Compatriots! It is my pleasure to head off the new school year as the Patriot’s Editor-in-Chief, and I look forward to leading an excellent staff.

This issue features a Point-Counterpoint – the first in a long time! – on Proposition 19, an initiative that would drastically reshape California drug policy. Opinion Editor Charlie Deist writes the Point in favor of ending drug prohibition, while I assess how Prop 19 will fall short.

Included is a poll asking for your input on the matter – be sure to go and vote and check out our blog. Over this summer, Managing Editor Andy Nevis rebooted the blog, and our staff will be regularly adding content. Andy has also written on Cal’s rendition of the national anthem and the innovative virtual UC program.

Our articles for this issue also include: Romik Barseghian on last year’s fee increases; Rick Chen on Israel; myself on California’s prison system; Casey Given on race relations in Berkeley; and new staffer Robert Williamson on conflicts of interest in the UC system. Enjoy!

Your Compatriot,

Andrew Glidden

Foremost among the public policy objectives of Prop 19 is improving the criminal justice system by reducing criminalization. The intent is to stop wasting resources prosecuting largely victimless activities and divert police attention to more serious offenses. Prop 19 does no such thing. While it would legalize the possession of up to one ounce of marijuana, this amount is already decriminalized and is not an arrestable offense, and possession is also already being downgraded to an infraction. The California Police Chiefs Association admits that they do not enforce the law in cases involving under an ounce. Taken together, these factors make the effects of legalization on reducing arrests for possession trivial.

The law would actually exacerbate many of the enforcement problems we currently face by creating new demographics of groups to jail. The law would make it expressly illegal to give marijuana to anyone under 21, under penalty of six months in jail and a $1,000 fine, yet the current penalty is only a $100 fine. Even smoking in the presence of minors can result in arrests – even for those who use the drug medicinally. By reclassifying minor offenses into more serious ones, Prop 19 would actually result in more enforcement and higher costs. The initiative would make it illegal to possess marijuana purchased from anyone other than a State-licensed dispensary. That removes the presumption of innocence from the court system, shifting the burden of proof onto the citizen, and allows the State to create legal monopolies, which would remove competition and advance corporate rather than consumer interests. That’s bad jurisprudence and bad economics.

The second main purpose, revenue generation, is just as more problematic. Like any tax, it would shift resources away from useful economic activity toward the already bloated California government. If a person is going to be buying marijuana whether or not a tax is in place, the amount paid as tax would have instead gone to other things, such as consumer goods. And while proponents claim it will reduce the efficacy of cartels, the tax rate of $50/oz currently being recommended will maintain a black market and all the other crimes that come with it; because the black market would dodge the tax, the projected $1.4 billion in revenues will never materialize. Because the initiative lends itself to corporatization of the marijuana trade, it will also generate a new kind of cartel – a small set of corporations with strong vested interests in manipulating public policy. Perhaps worst of all, it creates a government addiction to vice: the State will have a financial interest in citizens lighting up, which will conflict with the broader objective of sobriety (or at least restraint).

The proposal to tax marijuana relies on two very dangerous presumptions: that California’s fiscal problems are the result of insufficient taxes, rather than exorbitant spending, and that the State should treat politically marginalized groups – those who consume cigarettes, alcohol, gasoline, and now weed – as beasts of burden, to support the ever expanding government bureaucracy.

The consequences of Prop 19 are clear: less freedom and more government controls. If Californians want to legalize marijuana, Prop 19 simply won’t do it. We need an alternative that will very simply remove possession, consumption, and trade of marijuana from the penal code, which would reduce costs for the criminal justice system and promote competition. If Californians also want to tax marijuana, they should do so by including it in the sales tax, not by imposing additional excise taxes.

In all fairness to unions, collective bargaining is sometimes the only way to bring working conditions to a reasonable level. For example, Henry Ford, believing that a man did his best work standing, refused to allow his workers time to sit. Coal miners unionized in part to improve safety and replace workers with machines that improved productivity and reduced casualties from mine collapses. Yet collective bargaining agreements often create poor incentives and conflicts of interest, particularly where emergency services are concerned. The worst offender in this respect is the prison guards’ union. Because their salaries depend on having prisoners to guard, they will be predisposed to policies that increase the number and length of incarcerations, without regard to the cost or public safety concerns raised by these policies.

The California Correctional Peace Officers Association (CCPOA) has lobbied intensely to increase prison capacity and lengthen sentences, spending over $30 million dollars to support candidates that advance their agenda. They have also advocated proliferation of criminal statutes and enforcement personnel, mandatory sentencing, and rigid parole rules, while expressing skepticism toward alternative sentencing. Indeed, when alternative sentencing laws passed the Legislature with strong bipartisan support, then-Governor Davis, who had received $3.4 million, vetoed them. In 1994, the union’s activities were focused on the “three strikes” rule, which was approved.

Criminalization of non-violent offenses, including minor drug offenses and occupational licensure infractions, creates significant pressure on the system by consuming physical and human resources that would be better directed at property crimes and violent offenders. Since few people want to hire or rent to people with criminal records, the people jailed for these minor infractions are pushed out of productive jobs and even their homes. The emphasis on incarceration also diverts resources from other programs that have a proven record of reducing recidivism
at minimal costs, such as drug courts. And the cost of all this is exorbitant: $45,000 annually, even excluding lost productivity and social effects like increased homelessness.

It seems like a perfect example of bad policy, so how did it pass? Follow the money. In 2006, the average base pay for guards was $57,000, which reflects an astounding 27% increase from 2003. This figure doesn’t account for pay increases from overtime, pension obligations, or other benefits.

In California, prison guards have every incentive to increase the number of cells, but not the number of guards. Understaffing means more overtime, which is paid at 1.5-2 times the normal wage rate. And because of union rules, overtime is also allocated by seniority, so the highest-paid guards get the most overtime pay. In 2006, the highest paid officer was paid $187,000 – $73,000 in base pay and a whopping $114,000 in overtime. It would be easy to reduce these costs by hiring more guards, but political resistance has prevented this.

These exceptionally high labor costs are further exacerbated by defined benefit pension rules that base benefits on the highest salary and seniority of retiring officers. In California, retirement can come as early as age 50 at 90 percent of highest pay; because that calculation includes overtime, this means prison workers can retire, as young as age 50, at higher incomes than their nominal salaries! They can also continue to work in the exact same jobs, “double dipping” for hundreds of thousands of dollars each year. This pension system creates expensive long term liabilities for the State, putting it in a precarious fiscal position. David Crane, a special adviser to Governor Schwarzenegger, together with University of Chicago and Stanford researchers, estimates the unfunded liabilities of the California pension system at about $500 billion, with the corrections department in particular driving the cost.

The exploding costs for prisons, combined with the State’s dire fiscal situation, has forced California to cut back on its drug treatment, vocational training, and literacy programs, despite their effectiveness in reducing recidivism. The State has thus put itself in a position to pay for a greater number of prisoners, each at a higher cost.

If California is ever to regain solvency, voters will need to stop buying into the “tough on crime” rhetoric and reign in the excesses of the prison unions. Part of that means holding legislators’ feet to the fire and demanding that they prioritize the taxpayer, not well-organized interest groups.

Two years after supporters of Alaskan and coastal oil drilling responded to peaking gas prices with the mantra, “drill, baby, drill”, Obama finally got the message – that opening up US oil resources would be necessary to help the country pull out of its weak economy and into stronger growth.

Obama’s proposal would open up parts of the Atlantic coast, Alaska, and the Gulf of Mexico to oil and natural gas exploration, with enormous potential for fueling economic growth. Even though those oil supplies would take years to get on the market, merely having prohibitions lifted signals to markets that future supplies will not be as scarce, which will likely lower prices for oil futures contracts. This may have immediate effects on the short term price even though new oil is not brought to market in the short term. As oil does hit markets in future years, we can expect it to be used to generate vast amounts of wealth.

Currently, the amount of coastal oil resources at our disposal is largely unknown. Oil exploration is only done by those who have an interest in it: oil companies. Because of the longstanding prohibition on drilling, there was very little incentive to find untapped oil sources. Current estimates, based on thirty year old seismic data, predict about 3 years worth of fuel, which is no small amount. When exploration begins in earnest, and with the aid of modern technology, chances are fair we’ll have far more domestic oil supply than this. Unfortunately, that would only be the case if Obama’s plan actually involved starting drilling operations.

Obama’s plan begins with the Interior Department conducting extensive surveys along the coast to determine environmental and geologic suitability for development, and that may be where it ends. Since the ultimate decision on whether or not to allow drilling will come from either Obama’s successor, an unelected bureaucrat, or (a likely-Democrat controlled) Congress, actual drilling operations can be stalled or blocked, despite today’s promises. A likely avenue might lay in citation of environmentalist concerns that oil will cause damage to ocean wildlife, either as part of the drilling/development or due to potential spills. Let us also bear in mind that high energy prices are a stated goal of the environmental movement, so the “greens” have no ideological reason to weigh human economic needs against real – or perceived – environmental problems. There does exist enormous potential to obstruct drilling, and politicians or bureaucrats will likely find it in their interests to impede oil harvesting. Skeptics of this prediction need only look at the Central American Free Trade Agreement, CAFTA, which was negotiated years ago and never ratified due to union, agriculture, and other interest groups’ lobbying and recalcitrant Democrats in the Senate.

Granted, Obama did suggest during his campaign that he might support domestic oil production, so it may be disingenuous to be so skeptical about the prospects of its implementation. On the other hand, many of his other promises have been broken in the face of backlash from other prominent Democrats. Obama is probably aware of the political risks he’s taking, and it’s very possible he will reconsider his commitment to human economic needs if it endangers his assumption of power in other areas.

The fascinating part about Obama’s proposal lies mostly in his impeccable timing. Since the recently-passed health insurance regulations have not been phased in yet, the interest groups that would support them have not rallied together to create a powerful voter-bloc. That means the time to roll back the most pernicious of these regulations (e.g. the individual mandate) is now. By giving oil drilling the national limelight now, he distracts the country from the recent health insurance regulation laws. Whether this is a deliberate attempt to channel the rage of limited-government grassroots activists and right wing fixtures such as Coulter and Limbaugh away from some of the biggest powergrabs of modern memory remains to be seen, but it certainly has the potential to distract attention-deficit media and the rank-and-file voter. No matter how much energy (or associated wealth) we get by drilling, it will never be worth the damage caused by both those insurance regulations and the precedent of nearly limitless Federal power they set.

The public, and students especially, seem to love making open-ended commitments, particularly when it comes to education. After all, education has some very real benefits, particularly access to high skilled and therefore high-wage jobs. It stands to reason that, other things being equal, an educated population is better off than an uneducated one, and so the politics of education tends to follow the rule, more is better. Unfortunately, the choice isn’t between education and nothing – it’s between education and everything that educational resources could provide. Costs never appear on the public radar. Case in point: Obama’s loan forgiveness proposals outlined in his State of the Union address.

Obama’s plan would radically reshape the student lending environment. First, annual loan payments would be capped at 10% of a person’s income beyond 150% of the poverty level. Someone earning a bit over $15,000 per year would have no obligation to repay debts; payments for someone with an income around $60,000 would be about $4,500 per year. If, after 20 years, the loans have not been repaid in full, they would be forgiven, and if the borrower happens to be in a government job, the loans would be forgiven after 10 years. As Obama said, “In the 21st century, the best anti-poverty program around is a world-class education… And let’s tell another one million students that when they graduate, they will be required to pay only ten percent of their income on student loans, and all of their debt will be forgiven after twenty years – and forgiven after ten years if they choose a career in public service. Because in the United States of America, no one should go broke because they chose to go to college.”

Let’s go ahead and predict some of the easily foreseeable consequences of this. By capping the amount that lenders can require in payments, many students’ debts will simply not be paid off as quickly, and they will in fact be paying far more as the value of their debt grows in time due to interest. If the student’s debt is high enough, or income low enough, some students would find their interest capitalize, meaning their debts could increase over time. As a simple demonstration, imagine a student with $60,000 in federally backed Stafford loans, at 6.8% interest, and an income at, say, the national average for college graduates, $46,000. While the payments would be just over $3,000 a year, the interest would accumulate at a rate of over $4,000 per year – a net increase in debt every year.

Assuming students do repay their debts, that could be a good thing for lenders, since student loans typically have much higher interest rates than other kinds of investments. However, interest rates are so high for students in part because they have no collateral backing them. Without collateral, some students might be inclined to get an education and then default on their debts or have them forgiven after the requisite time period, giving themselves a “free” or cheap education at taxpayer or corporate expense. The higher interest rates charged are a way for lenders to come away with a normal rate of profit even though some percentage of students are losing investments. Reducing the time for debt forgiveness would simply increase the magnitude of the problem. The even lower time limit for government workers, ten years, presents an even bigger technical problem, as well as transferring wealth from private lenders to government workers and creating huge incentives for citizens to choose less-productive government work over the private sector.

After a little time for the regulations to set in, financial markets are going to be in quite a sticky situation. Loans will be far less likely to be repaid, leaving lenders with two choices: continue lending at a loss and eventually go bankrupt, or implement credit rationing. Since no one works for their own loss, the more likely effect is rationing. Credit rationing can take many forms. It could mean that lenders limit the amount of money they lend to the amount that can be repaid in full before 20 years, so students could expect to get significantly less. A reasonable hypothetical amount might be $30,000 of debt, which would enable average students to repay their debts. Ironically, this policy thus means that low-income students will have an even harder time paying for college, because loans are even less viable as a means of covering the cost of education. This may also create natural self selection in credit markets, as higher-than-average income families would be able to finance education partially with their own money and partially with loans, while the poor will be even less able to pay and will simply opt not to advance their educations further. The unintended consequence of Obama’s plan to make sure “no one [goes broke] because they chose to go to college” is that many people, particularly the children of the poor, will simply not be able to make that choice. As an anti-poverty program, this doesn’t pass muster.

Alternatively, it could lead to discrimination in credit markets. While the public often hears about the gap between incomes of average college graduates and average high school graduates, there’s really no such thing as an average education; different degrees each have their own income distributions. An English degree is not equivalent to a law, medical, or engineering degree: the latter have much higher market value. Instead of offering limited loan amounts to everyone, creditors could require regular disclosures of information such as students’ university, major, GPA, course rank, internships or work experience, and other factors that might indicate higher prospects for better incomes.

In short, credit markets might work to systematically deny candidates with lower income potential. Of course, this kind of discrimination would probably be immediately branded as evil and unfair, and then banned, leaving lenders with only the first option, general credit rationing. Now we have the familiar political issue of “market failure,” where the “socially optimal” quantity of a good (student loans, education) is not furnished by market transactions. As a result, there will be strong political pressure to “do something” to make newly-mandated “affordable” loans more accessible to the general public, especially the poor.

In comes the federal government, to save the day yet again – this time, by creating a “public option” in lending (exempt from the governments’ own regulations or backed at huge taxpayer expense) or through direct grants to students or universities. And, if the government does increase grants to universities, it will gain additional control over how university funding is spent, since “maximizing taxpayer value” is a priority. This is not conjecture. There is a well-established precedent that institutions receiving government funding can have policy dictated to them, and prominent policymakers are currently advocating nationalizing student lending. Furthermore, because subsidies can only practically be given to existing institutions, it would severely retard the growth and competitiveness of newer educational institutions, such as University of Phoenix.

What’s missing is of course the simple fact that markets do not fail. They operate exactly as they ought to, given the constraints of the legal and regulatory environment. When government breaches or forbids contracts in the name of “the public good,” the results are inevitably in some way contrary to the original intent, and at the price of vital freedoms. In this case, instead of making the burden of college debts more bearable, Obama’s plan will further encourage growth in the government-sector, increase the total cost (cost plus interest) of education, and force widespread credit rationing, at the expense of the poor, investors, and particular education programs. Having initially failed, it will undoubtedly generate political pressure for a further increase in government control in financial markets, university policy, and other areas.

If the government adopted true free market reforms, rather than more band-aids on festering regulatory problems, we would see less credit rationing and greater accessibility of education loans, as well as pressure for cost reduction. Markets can provide all human needs, even education, so long as they are founded upon a proper regulatory structure that respects individual rights, particularly the rights to property and freedom of contract. Without that foundation, some children will be left behind.

First, the facts: In the 2008 election cycle, the non-profit corporation Citizens United released a documentary largely antagonistic to Sen. Clinton. Citizens United planned a release for theaters as well as pay-per-view and DVD, but McCain Feingold limited advocacy for or against candidates during elections; even advertising the movie would have been illegal, yet the expenditure for the movie was entirely independent of the campaigns for or against Sen. Clinton, so there can be no charges of corruption, the official reason for campaign finance laws.

During arguments, the government claimed that any kind of broadcast communication that even mentioned a candidate’s name would be covered under the law. This includes advertisements for products. Remember the Obama Commemorative Plates going around a year ago? Illegal! The Kindle, Amazon’s electronic book, is also subject to the law. The Court also found that, by letting the laws stand, they would potentially allow Congress to ban books and other print media that mentioned candidates, and by setting a precedent that such action might be in principle permissible, lead to censorship in other ways. Even the blogosphere wasn’t immune, because express advocacy of candidates in an electronic form is technically illegal under McCain- Feingold. The government also argued that because “the First Amendment refers both to freedom of speech and of the press, there would be a potential argument that media corporations, the institutional press, would have a greater First Amendment right [than other groups].” This means, of course, that media corporations have potentially greater rights to free speech than everyone else, and true to the government’s word, mainstream media giants were exempted from the law.

The hysteria from the left, and even some nominal conservatives and libertarians, has been forthcoming in no short supply. They decry the fact that, by the Court’s decision, corporations will be allowed to influence elections. But what they are largely criticizing, corporate funding of elections, is still illegal. Corporations have been barred from direct contributions to campaigns for a century, and that facet of campaign finance law stands. The decision affirms the right to make independent expenditures and communications – a documentary, a blog, an advertisement. Corporations are still banned from directly contributing to campaigns, and so there can be no corruption – unless congressmen want to admit that as soon as someone says something nice about them they are obligated to dispense favors.

Their criticisms are based in a mindset that evades any consideration of what corporations are. A corporation is simply a voluntary association of individuals who combine their capital to undertake large expenditures and reduce individual liabilities. It does include for-profit corporations, certainly, but also non-profits, think tanks, and policy advocacy groups such as the ACLU, NRA, NARAL, Cato Institute, and Heritage Foundation. Why should individuals, speaking jointly under the aegis of an advocacy group, be prohibited from speaking via broadcast, such as when the ACLU was prohibited from advertising the names of candidates who had voted for warrant-less wiretapping and other invasive government powers? Why should free speech be taken so literally as to exclude dissemination of information by print and broadcast media? As Chief Justice Roberts stated, “The First Amendment protects more than just the individual on a soapbox and the lonely pamphleteer.” And, for the unconvinced who would still claim that a corporation, particularly a for-profit one, is a danger to democracy, consider what would happen to liberty in other areas if organization along corporate lines may be a justification for some restriction. We can have the right to practice religion – but not the right to build a church, which is often a corporate endeavor. You’re free to attend a private school, but you can’t incorporate to establish or maintain one. And you’re free to write about whatever you want on your blog, so long as you don’t use corporate-owned servers.

Logically, the kind of power the government granted itself, and many citizens have supported in the name of “clean politics”, makes any freedom or right currently protected vulnerable to harassment or outright denial by government. Large segments of the population believe nevertheless that for-profit corporations might unduly influence politics so that policies and candidates do not accurately reflect the public’s interests. They fail to take into account two very critical details.

First, corporations and unions do not speak with a uniform voice. While some corporations such as Wal-Mart supported Obama’s health insurance regulation proposals, others, such as Whole Foods, opposed them. Second, corporate shareholders are predominantly average Americans who own corporate assets by proxy, through investment firms who have been entrusted with this money to maximize shareholder wealth. Not only will it be against their self-interest to spend money lobbying for things investors may find controversial, a more plausible attempt to “seek rent” (create a policy good for the company and bad for everyone else) would be severely hamstrung by the fact that diverse portfolios would make such an act cause more self-injury than benefit.

President Obama’s response, and history, are particularly enlightening. He revealed his ignorance and poor taste by remarking in the State of the Union, “With all due deference to separation of powers, last week the Supreme Court reversed a century of law that I believe will open the floodgates for special interests…” The aforementioned ignorance of what McCain-Feingold actually says notwithstanding, it should be noted that the law is about seven years old – that’s a few short of a century, Mr. President. Shortly after the decision, he offered the following commentary: “With its ruling today, the Supreme Court has given a green light to a new stampede of special interest money in our politics. It is a major victory for big oil, Wall Street banks, health insurance companies and the other powerful interests that marshal their power every day in Washington to drown out the voices of everyday Americans. This ruling gives the special interests and their lobbyists even more power in Washington while undermining the influence of average Americans who make small contributions to support their preferred candidates. That’s why I am instructing my Administration to get to work immediately with Congress on this issue. We are going to talk with bipartisan Congressional leaders to develop a forceful response to this decision. The public interest requires nothing less.” This, from the man who accepted nearly $1 million from Goldman Sachs, more than any other contributor, as well as corporate and union contributions as a state legislator.

Mr. Obama’s objections, as far as can be ascertained, are not that corporate money will support a bad agenda. It is that it won’t support his agenda. He was quite fine with corporate funding from rent-seeking unions, insurance companies, and pharmaceutical companies supporting his ambition to tighten health care markets. He conveniently ignores the fact that such corporations would not be “[marshaling] power in Washington”, they would be presenting ads to the general public, and those ads would have to reveal who was funding them. Rather than spending money on lobbying Congress directly, the most they could do is denounce a congressman, and such ads would likely be ineffective since voters can easily establish a corporation’s self-interest in supporting a particular candidate or agenda. A corporation pushing an agenda antithetical to most Americans’ values cannot be successful, unless most Americans are ignorant and easily swayed – and if they are, what does that say about a man who wins a landslide electoral victory? Furthermore, as Obama himself should know from his presidential campaign, small donors and viral advertising through media like Facebook are far more effective than massive television ads.

Campaign finance regulation heavily favors incumbents, who have numerous legal provisions to protect them from competition for public visibility. For starters, they have name recognition. They can fund mailed advertisements (“newsletters”, “Washington Updates”) at taxpayer expense via the franking privilege. They can travel across their states at taxpayer expense. Incumbents often have more money than their challengers due to existing fundraising infrastructure. Yet the public is sold the nonsense that “the public interest requires no less” than these restrictions, and therefore entrenched politicians and interests.

The Constitution is clear enough: “Congress shall make no law…abridging freedom of speech” (emphasis added). The Court, and common sense, tell us that spending is a necessary and constitutionally protected component of speech, because it purchases the medium by which the speech is conveyed.

The dissent, including Obama-appointee Justice Sotomayor, has demonstrated a woefully low level of respect for both the Constitution and the moral principles it embodies. On the other hand, we can be thankful for Justice Kennedy’s opinion standing for the majority. It is commendable for its support of free speech and free thought: “When Government seeks to use its full power, including the criminal law, to command where a person may get his or her information or what distrusted source he or she may not hear, it uses censorship to control thought. This is unlawful…The First Amendment confirms the freedom to think for ourselves.”

Scott Brown’s victory in the Massachusetts special Senate election caught national attention as a political game-changer. In a state where only 11% of the electorate is Republican, Brown won against Democrat Martha Coakley with a solid margin. Remarkably, Brown did not campaign as a “moderate”, but as a candidate who would fiercely oppose Obama’s agenda.

Interestingly enough, both Obama and Brown reveal a stunning political reality: while “moderation” sounds more appealing than “extremism”, it is the “extreme” – the consistent – who actually win elections. He did so in a state used as a model for Obama’s health insurance regulatory scheme, a tragic irony for the left’s hubris and an indication that voters in that state are fed up with both the Democrats’ national agenda, and perhaps their own health insurance policies.

What’s really important about the election is the fact that it gives Republicans 41 seats in the Senate. While technically only a majority is needed to pass legislation or confirm appointments, Senate rules allow for unlimited debate. Democrat Strom Thurmond currently holds the record for longest speech, at 24 hours and 18 minutes, in a last ditch attempt to block the Civil Rights Act of 1957. If debate never stops, the Senate is unable to move to a final vote, and the legislation or confirmation cannot be passed. Under current Senate rules, 60 votes are needed for a “cloture motion” to stop debate and proceed to a vote. This means that a bill or confirmation can literally be talked to death, even if a majority would have supported it. With Brown as the 41st Republican Senator, a unified vote can block any legislation that does not have bipartisan support, meaning Democrats can no longer unilaterally force bad laws (additional health insurance regulations, “cap and trade”, etc) on the public.

Ultimately, though, the election doesn’t change the majority in the Senate, and Republicans will still be unable to advance their own agenda. What it does win is valuable time, allowing Republicans to hold out until the November elections. Then, voters across the country will instate a new House of Representatives and replace one third of the Senate. While many incumbents will remain, history and the current political climate indicate that the midterm elections will bring with them significant turnover, and Republicans running under a coherent agenda may be able to win back Congress.

Despite winning the Nobel Prize in Economics, Oliver Williamson’s name is often unrecognized among Berkeley’s student population – which is a shame because of the man’s tremendous insights and revolutionary approach to economics. His work defines the field of transaction cost economics, reshaping how we understand business practices and carry out regulations, particularly anti-trust regulations.
Williamson’s approach to economics is quite refreshing. Rather than the “rationalist” approaching economics with rigorous mathematics and thought experiments, Williamson is a devout empiricist with very little regard for untested theory and uncritical ideology. He described observing a conference in which the late Nobel Laureate Milton Friedman presented the results of the first empirical tests of Keynesian monetary theories such that Friedman “had the data on his side,” and was able to stand “against the whole world,” demonstrating the errors of Keynes’ theories using cold, hard data instead of elegant mathematics or debatable logical arguments. Williamson’s view of economics allows for the omission of rigorous mathematical models and demands a high degree of empirical validation – both, as he says, “breaths of fresh air” in the field. The approach has served him well, allowing him to analyze economic phenomena in a far richer context than can be examined by mathematical models, while his ivory tower colleagues generate theories divorced from reality.

The particular course of Williamson’s work was set while he was on leave in Warrick, where he read about an economist of the 1930’s – not Keynes – who influenced him greatly. That man, John R. Commons, took exception to what Williamson calls “the resource allocation paradigm,” the traditional view that characterizes firms as single actors responding to prices and demand schedules to produce and deliver the optimal quantity of goods and services. While this can often be useful, it reduces economics essentially to calculus problems, as any student in the Econ 101 series can attest to. This approach tends to dehumanize core issues and dismiss the rich context that gives rise to particular solutions to economic problems, hence Williamson’s criticism of the “firm as production function” model of economics.

Commons believed that the concept that economics should be founded upon was one that can find a way to combine “conflict, mutuality, and order.” The study of governance thus addresses the “means to infuse order, mitigate conflict, and realize mutual gain.” Commons, and Williamson, take this fundamental economic unit to be, not firms, but transactions. Unfortunately, Commons never found a way to give transaction costs what Williamson describes as “operational content”; Commons was unable to formulate a model, verbal or mathematical, and so was unable to give transaction cost economics sufficient momentum.

Central to Williamson’s work is a study of contracts. One aspect of this is the broken contract: someone simply does not cooperate, or there is an honest disagreement that can harm a party who made an investment that can’t be easily liquidated or redeployed – a characteristic he terms asset specificity, which has itself redefined how we think about economics. Traditional solutions to broken contracts include information disclosure rules and auditing to ensure more complete information and thus more appropriate contracts, or penalty clauses to discourage breach of contract. Says Williamson, “if push comes to shove, we get a special dispute system to arbitrate – not the courts – whose objective is to get back on track, not to extract wealth punitively.” Such an arbitration system produces order, deters conflict, and promotes harmony and mutual gain. Williamson describes this process as “a way to think about contracts in a constructive, not legalistic, way.”

To analyze contracts, we must be able to describe the organizations that make them. Both Chester Barnard and Friedrich Hayek described organization as a tool to facilitate adaptation. Barnard, a management theorist, took adaptation to mean deliberate, purposeful, and coordinated changes – the kind that define a “hierarchy,” or a heavily structured organization. Hayek, a Nobel prize-winning Austrian economist, instead framed adaptation within the context of relatively disorganized markets,  with signals such as prices communicating information that people adjust to autonomously to re-equilibrate the system and restore order.

Williamson is dissatisfied with choosing either of the two views, as each has strengths and weaknesses that make them more suited to certain contexts than others. His work attempts to characterize these governance structures and determine which one makes transactions more efficient, in which contexts, and why.

He is also quick to point out the range of phenomena the transaction-cost and governance approach to economics can explain. Williamson’s work has touched economic and administrative issues such as credit versus equity financing – redeveloping finance in constructive ways – to anti-trust laws and business regulations – providing information on the contexts in which these laws don’t work, and suggesting alternative strategies that promote harmony and mutual gain.

His work in anti-trust alone has forced countries across the globe to rethink what economic ends they pursue and how they do so. Williamson, as the Special Economic Assistant to the head of the Anti-Trust division within the US Department of Justice, noted how classic economic theory did not appropriately respond to monopolies; the DoJ had, in his mind, “the wrong perspective.” After Williamson, vertical integration (where a company owns all stages of production, such as a power plant owning a railroad line and a coal mine) is no longer itself a justification for anti-trust suits. He showed how this arrangement in fact stabilizes and lowers prices by making supply more consistent and efficient. He has also criticized anti-trust leveled at companies whose sole fault is that they are big, regardless of their efficiency. As economist Thomas Sowell observed, even 100% market share does not make a monopoly – the company has to be doing things directed at keeping the competition out, and selling more for less isn’t a legitimate claim for “anti-competitive” business. The notion that we should have competition for competition’s sake has only resulted in wasted resources and losses to consumers.

His work in the anti-trust field has even led to the reconsideration of how we evaluate the monopolistic nature of companies. In one such memorable case, large oil companies had contracts with each other to buy and sell from each other in particular regions. When one oil company ran a shortage in one area, a second company would supply the necessary oil from its surplus. The first would then supply the second oil at another region. At first this seems to be a scheme to keep the little guy out and entrench the large oil producers. But internal company memos defended the policy by indicating that small suppliers characteristically have minimal investments in a given region, increasing the likelihood that they will not be able to fulfill long term contracts, thereby increasing the volatility of supply and prices. The “monopolistic” actions of the company were in fact intended simply to promote order in the marketplace, to the benefit of both consumers and the economy at large. Empirical evidence like this has at least partially restored the presumption of innocence in the legal system, even (and especially) for business.

Perhaps most importantly, Williamson has demonstrated that decentralized, voluntary associations are viable “governance structures” and that government management of the economy is often neither necessary nor desirable. For all of his many achievements over the course of his long and distinguished career, Oliver Williamson deserves to be saluted.

The entire protest movement is rife with contradictions. Shouting “Who’s University, Our University,” they prohibit other students from using the university facilities. Claiming a “right” to education – meaning a right to force someone to pay for their education – they infringe upon other students’ true right to education – the right to undertake a course of study with the consent of both the student and educator. In the course of their protest, they disrupted over 100 classes, affecting nearly 4,000 students. While they decry the university and legislature depriving students of their imagined rights, they seek amnesty for violating the real rights of thousands of students. And when it comes time to actually assert their demands, the issue of fees is nowhere to be found; instead, the university is pelted with demands not to allow Panda Express near campus. The protesters are right — a question of priorities, indeed.

The actions of the occupiers was a trespass, pure and simple. Each one is guilty of intentionally interfering with the operation of the university, obstructing and intimidating innocent civilians, and refusing to leave when asked. The university’s response has been rather predictable: negotiate with the protesters and attempt to come to a peaceful solution. This has proven far less than satisfactory. They employed negotiators such as Professor George Lakoff, who told the protesters that they could “come out, no handcuffs, no arrests, just a misdemeanor equivalent to jaywalking.” Lakoff, a leftist linguistics professor who has developed a reputation for “framing” (euphemizing) issues, once more showed his talent for lying to achieve his ends – the penalty for trespassing is up to six months of prison and a $1,000 fine. The fact that the university would employ him in this, or any, capacity, reveals their terrible intellectual dishonesty and shortsightedness (more on this anon).

The conflict did finally end when the police pushed through the crowd, arrested the offenders, and cited each of them with trespassing. But this is what they ought to have done from the outset – the protesters had every right to protest outside the building, but none to occupy it, and none to obstruct foot traffic (One protester said “Students are no different from police – you respect the police barricade, you respect the student barricade”, showing an inability to differentiate from a barricade meant to restore order and protect rights and one intended to sow chaos and infringe on rights). The right to free speech and assembly does not entail the right to deprive others of their rights. There are those who will point to videos of “police brutality,” which include striking protesters with batons and shooting particular protesters with rubber bullets. Such reports mischaracterize police brutality, which refers to capricious, unwarranted, and excessive use of force by the police. This was not the case in this situation: protesters were ordered to stand aside to allow the police into Wheeler to make their lawful arrests; failure to comply with such an order is a felony with a penalty of up to four years in prison. Police officers’ use of force was provoked by protesters’ obstruction of legitimate arrests, and cannot be considered excessive given the offense, especially within the context of existing law.

Yet the university, rather than defended the legitimate police action, apologized for it. Chancellor Birgenau wrote in an open letter to the campus community, “Many of you have written to us expressing concerns that police action at Friday’s demonstration in front of Wheeler Hall showed brutality toward individuals who did not appear to be presenting any imminent threat… We truly regret the incidents that brought physical and emotional injury to members of our community.” The university seems to believe that the proper role of the police is to nurture protesters’ emotions rather than advance justice and protect rights. Taking it even further, the university dropped the charges against Wheeler’s occupants, letting them walk away from an incredibly damaging and disruptive affair without penalty.

The university imagines it is somehow smoothing ruffled feathers and calming a tense situation. Their actions are worse than a trade of justice for order. The Monday following the occupation, protesters rallied around Wheeler, with organizers shouting that the resolution of the conflict had nothing to do with good-faith university negotiations, but merely that the police realized that if they did not let the protesters off, “shit would go down.” “It showed that we have power, as a force!” cried the same organizer. The tone and content of these statements indicates that these protesters are more interested in being rabble than advocating their agenda with civility, and that in the long term, the university is working to encourage rather than minimize the disruptions.

If the protesters really wanted to have their concerns addressed, they would do better to approach the issue civilly and rationally. If the university wished to educate students effectively in an orderly environment, they would do better to serve justice and rights rather than the malicious caprice of intellectually arrested students.

Democrats in particular have bristled at the term, arguing that they are not “nationalizing” health care, but are simply providing a “government-run public option”. But socialism means more than government owning an industry outright. Socialism is a politico-economic system in which costs – and decision-making – are spread across society. The current “reforms” socialize costs and economic decisions, and the proper term for that is socialism. The least that “reformers” can do is have the intellectual integrity to call it as it is. But whatever the merits or demerits of their prolific labels, Republicans on the whole have not been anywhere near as vocal in promoting a positive agenda – that is, assessing the real problems in the health care system and offering a solution.

The first step is to recognize that many of the problems in our health care system have nothing to do with the federal government. In fact, the Congress has no constitutional authority to legislate anything related to health care. The sources of many of our health care system’s problems are at the state level: state legislators and insurance commissioners have imposed controls harassing insurers, health co-ops, charities, group practitioners, and doctors. If real reform is the objective, state government is where the lion’s share of the work is. If health care becomes a federal issue, the only practical effects will be that the federal government becomes more involved in local issues, reducing the responsiveness of the medical system, increasing administrative costs, and diminishing individual freedom.

Medicine is one of the only professions without transparency in billing; medical providers do not list the prices for their services before consumers buy them, so consumers do not have the necessary information to make proper choices. Improving visibility would ensure that people’s decisions to buy health care reflect economic realities.

One of the greatest improvements that could be made in insurance, as bad as it sounds, is to allow insurance companies to discriminate. Government requires that insurance companies use “community pricing”, which means that individuals must pay the same for insurance regardless of their risk categories. Age, gender, ethnicity, hobbies, employments, drug use, diet, exercise, and many other factors influence which health problems a person is likely to have, but insurance companies’ discrimination between these real health factors is legally forbidden. Young individuals with healthy lifestyles thus have artificially high insurance costs. This prices many of them out of the insurance market, leaving them uninsured and so further increases the price for others. As far as insurance markets are concerned, discrimination is a good thing. Insurance is a financial instrument for spreading unpredictable, catastrophic loss. If someone is known to be high risk, it makes no sense to pool them with low risk individuals because prices will not reflect costs, and the market will not function effectively. When insurance markets are free to discriminate among real risk categories, prices for each group more accurately reflect their real economic costs, and prices, on the average, fall.

Because the elderly and unhealthy are effectively subsidized by community pricing, they benefit greatly when this policy is a universal requirement. The core of the “individual mandate” to buy health insurance is not “individual responsibility” for each individual’s costs, but is an attempt to force those who are disadvantaged by community pricing to subsidize those who benefit, regardless of the real costs for either group, and with flagrant disregard to the consequences, both personal and economic, of such an action.

Licensing laws in insurance have prevented doctors from using innovative, low-cost payment plans for medical services to the poor. They have also prevented extremely effective Christian community groups from formalizing their pooling of medical expenses under a contract; thereby denying them market presence and reducing their efficiency and service. Doing away with these laws would create an environment in which insurers, doctors, co-ops, and charities can devise new, efficient services and introduce more competition in the insurance industry.

Medical licensing has also contributed greatly to the expense of medical care. By forbidding anyone other than a licensed provider from giving medical care, the government and the American Medical Association together restrict the number of doctors, reducing supply and driving up prices. It also leads to “gold plating” of medical care, where doctors must be present to diagnose and treat ailments, even when a nurse, technician, or pharmacist is perfectly competent to judge and implement the appropriate treatment. This does more than cause consumers to spend money needlessly: it also consumes more of the doctor’s time, resulting in lower quality and greater costs to those who need the doctor’s attention most. Perhaps the worst effect is when there is no doctor present at all, where paramedics or technicians might have been present to give aid, but were not due to licensing laws that impeded their training or employment. There is no way to calculate this hidden cost. Removing medical licensing laws would instantly increase medical supply and reduce costs in both wealth and human life.

Of course, safety in medicine is valuable. Instead of paternalistic licensing laws that presume consumers are incompetent to choose their medical providers, we could just as well have certification – a government or private organization (such as a university) verifying that a prospective doctor had the skills necessary to his work. Citizens would be able to base their judgments accordingly, rather than being preemptively prohibited from choosing a doctor without the right piece of paper.

Eliminating minimum benefits packages would do a great deal to improve the health care system. Every state has laws requiring insurance companies to cover certain expenses in all their plans, from chiropractors to in vitro fertilization to alcohol and drug rehabilitation. Sometimes these laws also require that the insurance have a low-deductible to reduce out of pocket expenses (but increase premiums). These laws are sold to the public under the guise of giving people some degree of security. But the same people must pay for that security, whether they consider it worth it or not. Pre-natal care and rehabilitation are of no use to a single teetotaler, and requiring him to pay for it will only drive up the cost, either reducing his standard of life or driving him out of the insurance market altogether. Eliminating these minimum benefits packages would allow individuals to purchase only the coverage they want.

Once states have removed their counterproductive insurance regulations, there will be far fewer barriers to interstate trade, which is limited due to the number and variety of state regulations. If these regulations are both minimized and standardized, over 1,000 insurance providers will be able to expand their markets to the entire nation, breaking apart local monopolies and bringing competition to urban areas, which are currently dominated by a select handful of insurers. The federal government can do its part to abolish existing federal limitations on interstate financial services such as insurance.

The federal government can also improve health care through our international trade relations. Although businesses in the United States are the primary innovators in medical technology and pharmaceuticals, we pay the highest prices, in part, because other countries impose price controls. However, price controls do not actually lower costs; they are simply efforts to avoid paying them. American consumers must pay artificially high costs to pay for development of new drugs, while foreigners pay little more than the cost of manufacture. Allowing drug reimportation from these countries will effectively import their price controls, but only to the extent that pharmaceutical companies choose to sell to such countries. This will pressure pharmaceutical companies to reject other countries’ controls, making foreigners responsible for the real cost of drugs if they wish to benefit from the advances of American medicine. Such a move would greatly increase economic freedom around the globe while lowering our medical expenses.

The next step for both state and federal governments is to end tax exemptions for fringe benefits. This system was originally the product of World War II’s price controls, which forbade paying workers more than a certain amount. To circumvent the price controls, companies gave their employees fringe benefits like health care, which tax laws do not consider income. These benefits are income, however, just not income that employees have control over. This lack of control, combined with the employer’s standardization of health insurance plans, significantly reduces efficiency – people don’t get the insurance they want and are willing to pay for, they get the insurance they’re given. Furthermore, employer provision of health insurance leads to the disastrous situation in which a worker simultaneously loses his job and health coverage, ensuring that an ailing worker’s layoff will mean financial catastrophe. It also means that people go without coverage for the duration of their unemployment, so that an ailment that develops during the unemployment becomes a “pre-existing condition” that insurance companies will refuse to cover. By simultaneously reducing the personal tax rate and removing these exemptions, employers would drop their insurance plans while raising workers’ wages, allowing them to enjoy the same standard of living while obtaining their insurance independently of their employers. Since consumers, not their employers, would be buying the insurance, they would be able to select a plan that better meets their individual needs, giving them the opportunity to buy more or less coverage as they see fit. And it would increase the portability of insurance, so consumers would be able to take their insurance with them even if they move or change jobs, so consumers would never need to go without coverage.

Drug costs could be easily reduced by reducing the scope of the FDA, whose benefits have not justified its costs. One of the proudest achievements of the FDA was the blocking of thalidomide, which was marketed as a remedy for morning sickness in Europe and caused terrible birth defects. The ban, combined with the disaster in Europe, was taken as evidence that the FDA was doing its job well, but for every thalidomide, there are many legitimate, effective drugs that have been kept off the market or abandoned, and many diseases that have long gone ignored, their cures never researched in the first place. Even the “harmful” drugs currently banned by the FDA are not necessarily bad. Thalidomide has uses that extended beyond morning sickness: since it prevents angiogenesis – blood vessel formation – it can arrest the growth of some cancers. It can also be used as a remedy for skin conditions, including leprosy, and diseases such as macular degeneration.

The FDA adds hundreds of millions of dollars and about a ten year delay to the marketing of new drugs. The expense means the drugs that are researched are ones which are intended for huge segments of the population, and even if a drug is exceptionally effective for other diseases, it is abandoned simply because the number of people it reaches is minimal. The cost of the FDA is far more than the billions lost in the approval process – it includes the very real cost in human lives from the reduced research efforts of pharmaceutical companies and the death toll of terminally ill patients that could have benefited from experimental drugs that were blocked from the general public during their development phase. An overhaul of the FDA’s regulations, including limiting its power to keep drugs off the market, would stimulate research efforts, providing consumers with more effective medicines for a greater number of diseases, make many drugs available for immediate use, and drastically reduce the cost of medicine.

Opponents of this will point out that unscrupulous companies will put harmful drugs on the market and advertise them as beneficial; this is fraud, and can be prosecuted as such, rather than creating an arbitrary regulation that pushes out beneficial drugs at the same time.

One of the more overlooked issues is the corporate income tax. One of its consequences is that charities must devote considerable time and expense to demonstrate their nonprofitable, secular, charitable nature to the IRS. Some charities undoubtedly find the expense to be greater than they value assisting others, and are thus artificially barred from their charitable activities. Those that do still exist become less efficient in providing charity because some of their wealth and effort is devoted to satisfying the IRS rather than fulfilling their mission. As far as real corporations are concerned, the corporate income tax is one of the most economically damaging taxes around, especially considering its low revenue. This tax is passed on to consumers, increasing medical costs by a substantial margin. Removing the corporate income tax would end some anti-charity policy bias and significantly reduce insurance, pharmaceutical, and practitioner costs.

Finally, Medicare and Medicaid should be phased out due to the sheer number and proportion of problems. Proponents point to the fact that Medicare and other socialized health care systems are more efficient by virtue of the fact that they do not seek profits and have lower administration costs. But since they do not seek profits and have their losses subsidized, they have no incentive to be efficient or control costs. Benefits are administered on a fee-for-service basis and has no ability to deny low value, inefficient services. Nor is their administration really less costly. Their claims are computerized and automatically approved without human oversight, lowering nominal costs but giving rise to rampant fraud: unscrupulous individuals can easily charge to Medicare with little possibility of detection. A former fraud investigator in New York estimated fraud for the state was about 40% of all charges. This cost greatly exceeds any potential benefit of reduced administrative costs. Furthermore, Medicare draws almost $200 billion annually from the general fund, indicating that premiums and Medicare-specific taxes are insufficient to cover its expenses. If a cost is paid through taxes, it has not decreased; it is simply hidden from consumers. The economic damage stemming from Medicare taxes, supplementary taxes, borrowing, and the administration of taxes, is often ignored in considering Medicare’s economic footprint. Studies show that the “deadweight loss” of Medicare – the extent to which Medicare hurts our economy – amounts to about one third of every dollar spent on the program. Medicare and Medicaid chronically undercompensate physicians, leaving them to refuse to serve the elderly or to shift their costs to the privately insured, driving the expense of private insurance up and availability down.

Still, proponents of the system claim that it is an astounding success, as measured by the number of elderly who are enrolled in it. This conveniently omits discussion of the relative costs involved, and of the fact that under current law, the elderly must enroll in Medicare or lose their Social Security benefits. This is an injustice on a titanic scale: the elderly are to be taxed over 14% of their entire life’s income for literally no benefit, unless they restrict their choice of medical care and impose a greater tax burden on younger generations. If the elderly are forced into Medicare, the number of elderly enrolled is meaningless.

If a gradual abolition of Medicare and Medicaid proves to be politically unfeasible, at the very least Congress could enable the elderly to opt out and authorize administrative reforms that would add oversight and reduce fraud.

The effect of these reforms will be to have prices reflect economic realities, extending coverage and reducing average costs. Consumers would have greater freedom of contract, giving them a more portable, flexible, and efficient insurance. They would also benefit from increased supply of medical professionals, technology, and pharmaceuticals. Most importantly, these proposals recognize every person’s inalienable right to his own life, which is more than can be said of current reform efforts.