Quick Reflection on the Constitution

A discussion on the Constitution is one which could consume much time. It's late on a Friday night, but I wanted to get a few thoughts on out this subject. Lately, I've reflected a bit when I've heard comments about the Bill of Rights, our (the citizens) Constitutional rights, government authority, and so on.

I've found that even the most staunch advocates of "conservatism" and "small government" often speak of things such as the First Amendment as if the Constitution itself, and on behalf of the government, grants us rights. This is in direct conflict with the Declaration of Independence, and, to the best of my knowledge, the intent of the authors. I have both the Federalist Papers and the Anti-Federalist Papers in my reading queue, but consider the Declaration itself:

We hold these truths to be self-evident, 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 instituted among Men, deriving their just powers from the consent of the governed...

The Constitution is intended to set forth laws for how the government operates. The Bill of Rights is not there to reflect the government's goodwill to its citizens. It is there to reinforce the limits which are imposed on government. We the people naturally have a right to free speech. The government does not give us this right. The Constitution does not give us this right. We have it. The Constitution and its amendments are intended to reinforce our natural rights and ensure that the government cannot take them away.

I would contend that there is no such thing as a Constitutional right. We give the government its power and its our responsibility to ensure that they do not abuse it. I think that we've failed. I think that, over time, the perspective has changed in that most people no longer hold the view that the government receives its "just powers from the consent of the governed," and that the government in its glorious generosity grants us our rights, such as free speech, provided that we don't abuse such rights.

Election Day

This coming Tuesday is an election day here in Indiana. In my township, there will be two issues on the ballot. Here is a link to the Perry Township, Marion County, Indiana ballot. I don't watch much local television and I don't read the newspaper. I haven't heard too much about these issues.

The first issue is in regards to Wishard Hospital. Wishard is in downtown Indy and is looking to build new facilities. To do this, they seek to issue bonds (get loans). Wishard is part of the Health and Hospital Corporation of Marion County - a quasi-government entity. As such, they can issue bonds which are guaranteed by the local government. Wishard contends that they will be able to repay their bonds with their own revenues; however, they seek government-backed bonds to receive lower interest rates.

You can read about the pro-Wishard position here. You can read one opposing view here (lots of well-informed comments on this post). I will be voting against the referendum.

I only heard about the second issue tonight while I was at my in-laws. My sister-in-law received a phone call to encourage a vote for the referendum. In this issue, the Metropolitan School District of Perry Township also seeks to issue bonds (up to almost $100M) for school renovations. I have not been able to find a good opposition website for this issue; you can visit the site which argues for the referendum here. I will be voting against this referendum as well.

While I admit freely that I do not have the context of the entire issue for either referendum, I am absolutely concerned with a further expansion of local government spending in this environment. I am not totally opposed to all local government spending. However, I do not feel that all options have been explored. Wishard serves the community but perhaps it's time for other hospitals to serve a similar purpose. Perry Township schools may well need renovation, but have we ensured that all other cost savings have been pursued prior to asking for taxpayer funded capital? I doubt it. I'll vote no.

Loose Ends... Vol. LXVI

I have saved a few articles in my Google Reader which I had thought about using as writing inspiration. Alas, it's time to clean them out with some short commentary. All three articles tonight come from the great financial blog, naked capitalism.

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This first entry comes from Edward Harrison of Credit Writedowns by way of naked capitalism. Harrison lays out many facts of the current economic climate and argues that we are in a depression - not a recovery from a recession. I have to agree with Harrison. While we will likely have a technical recovery in GDP growth in the third quarter, which will be announced later this week, the structural issues of debt in the economy still remain.

I like Harrison, respect his depth of knowledge, and usually agree with him. He generally has a libertarian view on things; however, he has called for more government intervention over the last year. To note from his blog:

From an ideological perspective, I would call myself a libertarian realist. I am a firm believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Often government intervention and oversight is not just wanted but warranted.

I highly recommend this article, but be warned; it is long. This also was one of my first exposures to "chartalism" - a macroeconomic theory which seeks to explain monetary phenomenon by way of a relationship between private savings, government spending, and the country's balance of trade. It's interesting - more in a future article on monetary theory.

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Yves Smith published this next article a couple weeks ago regarding the AIG bonus payouts. Two days later, Neil Barofsky of SIGTARP issued the latest audit report on AIG compensation. From the report (page 13):

... According to AIG officials, individual awards paid in March 2009 ranged from $700 for one File Administrator to more than $4 million for one Executive Vice President... $7,700 was awarded to one Kitchen Assistant... Distribution of the remaining $198 million is expected in March 2010...

Awesome - our bailout dollars at work. "Pay Czar" Kenneth Feinberg ordered significant reduction in pay at several bailed out companies earlier this week. I'm basically for this. These companies only exist due to the taxpayer largess. They can be told what to do.

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We turn back to an Edward Harrison post for the last entry of the night. This article highlights some key decisions happening in the courts regarding mortgage foreclosures. There are a lot of good links in this one to other bloggers who are picking up on the story.

The very interesting decision by the court (in one particular case) is that the bank which claims to hold the mortgage has not met the burden of proof to show this is actually the case. When one receives a loan to purchase a house, the mortgage is actually the security against the loan. The proliferation of securitization has transferred mortgages from one party to another over and over again. When the borrower stops making payments, the mortgage holder moves to foreclose on the property. Increasingly, the mortgage holders have been unable to prove that they actually legally hold the mortgage since the securitization process has been sloppy - at least in terms of following all the necessary and required processes for such a transfer.

Very interesting stuff... could we be seeing the beginning of a massive debtor's revolt?

Blue Laws and Corporatism

The Indiana General Assembly is not currently in session. In fact, they are hardly ever in session. This past year, they spent a lot of time debating a budget for the state. They required a special session to get that done. One thing they didn't address was Sunday sales of alcohol.

Indiana, like many other states, still has "blue laws" on the books which regulate and/or prohibit the sale of alcohol in various ways. A study committee was established to hold hearings, review and recommend potential legislation for the upcoming session. The Interim Study Committee on Alcoholic Beverage Issues convened over the past several weeks and voted on their recommendations on Tuesday, October 20.

The study committee has voted to recommend no changes to existing law. The two key proposals (which were shot down) were to allow Sunday sales of alcohol (defeated 7-4) and to allow other businesses besides liquor stores to sell cold beer (defeated 11-0). The full story can be read here. I have not been able to locate any sort of formal report at this point in time.

This particular issue and story has several things that I find distasteful. First, there is never a good time to legislate morality. The 18th Amendment was a failure. The purchase of alcohol on Sunday does not harm anyone as a threat to life, liberty or property. That is unless you are a liquor store in Indiana who is protected by government corporatism. That leads to my second point. The liquor store lobby does not want reform because they a) have a protected monopoly on cold beer sales, and b) have lower operating costs compared to their competitors because they stay closed on Sundays. Third, I noticed this vote was pretty much on party line. I'd like to see the final report before I pass judgment on that, but it smells fishy to me.

So, the forces of the nanny state have joined the forces of corporate lobbies to deny Hoosiers the ability to get a cold six-pack of beer at the local grocery store on Sundays. This is not over yet as this was just a study committee. However, I think this is a strong indication that this battle won't be won in the 2010 General Assembly.

Loose Ends... Vol. LXV

I'm a day late (and a few topics short) for Loose Ends this week.

Indiana University professor Elinor Ostrom was awarded the Nobel Prize for Economics last week. The award was "for her analysis of economic governance, especially the commons." This is a very interesting subject for those with libertarian leanings. I plan on reading some of her work and reporting back here on the blog.

Proposed Smoking Ban in Indianapolis

Indianapolis already has a limited smoking ban. For the most part, the only places you can smoke are bars which do not employ or allow entrance to anyone under the age of eighteen, smoke shops, and bowling alleys. Smoke Free Indy, an anti-smoking activist group, is leading the charge to strengthen the ban and remove pretty much all existing exemptions.

Proposal 371, which would extend the ban, passed out of committee on October 14. It will go before the entire City-County Council on October 26. Potentially adding some strength to their position, a report from the Institute of Medicine was released the next day which supports smoking bans as an effective tool in improving public health. The folks at libertarian-minded Reason published a response to the report on their blog which questions the strength of their conclusions and provides other good background material.

I think it's pretty clear that smoking isn't the greatest lifestyle choice to maximize longevity. Second-hand smoke (apparently also called "passive smoking") also has an adverse impact on health. We can all make our choices about smoking and, in today's anti-smoking world, spend most all of our time avoiding second-hand smoke if we choose to do so. Smoking is legal. Adults should be able to congregate in public places to smoke.

After spending a few hours of research on this subject, there is reason to be cautious in determining the magnitude of the health risk posed by second-hand smoke. But, to me, that's not really the whole issue. Owners of private property who operate an adult establishment should have the choice to allow smoking. A continuing escalation of smoking bans is an infringement on private property rights and personal liberty.

As an end note, the Marion County Health Department commissioned a report which was released in February 2002 on the economic impact of second-hand smoke in Marion County (Indianapolis). You can read the report here. It estimates that the health care costs due to second-hand smoke in 2000 were over $50M. I find it a bit amusing that in most economic studies, money being spent is equated to creating jobs and helping the economy. I guess there is a difference between good spending and bad spending.

Greed Is... Only Natural

Ever since the financial crisis exploded over a year ago, there has been plenty of rhetoric in the media decrying greed. Occasionally, you get a rabid capitalist taking the opposite position - reverently quoting Wall Street's Gordon Gekko... "Greed is good!"

Today, I read another article on the subject at naked capitalism. I had been planning on writing on this subject for some time. No time like the present...

What is greed? Wiktionary says: a selfish or excessive desire for more than is needed or deserved, especially of money, wealth, food, or other possessions. It's also one of the seven deadly sins. My basic philosophy of human action is that every decision - whether trivial or significant - is driven by a complex assessment which seeks to maximize the individual's self-interest. I also believe that self-interest is not the same as financial wealth. If I had to describe self-interest as anything, I'd describe is as happiness.

This philosophy of human action extends to the microeconomic theory of utility maximization. Generally utility is measured by money. For some, financial wealth is very important. Perhaps money cannot buy happiness, but money may be equated with happiness. I think of utility and self-interest as much more complex, perhaps "softer", concepts. Why else would one donate to a charity, smell the roses, or even love? These are rational actions which produce happiness.

The unending pursuit of happiness is only natural. So, is a "selfish or excessive desire for more than is needed" bad? There is no way to clearly define "excessive" or "more than is needed" - they are subjective terms. Thus, greed can only be attributed as wrong by one who feels that someone's actions exceed the reasonable pursuit of happiness. Perhaps greed is bad or sinful, but only under a system of morality which recognizes this as such.

The opposition voices to greed seek laws and regulations to control and/or punish greed. But, since greed is a moral issue, a matter of subjectivity, when is it appropriate to use government force? I suggest it is appropriate only when one's greed - the insatiable desire for excess - violates another's life or property.

I believe that humans are sinful. The pursuit of self-interest crosses the line when another is harmed. It is also usually kept in check by fear. This may be the fear of personal loss, but it may also be the fear of getting caught doing something illegal.

If greed is the biggest problem of capitalism, it is only because there is not enough risk associated with fear. I'd argue that this isn't capitalism; it's definitely not a free market. The government has removed this risk for some businesses and individuals which has allowed greed to take over. If you want to find blame for income inequality, high unemployment, and the financial crisis, don't blame greedy capitalists on Wall Street. Blame the government for systematically removing risk and misaligning incentives. Patchwork regulation, inconsistent enforcement, manipulated interest rates, perverse tax incentives, ... all these things serve to distort the greed/fear balance and let ugly human nature wreak havoc.

Money and Credit

This is a big subject. I've been meaning to post on this subject for some time now, but as I expand my research, it keeps getting bigger and bigger... So, I'll probably address this subject over a series of posts. I want to introduce the key themes here and provide some sources for readers to explore independently.

An any given economy there must be a means to facilitate the exchange of goods and services. Ancient systems were based on barter. This evolved to involve the concept of money where something was accepted as a commonly used medium to enable exchange. Commodity money is the most basic concept of money. Items which have an inherent value as a commodity (such as beads, stones, or gold) would serve a dual-purpose as money. Over the course of a few nuanced evolutions (largely driven by banks), we ultimately arrived at the concept of government-issued fiat money.

The general and basic understanding of monetary history speaks of government-issued commodity money whereby the state would issue currency which was "backed" by a commodity - usually gold and/or silver. One such example is the gold standard. The state would issue currency which would be redeemable on demand in gold. The state (via a central bank) would hold reserves of gold to ensure redemption could be executed.

(It should be noted that private banks have also issued private currency called banknotes. These banknotes may or may not be legal tender - something that has the force of law for resolving debts. While these concepts are important for a thorough understand of monetary history, they are not terribly relevant in this particular discussion.)

In a fiat currency system, the state issues currency which is backed by a variety of assets. Most currencies today are reserved with a combination of gold, foreign currencies, and government issued securities. Up until our recent financial crisis, the dollar has been backed largely by U.S. treasuries. The Federal Reserve issues Federal Reserve Notes (prints money) to acquire assets such as U.S. treasuries (government debt). The money goes into general circulation. Ultimately, the money is collected by the government via taxes and then remitted to the Federal Reserve to pay off the government debt. This ends the cycle.

To a large degree, most classical and modern macroeconomic and monetary theory is based on this view of currency. It is augmented by the phenomenon of fractional-reserve banking where banks expand the money supply (volume of currency/money in circulation) via lending. The traditional example is that the bank has $10M in deposits and can then loan out $9M under a reserve requirement of 10%. The $9M makes it way to another bank who can then lend $8.1M. This continues ad infinitum "creating" new money all the way along.

Unfortunately, these basic concepts upon which most economic theory and policy is based is wrong. Banks don't operate this way. The system is not this simple.

If you want to read a lot more detail, please read the following article. I'll attempt to explain the basic concepts in an upcoming entry.

"The Roving Cavaliers of Credit", by Steve Keen (my new favorite economist)

Loose Ends... Vol. LXIV

This is the sort of macroeconomic "theory" that burns me up... more from Paul Krugman:

... let's use the Taylor Rule estimated by Glenn Rudebusch at the San Francisco Fed... This rule describes past Fed policy quite well.

Applied to current data, the rule says that the Fed funds rate should be - drum roll - minus 5.6 percent. You can’t do that, of course, so we’re very hard up against the zero lower bound. And if you think the Taylor rule was a good guide to policy in the past, the Fed shouldn’t start to raise rates until the rule starts, you know, yielding a positive number.

I don't doubt that such a rule has historically been a good predictor of the Fed funds rate. But should it? Is the economy really so simple that the proper cost of money can be decided by a simple linear equation involving the distorted government statistics of inflation and unemployment? Has the historical rate actually been correct? (No. No. And no.)

The ruling class of macroeconomists not only think that they can plan and control the economy - no, that's not enough. They use relatively simple mathematics to determine their policies which are supposedly smarter than the dynamic market forces of hundreds of millions of people.

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The Nobel Peace Prize for 2009 has been awarded to Barack Obama. You can read the press release here. Nominations had to be received by February 1 which means that Obama had been in office for no more than eleven days before his nomination. However, I did also read that "the Committee may on that occasion add further names to the list, after which the nomination process is closed."

Obama apparently won based on his efforts to change the reputation of the U.S. which festered in the international community under the Bush administration. It appears that it is his promises, not his actions, which cemented the victory. Meanwhile, Obama is mulling an increase in troops in Afghanistan, potentially seeking regime change therein, and has yet to place significant public pressure on Israel, India or Pakistan to sign on to the Nuclear Non-Proliferation Treaty.

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Congressmen Ron Paul (R-TX) and Alan Grayson (D-FL), two of the fiercest opponents of the financial status quo, have submitted a letter to Senator Chris Dodd (D-CT) who is Chairman of the Senate Committee on Banking, Housing, and Urban Affairs.

The letter asks Dodd to delay the confirmation of Ben Bernanke to continue in his capacity of Chairman of the Federal Reserve. This seems like a simple and poignant request. The economy has experienced a major crisis which is almost universally agreed to be triggered by the financial sector. The Federal Reserve has regulatory authority over the banking system. Its monetary policy authority is conducted with the goals of maximum employment, stable prices, and moderate long-term interest rates. Read their mission statement.

While Bernanke has received many rave reviews for saving the economy, he was also in charge prior to the crisis. Regardless of your opinion on what Bernanke has done since the collapse of Lehman, his record in leading the Fed in its self-declared mission is questionable. Further, his creative, yet secretive, and legally dubious actions since Lehman should be investigated before we declare him our savior.

The Petrodollar Hegemony

Gold had a great week this past week hitting its all-time high of $1062.70 in nominal U.S. dollars. While there are many factors to such a rise in prices, an article by Robert Fisk on October 6 in The Independent, a U.K. newspaper, helped spur some of the action.

The article, entitled "The Demise of the Dollar", has set off something of a firestorm in the financial and political blogosphere. The article suggests that a secret agreement has been reached between key nations to end the pricing of oil in U.S. dollars which would subsequently end its dominance as the world's reserve currency. Is this a true signal of the dollar's collapse? Is hyperinflation around the corner? Or is this just overblown rhetoric and meaningless scaremongering? In order to answer these questions, we have to get a basic understanding of the world's currency markets.

All modern major currencies are fiat currencies and no longer exist on a commodity standard such as gold. Since the currencies cannot be converted into a commodity which has inherent value, the value of the currency is determined by the dynamics of supply and demand. These dynamics play out in the foreign exchange markets (forex) which set the prevailing rates of exchange between international currencies. The forex market accounts for between $3-4 trillion (yes, with a "t") of trading per day! It is the largest of the financial markets - bigger than stocks, bonds, commodities, or any other such market. Currencies are traded twenty-four hours a day for five days of the week. Banks and other financial institutions, multinational corporations, hedge funds and central banks are the biggest players; although, individual investors and many others also play the market.

To understand the value of a currency, one must break down the factors which contribute to the supply and demand for that currency. A currency is demanded when it is required for payment of goods and services or desired as a store of value. In the domestic economy, the fiat currency has its value since the government establishes it as required for payment of taxes. This gives the currency much of its inherent value. Consider a multinational corporation. It must pay its employees in a variety of currencies and may incur other expenses in multiple currencies as well. Similarly, revenues are collected in various currencies as customers generally pay in their local currency. Such corporations establish bank accounts in multiple currencies and execute currency exchange transactions to manage the differences in how their revenues and expenses are denominated. They also trade currencies to mange risks associated with changes in exchange rates.

Banks will also engage in currency trades for similar reasons as the multinational corporations. Banks also engage in transactions with central banks which adds an additional element to the supply and demand dynamics. Central banks issue currency and maintain reserves held against the issuance. Many central banks hold reserves of foreign currencies as assets which "back" the issuance of new currency which is considered a liability. This is a process which deserves its own article, but, needless to say, the actions of central banks and their relationships with commercial banks have an impact on the demand for various currencies.

These are some of the most important factors which impact the demand for a particular currency in the forex market. The supply of a currency is also variable. It would seem that the total circulation of the currency as issued by the central bank would be the most important factor in the supply of a currency. This is not entirely true for a few reasons. First, money supply measures do not fully capture credit money (money "created" by banks) and the potential expansion thereof. Second, and related to the first, leverage is widely used in the forex market. In other words, traders will take on debt to enter the forex market. Third, the supply of a currency in the forex market is dependent on the desire of the trader to not hold on to that particular currency. The currency of a completely insulated national economy with no international trade would have very little (if any) supply in the forex market regardless of the total supply of such a currency.

With this background, we can turn to the oil market. Since the 1970s oil has been (for the most part) priced and sold in U.S. dollars. Oil producing countries seeking to sell oil around the world have demanded U.S. dollars as payment for oil. This, along with other factors, has helped establish the U.S. dollar as the primary reserve currency of the world. Everyone needs oil. Thus, everyone needs dollars. This implicitly creates a demand for U.S. dollars as those who buy oil need to exchange their currency to complete their transactions. This also places dollars in the hands of oil producing countries who can either hold them (as reserves), invest them (by purchasing dollar-denominated assets such as U.S. treasuries or stocks), or exchange them for other currencies.

The term used to describe the dollars earned by these oil producing countries is a petrodollar. When these nations invest their petrodollars in other assets, it is referred to as petrodollar recycling. This recycling process leads to investment. The investment is arguably very favorable to the United States. Since countries such as Saudi Arabia, Kuwait, and Qatar amass large amounts of petrodollars, it enables easy recycling towards U.S. stocks and bonds. If oil were priced in euros or some other currency (or possibly even a new currency), these nations would now hold something other than dollars.

A key question is how such a change would change the behavior of the oil rich nations. If they earned an increasing amount of petroeuros (for the sake of argument), they could either hold them as reserves or recycle them. Holding them as reserves would link the value of their currency more closely to the euro. Recycling would imply either increased investment in euro-denominated assets or utilizing the forex market to sway euros for, say, dollars. It seems clear that if the oil producing nations prefer to hold and/or invest dollars, they would prefer to demand dollars for oil rather than accepting euros only to swap them later for dollars.

According to the Fisk article, China, Russia, Japan and France are involved in the discussions with the oil producing Arab nations to end the petrodollar hegemony. If this is the case, then it implies that these nations would prefer to avoid having to hold as many dollars as they do today. These countries acquire their dollars today via trading relationships, existing currency reserves, and the forex market. Their desire to move away from dollars would indicate an expected decrease in trade with the U.S., a desire to maintain or reduce their dollar reserves, and/or seeking to avoid the forex market. The last one is an unlikely reason since this would imply an expected increase in the value of the dollar.

However, the status of the U.S. dollar as the world's primary reserve currency is due to more than dollar-denominated oil. The U.S. is by far the largest consumer economy and importer of international goods and services. Other economies depend on a health U.S. consumer and, as a result, need the U.S. dollar. The U.S. has also been the leader in technology and other economic expansion which attracts foreign investment; this too creates demand for the dollar. Finally, political stability and military dominance solidifies the dollar as a safe investment. All these factors, in addition to the petrodollar hegemony, ensure U.S. dominance.

Will these things come to an end? Not anytime soon... but, the tide may be well be shifting. An end to the petrodollar hegemony may be an important step towards the end of the U.S. dollar hegemony and, ultimately, the end of U.S. political and military dominance.

For additional reading, see here and here.

Loose Ends... Vol. LXIII

Now that I have my health care posts behind me, I'll try to get to a more regular schedule. I don't have much interesting to say tonight. We'll keep an eye on Iran, Afghanistan, health care, and everything else this week.

Nicole and I officially took the plunge and joined the Libertarian Party today. We have been both skeptical and critical in the past, but we are hopeful that the Indiana chapter is committed to pragmatism.

Practical Ideas for Health Care

In my last post, I outlined my thoughts on a more ideal health care system. I recognize that these thoughts describe a system which is much different than what we have today. Justified criticism is often directed towards such ideas for being too ideological, theoretical, or impractical. So, I'd like to close my series on health care (for now) with some ideas which may be more practical. I do recognize that some of these ideas may be politically untenable at this time and also concede that true health care reform requires hours and hours of research beyond what I'm able to provide. Here is my six-point plan for reform.

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1. Authorize and Promote the Establishment of Health Care Subscription Programs

As noted in my thoughts on a more ideal health care system, the idea of a health and wellness subscription service seems like a great idea. Such a service may not be technically illegal today (I have not researched this), but the regulatory system and network of insurance providers are not aligned with such a model. This is not fundamentally different than prepaid health care which is a more accurate description of today's health "insurance" products. I would allow Medicare, Medicaid, and Medicare Advantage plans to use federal dollars towards such programs if the patient chooses to do so.

2. Provide Significant Tax Incentives for Private and Corporate Donations to Non-Profit Health Care Providers

Medicare and Medicaid face significant funding issues in the near future. Our federal budget problems are well known. I think it's important to put more choice in the hands of the taxpayer. As part of a larger plan to create a more democratic and free market system of taxation, I would implement a revolutionary tax credit for health care funding. Individuals and corporations would be eligible for a 50% tax credit for every dollar donated to an authorized, non-profit health care provider. This would include free clinics, non-profit hospitals, medical research centers, universities, and more. I would expect billions of dollars to flow into such institutions. The government would use this flow of funds to offset Medicare and Medicaid spending with the ultimate plan of eliminating the need for direct government aid to these programs.

3. Reduce the Patent Life for New Drugs and Streamline the FDA

Pharmaceutical companies have made major advancements to develop drugs which help patients all over the world with all sorts of ailments. They've made a lot of money doing so which provides the incentives to hire the best chemists and invest in research and development. But, I believe that we must level the playing field a little more. Patents support monopolistic practices and the FDA helps establish a de facto cartel in the drug industry. Both of these lead to higher medical costs. We need a quicker time to market for generics. We also need the FDA to increase competition by encouraging and regulating the expansion of natural medicine. If this requires the establishment of an independent agency to compete with the FDA, then so be it.

4. Implement Tort Reform

Defensive medicine clearly adds cost to the system. The expansion of more inexpensive care via free clinics and other non-traditional health and wellness services may only serve to encourage malpractice suits. This needs to be cut off before it constrains such expansion.

5. Allow Interstate Competition for Health Insurance and Implement Health Exchanges

Insurance products are regulated at the state level which has led to inconsistent rules and low levels of competition. Using the federal power to regulate interstate commerce, we should allow insurance to be sold across state lines with consistent regulation. This is not enough. The current plan to establish a health insurance exchange (with or without the public option) is a good one; however, I have a different twist on it. We have seen the Internet provide great tools to help consumers find what they are looking for. We should provide ten large grants to prospective health exchange providers set up as quasi-government corporations. After a term, they will be spun off as private corporations. As an example, imagine if Google provided a search service to find the best customized health program that meets your needs. The health exchange should help consumers find both traditional health insurance (today's prepaid health care) and local health subscription services as described above.

6. Phase Out the Health Maintenance Organization Act of 1973

The HMO Act of 1973 mandated that employers of 25 or more employees must offer health benefits to an approved HMO. This solidified the link between employment and health care coverage. This should be repealed in a responsible manner so that individuals seek their own health care coverage via the aforementioned exchanges. This could start with applying income taxes towards employer-provided health care benefits while providing a tax deduction for costs incurred by purchasing individual plans. Employers would not be allowed to rescind existing health care benefits without a certain percentage of employees opting out, a two-year notice period, and payout incentive to those who have not transitioned by the end of the two-year period.

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I'm sure there are other good ideas which would fit in this framework which is intended to support the evolution of today's health care system to one which I feel would be more effective. Having watched the Senate Finance Committee debate the Baucus plan, I appreciate the complexity involved in drafting reform legislation. I hope you have found this basic set of ideas to be interesting and practical.