed a new Supreme Court
case is challenging the 1998 '' Sonny Bono Copyright Term Extension
Act, '' which extended copyright protection terms to life of the author plus

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70 years (up from 50 years) (Table 40.1). Some jokingly call it the '' Mickey
Mouse Protection Act. ''
Rights owners certainly expend great energy on extending the legal
monopoly granted by copyright. This is the widespread criticism of the
Copyright Term Extension Act, in that new protections were given retroac-tively.
The middlemen— and heirs— continue to want to be paid, an
impulse having little to do with Walt Disney's initial inspiration to invent
Mickey Mouse. Similarly, the heirs of Margaret Mitchell, author of Gone
with the Wind,
protested the derivative work The Wind Done Gone by
Alice Randall. Although decisions about copyright terms inevitably will
be arbitrary, there seems little reason to provide retroactive legal protection
decades after a creator is dead.
Anger at the middleman (or heirs) is understandable: one exploring and
sampling, say, roots-country music, would not be thrilled about paying
BMG/ RCA for the privilege when artists have been dead for more than
60 years. More consciously adhering to the Constitution's goal of promot-ing
the progress of science and the useful arts— rather than promoting
unnecessary government monopoly— seems a sensible course. Copyright
laws that instead extend terms of protection to benefit a middleman do
little to '' incentivize'' true creative activity.
One possible solution to the perceived problem of duplicating digital
content that is still protected has been suggested by Wayne State University
law professor Jessica Litman, who calls for revisions to '' recast . . . copy-right
as an exclusive right of commercial exploitation. '' She would focus
less on whether copies were made of a work and instead focus more
narrowly on ensuring that copyright holders retain the sole opportunities
for commercial exploitation of their work. Under this model, she points
out, individual trading of song files wouldn't be actionable, but perhaps
Napster's facilitation of large-scale sharing would be because of its signifi-Table

40.1 Ever-Increasing Copyright Terms of Protection
Year Term of Copyright Protection
1790 28 years (14 years of protection possible 14-year renewal)
1831 42 years (28 years of protection possible 14-year renewal)
1909 56 years (28 years of protection possible 28-year renewal)
1976 Life of the author 50 years
1998 Life of the author 70 years

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cant interference with rights holders' commercial opportunities. Such an
approach would put the law back in line with the public's typical under-standing
of the copyright bargain and fair use.
The second step toward establishing common ground is for Congress
to reject the impulse to either ban or impose new technologies or business
models to solve copyright problems. Examples of bans include bans on
file-sharing programs, restrictions on copy protection, and prohibitions on
'' collusion'' among creators seeking to shelter their content. Examples of
technology impositions would include federally certified copy protection
standards and compulsory licensing.
Calls to ban file sharing came early. The response to Napster was a
perfect example of creators wanting the government to ban or restrict file-sharing
technologies that reduce copyright control. Today— now that peer-to-
peer file sharing has become even more widespread despite Napster's
demise— some people go so far as to endorse measures such as Sen.
Ernest Hollings' (D-S. C.) Consumer Broadband and Digital Television
Promotion Act. This bill would require federally certified DRM controls
on any devices capable of manipulating and copying digital content, such
as computers and personal digital assistants ('' palm pilots''). The idea
would be to ensure that those who copy files do so only with permission,
on approved equipment. Manufacturers would be forbidden to make
devices that didn't include the copy protection technology.
While some people inappropriately want to ban file-sharing capabilities,
others— equally inappropriately— want to ban copy protection technolog-ies
designed to halt file sharing. Those who eagerly share copyrighted
files often condemn experimental DRM technologies by which copyright
holders hope to shield works from reproduction, such as digital watermark-ing
and enhanced encryption. As noted, some regard such efforts as threats
to free expression (which is ironic, given that many in the next breath
will assert that encryption or watermarking can always be cracked— and
so far, that's been true).
Many opponents of copy protection also want government to impose a
different type of technology mandate— a compulsory license— that would
require content providers to license their products to others at a govern-ment-
regulated rate. So while opposing mandatory DRM schemes, this
crowd simultaneously endorses forced '' contracts'' and their accompany-ing
government-set royalty fees, which are little more than price controls.
Reps. Rick Boucher (D-Va.) and Chris Cannon (R-Utah) have pushed for
a '' Music Online Competition Act, '' which would implement a version
of this plan.

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The legislative extremes of either banning or imposing particular techno-logies
or business models should be avoided.

A New Model for the Future
Finally, when thinking about the future, it helps conceptually if we
break up intellectual property into '' A, B, and C'' components. A is what's
in the public domain. B is the stuff protected now, which we're fighting
over. C is what hasn't been created yet. If Congress allows market mecha-nisms
to take over C, then, over time, C and A will dwarf B.
In other words, we need to think of ways of making the role of govern-ment
smaller. Avoiding interference with technological experimentation
can do that. For example, digital rights management— although it will
never fully prevent copying— can make it inconvenient enough so that
cracking encrypted songs may not be worth the trouble. Perhaps a 19-
cent music download, certified virus free, that also includes liner notes,
lyrics, photos, and discount coupons on merchandise and concerts is a
better deal than a free song.
And the fair use issue may not be as thorny as some people expect.
First, it is not in the interest of profit-maximizing companies to restrict
intellectual output and software research. In striking the balance, companies
face market-induced incentives to avoid devising copy protection schemes
so inconvenient or cumbersome that they go beyond the goal of deflecting
piracy. For example, although one isn't necessarily entitled to a perfect
digital copy as a matter of fair use, record companies are nonetheless
experimenting with putting multiple versions of songs on CD as a way
to alleviate fair use concerns and give people the portability they want.
Moreover, as University of Texas economics professor Stan Liebowitz
notes, while digital rights management technologies won't prevent all
copying, the imperative is to prevent massive unauthorized duplication.
With respect to fair use, Liebowitz argues that, given technologies such
as micropayments, voluntary DRM schemes will not restrict the output
of intellectual property at all as IP pricing techniques are improved.
Technological experimentation may offer artists and inventors the option
of '' opting out'' of the IP legal regime entirely and instead relying on
new technologies and unique business models to protect their property
and receive compensation for it. Digital distribution even gives producers
and artists the option of avoiding the existing music companies and movie
studios. Artists often claim to be ripped off, which is another fight within
the wide-ranging copyright debate of today. (MP3. com was one of those

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options— artists-direct-to-the-customer model.) Of course, if artists rather
than middlemen control their copyrights, it won't end disputes over length
of protection, but it could remove one layer of the dispute.
The bottom line is that Congress should not imagine that it has all the
answers to practical problems of digital copy protection as '' Napsteriza-tion''
continues to unfold. Perhaps technology can be a better means of
controlling use of one's creations, in some applications, than can law—
even if law is in place as a backup.
Also, to lessen the reliance on traditional copyright protections, policy-makers
should ensure that unintentional government barriers don't stand
in the way of private efforts by individuals to protect their intangible
creations. For example, overzealous antitrust enforcement might hamper
collective private efforts to license songs, such as the MusicNet and
Pressplay services. Restrictive contracts that antitrust law might eye suspi-ciously
could in fact benefit consumers by ensuring returns for producers,
preserving their incentives to create. Indeed, some academics have sug-gested
that regulation such as antitrust law may force the '' need'' for
more intellectual property law and enforcement than would otherwise be
warranted.

Suggested Readings
Crews, Clyde Wayne Jr. '' Musical Mandates: Must the Pop Music Industry Submit to Compulsory Licensing? '' Cato Institute TechKnowledge no. 16, August 15, 2001,

www. cato. org/ tech/ tk/ 010815-tk. html. Crews, Clyde Wayne Jr., and Adam Thierer. '' When Rights Collide: Principles to Guide
the Intellectual Property Debate. '' Cato Institute TechKnowledge no. 10, June 4, 2001, www. cato. org/ tech/ tk/ 010604-tk. html.
Liebowitz, Stan. '' Policing Pirates in the Networked Age. '' Cato Institute Policy Analysis no. 438, May 15, 2002, www. cato. org/ pubs/ pas/ pa-438es. html.
Litman, Jessica. Digital Copyright. Amherst, N. Y.: Prometheus Books, 2001. Thierer, Adam, and Clyde Wayne Crews Jr., eds. Copy Fights: The Future of Intellectual
Property in the Information Age.
Washington: Cato Institute, 2002.
—Prepared by Clyde Wayne Crews Jr. and Adam Thierer

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41. Telecommunications and Broadband Policy
Congress should
end regulatory asymm