Hoover Digest, 2013, No. 2, Spring

RESEARCH AND OPINION
ON PUBLIC POLICY
2013 NO. 2 SPRING
THE HOOVER INSTITUTION STANFORD UNIVERSITY
RESEARCH AND OPINION

O N P U B L I C P O L I C Y
2013 NO.2 SPRING
T H E H O OV E R I N S T I T U T I O N
S TA N F O R D U N I V E R S I T Y
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On the Cover
Sun-drenched Andros, second-largest of
the Cyclades islands, is well-watered and
green, a rarity in its arid neighborhood.
The rivers that cross this Greek island,
shown in a 1949 travel poster, drew
settlers thousands of years ago and today
water terraces and valleys full of figs,
olives, mulberries, apples, and almonds.
Like other Greek islands, Andros looks
to the sea, where many of its people have
decided to seek their fortunes. One of
them landedand was almost wrecked
in Hollywood. See story, page 184.

.
.
visit the
HOOVER INSTITUTION
online at
www.hoover.org
Contents
HOOVER DIGEST 2013 NO. 2 S P R I N G
TA X E S
9
The Bills Come Due

A tax-season reminder: whos paying for big government? Inevitably,
the middle class. By .
12
Soaked
Taxes are already much higher than most people realize. By
. and . .
16
Focus on the Factions

Tax policy wont settle down, and wont be fairuntil its purged of
politics. By . .
24
Taxing the Poor

When making more money means losing government benefits, people are taxed into remaining poor. By .
TH E ECONO MY
27
Patching the Debt Ceiling

Whats rarer than a trillion-dollar coin? A budget that Congress will
actually obey. By . .
36
And the Cliffs Keep Coming

Any fiscal deal must be built upon tax reform and spending cuts.
By . .
Hoover Digest 2013 No. 2
41
Crash? What Crash?

Just over six decades ago, an abrupt cut in government spending was
supposed to destroy the economybut didnt. What we can learn
from the cuts and the economic boom that followed World War II.
By . .
47
Suddenly, Sandy
Why even smart people underinvest in disaster preparedness. By
.
R E G ULA T I ON
51
Unwieldy and Unwise

The romance of enlightened government? The tale may begin
with good intentions and high expectations, but it rarely ends well.
By . .
55
Misplaced Trust
Governments and markets both sometimes fail, but only governments gamble with our lives. By .
H E A LT H CA RE
60
ObamaCares Unhealthy Assumptions

Four ways in which its original promises have proven to be fantasies.
By . .
64
The Free-Market Cure

Americans are still unhappy with ObamaCares promise of
fewer choices and higher bills. Our leaders must take notice.
By . .
TH E CONSTITUTION
67
Are You Smarter than the Constitution?

The founders knew what they were doing. By . .
73
A More Powerful Message

To advocate for a better world, conservatives would do well to acknowledge the world as it is. By .
77
Now Go Deep
Politics is only topsoil. The enduring values of conservatism are the
roots. By .
TH E M I DDL E EAST
80
Mission Never Quite Accomplished

As America prepares to depart Afghanistan, the Taliban prepares to
return. By .
84
What Ever Happened to Bahrain?

The Arab spring never arrived there, and Washington chose not to
care. By .
I N T E LLIGENC E
90
The Threat Multipliers

Why are we so bad at predicting the next hot spot or bad guy? Because
we fail to study the conditions that create them. By . .
95
Private Spies
Even theme parks and hotel chains have their own intelligence services now. Theyre hunting familiar quarry: valuable data in an uncertain world. By . .
FO R E I G N P O LIC Y
100
Keeping the Peace

If international order must be rebuiltagainthen let us use the
proper tool: realism, not idealism. By .
103
The Road to Rogue

Pariah states tend to eventually settle down and behave, but in the
meantime they have a chilling effect on diplomacy and peace. By
. .
I M MI G R A T ION
113
The Immigration Imperative

Immigrants are unlikely to be complacent about the freedom and
opportunity that for them were once only a dream. By
and .
ED U CA TION
124
A Bar Exam for Teachers?

In theory, its a promising idea. But in practice . . .
. .
By
CA L I F O RNIA
128
California, Here I Stay

If not the Promised Land, its still a land of promiseone where
statism may finally be meeting its match. By .
I N T E R VIE W
136
Scalia on Scalia
Supreme Court Justice on the follies of the Living Constitution and legislative intent. talks with
perhaps the most fascinatingand scathingjurist in the nation.
VA L U E S
146
The Drug War and the Damage Done

Some wars cant be won. By . and . .
H I S T O R Y AND CUL TURE

153
Turning Points
Communism may have ended, but history hasnt. The great story of
empires, revolutions, and human strivings continues to unfold. By
.
161
The Present-Minded Professor

The president of the United States recognizes Hoover senior fellow
. for his scientific achievements and for working toward a more secure world. By .
I N M EM O R IA M: P ETER J. DUIGNAN
165
Our Man in Africa

The late Hoover fellow . : an honest and faithful
chronicler of the continent he loved. By .
H O O V E R A RC HIVES
170
Taiwans Tragedy
New light on how American diplomats struggled to steer Taiwan
away from crisis in 1947. By - .
184
On the Cover
T AX E S
The Bills Come Due

A tax-season reminder: whos paying for big government? Inevitably,
the middle class. By Edward Paul Lazear.
The president made inequality an important part of his campaign rhetoric. Raising taxes on the rich is at the heart of his economic plan.
Although it is hardly clear how this would reduce unemployment or get
the economy growing again at a respectable rate, the president argues that
raising taxes on the rich will help to address income inequality and lessen
our fiscal problems.
Our fiscal problems are not an act of nature. In part they are a result
of a recession that hit government receipts hard, but an even larger role
is played by the increased spending that was an explicit policy decision of
the administration and its allies in Congress. Because our tax structure is
progressive, the cost of the added spending has and will continue to be
borne to a significant extent by the wealthy.
But it is not merely the rich who bear the burden. A large chunk of the
increased spending that has occurred during the past three years must be
financed by the middle class.
There has been a large increase in government spending since the president has taken office. Relative to a baseline year of 2008, the increase from
200911 has amounted to about $1.6 trillion, and subsequent spending
will add significantly to that total. Some of this spending is desirable,
EDWARD PAUL LAZEAR is the Morris Arnold and Nona Jean Cox Senior Fellow at the Hoover Institution and the Jack Steele Parker Professor of Human
Resources Management and Economics at Stanford Universitys Graduate School
of Business.
10
Illustration by Taylor Jones for the Hoover Digest.
helping those who are most unfortunate deal with the pain of the recession and the failing recovery that has followed.
But there is no denying that someone must foot the bill for much larger
government.
The roughly $1.6 trillion increase in overall spending for 200911 as
compared with 2008 must be financed through either current taxes or
borrowing, which translates into future taxes. According to Congressional
Budget Office data, the top 5 percent of household earners pay almost 40
percent of all federal taxes, which means they will cover about $630 billion of the excess spending if tax proportions are unaltered.
The remaining $1 trillion must be covered by the bottom 95 percent of earners, who have household incomes below $134,000, based on the latest CBO
figures. In fact, about 44 percent of the cost of the additional Obama spending
falls on those with annual household incomes that are between $35,000 and
$100,000. Their share of the excess from 200911 alone amounts to about
$700 billion, or $4,500 per American in this middle-class group.
Given the deficits projected for all coming years, raising taxes on the rich
will do little to slow the rapid increase in our debt burden. The fact remains
that the middle class will pay for a large chunk of the costs of bigger government past and future, even with higher taxes on the upper-income group.
No doubt some of the spending has softened the blow of the recession for some Americans. But increased spending has done nothing to
reduce basic earnings inequality. In April 2012, the Department of Labor
reported that between 2009 and 2012, earnings among the top 10 percent
grew at 7 percent, while those in the bottom 10 percent grew at only 2.5
percent. Struggling Americans will not be better off until the economy
recovers.
The policies of the past few years have done little to help solve the fundamental problems, but their cost to the middle class has been and will
continue to be substantial. Middle-class people will be required to pay for
the majority of the spending growth at a time when their economic condition has worsened.
Reprinted by permission of the Orlando Sentinel. 2013 Orlando Sentinel. All rights reserved.
11
T AXES
Soaked
Taxes are already much higher than most people realize. By Edward
C. Prescott and Lee E. Ohanian.
President Obama argued that his re-election gave him a mandate to raise
taxes on high earners. But tax rates are already highmuch higher than
is commonly understoodand increasing them will probably further
depress the economy, especially by affecting the number of hours Americans work.
Taking into account all taxes on earnings and consumer spending
including federal, state, and local income taxes, Social Security and Medicare payroll taxes, excise taxes, and state and local sales taxesEdward
Prescott has shown (especially in the Quarterly Review of the Federal
Reserve Bank of Minneapolis, 2004) that the U.S. average marginal effective tax rate is around 40 percent. This means that if the average worker
earns $100 from additional output, he will be able to consume only an
additional $60.
Research by others (including Lee Ohanian, Andrea Raffo, and Richard Rogerson in the Journal of Monetary Economics, 2008, and Edward
Prescott in the American Economic Review, 2002) indicates that raising
tax rates further will significantly reduce U.S. economic activity and by
implication will increase tax revenues only a little.
EDWARD C. PRESCOTT directs the Center for the Advanced Study in Economic Efficiency at Arizona State University and was the co-winner of the Nobel Memorial
Prize in Economic Sciences in 2004. LEE E. OHANIAN, a senior fellow at the Hoover
Institution, is a professor of economics and director of the Robert Ettinger Family
Program in Macroeconomic Research at the University of California, Los Angeles.
12
High tax rateson both labor income and consumptionreduce the

incentive to work by making consumption more expensive relative to
leisure, for example. The incentive to produce goods for the market is
particularly depressed when tax revenue is returned to households either
as government transfers or transfers-in-kindsuch as public schooling,
police and fire protection, food stamps, and health carethat substitute
for private consumption.
Taking into account all taxes on earnings and consumer spending, the
marginal effective tax rate is around 40 percent.
In the 1950s, when European tax rates were low, many Western Europeans, including the French and the Germans, worked more hours per
capita than did Americans. Over time, tax rates that affect earnings and
consumption rose substantially in much of Western Europe. Over the
decades, these have accounted for much of the nearly 30 percent decline
in work hours in several European countriesto 1,000 hours per adult
per year today from around 1,400 in the 1950s.
Changes in tax rates are also important in accounting for the increase
in the number of hours worked in the Netherlands in the late 1980s, after
the enactment of lower marginal income-tax rates.
In Japan, the tax rate on earnings and consumption is about the same as
it is in the United States, and the average Japanese worker in 2007 (the last
nonrecession year) worked 1,363 hoursor about the same as the 1,336
worked by the average American.
All this has major implications for the United States. Consider California, which recently enacted higher rates of income and sales tax. The top
California income-tax rate will be 13.3 percent, and the top sales-tax rate
in some areas may rise as high as 10 percent. Combine these state taxes
with a top combined federal rate of 44 percent, plus federal excise taxes,
and the combined marginal tax rate for the highest California earners is
likely to be around 60 percentas high as in France, Germany, and Italy.
Higher labor-income and consumption taxes also have consequences
for entrepreneurship and risk-taking. A key factor driving U.S. economic
growth has been the remarkable impact of entrepreneurs such as Bill Gates
13
of Microsoft, Steve Jobs of Apple, Fred Smith of FedEx, and others who
took substantial risk to implement new ideas, directly and indirectly creating new economic sectors and millions of new jobs.
Entrepreneurship is much lower in Europe, suggesting that high tax
rates and poorly designed regulation discourage new business creation.
The Economist reports that between 1976 and 2007 only one continental
European startup, Norways Renewable Energy Corporation, achieved a
level of success comparable to that of Microsoft, Apple, and other U.S.
giants, making the Financial Times Index of the worlds five hundred largest companies.
U.S. growth is currently weak, and overall output is 13.5 percent lower
than what it would have been had we continued on the pre-2008 trend.
The economy now faces two serious risks: the risk of higher marginal
tax rates that will depress the number of hours of work, and the risk of
continuing policies such as Dodd-Frank, bailouts, and subsidies to specific industries and technologies that depress productivity growth by protecting inefficient producers and restricting the flow of resources to the
most productive users.
The combined marginal tax rate for the highest California earners is
around 60 percentas high as in France, Germany, and Italy.
If these two risks are realized, the United States will face a much more
serious problem than a recession this year. It will face a permanent and
growing decline in relative living standards.
These risks loom as the level of U.S. economic activity gradually moves
closer to that of the 1930s, when for a decade during the Great Depression
output per working-age person declined by nearly 25 percent relative to
trend. Considering GDP growth, the U.S. economy is continuing to sink
relative to its historical trend.
We have lost more than three years of growth since 2007, and our
underachievement will continue unless pro-productivity policies are
adopted and marginal tax rates are stabilized or lowered to prevent a
decrease in work effort across the board. That means lifting crushing
regulatory burdens such as those imposed by Dodd-Frank, and it means
14
reforming immigration policies so that we can substantially increase our

base of entrepreneurs by attracting the best and brightest creators from
other countries.
Economic growth requires new ideas and new businesses, which in turn
require a large group of talented young workers willing to take on the
considerable risk of starting a business. This requires undoing the impediments that stand in the way of creating new economic activityand
increasing the after-tax returns to succeeding.
Reprinted by permission of the Wall Street Journal. 2013 Dow Jones & Co. All rights reserved.
New from the Hoover Press is Government Policies

and the Delayed Economic Recovery, edited by Lee E.
Ohanian, John B. Taylor, and Ian J. Wright. To order, call
800.935.2882 or visit www.hooverpress.org.
15
T AXES
Focus on the Factions

Tax policy wont settle down, and wont be fairuntil its purged of
politics. By Richard A. Epstein.
Recently I was asked what President Obamas re-election means for the
future of liberty in the United States. As a classical liberal, my outlook
is best captured in a simple proposition: a system of sound governance
needs to promote a mixture of individual liberty and private property to
allow individuals to maximize the gains from individual effort and social
cooperation.
A strong government that can protect these rights must, of course,
backstop the market system by collecting tax revenues that are spent on
the public goods that markets cannot easily or efficiently supply, such
as defense and social infrastructure. The use of state power always opens
up the path for general abuse because large doses of government discretion allow all political forces to secure factional gains that result in overall
social losses. The central challenge for government is to incur minimum
political distortions while allowing taxes to raise the revenues needed to
discharge essential government functions.
W H E R E T HE F ACTI O NS R O AM
There are two key ways to constrain the political risks of faction. The first
is to adopt only a single instrument of taxationmost likely an income
RICHARD A. EPSTEIN is the Peter and Kirsten Bedford Senior Fellow at the Hoover
Institution and a member of Hoovers John and Jean De Nault Task Force on Property Rights, Freedom, and Prosperity. He is the Laurence A. Tisch Professor of Law at
New York University Law School and a senior lecturer at the University of Chicago.
16
or consumption taxto reduce the risk of political intrigue. There is,

for example, no place under a sound system of taxation for special excise
taxes like the 2.3 percent tax imposed on medical devices to help fund
ObamaCare. The second is to make the system of taxes durable over
time, so that the form and incidence of the tax are not subject to constant
maneuvering. Our fiscal cliff arises because tax policy is revised every two
years, provoking political crises.
Without question, the form of taxation that best meets these dual
requirements is a flat tax on consumptiona position that enjoys virtually
no visible political support today. Virtually every key tax-policy initiative
today lurches in the opposite direction. The constant calls for higher levels
of progressivity; the short shelf life for key tax rates that must be renegotiated every year or two; and the constant playoff between interested parties
jockeying to shift wealth among income, death, and excise taxesthese
only magnify the political mischief. Unless something is done to alter the
direction of political discourse in the United States, the next four years
will be a replay of the past four years. We will witness a slow decline in the
standard of living across all groups within the United States. Tax policy is
a key piece in that overall mosaic.
A whopping tax increase on dividend income would surely retard the
mobility of capital.
The president obsesses about the increases in income inequality,

which for him clinch the case for higher tax rates for privileged individuals and couples. The president thinks revenue growth from taxes can be
reduced to a simple task of addition and multiplication. Start with the
current tax base, and multiply it by the increased tax rates to determine
the added tax revenues. That static thinking was also embraced in a New
York Times editorial:
The special low tax rates for investment income are among the largest tax
breaks in the code. They allowed investors to pocket some $100 billion
in 2012 alone compared with what those investors would have paid if
investment income were taxed the same as regular income.
17
18
Illustrations by Taylor Jones for the Hoover Digest.
What this editorial never asks is whether we would have had the same
amount of capital gains revenue if capital gains rates were higher. The
answer to that question is likely to be no. The lower rate of return will
make it more likely that individual investors will hold on to their stocks
for longer periods, which could reduce the total amount of gains in ways
that more than offset the tax increase.
The slowdown in the rate of capital turnover spells bad news to
the economy because it reduces the efficiency of capital markets by
making it more costly for investors to reallocate capital from weaker
to stronger ventures. Both the president and the New York Times have
supported a whopping tax increase on dividend incomefrom the
current 15 percent to 39.6 percentwhich would surely retard the
mobility of capital.
W H Y A F L AT CO NSU MPTI O N TAX ?

A sound tax system has as few moving parts as possible. We should scrap
the current system in favor of a flat tax on consumption.
Radically simplifying the tax system to a flat tax on consumption
would facilitate two desirable economic changes. First, it would reduce
taxes to zero when capital is redeployed from one venture to another, which in turn would induce better investor monitoring of current
firms. The ability of investors to sell out without adverse tax consequences thus provides an added incentive for efficient market behavior.
Second, it would eliminate the need to draw any distinction between
ordinary income and capital gains, which is one of the weak points of
the current system.
The stability of social institutions was a great theme of such classical
writers as David Hume and Adam Smith. It should not be forgotten.
It is, of course, difficult to work an immediate transition from an

income tax to a consumption tax. But they are possible to exempt all
capital gains from taxation to the extent that they are reinvested in
other capital assets. Right now, that approach is in fact tax policy with
respect to an exchange of capital assets as part of a business reorganiza-
19
tion, such as a recapitalization or merger. It takes little ingenuity to use

the same system for any sale and reinvestment. Any short-term loss in
revenue is likely to be made up by the combination of higher wages,
higher dividends (at least if the tax is kept low), and higher capital asset
values, which would generate additional revenues when liquidated for
other uses.
One advantage of introducing the flat tax on consumption is that its
variation leaves the government the only degree of freedom that it needs
to make necessary budget adjustments. It is commonly thought that during economic slowdowns, the government should engage in deficit spending, just as ordinary individuals try to even their consumption patterns by
borrowing, while making up the gap by saving in good times. Any aggregate target can be achieved by just manipulating a single rate to achieve
the desired revenue goals. At this point, the deliberations in question will
become simpler, in sharp contrast to todays bitter, protracted, and expensive negotiations.
Rate stabilization will also lead to more reliable and rational decisions
in both capital and labor markets, by removing one gratuitous degree of
uncertainty from business risk. These indirect benefits are typically ignored
because they are so hard to measure directly. But they are ubiquitous, and
should prove substantial because they operate quietly and reliably in both
the long and the short run. The stability of social institutions was a great
theme of such classical writers as David Hume and Adam Smith, and
should not be forgotten.
Current tax policy puts items like income and deductions into political
play, generating deleterious short-term consequences. Evidence of this can
be seen in the rapid response of investors, who are anticipating future tax
hikes and scaling back on their investments. The adverse responses are not
confined to large firms but also extend to wealthy individuals who will
bear the brunt of any tax increase.
The proposed increase in the estate and gift taxes, targeted exclusively
at high-income taxpayers, has set off an immediate flurry of tax planning
efforts by well-to-do individuals to minimize the bite of these unknown
and unwelcome tax changes. Typical of the common hijinks are the estate
planning tactics recently reported in the Wall Street Journal by AnnaMaria
20
Andriotis, which should belie the naive belief that high-income taxpayers
dont respond to incentives.
It is not just that people go to extra lengths to alter their patterns of
giving to take full advantage of the lifetime exemption from the gift and
estate taxes and annual exclusions (now $13,000 per each donor/donee
pair); it is that they engage in the conscious destruction of wealth to
minimize the impact of taxes. Thus one common scheme involves the
transfer of a valuable asseta family vacation home, for exampleto a
limited liability company (LLC) where it is then owned by several family members. This decision to complicate the state of the title reduces
the marketability of the asset, and thus reduces the amount of tax that
it will attract at the death of the senior generation. The cold-blooded
21
calculation is that the tax savings for the family unit more than justifies
the losses in market value.
Yet what possible social reason is there to spend tax-deductible dollars
to reduce social wealth? Moving to a system of taxation that looks only
to consumption treats the transfer of wealth from one person to another
as a non-taxable event. The result is the better mobility of capital, lower
tax drag, and fewer wasteful tax-planning expenses. It would also generate
more income (or consumption) tax from more-productive firms.
CH OO S I N G T HE R I G H T PATH
This sensible push for tax simplification and tax reduction does not
look through the world with rose-colored glasses. Since the advent
of the income tax in 1913, tax rates have gyrated from high to low
and back again. As Stephen Moore has once again demonstrated in
the Wall Street Journal, the typical response to these tax reductions
is a spur in economic activity that results in the collection of larger
amounts of capital gains taxes from wealthy individuals, who also
prosper under the regime by their higher after-tax earnings. As Moore
points out, strong revenue surges followed the tax cuts under John F.
Kennedy, Ronald Reagan, and George W. Bush as investors responded
with higher levels of economic activities and more rapid turnover of
investments.
Too many people agree with the presidents supposition that taxation is a
zero-sum game, whereby the rest of the population gains amounts taken
from the rich. Not so.
What makes the situation more impressive is that these overall gains
were achieved in a less-than-ideal tax environment. Tax rates were still
progressive; multiple instruments of taxation were still in use; tax horizons
were short; and special gimmicks were the order of the day.
There is a desperate need to get this nations fiscal house in order. The
least desirable way to achieve that goal is to double down on the structural
defects of the current tax structure in the hopes that it will generate some
22
much-needed relief to the middle class. If we sock it to the rich, we run

the risk of impoverishing the nation.
Too many people agree with the presidents supposition that taxation is
a zero-sum game, whereby the rest of the population can gain amounts
taken from the rich through taxation. Not so. The explicit tax increases on
the rich will be passed on in a variety of ways to the population as a whole
so that everyone is made worse off in the name of income equality. John
F. Kennedy famously said that a rising tide raises all boats. A falling tide
will leave many of these same boats grounded.
Reprinted from Defining Ideas (www.hoover.org/publications/defining-ideas). 2013 by the Board of
Trustees of the Leland Stanford Junior University. All rights reserved.
Available from the Hoover Press is Free Markets Under

Siege: Cartels, Politics, and Social Welfare, by Richard
A. Epstein. To order, call 800.935.2882 or visit www.
hooverpress.org.
23
T AXES
Taxing the Poor

When making more money means losing government benefits, people
are taxed into remaining poor. By Thomas Sowell.
With all the talk about taxing the rich, we hear very little talk about taxing the poor. Yet the marginal tax rate on someone living in poverty can
sometimes be higher than the marginal tax rate on millionaires.
While it is true that nearly half the households in the country pay no
income tax at all, the apparently simple word tax has many complications
that can be a challenge for even professional economists to untangle.
If you define a tax as only those things that the government chooses to
call a tax, you get a radically different picture from what you get when you
say, If it looks like a tax, acts like a tax, and takes away your resources like
a tax, then its a tax.
One of the biggest, and oldest, taxes in this latter sense is inflation.
Governments have stolen their peoples resources this way not just for
centuries but for thousands of years.
Hyperinflation can take virtually your entire lifes savings, without the
government having to bother raising the official tax rate at all. The Weimar Republic in Germany in the 1920s had printing presses turning out
vast amounts of money, which the government could then spend on whatever it wanted to pay for.
Of course, prices skyrocketed with vastly more money in circulation.
Many peoples life savings would not buy a loaf of bread. For all practical
purposes, they had been robbed, big time.
THOMAS SOWELL is the Rose and Milton Friedman Senior Fellow on Public
Policy at the Hoover Institution.
24
A rising demagogue coined the phrase starving billionaires, because

even a billion marks was not enough to feed your family. That demagogue
was Adolf Hitler, and the publics loss of faith in their irresponsible government may well have contributed toward his Nazi movements growth.
Most inflation does not reach that level, but the government can quietly steal a lot of your wealth with much lower rates of inflation. For
example, a $100 bill at the end of the twentieth century would buy less
than a $20 bill would buy in 1960.
If you put $1,000 in your piggy bank in 1960 and took it out to spend
in 2000, you would discover that your money had, over time, lost 80
percent of its value.
Despite all the political rhetoric today about how nobodys taxes will be
raised except for the rich, inflation transfers a percentage of everybodys
wealth to a government that expands the money supply.
Moreover, inflation takes the same percentage from the poorest person
in the country as it does from the richest.
Thats not all. Income taxes only transfer money from your current
income to the government, but the government does not touch whatever
money you may have saved over the years. With inflation, the government
takes the same cut out of both.
No wonder the Fed uses words like quantitative easing instead of
saying its just printing more money.
It is bad enough when the poorest have to turn over the same share
of their assets to the government as the richest do, but it is grotesque
when the government puts a bigger bite on the poorest. This can happen
because the rich can more easily convert their assets from money into
things like real estate, gold, or other assets whose value rises with inflation.
But a welfare mother is unlikely to be able to buy real estate or gold. She
can put a few dollars aside in a jar somewhere. But wherever she may hide
it, inflation can steal value from it without having to lay a hand on it.
No wonder the Federal Reserve uses words like quantitative easing
instead of saying in plain English that it is essentially just printing
more money.
25
The biggest and most deadly tax rate on the poor comes from a loss
of various welfare state benefitsfood stamps, housing subsidies, and the
likeif their income goes up.
Hyperinflation can rob a lifes savings without anyone having to lay a
hand on the money.
Someone who is trying to climb out of poverty by working their way

up can easily reach a point where a $10,000 increase in pay can cost them
$15,000 in lost benefits that they no longer qualify for. That amounts to
a marginal tax rate of 150 percentfar more than millionaires pay. Some
government policies help some people at the expense of other people. But
some policies can hurt welfare recipients, the taxpayers, and others, all at
the same time, although in different ways.
Why? Because we are too easily impressed by lofty political rhetoric and
too little interested in the reality behind the words.
Reprinted by permission of Creators Syndicate (www.creators.com). 2012 Creators Syndicate Inc. All
rights reserved.
Available from the Hoover Press is Ever Wonder Why?

And Other Controversial Essays, by Thomas Sowell. To
order, call 800.935.2882 or visit www.hooverpress.org.
26
T H E E CO N O M Y
Patching the Debt

Ceiling
Whats rarer than a trillion-dollar coin? A budget that Congress will
actually obey. By John H. Cochrane.
The Fed and Treasury decided not to try the trillion-dollar coin idea to avoid
the debt limit, thus scotching one of last winters most entertaining ideas. But
the episode was very revealing about how our fiscal and monetary policies work
(or dont work, as the case may be). It also played up the numerous misconceptions floating around and leads to a thought on a better way to approach the
same objectives, which might be a useful compromise for both sides.
First, to be clear, let me clarify the playlist:
Debt: U.S. government bonds, issued by the Treasury. Promises to pay
for your health care are not debt, and if the government reneges on that
promise its not a default.
Cash: bills and coins.
Reserves: essentially checking accounts at the Federal Reserve. Banks
may freely obtain cash in return for reserves and vice versa. We often
say the Fed prints money when in fact what it does is create reserves.
In the first debt-limit debate, I was initially puzzled that it was a problem
at all. The debt limit does not include currency or reserves, though both are
JOHN H. COCHRANE is a senior fellow at the Hoover Institution and the AQR
Capital Management Distinguished Service Professor of Finance at the University
of Chicagos Booth School of Business.
27
Though the Fed can manufacture money costlessly, it legally can do so

only by buying assets.
The architects of our monetary system and debt limit werent so dumb
after all. Though we have a fiat money system, and, drawing a circle
around the whole government, it should be able just to print money and
give it to people (Social Security) or buy tanks and stuff with the printed
money, the debt limit does pretty well constrain the government budget.
To emphasize, this isnt about a fight between Treasury and Fed. They
can agree they want to print money to evade the debt limit. But they still
cant do it. Its a limit on what the government as a whole can do.
28
Illustrations by Taylor Jones for the Hoover Digest.
functionally U.S. government debt. That seems like an unfortunate oversight: why cant the government just pay its bills by printing money, i.e.,
creating reserves? Sure, you might worry about inflation sooner or later, but
this is a legal question. The government can print money to pay its bills, no?
Well, no, which is really interesting.
For the Fed to print money, meaning to create reserves, it has to buy
some other asset. Though the Fed can manufacture money costlessly, it
legally can do so only by buying assets. The Fed cannot engage in fiscal
policy, and printing up checks and sending them to taxpayersor even
dropping cash from helicoptersis fiscal, not monetary policy.
And the debt limit applies to all federal debt outstanding, including
debt held by the Fed. So, as long as the Fed buys only Treasury bills, the
debt limit does, in fact, stop the government as a whole from printing
money (creating reserves) to pay bills. To do so, the Treasury has to issue
debt, borrowing the money, pay its bills, and then get the Fed to buy the
debt, so that in the end there is more money outstanding. A debt limit
stops this operation.
But the Treasury has the actual printing presses that make good oldfashioned cash. Why cant the Treasury just print up money and use it to
pay bills? (Or deposit the cash at the Fed, thereby get reserves, and transfer
the reserves by writing checks?) No, thats illegal too. The Treasury prints
the bills, but they can only be issued by the Fed, and in return for alreadycreated reserves.
S O L UT I O N S TO O CLE V E R B Y H ALF
So our army of clever lawyers and policy wonks is hard at work finding
loopholes, either ways to create debt that doesnt count as debt, or ways
to print money to pay bills anyway.
Heres where the trillion-dollar coin idea came up. Apparently,
though the Treasury is not allowed to print money or regular coins and
pay bills with them, it can issue commemorative coins and sell them
directly. So, most simply, it could in principle pay for a trillion dollars
of deficit by minting a trillion dollars worth of commemorative coins.
(Coins are just metallic dollar bills; they dont have a metallic value
equal to face value.)
29
Thats not very practical. But as a little favor to the platinum lobby,
there is no limit to the denomination of platinum coins the Treasury can
issue. So, the idea was this: make a trillion-dollar coin out of platinum.
Deposit the coin at the Fed, just as the Treasury now deposits cash. The
Fed creates a trillion dollars worth of reserves in the Treasurys checking
account, and the Treasury can merrily write checks.
If the Fed goes along and sells its roughly $1 trillion in Treasury
securities, it can soak up that new cash, putting debt in private hands.
For the first trillion, the government isnt even printing money, it is
exactly as if the Treasury borrowed a trillion dollars by issuing a trillion
in new debt.
James Pethokoukis at the American Enterprise Institute covered a few
more clever ideas, including a variety of IOUs. There are various ways
the federal government could essentially send tradeable IOUs in place
of checks, as California did, avoiding its balanced-budget rules and the
prohibition on states issuing currency. Cash is, in the end, no more or less
than a tradeable IOU of the U.S. government.
A less obvious and more realistic option strikes me as important.
I assumed above that the Fed buys only Treasury bills when it creates
reserves out of thin air. But thats no longer true. During the financial crisis, the Fed bought commercial paper, and lent directly to various financial institutions. (It called such a loan an asset on its balance sheet, so it
seems as if the Fed is buying something of value.) Now it is buying and
holding mortgage-backed securities.
This is fiscal policy. When the Fed lends directly or buys assets other
than Treasuries, the total of debt and money increases. The traditional
restriction that the Fed should buy only Treasuries separates it from
fiscal policy.
D AN C IN G W IT H D E FAU LT
One of the silliest, constantly repeated arguments is that running into
the debt limit will force the United States to default on its debts and
cause a global financial disaster. (This goes right up there with Greek
default will force it off the euro in the fallacies-casually-repeated-asfacts department.)
30
31
Recently I listened as Scott Simons soothing voice introduced an NPR

article on the trillion-dollar coin with this statement:
(I)t will certainly be no laughing matter if the U.S. Congress refuses to
raise the borrowing limit and the U.S. government defaults on its debt.
No, Scott (and NPR writers). If a $100 bond comes due, the Treasury
can sell a new $100 bond to pay off the principal without increasing the
total amount of debt. And theres still $2.5 trillion of tax revenue coming
in. Thats plenty to cover interest payments. If anything, the law is pretty
clear that interest payments on the debt are the last thing the government
can stop paying, not the first.
In place of a single debt ceiling, periodically raised by a few trillion after
a big fight, why not a ceiling path?
This is simply a red herring. Social Security checks might stop, farm
price support payments might stop, they might have to send the TSA
home from airports. All this might cause a lot of hardship, but there is
nothing forcing the government to default. Default would be a choice.
Perhaps NPR can be forgiven for passing along this trope. But whats
Paul Krugman doing with this obvious piece of misinformation? Writing
in the New York Times, which is supposed to be fact-checked:
Finally, just consider the vileness of that GOP threat. If we were to hit the
debt ceiling, the U.S. government would end up defaulting on many of
its obligations. This would have disastrous effects on financial markets,
the economy, and our standing in the world.
Parse that carefully for Clintonian veracity. Defaulting on its obligations could mean not paying promised farm price supports, or delaying
payments (as the state of Illinois does) to vendors, not actual default on federal debt. So its just a nanometer this side of factually incorrect. But youd
have to be very knowledgeable to infer from disastrous effects on financial
markets that Krugman is not talking about actual default (a term meaning
not paying back bonds) but about a more metaphorical sort of default
(meaning breaking an implicit promise).
32
In his blog, hes less circumspect:

By contrast, nobody really knows what happens if America defaults, even
briefly. The whole structure of world financial markets is built around the
use of Treasury bills as the ultimate safe asset; what happens if they lose
that status? It would certainly be an interesting experiment, but one best
carried out if you have plenty of bottled water and spare ammunition in
your basement.
I agree on the consequences of default. But, as much as Krugman dislikes Republicans and the debt ceiling, passing on the canard that hitting
the ceiling implies a default on Treasury debt is misleading, no matter
how useful it would be to the give-in-and-spend side of the debate if those
obstructionist Republicans were to believe it.
Even the White House gets into the act, saying in an official statement:
There are only two options to deal with the debt limit: Congress can pay
its bills or it can fail to act and put the nation into default. When congressional Republicans played politics with this issue last time, putting us at
the edge of default, it was a blow to our economic recovery, causing our
nations credit rating to be downgraded. The president and the American
people wont tolerate congressional Republicans holding the American
economy hostage again simply so they can force disastrous cuts to Medicare and other programs the middle class depends on while protecting the
wealthy. Congress needs to do its job. [emphasis added]
The architects of our monetary system and debt limit werent so dumb
after all.
I should say more about the long-run chance of U.S. default. Faced
with really disastrous spending cutsand a trillion per year is more than
just farm price supports and windmill subsidiesand not being able to
print money, our government might in fact be tempted to default. Not
in a big way, but in the usual government muddle. It could delay interest payments, for example, or force exchange of maturing debt for new
longer-term debt. In this case Krugman is right: such shenanigans would
33
seriously affect the stature of U.S. debt in financial markets, which tolerate inflation but do not tolerate explicit default.
Moreover, lets think about what happens when the debt limit is
imposed not by congressional action but by bond markets refusing to
lend anymore. I had always thought this would mean monetization and
inflation. But the chance that it could mean default, truly Greek-style, is
raised, at least up from zero, by strict limits on monetization.
Faced with really disastrous spending cuts, the government could
delay interest payments or force exchange of maturing debt for new,
longer-term debt.
These are far-off, low-probability scenarios. Still, the possibility of

explicit defaultnot now, not next year, but once things get really bad
is not as remote as I once thought.
Which, by the way, is not necessarily a bad thing. Governments that
really cannot monetize their debts but must repay them or face the horrible costs of default tend to figure out how to balance their budgets, and
they get better interest rates.
A B E T T E R C EI LI NG ?
These occasional battles over the debt ceiling are obviously not an ideal
way to run fiscal policy. But they do have an important function in the
political battle to limit spending.
Such devices are important. Though we hear repeated over and over
that the debt limit just finances the same spending that Congress passes,
any household knows that a budget is a good idea. When one spouse
wants to go get another six-pack, the other one may be able to point to a
budget and enforce spending priorities.
And for Congress, too, a budget would be a useful and better way to
limit spending. Lay out both taxing and spending, preferably over a number of years, and then stick to it. The budget then takes on the force of
an overall constraint; Congress can say to a worthy petitioner, We would
34
love to help, but if we give it to you we have to take it from someone else;
the budget wont let us do it.
However, the law requiring Congress to pass a budget seems not to
have the same force as this set of laws governing the debt ceiling. Besides,
budget numbers are so full of accounting tricks and gimmicks that even
passing a budget can fail to have the strong force limiting spending that
one would hope. It was budget rules that gave us temporary Bush tax
rate changes in the first place.
By contrast, the actual amount that the government has to go out
and borrow is a hard number, and it seems to pose a stronger constraint
than the budget act. That makes it a blunt instrument, but a more useful
instrument than the fine instrument that seems not to work.
Still, occasional crises are not a good way to impose discipline. So, herewith a modest proposal in two parts:
First, fix the remaining loopholes. No platinum coins. Federal debt
should include Federal Reserve liabilities (cash and reserves) net of Treasury debt held by the Fed. Reinforce the ceiling.
Second, in place of a single ceiling, which is then periodically raised by
a few trillion after a big fight, put in a ceiling path. If $1 trillion deficits
($80 billion per month) seem like a lot, renew the debt ceiling at $50 billion per month this year, and $40 billion per month next year.
This constraint on spending would not cause a periodic game of chicken, and might actually have some force.
Reprinted from John H. Cochranes blog, the Grumpy Economist (http://johnhcochrane.blogspot.com).
Available from the Hoover Press is Pension Wise:

Confronting Employer Pension UnderfundingAnd Sparing
Taxpayers the Next Bailout, by Charles Blahous. To order,
call 800.935.2882 or visit www.hooverpress.org.
35
T HE EC ONOM Y
And the Cliffs Keep

Coming
Any fiscal deal must be built upon tax reform and spending cuts. By
Gary S. Becker.
How good was the recent agreement that kept the United States from
plunging over the fiscal cliff? Not good at all, in my opinion. Its biggest defect was the failure to do much about federal spending, which has
grown rapidly since 2000, especially during the past four years, and will
continue to grow absent major reforms. Some of the increases in taxes are
desirable but many are not; moreover, the whole set of tax changes will do
little to close present and future fiscal deficits.
Most of the reforms in taxation and spending that I advocate here will
not be considered politically feasible because of the power of special interests. In fighting special interests, however, one needs to be clear on the
desired goals, and that is the spirit motivating my discussion.
The fiscal agreement contains very little reform of the basic tax code.
Nothing was done about the many undesirable special exemptions called
corporate welfare. These include, among many, employer deductibility of
contributions to health care coverage of its employees, subsidies to the oil
industry, and subsidies also to alternative sources of energy, such as solar.
GARY S. BECKER is the Rose-Marie and Jack R. Anderson Senior Fellow at the
Hoover Institution and a member of Hoovers Working Group on Economic
Policy and Shultz-Stephenson Task Force on Energy Policy. He is also the University Professor of Economics and Sociology at the University of Chicago. He was
awarded the Nobel Memorial Prize in Economic Sciences in 1992.
36
Middle-income and rich families are the main beneficiaries of the

deduction for interest paid on home mortgages, which cost about $90
billion in federal tax revenue in 2012. Although many attempts have been
made to provide economic and social justifications for encouraging home
ownership, the arguments and evidence are weak.
Charitable contributions are the other major itemized deduction. That
deduction has greater justification because it helps decentralize charitable
giving away from the government. Nevertheless, with such large fiscal
deficits, that deduction should also be restricted. The fiscal agreement did
limit total deductions by couples earning more than $300,000 but it did
not distinguish among deductions, and the limit should apply to all personal income tax filers.
The optimal income tax structureif income rather than consumption remains the basis of taxationwould have a rather flat percentage
tax on a very broad definition of income that eliminates the great majority
of deductions and incorporates dividends and capital gains into reported income. The extra tax revenue from increasing marginal tax rates as
incomes increase is not worth the social cost in the form of tax avoidance
and evasion. An element of progressivity should be introduced through
providing an exemption from income taxes for people with incomes below
a reasonable poverty line.
The tax changes in the recent fiscal agreement combine higher taxes
on the rich, including limits on their itemized deductions, with higher
taxes on capital gains, dividends, and estates. All the changes combined
are estimated to bring in only about $600 billion in additional tax revenue over ten years. This is a drop in the bucket when federal spending is
almost $4 trillion per year. Even the $600 billion figure is a large overestimate of what will be generated in added revenue because it assumes no
changes in behavior on the part of businesses and individuals affected by
higher tax rates.
Corporations are likely to adjust to the higher rates by reducing dividends, taking more of their income abroad, and making other changes
that reduce their tax burdens. Individuals facing higher marginal tax rates
will increase their itemized deductions when this helps reduce their tax
obligations, shift their effort and energy from work to untaxed or lower-
37
38
taxed activities, and take increasing advantage over time of loopholes discovered by tax lawyers and accountants.
On the spending side of the fiscal-cliff confrontation, where virtually
no progress was made, extended unemployment benefits received a new
lease on life. This does not involve a lot of spending, but the extension
makes no sense when employment is growing each month and when
almost 4 million jobs are going unfilled. Paying compensation for almost
two years of unemployment has contributed to the large number of workers who have been unemployed for longer than a year.
Federal spending has increased from about 18 percent of GDP in 2000
to over 24 percent at present. A good part of the increase went to spending
on Social Security, Medicare, and Medicaid, but many other categories of
spending increased as fast as these entitlements, or even faster. Adjusted
for inflation, between 2000 and 2011 Medicare grew by over 100 percent
and Medicaid by 83 percent, while income security programs grew by
over 130 percent and defense by 86 percent. Spending on highways and
mass transit, energy, and various other programs also grew a lot. So-called
discretionary spending as a whole, which includes various domestic programs and defense, grew by over 70 percent.
So even if we excluded entitlements, there are many places to cut federal spending to help move the country toward the spending typical of the
end of the Clinton presidency. There was no widespread belief then that
the federal government was on a starvation diet.
The tax changes said to have averted the fiscal cliff are a drop in the
bucket when federal spending is almost $4 trillion per year.
Of course, it is also crucial to try to rein in the growth of Medicare and

Medicaid, since they are so important. Medicaid and related government
health programs are supposed to be for children and parents in poor families, but the definition of poor has expanded beyond a reasonable level
and should be scaled back.
A mandate for health care coverage can perhaps be justified as an effort
to control free riding, but such a mandate should require only coverage
against health catastrophes and should subsidize only the premiums of
39
poor families. The Affordable Care Acts mandate, by contrast, requires

extensive coverage and subsidizes premiums for individuals earning up to
four times the poverty level.
Look back only a dozen years, when federal spending was far lower, and
virtually nobody thought the government was on a starvation diet.
Medicare can also be reformed in several ways. One important change

would be to increase the fraction of out-of-pocket spending by the nonpoor elderly receiving medical treatment under Medicare. This fraction
is much below that in Switzerland, a country that generally provides
excellent medical care. ObamaCare does little to increase out-of-pocket
expenses, and instead adds a series of quotas on care and price controls on
payments for care.
People older than sixty-five are much healthier than when Medicare
started more than half a century ago. This suggests that extending Medicare eligibility to age sixty-seven or sixty-eight would not impose major
hardships on persons of these ages and would encourage them to make
greater use of private insurance. Of course, to allow older people to prepare for this change in eligibility age, it should not go into effect for five
years or so, and could be phased in after that.
I am not optimistic reforms like these will be enacted in the near future.
The president and both parties in Congress have inflexible positions. Nor
have the media been of much help in arousing the public, instead concentrating on how to raise taxes on the so-called rich rather than on reforming
taxes and spending. Still, it is worth trying to show how to reform the tax
code and identify the many reasonable ways to cut federal spending.
Reprinted from the Becker-Posner Blog (www.becker-posner-blog.com).
New from the Hoover Press is The Taylor Rule and the
Transformation of Monetary Policy, edited by Evan F.
Koenig, Robert Leeson, and George A. Kahn. To order,
40
T H E E CO N O M Y
Crash? What Crash?

Just over six decades ago, an abrupt cut in government spending
was supposed to destroy the economybut didnt. What we can
learn from the cuts and the economic boom that followed World War
II. By David R. Henderson.
The final conclusion to be drawn from our experience at the end of the
last war is inescapablewere the war to end suddenly within the next six
months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to
shift from astronomical deficits to even the large deficits of the Thirties
then there would be ushered in the greatest period of unemployment and
industrial dislocation which any economy has ever faced.
Paul Samuelson, 1943
[A]t the end of 1946, less than a year and a half after V-J Day, more than
ten million demobilized veterans and other millions of wartime workers
have found employment in the swiftest and most gigantic change-over
that any nation has ever made from war to peace.
President Harry S. Truman, January 1947
We often hear that big cuts in government spending over a short period are a
bad idea. The argument against big cuts, typically made by Keynesian economists, is twofold. First, large cuts in government spending, with no offsetting
DAVID R. HENDERSON is a research fellow at the Hoover Institution and an associate professor of economics at the Naval Postgraduate School in Monterey, California.
41
tax cuts, will lead to a large drop in aggregate demand for goods and services,
thus causing a recession or even a depression. Second, with a major shift in
demand (fewer government goods and services and more private ones), the
economy would experience a wrenching readjustment, during which many
people would become unemployed, and the economy would slow down.
But if such claims were true, wouldnt history confirm them? And
wouldnt the decline in the economy be large when the government cuts
spending a lot? Thats certainly what the late Keynesian economist Paul
Samuelson thought.
Well, Samuelson was wrong, and not just wrong, but spectacularly
wrong.
In a 2010 study for the Mercatus Center at George Mason University,
I examined the four years from 1944, the peak of World War II spending, to 1948. Over those years, the U.S. government cut spending from
a high of 44 percent of gross national product (GNP) in 1944 to only
8.9 percent in 1948, a drop of over 35 percentage points of GNP. The
result was an astonishing boom. The unemployment rate, which was
artificially low at the end of the war because many millions of workers
had been drafted into the U.S. armed services, did increase. But between
1945 and 1948, it reached its peak at only 3.9 percent in 1946. From
September 1945 to December 1948, the average unemployment rate
was 3.5 percent.
After FDR and Truman kicked out their anti-free-market advisers,
investors were then much more willing to hazard their private property.
Most of the policies that Samuelson feared actually happened, and in

spades. Price controls were eliminated. Not only was the federal budget deficit decreased, but also, in 1947, the budget surplus was over 5
percent of GNP. Major demobilization took place. Between 1945 and
1947, when the postwar transition was complete, the number of people
in the armed forces fell by 10.5 million. Civilian employment by the
armed forces fell by 1.8 million, and military-related employment in
industry fell off the cliff from 11 million to 800,000. As demobilization
proceeded, optimistic employers in the private sector scooped up mil42
lions of the soldiers, sailors, and others who had been displaced from the
armed forces and from military industries.
W H A T D O YO U B E LI E V E ?
According to official government data, in 1946, the U.S. economy suffered the worst one-year recession in its history. The official data show
a 12 percent decline in real GNP after the war. That certainly sounds
like a depression. So, is the story about a postwar boom pure myth?
No. What is mythical are the governments data. Ask most people who
were young adults in those years (a steadily diminishing number of
people, so talk to them soon) about economic conditions after the
war, and they will talk about the postwar boom. Why is there such
a disconnect between their perceptions and the data? There are two
reasons.
The first is what economists call an index-number problem. When
price controls were removed after the war, prices shot up. Therefore,
the prices used to convert nominal GNP into real GNP made real GNP
look lower than it actually was. Milton Friedman and Anna J. Schwartz
note in their modern classic, A Monetary History of the United States,
18671960:
The jump in the price index on the elimination of price control in 1946
did not involve any corresponding jump in prices; rather, it reflected
largely the unveiling of price increases that had occurred earlier.
Consider the following example. Imagine that the free-market price of

a pound of filet mignon during the war was $1.40 a pound. But imagine
further that the governments price controllers had set the price at $1 a
pound. Then, when the price control was removed, the price would have
shot up to $1.40 a pound. Inflation statistics would have recorded some
amount of inflation due to this large price increase. But those statistics
would have overstated the real price increase because getting beef at $1.40
a pound would have been better for many of the people who couldnt,
because of the wartime beef shortage, get it at $1 a pound.
The second reason that the governments data are mythical is that GNP
and GDP, which are supposed to measure the value of production, instead
43
measure government spending on goods and services at their coststhat

is, at the prices the government paid for them. But we have no idea what
those goods and services bought by the government during the war were
actually worth. So we cant straightforwardly compare GNP during the
war with postwar GNP.
Is the story of a postwar boom just a myth? No. Whats mythical are the
governments data.
If we cant compare, then why do I say that there was a postwar boom?
Because people bought cars, houses, gasoline, tires, sugar, nylons, meat,
and other products that they were unable to buy during the war. Also, one
important piece of information was not subject to the same measurement
problem that the GNP data were: namely, the unemployment rate. As
noted, that was under 4 percent.
But why did this postwar boom occur? The answer, in a nutshell, is
that the U.S. economy went from being centrally planned, with price
controls and government allocation in large sectors of the economy,
to being much more of a free market. During the New Deal, Franklin
Roosevelt had many advisers who were hostile to free markets. But
during the war, Roosevelt, although he centrally planned the economy
for the duration, kicked out most of his antimarket adviserspeople
like Ben Cohen, William O. Douglas, trust-buster Thurman Arnold,
price controller Leon Henderson, and Felix Frankfurter. In 1945 and
1946, Harry Truman got rid of the remaining New Dealers, including
two of the most prominent ones: former vice president Henry Wallace
and Harold Ickes.
As a result of these changes, writes economic historian Robert Higgs,
Investors were then much more willing to hazard their private property
than they had been before the war, as both survey data and financial market data confirm.
And invest they did. Gross private domestic investment was $44.4 billion in 1941 (in real 1964 dollars). For all of the war years, it was half or
less of that 1941 level. In 1946, it shot up to $51.7 billion, grew slightly
to $51.8 billion in 1947, and then grew to $60.6 billion in 1948.
44
T H E K EY N ESI AN R E SPO NSE

Keynesians and others have their own explanations for why the Keynesian
predictions of postwar economic disaster did not come to pass. The three
most popular are: women left the labor force; the GI Bill put many returning soldiers in college rather than into the workforce; and the American
people stopped saving and started spending the money they had accumulated during the war. The data, however, do not support these explanations:
Rosie the Riveter goes home. There was no surge in unemployment,
goes the first explanation, because women left the defense plants and went
back to being housewives and raising families. This explanation is half true
and totally misleading. First, approximately half of the women who entered
the labor force in the early 1940s stayed in it after the war. The number of
women in the labor force rose from 14.5 million in 1941 to a peak of 19.4
million in 1944, declining to 16.9 million in 1947. In other words, of the 4.9
million women who entered the labor force between 1941 and 1944, 2.4 million stayed in the labor force. Thus, there was still a need for millions of jobs to
open up for newly demobilized male soldiers. The fact that the unemployment
rate stayed in the low single digits is an outstanding success story.
Second, what defense plants? Almost all of them shut down or were
reconverted to peacetime uses after the war. Women who wanted to stay
employed had to find other private work. As Higgs points out, The real
miracle was to reallocate a third of the total labor force to serving private
consumers and investors in just two years.
The GI Bill. The second explanation goes, The economy adjusted
smoothly because the GI Bill put so many of those 10 million demobilized
soldiers and sailors into college. But at its peak, in September 1946, the
GI Bill put only 800,000 veterans into college. Had all these veterans been
officially unemployed instead, which is unlikely, the unemployment rate
would have been higher by only 1.4 percentage points.
Pent-up demand and the drawing down of savings. Keynesian economists also explained away why their glum postwar predictions hadnt
come true by arguing that people drew down their savings to finance their
pent-up demand for the various goods they could not have during the
45
war: cars, tires, refrigerators, stoves, and so on. In 1943, Samuelson argued
that pent-up demand for consumer goods would cushion the blow of
demobilization. Cited in almost every textbook on U.S. economic history, this explanation has become orthodoxy. Theres a problem with this
explanation, though: it doesnt fit the evidence.
There are two parts to Samuelsons explanation. The first, which is plausible, is that there was pent-up demand because of the heavy rationing that
the government imposed during the war. People were ready to buy cars, for
example, after having not been able to do so for more than three years. But
even Samuelson pointed out that this would be a short-term cushion at best.
Of course, one could argue that the two years from 1945 to 1947 were short
term. But then, after this pent-up demand was satisfied, there should have
been a major drop in economic activity and a major increase in unemployment in the medium term. That didnt happen. The unemployment rate
was 3.8 percent in 1948 and rose to only 5.9 percent in 1949.
The second part of the explanation is that people drew down the savings they had accumulated during the war. But if people were drawing
down their savings after the war, their rate of saving would have been
negative. It wasnt. While the personal saving rate did fall substantially
from a wartime peak of 25.5 percent in 1944 to 9.5 percent in 1946 and
4.3 percent in 1947, it remained positive.
The bottom line is that after the biggest percentage government spending cuts in American historythe cuts in government spending after
World War IIthe economy boomed. There are, of course, policy lessons
to be drawn from the postwar experiencelessons that we can apply to
todays fiscal crisis. Since we must cut the federal budget deficit, the best
way to do so is with cuts in spending.
Reprinted from Defining Ideas (www.hoover.org/publications/defining-ideas). 2012 by the Board of
Trustees of the Leland Stanford Junior University. All rights reserved.
New from the Hoover Press is Entitlement Spending: Our
Coming Fiscal Tsunami, by David Koitz. To order, call
46
T H E E CO N O M Y
Suddenly, Sandy
Why even smart people underinvest in disaster preparedness. By
Michael Spence.
Super storm Sandy (which I experienced in lower Manhattan) added to a

growing collection of extreme weather events from which lessons should be
drawn. Climate experts have long argued that the frequency and magnitude
of such events are increasing, and evidence of this should certainly influence
precautionary stepsand cause us to review such measures regularly.
There are two distinct and crucial components of disaster preparedness.
The one that understandably gets the most attention is the capacity to
mount a rapid and effective response. Such a capacity will always be necessary, and few doubt its importance. When it is absent or deficient, the loss
of life and livelihoods can be horrificwitness Hurricane Katrina, which
ravaged Haiti and New Orleans in 2005.
The second component comprises investments that minimize the
expected damage to the economy. This aspect of preparedness typically
receives far less attention.
Indeed, in the United States, lessons from the Katrina experience appear
to have strengthened response capacity, as shown by the rapid and effective
intervention following Sandy. But investments designed to control the
extent of damage seem to be persistently neglected.
MICHAEL SPENCE is a senior fellow at the Hoover Institution, a professor of
economics at New York Universitys Stern School of Business, and the Philip H.
Knight Professor Emeritus of Management in the Graduate School of Business at
Stanford University. He was awarded the Nobel Memorial Prize in Economic
Sciences in 2001.
47
A roller-coaster sits amid the waves at Seaside Heights, New Jersey, after super storm
Sandy swept through last October. Lessons from the devastating Hurricane Katrina of 2005
appear to have strengthened response capacity in the United States, but investments in
controlling the extent of damage have yet to catch up.
Redressing this imbalance requires a focus on key infrastructure. Of

course, one cannot at reasonable cost prevent all possible damage from
calamities, which strike randomly and in locations that cannot always be
predicted. But certain kinds of damage have large multiplier effects.
This includes damage to critical systems like the electricity grid and
the information, communication, and transport networks that constitute the platform on which modern economies run. Relatively modest investments in the resilience, redundancy, and integrity of these
systems pay high dividends, albeit at random intervals. Redundancy
is the key.
The case of New York City is instructive. The southern part of Manhattan was without power for almost a full workweek amid Sandy, apparently
because a major substation hub in the electrical grid, located beside the
48
Reuters/Andrew Burton
East River, was knocked out in a fiery display when the storm and a tidal
surge caused it to flood. There was no pre-built workaround to deliver
power by an alternate route.
The cost of this power failure, though difficult to calculate, was surely
huge. Unlike the economic boost that may occur from recovery spending
to restore damaged physical assets, this was a deadweight loss. Local power
outages may be unavoidable, but one can create grids that are less vulnerableand less prone to bringing large parts of the economy to a haltby
building in redundancy.
Similar lessons were learned with respect to global supply chains after
the earthquake and tsunami that hit northeast Japan in 2011. Global
supply chains are becoming more resilient, their duplication of paths a
response to the bottlenecks that can bring down large systems.
Cybersecurity experts rightly worry about the possibility of bringing an
entire economy to a halt by attacking and disabling the control systems in
its electrical, communication, and transportation networks. The impact
of natural disasters is less systemic than that, but if a calamity takes out
key components of networks that lack redundancy and backup, the effects
are similar. Even rapid response is more effective if key networks and systemsparticularly the electricity gridare resilient.
Why do we tend to underinvest in the resilience of our economies key
systems?
One argument is that redundancy looks like waste in normal times,
with cost-benefit calculations ruling out higher investment. That seems
clearly wrong: numerous expert estimates indicate that built-in redundancy pays off unless one assigns unrealistically low probabilities to disruptive
events.
That leads to a second and more plausible explanation, which is psychological and behavioral. We have a tendency to underestimate both the
probabilities and the consequences of what in the investment world are
called left-tailed events.
Compounding this pattern are poor incentives. Principals, be they
investors or voters, determine the incentives of agents, be they asset managers or elected officials and policy makers. If principals misunderstand
systemic risk, their agents, even if they do understand it, may not be able
49
to respond without losing support, whether in the form of votes or assets

under management.
Another line of reasoning is that businesses that depend heavily on
continuityfor example, hospitals, outsourcing firms in India, and stock
exchangeswill invest in their own backup systems. In fact they do. But
that ignores a host of issues concerning the mobility, safety, and housing of
employees. A broad pattern of self-insurance caused by underinvestment
in resilient infrastructure is an inefficient and distinctly inferior option.
Relatively modest investments in resilience, redundancy, and integrity of
systems pay high dividends, albeit at random intervals.
Underinvestment in infrastructure (including deferred maintenance) is

widespread where the consequences are uncertain or not immediate. In
reality, underinvestment and investment with debt financing are equivalent in one crucial respect: they both transfer costs to a future cohort. But
even debt financing would be better than no investment at all, given the
deadweight losses.
Cities and countries that aspire to be hubs or critical components in
national or global financial and economic systems need to be predictable,
reliable, and resilient. That implies a transparent rule of law and competent, conservative, and countercyclical macroeconomic management. But
it also includes physical resilience and the ability to withstand shocks.
Hubs that lack resilience create cascades of collateral damage when they
fail. Over time, they will be bypassed and replaced by more resilient alternatives.
Reprinted by permission of Project Syndicate (www.project-syndicate.org). 2013 Project Syndicate Inc.
All rights reserved.
New from the Hoover Press is The Nuclear Enterprise:
High-Consequence Accidents: How to Enhance Safety
and Minimize Risks in Nuclear Weapons and Reactors,
edited by George P. Shultz and Sidney D. Drell. To order,
50
R E G U L AT I O N
Unwieldy and Unwise

The romance of enlightened government? The tale may begin with
good intentions and high expectations, but it rarely ends well. By
Michael J. Boskin.
A successful society needs effective, affordable government to perform its

necessary functions well, and that includes sufficient revenue to fund those
functions. But a government that grows too large, centralized, bureaucratic, and expensive substantially impairs the private economy by eroding
individual initiative and responsibility; crowding out private investment,
consumption, and charity; and damaging incentives with high tax rates. It
also risks crowding out necessary government functions such as defense.
That is todays Europe in a nutshell, with America not far behind.
The recent death of James M. Buchanan, the father of public-choice
economics, is reason to reflect on his sage warnings. Buchanan was awarded the Nobel Prize in 1986 for bringing to the study of government and
the behavior of government officials the same rigorous analysis that economists had long applied to private economic decision-making. Buchanan
concluded that politicians pursuit of self-interest inevitably leads to poor
outcomes.
Buchanans analysis stood in marked contrast not only to Adam Smiths
dictum that the pursuit of self-interest leads, as if by an invisible hand,
to desirable social outcomes, but also to the prevailing approach to policy
MICHAEL J. BOSKIN is a senior fellow at the Hoover Institution, a member of
Hoovers Shultz-Stephenson Task Force on Energy Policy and Working Group on
Economic Policy, and the T. M. Friedman Professor of Economics at Stanford
University.
51
analysis, which views government as a benevolent planner, implementing

textbook solutions to market failures. According to this view, if markets do not fully internalize all the costs of private actionenvironmental
pollution is a classic examplesome optimal tax or subsidy supposedly can correct the problem. So, if a monopoly is restricting output and
raising prices, regulate firms and industries. When weak demand leads
to recession, increase government spending and/or cut taxes by just the
right amount, determined by a Keynesian multiplier, andpresto!the
economy rebounds quickly.
PU B L IC OF F I C I ALS AND SE LF-I NTE R E ST

Buchanan considered such analysis romantic. He showed that public officials, like everyone else, are driven by self-interest and governed by the
rules and constraints operating in their economic environment. Households have a budget constraint. Firms have technological, competitive,
and bottom-line constraints. For politicians, the ability to exercise powerfor their own interests or those of vested interestsis constrained by
the need to get elected.
Buchanan predicted that by hiding the full costs, the ability to finance
public spending through deficits would lead to higher spending and lower taxes at the expense of future generations, whose members were not
directly represented in current voting. He predicted ever-larger deficits
and debtand, as a result, ever-larger government.
Few government programs are targeted carefully enough to real needs
or to the really needy.
On this issue, Buchanan was unfortunately prescientand well before

financial crisis and deep recession led to yet another jump in the size and
scope of government, accompanied by large deficits and exploding debt
in the United States, Europe, and Japan. Buchanan argued tirelessly for
lower government spending, balanced budgets (even a balanced-budget
amendment to the U.S. Constitution), and streamlined regulation.
Buchanan, along with the late Hoover fellow Milton Friedman and
many others, correctly pointed out that government failures are as numer52
ous as market failures. So, even in areas like infrastructure or education,

it is necessary to compare the benefits and costs of the imperfect fiscal
and regulatory policies likely to be implemented by fallible, self-interested
officials with potentially imperfect market outcomes.
These government failures include rent-seeking, pork-barrel spending,
social engineering, regulatory capture, and induced dependency. Market
failures or claims of unmet need are not sufficient to prescribe government
intervention in the private economy because the cure may be worse than
the disease.
Deficits lead to higher spending and lower taxes at the expense of future
generations, whose members have no say.
There are, of course, important and successful government programs.

In America, the postWorld War II GI Bill financed higher education
for demobilized soldiers and was a highly beneficial public investment
in human capital. Social Security has helped reduce poverty among the
elderly. The military has kept the United States safe and free.
But the gap between textbook solutions drawn up in universities and
think tanks and the reality on the ground can be vast. More spending or
regulation does not always lead to better outcomes.
P I L ES OF DE AD WO O D
Government spending is no less subject to diminishing returns than
anything else. Programs become entrenched, develop powerful constituencies, and are hard to shrink. Few programs are targeted carefully
enough to real needsor to the really needyas politicians buy votes
by spreading coverage far beyond what is needed to achieve programs
stated goals. Hence Buchanans disdain for romanticizing government
action.
In country after country, one casualty of the ongoing debate over
spending, taxes, deficits, and debt has been efforts to make government
more effective and efficient. In most areas of government, from defense to
entitlements, better outcomes can be achieved at much lower cost, which
should please both the left and the right.
53
For example, Americas federal government has forty-seven separate

job-training programs in nine different agencies, costing almost $20 billion a year, most of which the Government Accountability Office reckons
are ineffective or poorly run. President Barack Obama added the fortyseventhfor green-energy job trainingin 2009. The success rate was
so poor (only a tiny percentage of participants got targeted jobs) that the
Labor Departments inspector general recommended shutting it down
and this at a time of massive unemployment, with firms listing millions of
job openings but unable to find workers with the required skills.
We have seen what ultimately results when unsustainable spending
leads to exploding debt: economic chaos and human tragedy. Somewhere
between romanticized government solutions to problems and Buchanans self-interested government officials, we must find leaders willing to
eliminate poorly performing programs; modernize, streamline, and consolidate others; improve services; and limit pressure for ever-higher,
growth-destroying taxes.
Reprinted by permission of Project Syndicate (www.project-syndicate.org). 2013 Project Syndicate Inc.
All rights reserved.
Available from the Hoover Press is Leviathan: The

Growth of Local Government and the Erosion of Liberty,
by Clint Bolick. To order, call 800.935.2882 or visit www.
hooverpress.org.
54
R E G U L AT I O N
Misplaced Trust
Governments and markets both sometimes fail, but only governments
gamble with our lives. By Mark Harrison.
Tail risks are the risks of worst-case scenarios. The risks at the far left tail of
the probability distribution are typically small: they are very unlikely, but not
impossible, and once or twice a century they will come about. When they do
happen, they are disastrous. They are risks we would very much like to avoid.
How can we compare the tail risks of government intervention with the
tail risks of leaving things to the market? Put differently, what is the very
worst that can happen in either case? Precisely because these worst cases
are very infrequent, you have to look to history to find the evidence that
answers the question.
To make the case for government intervention as strong as possible, I
will focus on markets for long-term assets. Why? Because these are the
markets that are most likely to fail disastrously. In 2005 house prices
began to collapse across North America and Western Europe, followed in
2007 by a collapse in equity markets. By implication, these markets had
got prices wrong; they had become far too high. The correction of this
failure, involving large write-downs of important long-term assets, led us
into the credit crunch and the global recession.
Because financial markets are most likely to fail disastrously, they are
also the markets where many people now think someone else is more likely to do a better job.
MARK HARRISON is a research fellow at the Hoover Institution, a professor of
economics at the University of Warwick, and an associate of Warwicks Centre
on Competitive Advantage in the Global Economy.
55
Whats special about finance? Finance looks into the future, and the
future is unexplored territory. Only when that future comes about will
we know the true value of the long-term investments we are making
today in housing, infrastructure, education, and human and social capital. But we actually have no knowledge of what the world will be like
in forty or even twenty years time. Instead, we guess. What happens
in financial markets is that everyone makes their guess and the market equilibrium comes out of these guesses. But these guesses have the
potential to be wildly wrong. So it is long-term assets that markets are
most likely to misprice: houses and equities. When houses and equities
are priced very wrongly, chaos results. (And in the chaos, there is much
scope for legal and illegal wrongdoing.)
Stalin increasingly overdid long-term investment in the industrialization
and rearmament of the Soviet Union. As a direct consequence, 5 million to
6 million people died.
When housing is overvalued, too many houses are built and bought at
the high price and households assume too much mortgage debt. When
equities are overvalued, companies build too much capacity and borrow
too much from lenders. To make things worse, when the correction comes
it comes suddenly; markets in long-term assets dont do gradual adjustment but go to extremes. In the correction, nearly everyone suffers; the
only ones who benefit are the smart lenders who pull out their own money
in time and the dishonest borrowers who pull out with other peoples
money. Its hard to tell which we resent more.
L OO K I N G F OR AN O R ACLE
If markets find it hard to price long-term assets correctly and tend to flip
from one extreme to another, a most important question then arises: who
will do a better job?
Its implicit in current criticisms of free-market economics that many
people think like this. Financial markets did not do a very good job. It follows, they believe, that someone else could have done better. That being
56
the case, some tend to favor more government regulation to steer investment into favored sectors. Others prefer more bank regulation to prick
asset-price bubbles in a boom and underpin prices in a slump. The latter is
exactly what the Fed and the Bank of England are doing currently through
quantitative easing.
Does this evaluation stand up to a historical perspective?
Were coming through the worst global financial crisis since 1929.
Twice in a century weve seen the worst mess that long-term asset markets
can makeand its pretty bad. A recent estimate of the cumulative past
and future output lost to the U.S. economy from the current recession, by
David H. Papell and Ruxandra Prodan of the Boston Fed, is nearly $6 trillion, or two-fifths of U.S. output for a year. A global total in dollars would
be greater by an order of magnitude. What could be worse?
For the answer, we should ask a parallel question about governments:
what is the worst that government regulation of long-term investment can
do? Well start with the second-worst case in history, which coincided with
the last Great Depression.
Beginning in the late 1920s, the Soviet dictator Josef Stalin increasingly
overdid long-term investment in the industrialization and rearmament of
the Soviet Union. Things got so far out of hand that in Russia, Ukraine,
and Kazakhstan in 193233, as a direct consequence, 5 million to 6 million people lost their lives.
How did Stalins miscalculation kill people? Stalin began with a
model that placed a high value (or priority) on building new industrial capacity. Prices are relative, so this implied a low valuation of consumer goods. The market told him he was wrong, but he knew better.
He substituted one persons judgment (his own) for the judgment of
the market, where millions of judgments interact. He based his policies on that judgment.
Stalins policies poured resources into industrial investment and infrastructure. Stalin intended those resources to come from consumption,
which he did not value highly. His agents stripped the countryside of
food to feed the growing towns and the new workforce in industry and
construction. When the farmers told him they did not have enough to eat,
he ridiculed this as disloyal complaining. By the time he understood they
57
were telling the truth, it was too late to prevent millions of people from
starving to death.
Because worst cases are rare, you have to look to history for the evidence.
This case was only the second-worst in the past century. The worst
episode came about in China in 1958, when Mao Zedong launched
the Great Leap Forward. A famine resulted. The causal chain was pretty much the same as in the Soviet Union a quarter century before.
Between 1958 and 1962, at least 15 million and up to 40 million Chinese people lost their lives. (We dont know exactly because the underlying data are not that good, and scholars have made varying assumptions about underlying trends; the most difficult thing is always to
work out the balance between babies not born and babies that were
born and starved.)
This was the worst communist famine, but it was not the last. In Ethiopia, a much smaller country, up to a million people died for similar
reasons between 1982 and 1985. If you want to read more, the place to
start is Making Famine History by Cormac Grda in the Journal of
Economic Literature (Vol. 45, No. 1, March 2007).
No one knows the secret of correctly valuing long-term assets like housing and
equities. But markets, unlike governments, are eventually self-correcting.
Note that I do not claim these deaths were intentional. They were a
byproduct of government regulation; no one planned them (although
some people do argue this). At best, however, those in charge at the
time were guilty of manslaughter on a vast scale. In fact, I sometimes
wonder why Chinese people still get so angry at Japan. Japanese policies
in China between 1931 and 1945 were certainly atrocious and many of
the deaths that resulted were intended. Still, if you were minded to ask
who killed more Chinese people in the twentieth century, the Japanese
imperialists might well have to cede first place to Chinas communists.
Perhaps there is less national humiliation in it when the killers are your
countrymen.
58
T H E P A I N O F CO R R E CTI O N
To conclude, no one has the secret of correctly valuing long-term assets
like housing and equities. Markets are not very good at it. Governments
are not very good at it either.
But the tail risks of government miscalculation are far worse than those
of market errors. In historical worst-case scenarios, market errors have lost
us trillions of dollars. Government errors have cost us tens of millions of
lives.
The reason for this disparity is very simple. Markets are eventually selfcorrecting. Eventually is a slippery word here. Nonetheless, five years
after the credit crunch, worldwide stock prices have fallen, house prices
have fallen, hundreds of thousands of bankers have lost their jobs, and
democratic governments have changed hands. Thats correction.
Governments, in contrast, hate to admit mistakes and will do all in
their power to persist in them and then cover up the consequences. The
truth about the Soviet and Chinese famines was suppressed for decades.
The party responsible for the Soviet famine remained in power for sixty
more years. In China the party responsible for the worst famine in history
is still in charge. School textbooks are silent about the facts, which live on
only in the memories of old people and the libraries of scholars.
Special to the Hoover Digest. Adapted from Mark Harrisons blog (http://blogs.warwick.ac.uk/markharrison).
Reprinted by permission.
Published by the Yale-Hoover Series on Stalin, Stalinism,

and the Cold War is Guns and Rubles: The Defense
Industry in the Stalinist State, edited by Mark Harrison.
To order, call 800.405.1619 or visit http://yalepress.yale.
edu/yupbooks/order.asp.
59
H EALT H C ARE
ObamaCares
Unhealthy Assumptions
Four ways in which its original promises have proven to be fantasies.
By Daniel P. Kessler.
As the federal government moves to implement President Obamas Affordable Care Act, the Department of Health and Human Services is slated to
spend millions of dollars promoting the unpopular legislation. In the face of
this publicity blitz, it is worth remembering that the law was originally sold
largely on four groundsall of which have become increasingly implausible.
1. Lower health care costs. One key talking point for ObamaCare was that
it would reduce the cost of insurance, especially for non-group insurance.
The president, citing the work of several health policy experts, claimed
that improved care coordination, investments in information technology,
and more efficient marketing through exchanges would save the typical
family $2,500 per year.
That was then. Now, even advocates of the law acknowledge that premiums are going up. In analyses conducted for the states of Wisconsin,
Minnesota, and Colorado, Jonathan Gruber of MIT forecasts that premiums in the non-group market will rise by 19 percent to 30 percent because
of the law. Other estimates are even higher. The actuarial firm Milliman
predicts that non-group premiums in Ohio will rise by 55 percent to 85
DANIEL P. KESSLER is a senior fellow at the Hoover Institution, a member of
Hoovers Working Group on Health Care Policy, and a professor at Stanford
Universitys Graduate School of Business and Law School.
60
percent. Maine, Oregon, and Nevada have sponsored their own studies,
all of which reach essentially the same conclusion.
Some champions of the law argue that this misses the point because
once the laws new subsidies are taken into account, the net price of insurance will be lower. This argument is misleading. It fails to consider that
the money for the subsidies has to come from somewhere. Although debtfinanced transfer payments may make insurance look cheaper, they do not
change its true social cost.
2. Smaller deficits. Increases in the estimated impact of the law on private
insurance premiums, along with increases in the estimated cost of health
care more generally, have led the Congressional Budget Office to increase
its estimate of the budget cost of the laws coverage expansion. In 2010,
the CBO estimated the cost per year of expanding coverage at $154 billion; by 2012, the estimated cost had grown to $186 billion. Yet the CBO
still scores the law as reducing the deficit.
How can this be? The positive budget score turns on the fact that the
estimated revenues to pay for the law have risen along with its costs. The
single largest source of these revenues? Money taken from Medicare in the
form of lower Medicare payment rates, mostly in the laws out years. Since
the laws passage, however, Congress and the president have undone various scheduled Medicare cutsincluding some prescribed by the law itself.
Put aside the absurdity that savings from Medicarethe countrys largest unfunded liabilitycan be used to finance a new entitlement. The
argument that health reform decreases the deficit is even worse. It depends
on Congress and the president not only imposing Medicare cuts that they
have proven unwilling to make but also imposing cuts that they have
already specifically undone, most notably to Medicare Advantage, a program that helps millions of seniors pay for private health plans.
3. Preservation of existing insurance. After the Supreme Court upheld
the constitutionality of health reform in June 2012, Obama said, If youre
one of the more than 250 million Americans who already have health
insurance, you will keep your insurance. This theme ran throughout the
selling of ObamaCare: people who have insurance would not have their
current arrangements disrupted.
61
This claim is obviously false. Indeed, disruption of peoples existing

insurance is one of the laws stated goals. On one hand, the law seeks
to increase the generosity of policies that it deems too stingy, by limiting deductibles and mandating coverage that the secretary of health and
human services thinks is essential, whether or not the policyholder can
afford it. On the other hand, the law seeks to reduce the generosity of
policies that it deems too extravagant, by imposing the Cadillac tax on
costly insurance plans.
Employer-sponsored insurance has already begun to change. According
to the annual Kaiser/HRET Employer Health Benefits Survey, the share
of workers in high-deductible plans rose to 19 percent in 2012 from 13
percent in 2010.
Thats just the intended consequences. One of the laws unintended
consequences is that some employers will drop coverage in response to
new regulations and the availability of subsidized insurance in the new
exchanges. How many is anybodys guess. In 2010, CBO estimated that
employer-sponsored coverage would decline by three million people in
2019; by 2012, CBOs estimate had doubled to six million.
4. Increased productivity. In 2009, the presidents Council of Economic
Advisers concluded that health reform would reduce unemployment, raise
the labor supply, and improve the functioning of labor markets. According
to its reasoning, expanding insurance coverage would reduce absenteeism,
disability, and mortality, thereby encouraging and enabling work.
This reasoning is flawed. The evidence that a broad coverage expansion would improve health is questionable. Some studies have shown that
targeted coverage can improve the health of certain groups. But according
to the Robert Wood Johnson Foundations Economic Research Initiative
on the Uninsured, evidence is lacking that health insurance improves the
health of non-elderly adults. More recent work by Richard Kronick, a
health policy adviser to former president Bill Clinton, concludes that there
is little evidence to suggest that extending insurance coverage to all adults
would have a large effect on the number of deaths in the United States.
The White House economic analysis also fails to consider the adverse
consequences of income-based subsidies on incentives. The support pro62
vided by both the Medicaid expansion and the new exchanges phases out
as a familys income rises. But as I and others have pointed out, income
phaseouts create work disincentives just as taxes do because they reduce
the net rewards to work. Further, the law imposes taxes on employers who
fail to provide sufficiently generous insurance, with exceptions for parttime workers and small firms. On net, it is hard to see how health reform
will make labor markets function better.
Some believe that expanding insurance coverage is a moral imperative
regardless of its cost. Most supporters of the law, however, use more
nuanced arguments that depend on assumptions that are increasingly
impossible to defend. If we are ever to have an honest debate about entitlement spending, we will need to distinguish these positions from one
anotherand see them for what they really are, rather than what we wish
they would be.
Available from the Hoover Press is Healthy, Wealthy, and

Wise: Five Steps to a Better Health Care System, second
edition, by John F. Cogan, R. Glenn Hubbard, and Daniel
P. Kessler. To order, call 800.935.2882 or visit www.
hooverpress.org.
63
H EALT H C ARE
The Free-Market Cure

Americans are still unhappy with ObamaCares promise of fewer choices
and higher bills. Our leaders must take notice. By Scott W. Atlas.
The battles over ObamaCare are not over, even though the Supreme Court
upheld the constitutionality of the Patient Protection and Affordable Care Act
and the president has been re-elected. Most of its major provisions will not
begin to be implemented until 2014. In that year, campaigns for the next congressional elections will be in full force, although it remains to be seen whether
public opinion on ObamaCare will be a driver of votes by then.
Have voters changed their minds and decided to support ObamaCare?
We all remember surveys showing a consistent, double-figure margin
favoring repeal of the law since its passage. In weekly Rasmussen polls for
more than two and a half years, between March 2010 and October 2012,
likely voters favored repeal by an average of 16 percentage points over
those who opposed repeal. Moreover, among those favoring repeal, the
data demonstrated a far stronger underlying sentiment compared to those
opposing repeal. Even the Supreme Court decision last summer did not
significantly mitigate the overall disapproval about ObamaCare.
Then came the presidential election. Along with the presidents predictable increase in overall approval ratings since his November re-election, the
sentiment for overt repeal of his health law, the legislation most closely tied
to the president, also waned once the campaigning ended and the polarizing
news coverage of the issue eased. Almost immediately after the election, the
margin favoring repeal narrowed significantlyfor example, to only 6 perSCOTT W. ATLAS, MD, is the David and Joan Traitel Senior Fellow at the Hoover
Institution and a member of Hoovers Working Group on Health Care Policy.
64
centage points in Rasmussens polling, 50 percent to 44 percentand with

that, a similar narrowing of voter enthusiasm for their respective positions.
Nevertheless, it is a mistake to infer new support for ObamaCare from
the reduced enthusiasm for its overt repeal. To the contrary, the American public remains highly skeptical, even negative, about the health care
reforms. Voters consistently have held that cost is their number one
concern about health care, and 54 percent now believe that health care
costs will go up under ObamaCareeven more than the 48 percent who
thought that in December 2012. According to a Huffington Post/YouGov
poll conducted in January, only 20 percent of people believed they would
be better off under the law, while 41 percent expected to be worse off. In
the February 23 Rasmussen polling of likely voters, 48 percent believed
that the U.S. health care system would get worse over the next two years
while only 27 percent thought the system would get better. And regarding
the overall view of the presidents health reform law, 51 percent still held
an unfavorable opinion while 45 percent held a positive view.
In truth, voters still overwhelmingly support many of the specific principles of the Republican health reforms that are directly contrary to the
new law, particularly those concerned with expanding individual choice
and facilitating market competition for better value.
A vast majority of Americansa full 77 percentsay they have a right
to choose between health insurance plans that cost more and cover just
about all medical procedures and other plans that cost less while covering
only major medical procedures (while only 8 percent are opposed). As
opposed to ObamaCares forced expense of bloated coverage with government-defined minimum essential benefits, Americans want the freedom
to buy cheaper plans covering only catastrophic medical carelike homeowners insurancebut not every minor expense.
An even greater majority85 percent to only 6 percentsay individuals should have the right to choose between health plans with higher
deductibles and lower premiums and plans with lower deductibles and
higher premiums. And, of course, government should facilitate rather
than limit these plansnot only because they represent better value for
millions of Americans but also because enrollees use more preventive services and wellness programs in these plans, improving health overall. It is
65
no surprise that high-deductible plans with health savings accounts have

already shown such a dramatic expansion, more than any other type of
coverage over the past five years, among employee choices.
Americans also support increased market competition to bring down costs
and improve options. Fully 72 percent of voters favor allowing individuals
and employers to buy insurance across state lines, instead of being restricted
to only those plans approved by their own states, disagreeing with the 14 percent who want such restrictions. Voters answering the question what would
do more to reduce health care costsmore free-market competition between
insurance companies or more government regulation? picked more free-market competition over more regulation by a ratio of 69 percent to 23 percent.
Contrary to the claims of those still celebrating President Obamas victory in November, conservative principles about health care are alive and
well in the American electorate. Fundamental beliefs about the importance of personal choice in health insurance coverage and a conviction
about the power of free-market competition to bring down insurance
prices are undeniable among the clear majority of Americans, regardless
of party affiliation. These views precisely match the foundations of health
reform espoused by Republicans and those opposed to ObamaCare.
Leaders in Congress and the states have a responsibility to create health
reforms that reflect these important principles held by the American people, even though the Affordable Care Act has begun implementation. As
for the 2014 campaign season, it would seem wise to visibly put forth
meaningful change based on what the vast majority of Americans clearly
want as the implementation of ObamaCare is thrust onto a still-unwilling
American public.
Reprinted by permission of Forbes Media LLC 2013. All rights reserved.
Available from the Hoover Press is Reforming Americas

Health Care System: The Flawed Vision of ObamaCare,
edited by Scott W. Atlas. To order, call 800.935.2882 or
visit www.hooverpress.org.
66
T H E CO N ST I T U T I O N
Are You Smarter than

the Constitution?
The founders knew what they were doing. By Richard A. Epstein.
Todays economic problems are so pervasive, some argue, that we should

rethink the fundamental structure of our venerable Constitution. University of Texas law professor Sanford Levinsons recent book, Our Undemocratic Constitution, argues for jettisoning our constitutional structures in
favor of more flexible institutional arrangements which, he thinks, will
prove better adapted to our troubled times.
In a recent New York Times column, Levinson raised the ante by calling the Constitution imbecilic. The title of his column, Our Imbecilic
Constitution, draws on the Federalist Papers use of the epithet imbecilic
to describe the state of affairs under the ill-fated Articles of Confederation,
under which the United States suffered from a weak central government
that was unable, for example, to levy taxes to support its endeavors. The
federal Constitution fixed that problem by creating a stronger national
government than existed under the Articles, albeit one that exercised only
a fraction of the powers that are now vested in Congress, some of which
have been delegated to the administrative agencies. In Levinsons view,
the same harsh indictment can now be made of the 1787 Constitution.
RICHARD A. EPSTEIN is the Peter and Kirsten Bedford Senior Fellow at the
Hoover Institution and a member of Hoovers John and Jean De Nault Task
Force on Property Rights, Freedom, and Prosperity. He is the Laurence A. Tisch
Professor of Law at New York University Law School and a senior lecturer at the
University of Chicago.
67
His argument rests on his distaste for two principles that create gridlock:
separation of powers, and checks and balances. He writes:
Our vaunted system of separation of powers and checks and
balancesa legacy of the founders mistrust of factionsmeans that
we rarely have anything that can truly be described as a government.
Save for those rare instances when one party has hefty control over four
branchesthe House of Representatives, the Senate, the White House
and the Supreme Courtgridlock threatens. Elections are increasingly
meaningless, at least in terms of producing results commensurate with
The many obstacles toward legislation, in his view, make it well nigh
impossible to form a coherent national policy. To find a cure, Levinson
argues, it is important to take a page from the Progressive policies of Woodrow Wilson. Long before he was elected president, Wilson insisted that the
structural safeguards of the original Constitution were an impediment to
responsible social policy. Historically, it is clear that Wilson won that debate.
Todays working Constitution is quite different from the sparer government
regime put in place by the original Constitution, the 1791 Bill of Rights,
and the Civil War amendments, most notably the Fourteenth Amendment
of 1868. (The Fourteenth Amendment gave citizenship to all former black
slaves and imposed extensive limitations on the powers that the states could
exert over their own populations. Its net effect was to make government at
both the federal and state level smaller than in 1787.)
The areas of greatest national distress are the very areas where federal
power has expanded the most.
For the most part, those restrictions worked well through the early years
of the twentieth century. Indeed, in writing about this issue, David Brooks
noted that the size of the federal government throughout the nineteenth
century was about 4 percent of GDP, and it grew to about 10 percent
under the New Deal. According to the Congressional Budget Office, that
number has increased to about 25 percent today. The increased role of the
government in the economy has harmed American society: all too often,
68
the challenges facing the country.
efficient private activities have been displaced by less-efficient government

programs with large transfer payments and high regulatory costs that do
wonders for their beneficiaries but little good for anyone else.
E R O D I N G T HE LI MI TS
How did we get into this position? Through conscious deviations from
the original constitutional plan. Historically, the system of limited govHoover Digest 2013 No. 2
69
ernment started to erode even before the great Progressive triumphs of

the New Deal era (and, most dramatically, the 193637 Supreme Court
term). The Seventeenth Amendment to the Constitution, adopted in
1913, authorized the direct election of senators. Before its passage, senators had been chosen by state legislatures. Without question, the amendment reduced the power of the states to restrain national legislation.
The Supreme Court chipped in as well. Even though it had the power
of judicial review, it did not always choose to exercise it. Between 1900
and 1920, the court gave its blessing to the progressive income tax and to
estate and gift taxation. In the 1920s, it upheld New Yorks rent-control
law in Block v. Hirsh and extensive zoning powers in Euclid v. Ambler. The
1930s saw the rise of independent administrative agencies, the end of constitutional protection for economic liberties, and a vast but questionable
expansion of congressional power under the commerce clause.
The simple truth is that the areas where this nation finds the greatest
distress are the very areas where federal power has expanded the most.
Levinson does not appreciate the force of these trends because he
regards gridlock as a dirty word and thinks that unified government
action is required to get us out of the current malaise. His suggestions are
strong stuff. One idea is that the winner of the presidential election gets to
appoint ten members to the Senate and fifty to the House of Representatives over his four-year term.
These numbers are not chosen at random, but to give the president
far greater leverage in moving through Congress whatever legislation he
wants. These extra senators and representatives are, after all, not beholden
to the voters in any state, and can thus do the bidding of the president.
Levinsons idea is to introduce into the United States a parliamentary system of government through the back door, something long championed
by progressives like Woodrow Wilson. Levinson suggests removing or
weakening the presidential veto as part of this scheme. The point seems
idle, however. How often would the president want to veto legislation that
his beefed-up party supports?
In addition, Levinson thinks that we should do away with the Electoral
College; the president can thus be chosen by a popular majority. To be sure,
the Electoral College has its problems. Candidates dont bother to campaign
70
in safe states. But that hardly counts as an indictment of the system. Without the Electoral College, each candidate would campaign almost exclusively in his safe states and devote far more effort to bringing out the loyal
voters than to winning over the fence hangers. The likely result is greater
nationwide polarization, especially by region. And if the elections outcome
were too close to call, we would have to endure a nationwide recount that
would make the Bush versus Gore dispute a comparative walk in the park.
On this issue, it is best to leave the status quo well enough alone.
California has passed many constitutional amendments. The result? A set
of ingrained institutional problems.
Levinson also wishes to undermine judicial supremacy. One possibility, he coyly suggests, is to require seven out of nine Supreme Court votes
to overturn unconstitutional legislation. Of course, that would, in the
current setting, totally insulate President Obamas health care plan from
judicial assessment, and effectively gut the practice of judicial review in
all but the most extreme cases. Another possibility is to make Supreme
Court justices responsive, in some way, to the will of the electorate, which
could lead to election campaigns or recall elections on a grand scale, during which the court would still be required to function. The template for
these and other unwise reforms is the pattern of governance found in the
states, which have had little or no trouble amending their own constitutions on countless occasions.
We shouldnt take any comfort in Levinsons desire to jump from the
frying pan into the fire. California has passed many constitutional amendments. It has elected judges, held recall elections, and passed popular initiativesall resulting in a set of ingrained institutional problems that
threaten to heap ruin throughout the state. New York and Illinois also
have lots of activity at the constitutional level, and their budgets and internal politics are in turmoil as well.
W H Y T HE C H ANG E S R U N AG R O U ND
The modern world offers no escape from our constitutional problems.
Nor should we expect it to. It is simply irresponsible to propose masHoover Digest 2013 No. 2
71
sive structural changes in constitutional governance without any theory to

indicate why and how they are likely to make things better. The only way
to think about governments is to first identify the set of individual rights
that they are supposed to protect, after which it is possible to put in place
the constitutional provisions on both individual rights and government
structure that might best protect those rights.
Ultimately, the set of public institutions in place at the federal and state
levels depends critically on articulating a strong theory of rights that sufficiently limits government discretion at all levels. In my view, it is virtually
certain that the United States will continue to totter unless and until its
political leaders take strong steps to re-establish the institutions that can
allow government to perform the few key tasks it can do best, without
intruding endlessly into the lives of ordinary citizens.
Right now, every important tax rate is prey to political manipulation.
Similarly, the weak protections afforded to private property and private
contract allow all levels of government to use their powers of taxation
and regulation to undermine private businesses for no long-term public
advantage.
No one should defend a state of anarchy to ward off the excesses of state
power. But unless we rediscover the middle ground between too much and
too little government power, we will continue to suffer as a nation, whether
or not we continue to operate under what remains of the federal Constitution. The original Constitution was not imbecilic. On many questions, it
reflects a level of wisdom that has unfortunately been lost today.
Reprinted from Defining Ideas (www.hoover.org/publications/defining-ideas). 2013 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.
Available from the Hoover Press is The Case Against the

Employee Free Choice Act, by Richard A. Epstein. To
72
A More Powerful
Message
To advocate for a better world, conservatives would do well to
acknowledge the world as it is. By Peter Berkowitz.
Political moderation is a maligned virtue. Yet it has been central to American constitutionalism and modern conservatism. Such moderation is
essential today to the renewal of a conservatism devoted to the principles
of liberty inscribed in the Constitutionand around which both social
conservatives and libertarians can rally.
It is a misfortune, inseparable from human affairs, that public measures are rarely investigated with that spirit of moderation which is essential to a just estimate of their real tendency to advance or obstruct the public good, observed James Madison in Federalist No. 37. The challenge,
Madison went on to explain, is more sobering still because the spirit of
moderation is more apt to be diminished than promoted by those occasions which require an unusual exercise of it.
In a similar spirit, and in the years that Americans were declaring independence and launching a remarkable experiment in self-government,
Edmund Burke sought to conserve in Great Britain the conditions under
which liberty flourished. To this end, Burke exposed the error of depending on abstract theory for guidance in practical affairs. He taught the
PETER BERKOWITZ is the Tad and Dianne Taube Senior Fellow at the Hoover
Institution, the chairman of Hoovers Koret-Taube Task Force on National Security and Law, and co-chairman of Hoovers Boyd and Jill Smith Task Force on
Virtues of a Free Society.
73
supremacy in political life of prudence, or the judgment born of experience, bound up with circumstances and bred in action. He maintained
that good policy and laws must be fitted to the peoples morals, sentiments, and opinions. He demonstrated that in politics the imperfections of human nature must be taken into account even as virtue and
the institutions of civil society that sustain it must be cultivated. And he
showed that political moderation frequently counsels rejecting the path of
least resistance and is sometimes exercised in defending principle against
majority opinion.
Social conservatives should refrain from trying to use the federal government
to enforce the traditional understanding of sex, marriage, and the family.
Madisons words and example and Burkes words and example are as
pertinent in our time as they were in their own. Conservatives should
heed them as they come to grips with two entrenched realities that pose
genuine challenges to liberty, and whose prudent management is critical
to the nations well-being.
The first entrenched reality is that big government is here to stay. This
is particularly important for libertarians to absorb. Over the past two hundred years, society and the economy in advanced industrial nations have
undergone dramatic transformations. And for three-quarters of a century,
the New Deal settlement has been reshaping Americans expectations
about the nation-states reach and role.
Consequently, the U.S. federal government will continue to provide a
social safety net, regulate the economy, and shoulder a substantial share of
responsibility for safeguarding the social and economic bases of political
equality. All signs are that a large majority of Americans will want it to
continue to do so.
In these circumstances, conservatives must redouble their efforts to
reform sloppy and incompetent government and resist governments
inherent expansionist tendencies and progressivisms reflexive leveling
proclivities. But to undertake to dismantle or even substantially roll back
the welfare and regulatory state reflects a distinctly unconservative refusal
to ground political goals in political realities.
74
Conservatives can and should focus on restraining spending, reducing

regulation, reforming the tax code, and generally reining in our sprawling federal government. But conservatives should retire misleading talk
of small government. Instead, they should think and speak in terms of
limited government.
The second entrenched reality, this one testing social conservatives, is
the sexual revolution, perhaps the greatest social revolution in human history. The invention, and popularization in the mid-1960s, of the birthcontrol pilla cheap, convenient, and effective way to prevent pregnancymeant that for the first time in human history, women could have
sex and reliably control reproduction. This greatly enhanced their ability
to enter the workforce and pursue careers. It also transformed romance,
reshaped the family, and refashioned marriage.
Brides may still wed in virginal white, bride and groom may still promise
to love and cherish for better or for worse and until death do them part, and
one or more children may still lie in the future for many married couples.
Nevertheless, 90 percent of Americans engage in premarital sex, cohabitation before marriage is common, and out-of-wedlock births are substantial.
Divorce, while emotionally searing, is no longer unusual, legally difficult, or socially stigmatizing. Children, once the core reason for getting
married, have become optional. Civil unions for gay people have acquired
majority support and same-sex marriage is not far behind.
Big government is here to stay. Conservatives should focus on reining it in.
These profoundly transformed circumstances do not oblige social conservatives to alter their fundamental convictions. They should continue to
make the case for the traditional understanding of marriage with children
at the center, both for its intrinsic human rewards and for the benefits a
married father and mother bring to rearing children. They should back
family-friendly public policy and seek, within the democratic process, to
persuade fellow citizens to adopt socially conservative views and vote for
candidates devoted to them.
Yet given the enormous changes over the past fifty years in the United
States concerning the ways individuals conduct their romantic lives, view
75
marriage, and think about the familyand with a view to the enduring
imperatives of limited governmentsocial conservatives should refrain
from attempting to use the federal government to enforce the traditional
understanding of sex, marriage, and the family. They can remain true
to their principles even as they adjust their expectations of what can be
achieved through democratic politics, and renew their appreciation of the
limits that American constitutional government imposes on regulating
citizens private lives.
Some conservatives worry that giving any groundin regard to the welfare and regulatory state, the sexual revolution, or bothis tantamount
to sanctifying a progressive status quo. That is to mistake a danger for a
destiny. Seeing circumstances as they are is a precondition for preserving
ones principles and effectively translating them into viable reforms.
Even under the shadow of big government and in the wake of the sexual revolution, both libertarians and social conservatives, consistent with
their most deeply held beliefs, can and should affirm the dignity of the
person and the inseparability of human dignity from individual freedom
and self-government. They can and should affirm the dependence of individual freedom and self-government on a thriving civil society, and the
paramount importance the Constitution places on maintaining a political
framework that secures liberty by limiting government.
So counsels constitutional conservatism well understood.
New from the Hoover Press is Constitutional

Conservatism: Liberty, Self-Government, and Political
Moderation, by Peter Berkowitz. To order, call
76
Now Go Deep
Politics is only topsoil. The enduring values of conservatism are the
roots. By David Davenport.
Months after the presidential contest, obituaries for conservatism are

still appearing. The Titanic is sinking, says one commentator; the conservative arguments put forward in the 2012 election will soon be
relics in a museum, writes another. Demography is destiny, many say,
and conservatism is basically populated by old white men whose day
is done. A standard refrain is that conservatism needs to change both
its message and its methods if it hopes ever to be heard again. Time for
an extreme makeover.
I have a slightly different message for conservatives: its time to go deeper.
Politics is only the shallow topsoil of the American political debate.
Its easily blown about by campaign ads and rhetoric, influenced by
momentum and even hairstyles. Former British prime minister Harold
Wilson wisely observed that a week in politics is a long time. Remember James Carvilles book after the 2008 election? The title boldly proclaimed 40 More Years: How the Democrats Will Rule the Next Generation. Less than two years later, Democrats suffered historic defeats in the
midterm elections.
Doubtless mistakes were made, as they say, at the political level in
2012. But the real work of conservatives now is not at that superficial,
topsoil level; it is in the deeper soil of policy and the taproot of values
where conservatives need to toil now. Americans should be presented with
DAVID DAVENPORT is counselor to the director and a research fellow at the
Hoover Institution.
77
a deeper and more compelling narrative about the policy choices facing
the country and the problems the present path will create. It is less about
an extreme makeover and more about deepening its own policy message
and clarifying its own values. Otherwise, why bother to become merely a
pale version of liberalism simply to broaden your appeal and win?
For example, there is a serious conversation to be had about the family, one that is not reduced merely to pro-life and pro-choice sound bites,
one that doesnt begin and end with same-sex marriage. Liberal Harvard
professor Daniel Patrick Moynihan pointed out the importance of a stable
family life to the health of the republic in the 1960s, and many have noted
the troublesome decline of family stability and the birthrate in Europe.
That conversation needs to take place in a serious way here in America.
Which family values are entirely personal, and which affect the public
good? This question of values is one that conservatives should appropriately raise, but in a thoughtful way.
How does America lead in a dangerous world? Conservatives have more
answers than liberals do.
There is a real debate to be had about the role of government. Here

my Hoover Institution colleague Peter Berkowitz rightly points out
that conservatives have mistakenly allowed the debate to be about
big versus small government. Government is big and it isnt likely to
shrink much. The real debate is about the role of government, not
merely its size. Its about limited government, not just big government.
Which health care decisions, marriage decisions, and social questions
are essential for government to decide? Federalism requires that we
ask whether an issue is for individuals or government to decide, and if
government, which branch and which level? That, again, is a serious
debate that needs more than the divisive question: Are you in the 47
percent or the 1 percent?
Conservatives arent wrong about immigration, and will make a big
mistake if they succumb to resolving these hard policy questions merely
on the political level so they can win Latino votes. What proper interest does a country have in deciding how many and who will be allowed
78
to enter? What about legal, not just illegal immigration: how do we

encourage the sort of immigration that will strengthen the country in
important ways?
Americans should be presented with a deeper and more compelling
narrative.
A strong national defense is not something that Americans are ready

to sacrifice. Even independent voters were greatly troubled by the lack of
security at our government facility in Benghazi, Libya, and that concern
risked becoming a tipping point in the recent presidential campaign. How
does America lead in a dangerous world? That is a question about which
conservatives frankly have more answers than liberals.
When a progressive friend asked me how I felt after the election and I
shared some of this, he said, You are an unrepentant conservative. And
so I am. Conservatives will make a big mistake if they think only of going
wide and shallow, seeking more votes at the topsoil level of politics. First
they need to go deeper, and sharpen the core values and principles which
many Americans do share, and which if sacrificed on the altar of politics
would leave conservatism one more loud voice merely seeking votes.
Reprinted by permission of Forbes Media LLC 2013. All rights reserved.
Available from the Hoover Press is Conserving Liberty,

by Mark Blitz. To order, call 800.935.2882 or visit www.
hooverpress.org.
79
T HE M IDDLE EAST
Mission Never Quite

Accomplished
As America prepares to depart Afghanistan, the Taliban prepares to
return. By Fouad Ajami.
We wanted a clear message from Obama that the United States will continue to support democracy in Afghanistan, Fawzia Koofi, a lawmaker
and human rights activist, said recently. Its the only alternative to Talibanization.
Her honesty revealed the plain truth, without official pieties and doublespeak: the United States is quitting Afghanistan, and the morning after
it does, the Taliban will begin the reconquest of that tragic land. After
eleven years and a toll of more than two thousand Americans killed and
eighteen thousand wounded, and the expenditure of more than $600 billion, what is perhaps the longest U.S. war is winding down.
That good war of necessity, set up as a willful contrast to the war of
choice in Iraq, is in Washingtons rearview mirror. No stirring prose
attends that war. When Afghan President Hamid Karzai came to Washington for an official visit in January, the mood was sober and resigned.
He could promise immunity for the U.S. forces that would stay in his
country, but this would not change the course of things. A cunning warlorda job requirementKarzai knew it was the endgame in Kabul for
the Americans.
FOUAD AJAMI is a senior fellow at the Hoover Institution and co-chairman of
Hoovers Herbert and Jane Dwight Working Group on Islamism and the International Order.
80
President Obama, who had made Afghanistan his just war of necessity,
had won re-election and he insisted that the conflict was meant to avenge
what befell the United States on September 11, 2001. A year into his first
term, he had doubled down in Afghanistan, ordering a surge of his own.
The potential damage to his presidency from war in the Hindu Kush was
contained. The Republicans couldnt outflank him, for they, too, knew
that this was an unpopular war.
B L OO D L ES S R E ALI SM
But Obama had been shrewd. Early on, he had stripped the Afghan campaign of exalted claims. Not for him was the passion of President George
W. Bush about the Iraq War spreading freedom throughout the Arab
world. Obama had spoken of a civilian surge of experts and technocrats
from all walks of life descending on Afghanistan and tackling its overwhelming troubles. This was shelved and forgotten. A bloodless realism
guided the enterprise.
We would end the war responsibly, Obama would repeatedly observe.
He was without illusions about the man in Kabul. In Bob Woodwards
Obamas Wars, the president asks and answers the central question about
the local partner in that war. Why should Karzai change? The Afghan
could go on with his ways, Obama said, and the U.S. would be stuck
tending to the country for him.
American soldiers could labor and sacrifice in Afghanistan, but the
flights, eight a day, from Kabul to Dubai would haul off the cash for the
warlords to prepare for the time when the American centurions would
be gone.
No stirring prose attends this war.
There is much said about the country being a graveyard for

empires, about the codes of the Pashtuns. But decades of mayhem
and corruption have hardened and wrecked the culture. Plainly, the
warrior bandits live off strategic rent, the subsidies that come to them
from foreign donors caught up in the messiness of Afghanistan. You
would think that these proud Afghans would want the departure of the
81
Americans, but they dread the day. Luck had come to them when AlQaeda, Arab jihadis, and financiers nested among them. Like a magnet, the Arabs had pulled in the mighty Americans with their gear and
deep pockets. A decade of this lucrative trade for the Afghans in power
has been heady.
In 2009, the U.S. ambassador to Kabul at the time, Karl Eikenberry,
explained the Afghan and Karzai ways in a cable he sent to Washington:
President Karzai is not an adequate strategic partner. He and much of his
circle do not want the U.S. to leave and are only too happy to see us invest
further. They assume we covet their territory for a never-ending war on
terror and for military bases to use against surrounding powers.
MO C K I N G T HE I MPE R I ALI STS

Say what you will about the Afghan warrior bandits: in the decade Americans spent among them, they never told us sweet things about our time,
and our role, in their country. This was imperialism with a new twist.
The clients dependent on imperial protection never wearied of secondguessing the protectors.
Karzai must be unique in that regard in the long line of unsavory despots Washington supported over several decades in developing countries.
For him, the coalition forces were predators inflicting pain and ruin on
the Afghans. At times, the foreign protectors ranked lower in esteem than
the Taliban.
You would think those proud Afghans would yearn for the departure of
the Americans, but they dread the day.
In November 2011, Karzai gave the quintessential Afghan statement

about the place of the Americans and their coalition partners in his homeland. The lion doesnt like it if a foreigner intrudes into his house. The
lion doesnt like it if a stranger enters his house. The lion doesnt want his
children to be taken away by someone else in the night, the lion wont let
it happen. All the lion would tolerate is for the outsiders to just guard
the four sides of the forest.
82
Well, soon the lion will be on his own. No Americans will be under any
compulsion to dwell on the meaning and the ways of the loya jirga, the
assembly of elders. We will be spared anthropological recitations about the
Pashtunwali, the code of the Pashtuns, for we have already seen through
the pretense.
There remain earnest Afghan women such as Fawzia Koofi and those
schoolgirls we glimpse in their uniforms when our television crews venture into that country. One shudders in fear and anxiety for them. They
wont be aboard the flights to Dubai. They will be there when the pitiless
soldiers of the Taliban, like the Khmer Rouge of Cambodia, sweep in and
overwhelm all that the foreign protectors have left in place.
Reprinted by permission of Bloomberg. 2013 Bloomberg LP. All rights reserved.
New from the Hoover Press is The Syrian Rebellion, by

Fouad Ajami. To order, call 800.935.2882 or visit www.
hooverpress.org.
83
T HE M IDDLE EAST
What Ever Happened

to Bahrain?
The Arab spring never arrived there, and Washington chose not to
care. By Larry Diamond.
Of the half dozen Arab states that were shaken by popular demands
for democracy when the Arab spring erupted two years ago, Bahrain
is the easiest to forget. In sharp contrast to Tunisia, Egypt, Libya, and
Yemenwhere dictators were toppledor even Syria, with its ongoing
civil war, Bahrains authoritarian monarchy has crushed the democratic
opposition.
Of the six countries gripped by revolutionary fervor, Bahrain is the
smallest in size and population, with most of its 1.3 million people (nearly half of them noncitizens) crowded onto an arid, largely barren island
about a third the size of Rhode Island. It is not nearly as rich as its small
Gulf neighbors, Kuwait and the United Arab Emirates, and its oil exports
rank a paltry forty-eighth in the world. Among the states of the Arab
Middle East, Bahrain may be the most dependent on a powerful neighbor,
Saudi Arabiawhich intervened militarily in March 2011 to rescue the
besieged and deeply unpopular monarchy.
But along with its mounting problems, Bahrain has a geostrategic
trump card: location. Jutting out in the center of the Persian Gulf, less
than a hundred miles from Iran, it hosts the U.S. Fifth Fleet, the pillar of
LARRY DIAMOND is a senior fellow at the Hoover Institution and a coordinator of
the Iran Democracy Project at Hoover. He is also a senior fellow at the Freeman
Spogli Institute at Stanford University.
84
naval security in the region and an indispensable counterweight to Irans

ambitions for regional hegemony.
Thus, Bahrain is a major strategic ally of the United States. And so
the active mobilization into the streets of more than a quarter of Bahrains entire citizenry became what the Al-Jazeera network called the Arab
revolution that was abandoned by the Arabs, forsaken by the West, and
forgotten by the world.
I N S EC U R E AND V I O LE NT
Since Bahrainis first took to the streets on February 14, 2011, to demand
revision of the constitution and a transition to democracy, the United
States has faced an acute and painful instance of the classic tension between
security interests and moral concerns. Deeply insecure over its minority
status as a Sunni Muslim monarchy reigning over a Shia Muslim majority,
the Al-Khalifa monarchy responded to the peaceful protests at the Pearl
Roundabout in the capital, Manama, with force. On Bloody Thursday,
February 17, King Hamads security forces raided the protesters in the
dead of night, killing four and injuring some 300.
Initially, the protesters had demanded merely freedom, democracy, and
equality (which could have preserved the monarchy on a new constitutional
basis, with limited powers). Even many Bahraini Sunnis (from outside the
privileged royal elite) rallied to this campaign for accountability and justice.
In particular, Bahrains Shia majority was tired of living as second-class citizens, utterly marginalized in the distribution of power and wealth. The contrast between their hardscrabble, high-density housing settlements and the
extravagant grounds and palaces of the royal family had already been vividly
documented. Five years earlier, Bahraini activists used Google Earth to display dozens of satellite images of royal properties, many of them private
islands, replete with palaces, lavish swimming pools, lush gardens, yachts,
and even a private golf course, racetrack, and hunting ground. Nevertheless,
a power-sharing deal could probably have been worked out if the regime
had responded to the 2011 protests with negotiations rather than repression. After all, King Hamad had assumed the throne in 1999 as something
of a political reformer; he and his crown prince were said to remain inclined
toward flexibility; and the formal architecture of an elected parliament had
85
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Reuters/Hamid I. Mohammed
allowed the moderate Shia political society, Al-Wefaq, to win eighteen of the
forty seats in the lower house as recently as 2010.
If political reform and a negotiated settlement were an option when the
protests broke out in February 2011, they were not so in the mind of the
Saudi monarchyor its hard-line Bahraini allies like the prime minister
and the chief of the royal court. The Saudi regime is deeply anxious about
stability in its own oil-rich Eastern Province, where most of its roughly
three and a half million Saudi Shia are located, and where the Shia form
a majority. For the House of Saud, the prospect of a Shia-dominated government in Bahrain must have raised the specter of escalating demands for
equality and dignity from Saudi Arabias own Shia minority.
Bahrains Bloody Thursday cleared the Pearl Roundabout but only
inflamed popular anger. Five days later, over a hundred thousand Bahrainis (nearly 15 percent of the indigenous population) took part in a
march to honor the protesters who had been killed. As the protests escalated in size and intensity, King Hamad offered modest concessions, but
too modest and too late. By then, Bahrains aroused majority would settle
for nothing less than a purely constitutional monarchy, and militants were
calling for an end to the monarchy altogether. As protests escalated further in March 2011, the monarchy called upon the Saudi-dominated Gulf
Cooperation Council for assistance.
In the early morning of March 17, five thousand soldiers, backed up by
tanks and helicopters, routed the demonstrators who had returned to the Pearl
Roundabout. More than a thousand were arrested, including several leaders
of the Haq Movement, which had split off from Wefaq in protest against the
2002 constitution and the latters decision to participate in elections. Among
the arrested Haq leaders were its head, Hassan Mushaima, and a mild-mannered engineering professor and human rights activist, Abduljalil al-Singace.
The March 17 crackdown dealt a devastating blow to popular aspirations for democracy in Bahrain, and marked a descent into new depths
of repression. There followed a state of emergency, beatings of hospital
patients, large-scale arrests of health workers, denial of medical care to the
injured, new waves of arrests of peaceful dissenters, economic retribution,
censorship of newspapers and social media, and police brutality so rampant that the BBC dubbed the country an island of fear.
A woman uses her mobile phone to record an anti-government protest in the village of
Barbar, west of Manama, Bahrain, in January. Thousands of antigovernment protesters
continue to organize rallies in the Persian Gulf state, which hosts the U.S. Fifth Fleet. A State
Department fact sheet on Bahrain calls it a vital U.S. partner in defense initiatives and a
major non-NATO ally. Barely visible is language calling for reform and reconciliation.
This is the context in which Bahrains highest appeal court confirmed

in January 2013 the life sentences of seven Bahrainis accused of plotting
against the government, including Mushaima, Singace, and Abdulhadi
al-Khawaja, co-founder of the Bahrain Center for Human Rights (and a
dual Danish citizen), who staged a 110-day hunger strike after his arrest
and torture in February of 2012.
The use of torture by Bahraini security services against detainees has been
widespread and systematic, aimed at punishing, humiliating, and breaking the spirit of the protest leaders. On May 19, 2012, Singace released a
harrowing twenty-two-page statement detailing his mistreatment. To sum-
87
marize: in the early morning of March 17, 2011, a group of masked men
broke into his home, beat and blindfolded him, and took him forcibly to
an unknown location without a warrant for his arrest. There, AJ (as he is
known to his Western friends), along with thirteen fellow Shiite activists,
was beaten, interrogated, and sexually abused while being held in a windowless 2-by-3-meter cell for roughly fifty days. During this period he was
interrogated without legal representation or knowledge of his alleged crime.
While he was being tortured with electric shocks and deprived of food,
water, and sleep, his oldest son was also imprisoned and interrogated. Partially paralyzed since birth, the elder Singace was denied basic health needs
and forced to stand on his one working leg for hours without his crutches.
Repeatedly, the authorities refused to let him carry out his Shiite prayer rituals and threatened to rape him, his daughters, and his wife. From my close
personal knowledge of AJ (a modest and generous man who was a Draper
Hills Summer Fellow at Stanfords Center on Democracy, Development,
and the Rule of Law), I have no doubt that his allegations are true.
The United States retreats too quickly into cynicism, failing to exercise
the full extent of our leverage.
Human rights organizations have documented many other cases of this

kind. So has the Bahrain Independent Commission of Inquiry (BICI),
established by the king on June 29, 2011, and composed of distinguished
international figures. It found systematic practice of torture and other
forms of physical and psychological abuse, as well as a culture of impunity for the perpetrators. While some of its recommendations for structural
reform were formally adopted, most remain to be implemented, despite
continual appeals from U.S. and European officials for dialogue, reconciliation, and concrete reforms (as thensecretary of state Hillary Clinton put
it two weeks before the BICI report was released on November 23, 2011).
Unfortunately, even after the latest cynical charade of justice, Bahrain
remains forsaken by the West. The United States has from time to time
issued statements of concern about arrests and convictions, but always
couched in the politesse of a big power with bigger issues to address. The
State Departments Fact Sheet on U.S. Relations with Bahrain, last
88
updated in August 2012, trumpets Bahrain as a vital U.S. partner in

defense initiatives and a major non-NATO ally (formally so designated
in 2002). Barely visible in this effusion is some gentle continuing language
on the need for reform and reconciliation.
W A S HI N GT O N I S FAR FR O M H E LPLE SS
It is an old story in the foreign policy of this, the worlds most powerful
democracy. We need a substantial security presence in the Persian Gulf now as
much as ever. But we do not need to buy in to the regimes false framing of this
as a sectarian conflict pitting a loyal American ally against an Iranian fifth column. Neither should we underestimate the cards we hold. Bahrain and Saudi
Arabia are more directly threatened by Iran than we are, and they need the
stabilizing presence of the U.S. Fifth Fleet at least as much as we, the United
States, perceive a national security interest in being there. As has so often been
the case when interests collide with principles on the world stage, we retreat
too quickly into cynicism, failing to exercise the full extent of our leverage.
The situation in Bahrain is not only deeply unjust but also unsustainable. Sooner or later a deeply aggrieved and enraged majority will erupt
again, and when it does, the anger and profound disappointment will be
directed at the United States as well. The AJs of Bahrain are our natural
partners in the quest for freedom in the Arab world, and we have failed
them. We expected something better of President Obama after he declared
in Cairo in June 2009 that freedom, democracy, and the rule of law are
not just American ideas; they are human rights. And that is why we will
support them everywhere. In Bahrain, and in too much of the Arab
world, those remain mere words.
Reprinted by permission of the Atlantic. 2013 Atlantic Monthly Group. All rights reserved.
Available from the Hoover Press is Jihad in the Arabian

Sea, by Camille Pecastaing. To order, call 800.935.2882
or visit www.hooverpress.org.
89
I NT ELLIGENC E
The Threat Multipliers

Why are we so bad at predicting the next hot spot or bad guy? Because
we fail to study the conditions that create them. By Amy B. Zegart.
In 1995, President Clinton issued a directive demanding that intelligence

priorities be placed into tiers. They were, and Afghanistan was near the
bottom. In 2000, a self-appointed bipartisan Commission on Americas
National Interests tried a similar drill. It ended up assigning counterterrorism and democracy promotion outside the Western Hemisphere as
second- and third-tier interests. In 2011, former defense secretary Robert
Gates told West Point cadets, When it comes to predicting the nature
and location of our next military engagements, since Vietnam, our record
has been perfect. We have never once gotten it right, from the Mayaguez to Grenada, Panama, Somalia, the Balkans, Haiti, Kuwait, Iraq, and
morewe had no idea a year before any of these missions that we would
be so engaged.
Why do these lists have such an abysmal track record? Because they
tend to focus on hot spots and bad guys: the places and adversaries that
make headlines rather than the underlying forces that ignite and inflame
conflict. Instead of lists of challenges, the Obama administration should
think much more about drivers of challenges, understanding better the
forces that are likely to amplify and multiply security threats now and over
the longer term. Think of these drivers as threat multipliers. They dont
AMY B. ZEGART is a senior fellow at the Hoover Institution and an affiliated

faculty member at the Center for International Security and Cooperation at Stanford University.
90
make the threats. They make the threats more dangerous, numerous, and
intractable. In my view, three threat multipliers are critical and deserve
much more systematic thought in Obamas second term: institutional
mismatch, climate change, and technology.
I N S T IT U T I O NAL MI SMATCH
Within states and across them, institutions are slow to adapt to new global
political realities. This matters. Effective governance is the key to both
global economic development and security, tamping down instability, and
responding quickly so that small crises stay small and big problems get the
attention they need.
Governments and international organizations are changing. The problem is they arent changing fast enough. At the state level, we are in the
midst of three races:
In the Middle East, the race is whether new democracies can be institutionalized fast enough to stave off instability. It doesnt look promising.
History suggests that building and sustaining democracies takes time.
Since 1950, only twenty-two countries have been continuously democratic.
In China, the adaptation race is whether the communist regime can deal
with massive social disruption triggered by the countrys breakneck economic development. For all the talk of Chinas rise, a weak China could
be vastly more dangerous, stoking nationalist flames and adopting a more
aggressive foreign posture to divert attention from domestic woes.
In the United States, the race is to transform a creaky 1940s national
security architecture to deal with a skyrocketing number of actors and
crosscutting issues. So far the U.S. government has responded to this
rising complexity by adding complexity, creating scores of coordinators,
czars, and special envoys right alongside the existing bureaucracy. When
policy coordination is so important, creating more offices to coordinate
is not a winning design.
Multinational institutions are also showing their age. The European
Union may be coming unstuck. NATO is struggling to find relevance.
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92
The United Nations Security Council and the International Monetary

Fund are mired in governance schemes that are out of whack with current power realities. The G-20 is a new player whose aspirations exceed
its capabilities. Improving and modernizing these organizational arrangements is vital because the United States cannot lead alone and international security problems increasingly require collective action. When institutional arrangements dont reflect power realities, cooperation becomes
more difficult. Coalitions become more fleeting, ad hoc, and time-consuming. And problems are left to fester, often growing more
difficult with time.
C L IM A T E C HANG E
Climate change is a second threat multiplier that both affects traditionally
stable places and exacerbates instability in some of the worlds most volatile regions. The direct effects of global warming are well-known: more
extreme weather events like hurricanes, prolonged drought, rising sea levels, ocean acidification, and melting of arctic ice, which is already generating conflict over newly accessible shipping routes and natural resources.
The indirect effects of climate change are less discussed but equally
severe. Climate change threatens to inflame social stresses and undermine
governance in already fragile states, creating ungoverned spaces that are
the breeding grounds for international terror, crime, and unrest. Consider
this: climate change is expected to produce up to a 30 percent drop in agricultural yields in Central and South Asia; severe water stress that will affect
two billion people, including many in South Asian and African
nations already on high alert for state failure;
increases in disease out-
93
breaks as water-deprived populations rely on unsafe sources of drinking

water; and an estimated displacement of two hundred million people living in low-lying coastal areas, particularly in Asia. Climate change also
diminishes response capacity because its effects are regional, making
neighbors less able to aid one another.
TE C HN OL OG Y
The third threat multiplier is technology. The one sure thing about technology is that nobody can predict just how it will be used or by whom. Facebook began as a Harvard student social site and ended up toppling regimes
in the Arab spring. Drones used to be the surveillance and killing tools of
advanced industrialized states, and now they are being used by rebel groups
and built by teenagers. Will drones prolong civil conflict by enabling both
sides to see whos around the corner and pick their battles more carefully?
Or will they strengthen international peacekeeping by providing a low-risk
substitute for boots on the ground? Nobody really knows.
What is known, however, is that we live in the early days of a profound
new technological era that has three key attributes: lower costs of collective
action, which gives civil society far more power against the state; diffuse, often
unrecognized vulnerabilities as more systemsfrom banks to dams to weaponsbecome networked; and technical capabilities that have developed far
faster than laws, policies, and international frameworks to manage their use.
In Washington, it is often said that the urgent crowds out the important. Unless the Obama administration does more serious thinking about
how to handle these three threat multipliers, the White Houses urgent list
will only grow longer.
Reprinted by permission of Foreign Policy (www.foreignpolicy.com). 2013 Foreign Policy Group LLC. All
rights reserved.
Available from the Hoover Press is Skating on Stilts: Why
We Arent Stopping Tomorrows Terrorism, by Stewart
Baker. To order, call 800.935.2882 or visit www.
hooverpress.org.
94
I N T E L L I G E N CE
Private Spies
Even theme parks and hotel chains have their own intelligence
services now. Theyre hunting familiar quarry: valuable data in an
uncertain world. By Amy B. Zegart.
Since 9/11, a quiet intelligence revolution has been brewing inside many
of Americas leading companies. Hotel chains, cruise lines, airlines, theme
parks, banks, chemical companies, consumer products manufacturers,
pharmaceutical companies, and even tech giants have been developing inhouse intelligence units that look and act a lot like the CIA.
These organizations dont steal competitor trade secrets or wiretap your
phones. But many conduct surveillance of customers, visitors, and employees to collect information and spot potential threats. Some run red-team
exercises that involve dressing in disguise and casing company locations to
test the security. For all of them, the main job is analyzing hot-spot developments around the world, around the clockfrom violence in Syria to
environmental protesters in Californiaanything that could threaten the
brand reputation, personnel, or business interests of their parent company.
Typically these in-house intelligence units have nondescript names like
Office of Global Safety and Security. (Most of these companies dont
like to talk openly about their intelligence activities for fear it will scare
away customers or hurt their brand reputations.) But dont let the bland
names fool you. These offices are staffed with former CIA, FBI, and military professionals who have close ties to the U.S. government and conduct
AMY B. ZEGART is a senior fellow at the Hoover Institution and an affiliated
faculty member at the Center for International Security and Cooperation at Stanford University.
95
global threat reporting by working through formal channels and informal

networks around the globe. This is the privatization of American intelligence that you havent heard about. And its part of the innovative, growing business of political risk management.
Concern about political risks to business is as old as the hills, of course.
In ancient Babylon, trade insurance covered looting and pillaging, the
political risks of the day. Thomas Jefferson launched Americas first
unconventional war in 1801 because thieving thrones in Tripoli, Tunis,
and other Barbary states of North Africa were sacking U.S. merchant ships
and holding them for ransom. In modern times, oil companies have been
at the forefront of political risk management, seeing competitive advantages to understanding turmoil in oil-rich countries. Royal Dutch Shell
has been doing scenario planning since the 1970s.
But political risk matters more now than ever because of the convergence of three things:
Supply chain improvements like just in time inventory management,
which ships goods from factories to consumers as fast as possible but
leaves no stockpiles to keep business operating if anything goes awry.
Globalization, which has made it possible to make and sell products in
more countries, to more consumersand, in the process, to generate
more nodes of disruption.
These three factors have given rise to a fundamental business paradox:

businesses face greater global opportunities than ever before, along with
greater vulnerabilities. Far-flung supply chains can dramatically lower costs
but they are hard to see and manage, leaving many managers unaware of
just how exposed their business is to supplier delays, political events, and
natural disasters far, far away.
In the old days, the free world and the Soviet bloc were two different
universes. Not anymore. Now everything is connected. Ikea has stores in
Russia. My CIA alarm clock was made in China. Unrest in Cairo can cause
legging shortages in California. And communications happen everywhere:
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The information revolution, which enables small groups to transmit

messages to mass audiences in real time.
97
wi-fi can be found in Bedouin tents, at the top of Mount Everest, and on
buses in rural Rwanda. Kenyan fisherman may lack electricity but they
can check weather conditions and fish market prices on their cell phones.
All of this connectedness means that political riskscivil strife, instability,
insurgency, coups, weak legal standards, corruptionhave more spillover
effects. What happens in Vegas does not stay in Vegas.
In 2011, Orange Business Services, the business communications arm
of one of Europes large mobile phone providers, thought the protests in
Tunisia couldnt possibly affect its operations in Egypt. One week later, it
was proven wrong. The domino revolutions of the Arab spring had cascading effects on a number of industries, ranging from telecom in Europe
to the tea trade in Africa.
The Syrian despot said he wasnt worried about a U.S. invasion. He was
worried about Facebook.
And instability in the Middle East was by no means an outlier. There

were nearly three dozen attempted coups in the past decade, seven between
2008 and 2010 alone, ranging from Thailand to Niger to Ecuador. The
Fund for Peaces Failed States Index has listed more than one hundred
countries in the alert or warning category for state failure since it
began in 2007. Thats more than half the countries in the world.
In a 2011 survey of the one hundred largest high-tech companies, 81 percent of executives said they were worried about natural disasters, wars, conflicts, and terrorist attacks, a jump of 26 points from the previous year. As
Ian Bremmer notes, major geopolitical changes have occurred about once a
decade for the past fifty years: decolonization in the 1950s and 1960s, dtente
in the 1970s, the Cold Wars end in the 1980s, 9/11 and terrorism in the early
2000s. The Arab spring is the latest, and undoubtedly there will be others.
Little changes also matter more now, too. Thanks to the informationtechnology revolution, lone individuals and small groups can have a
supersized impact if their messages go viral. Julian Assange used the Internet to turn his ragtag WikiLeaks operation into a phenomenon that roiled
diplomats across the globe. In 1998, the nongovernmental organization
Global Witness, which started with three friends in a London apartment,
98
exposed the role of conflict diamonds in Angolas civil war. By 2003, its
work had helped prompt United Nations sanctions against Sierra Leone,
Angola, and Liberia, and had cowed the diamond giant DeBeers into a
certification scheme to clean up the industry.
A few years ago, before the Arab spring erupted, a Stanford colleague
of mine met with Syrian President Bashar al-Assad. The Syrian strongman
said he was not worried about a U.S. invasion. He was worried about
Facebook. He should have worried more: in the Internet age, small, local
movements often dont stay small and local for long. In business as well as
politics, power has gone asymmetric.
Understanding the changing nature of political risk and how to mitigate it is a growing industry. In large part, this is because the U.S. government has left an intelligence gap. In many countries, intelligence services
regularly share information with businesses to give them a competitive
advantage in the global arena. But U.S. intelligence agencies do not. Since
9/11, the private sector has been filling the gap. In-house intelligence
units are the most pioneering examples, but they have plenty of company.
There are now scores of open-source intelligence services, analysis shops,
and consulting firms led by former high-level officials with names like
Chertoff, Albright, Rice, Hadley, and Gates.
So when you think convergence, dont just think about drones and
spooks. There is a burgeoning convergence of intelligence and business.
The CIA may not be getting into corporate espionage, but American
companies are getting into intelligence. Theyre just not talking about it
much.
Reprinted by permission of Foreign Policy (www.foreignpolicy.com). 2013 Foreign Policy Group LLC. All
rights reserved.
Available from the Hoover Press is Eyes on Spies:

Congress and the United States Intelligence Community,
by Amy B. Zegart. To order, call 800.935.2882 or visit
www.hooverpress.org.
99
F OREIGN P OLIC Y
Keeping the Peace

If international order must be rebuiltagainthen let us use the
proper tool: realism, not idealism. By Charles Hill.
The mathematician and astronomer Johannes Kepler prophesied, We

shall not get through this time without difficulty, for all the factors are
prepared. Kepler was predicting the Thirty Years War of 161848, which
would launch the modern international state system in which America
and the nations of the world still operate.
What ominous factors caused Kepler to shiver? Disturbances, upheavals, and conflicts. Merchants moaned about untrustworthy bankers.
Diplomats strutted even as they wavered. The masses sullenly made
deals they needed to survive when the gathering storm broke. Varieties
of religious fervor caused many to prepare to be slain rather than submit
to rule by others.
The 1648 settlement at Westphalia, though setbacks were many and
vicious, enabled procedures fostering what eventually would be called the
international community, a term that curled many a lip in the midst of
twentieth-century world wars. Those wars were attempts to overthrow
the established world order. Those wars failed, but in recent decades have
become seemingly interminable, and have required the stewards of world
order to confront what George Shultz labels asymmetrical warfare in
CHARLES HILL is a research fellow at the Hoover Institution and co-chairman of
Hoovers Herbert and Jane Dwight Working Group on Islamism and the International Order. He is the Brady-Johnson Distinguished Fellow in Grand Strategy,
the senior lecturer in international studies, and the senior lecturer in humanities
at Yale University.
100
which professional standards have been turned into self-imposed liabilities

by enemies who reject civilized international conduct.
No international order has proved immortal. Kepler today might note
that the world order shaped by the war he predicted might now fail to
survive to celebrate its 365th anniversary. What Keplerian factors are now
prepared for war?
Once again the crust of civilization has worn thin, and beneath can be
heard the muttering of primeval fires.
The causes of war as discerned ever since Thucydides time are three:
wars of ideology, of fear, and of gain.
The ideology of Islamism has been on the rise for generations and
now aims to expropriate the Arab spring. The ambitions of the 1979
Iranian revolution and Sunni fanaticism are transmogrifying into the
kind of major religious war that the Treaty of Westphalia sought to
forestall.
Thucydides traced the war that ruined ancient Greece to Spartas fear
that Athens growing power was crossing the line where it would be impossible to contain. Israel faces that threat from Iran, as todays international
structures for the maintenance of international security have failed to halt
Irans drive, propelled by religious ideology, to possess nuclear weapons.
Israel, bereft of its traditional sense of American support, is making ready
to act against Irans menace to its existence. President Obamas priority
must be to repair relations with Israel by convincing its leaders that the
United States understands Israels uniquely dangerous position.
The enemies of world order watch the American elections and tell
themselves their time has come: there is a world to be gained.
And there now grows a deepening appetite for gain. America, perceived
as eager to shed the burdens of world order in order to be fundamentally transformed through European-style social commitments, talks of
engagement even when Irans purported diplomacy is a form of protracted warfare. The enemies of world order translate the American election
101
results into the lexicon of abdication, telling themselves that their time has
come: there is a world to be gained.
The causes of war are ever thus: ideology, fear, and gain.
Only Americas return to world leadership can halt this deterioration.

Sequestration will relegate the United States to the rank of a second-rate
power; it must be reversed to enable American strength and diplomacy
to be employed in tandem. Without this the prediction of a Kepler for
today must be grim. As the biographer of Augustus Caesar wrote in the
years just before the Second World War, Once again the crust of civilization has worn thin, and beneath can be heard the muttering of primeval fires. Once again many accepted principles of government have been
overthrown, and the world has become a laboratory where immature and
feverish minds experiment with unknown forces. Once again problems
cannot be comfortably limited, for science has brought the nations into
an uneasy bondage to each other.
In this maelstrom lie opportunities not for idealism but for the cold,
austere use of power, soft and hard, in order to, as Augustus was advised,
teach the arts of peace to all. The old platforms for the region, including
the peace process, are gone. New structures must be built and only the
United States can lead the construction. Peace is not at hand, but statesmen can see the possibility of laying foundations for a new Middle East in
Syria-Lebanon, Egypt-Gaza, Saudi Arabia and the Gulf, and even, should
we finally get serious, in Iran.
Reprinted from Advancing a Free Society (www.advancingafreesociety.org). 2012 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.
Available from the Hoover Press is Trial of a Thousand

Years: World Order and Islamism, by Charles Hill. To
102
F O R E I G N PO L I CY
The Road to Rogue

Pariah states tend to eventually settle down and behave, but in the
meantime they have a chilling effect on diplomacy and peace. By
Thomas H. Henriksen.
After the Soviet Union tumbled into the historical dustbin, Americans
assumed that global peace and smaller defense budgets were at hand.
Then the rise of rogue states shattered rosy predictions for the post
Cold War era. Several warlike, medium-weight dictatorships arose,
exporting terrorism, destabilizing their regions, and, most menacingly,
embarking on a quest for weapons of mass destruction, particularly
nuclear arms.
Such pariah states actually represented a return to an ancient pattern.
Barbarous polities have long challenged empires or disrupted the peace
with raids, piracy, or war. The classical Romans, for example, fought the
unruly Gauls, who collaborated with Romes archrival, Carthage. In the
eastern Mediterranean, Rome also faced the pirate kingdom of Pontus,
which plundered the coastal cities in Asia Minor, Greece, and Italy itself
until Pompey crushed it.
Closer to our own era, the fledgling American republic collided with
maritime terrorism from the Barbary Coast in its first overseas conflict
since the War of Independence. Crews from Algiers, Tunis, Tripoli, and
Morocco sailed their feluccas from the North African shore across the
Mediterranean to prey on unprotected merchant vessels from America
and Europe. Justifying their banditry under Islamic tenets (since the vicTHOMAS H. HENRIKSEN is a senior fellow at the Hoover Institution. His latest
book is America and the Rogue States (Palgrave Macmillan, 2012).
103
TH E M O S T DA N G E R O U S R O G U E S
Terrorism began to escalate in the mid-1960s. The spate of assassinations, plane hijackings, and political kidnappings led Congress in 1979
to request an annual terrorist-state list from the State Department. This
listing formed the basis of what became known as rogue states, and in time
104
tims were non-Muslims), the Barbary pirates earned a handsome livelihood from tribute paid by Western governments to be spared seaborne
raids. Even Washington handed over payments amounting to about 20
percent of the treasury during the 1790s. Finally, presidents Thomas Jefferson and James Madison dispatched warships and Marines to assault the
city-states in a campaign that lasted more than a decade and was a distant
forerunner to the clashes of today.
But modern-day rogue states differ vastly from impoverished backwaters of the Ottoman empire strung along the Maghrebs littoral, despite
their similar anti-Western sentiments. They were born in the bipolar postwar world dominated by the United States and the Soviet Union, each of
which formed and sustained alliances and clients to check, subvert, and
harass its rival. Direct mutual assault became unthinkable after the 1962
Cuban Missile Crisis brought the superpowers to the brink of mutual
annihilation. Washington and Moscow thus looked to client states: in
the Third World, Washington backed anticommunist governments, even
those with unsavory human rights records. Moscow (and Beijing, for a
time) trained, equipped, and financed national liberation fronts to oust
colonial leaders or Western allies in guerrilla wars in Asia, Africa, and
Latin America.
As the Soviet Union disintegrated in late 1991, it unleashed its former
clients. The so-called captive nationssuch as East Germany, Poland,
Hungary, and Czechoslovakiagravitated toward free markets, democracy, and Western political culture. But other Soviet protgs morphed into
rogue nations. TwoCuba and North Korearetain their communist
party structures to this day. Others kept their military-style dictatorships
with subservient civilian parties; these included Iraq, Syria, Libya, Sudan,
and Yemen. Each of todays rogue states presents a unique challenge to the
United States.
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the catalog grew to include Cuba, Iran, Iraq, North Korea, Libya, Sudan,
Syria, and South Yemen.
After the Soviet Union vanished, its rogue progeny became more conspicuous. Official notice of these aberrant, aggrieved powers came during Bill Clintons first administration. Clinton first used the term rogue
states at the presidential level in Brussels in early 1994, when he so designated Iran and Libya and states like them for posing a clear and present
danger to Europe. Once presidentially uttered, the term moved its way
into diplomatic parlance as well as less formal speech. Years later, Clintons
secretary of state Madeleine Albright tried unsuccessfully to banish the
designation with the politically correct states of concern terminology.
In Americas fledgling years, the Barbary pirates earned a handsome
livelihood from tribute paid by Western governments.
During the 1990s, apprehension deepened about a few of the adversarial states as they chased after nuclear capacity. Nuclear bombs focused
Washingtons attention like no other weaponry. Of the rogues that itched
for atomic arms, three caused recurrent nightmares in Western capitals. In
his 2003 State of the Union address, President George W. Bush famously
dubbed them the axis of evil: Iraq, Iran, and North Korea. Each was
believed to be either a nuclear-armed nation (North Korea) or a nearnuclear-weapons state (Iraq and Iran).
North Korea first traversed the nuclear arms threshold. Soon after
the Korean War (195053), the Democratic Peoples Republic of Korea
insisted on nuclear technology from its Soviet benefactor. Moscow transferred nuclear reactors to its client in the 1950s. The North Korean regime
wanted atomic weaponry as an insurance policy against perceived South
Korean and American hostility. Nuclear armaments also gave ruler Kim
Il Sung a means to ensure his legitimacy among the masses as their ultimate protector from the outside world. Fearful and envious of the Souths
accelerated industrial development and status as one of the Asian tiger
economies, the North even now regularly broadcasts threats to turn the
South into a sea of fire. These propaganda outbursts have been punctuated by terrorist acts over the decades.
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U.S. diplomatic engagement of North Korea to stop or slow its nuclear

arming yielded next to nothing from the mid-1990s to the present. Pyongyang made no bones about its nuclear-arms ambitions; indeed, it taunted
Washington. Its two nuclear tests (in 2006 and 2009) were regarded as
less than spectacular, like its long-range-missile firings. But North Korea
also fields a large conventional army that could kill thousands of South
Koreans if war broke out. The costs would be catastrophic before the combined U.S. and South Korean forces could defeat it. The prospect of mass
casualties and peninsula-wide devastation has acted as a brake on U.S.
policy toward Pyongyang.
Changes are afoot north of the demilitarized zone, however. Because of
its near-destitute economy and agriculture, the North depends on China
for fuel and food. Thus, formerly freestanding North Korea has slipped
more and more within Chinas orbit, although the two countries do spar
over Beijings prodding to reform its economy along Chinese lines. The
Kim dynasty continues to defy frequent predictions that it will break
down like the Sovietized governments east of the Elbe River. Meantime, it
tests Washingtons ability to deter a nuclear-armed rogue in Asia.
Washington backed anticommunist governments, and Moscow (and Beijing,
for a time) trained, equipped, and financed national liberation fronts.
Saddam Husseins Iraq had moved close to an undetected nuclear

threshold by the time of the Persian Gulf War in 1991. Unmasked at wars
end by international inspections, Saddam next feigned nuclear-bomb
making to deter Irans regionwide ambitions during the remainder of the
decade. The Iraqi dictator fooled the American and European intelligence
agencies into believing he would soon possess the most dangerous weapon
on earth. President George W. Bush acted on the faulty information and
marched the United States into Iraq. The U.S. military and its coalition
partners dispatched Saddam in short order but then bogged down in a
protracted, bloody, and financially draining insurgency. The United States
and its allies eventually prevailed but the victoryand the anti-rogue war
itselfremain unpopular with the American electorate. Still, the world
was rid of one of its quintessential pariah states.
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SA BE R S A N D DI PLO MACY
One viable instrument of diplomacy against rogue states is a credible
threat to wage Armageddon.
During the presidency of George H. W. Bush, the United States stared
down North Korea. Pyongyang had blocked international arms inspectors
from its territory after U.S. satellites picked up evidence of North Korean
cheating on the Nuclear Non-Proliferation Treaty, which it had signed.
Fresh from the Persian Gulf War, thenchairman of the Joint Chiefs of Staff
Colin Powell uttered a threat: If [the North Koreans] missed Desert Storm,
this is a chance to catch a rerun. Coupled with General Powells not-toosubtle warning, Washington reinforced its military footprint on the Korean
Peninsula. In response, Pyongyang temporarily opened one nuclear facility
for inspection. Later, however, it resumed its intractable posture.
The George W. Bush intervention in Iraq played a role in convincing
Libyas strongman, Muammar Gadhafi, that a similar shock and awe fate
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YONHAP
As the third member of the evil troika, Iran differed substantially in its
orientation from other renegade nations. A onetime close ally of the United States, Iran underwent an Islamic revolution to oust the shah in 1979.
Beforehand, Iran educated its youth in American universities, modernized its infrastructure, and expanded opportunities for women in a Western tilt. Overnight, the revolutionary regime switched to an adversarial
posture vis--vis its U.S. benefactor. Historically distrustful of Moscows
territorial designs since Catherine the Great, Iran cooperated only tangentially with the Soviet Union, unlike other rogue nations, and its theocratic
regime bristled at the Soviet Unions officially sanctioned atheism. The
ayatollahs running Iran also possessed their own narrow agenda for the
Persian Gulf. They sought to restore the prestige and influence of the
former Persian empire across the region and to further a Shiite religious
and political revival in Iraq, Lebanon, and Bahrain. The mullahs preferred
to call down a plague on both outside powersAmerican and Sovietin
the Gulf neighborhood.
They have been Machiavellian enough, nevertheless, to see benefits
from working with post-Soviet Moscow against the Great Satanthe
United States.
South Korean soldiers patrol their side of a fence just south of the demilitarized zone separating the two Koreas. North Korea fields a large conventional army that could kill thousands
in the South if war broke out. But amid bellicose talk, cell phones intrude into the North with
messages and pictures of a richer and happier outside world.
awaited him if he persisted in pursuing nuclear arms. He was quoted as

saying: When Bush has finished with Iraq, hell turn on us. A credible
military threat persuaded Gadhafi to open Libya to international arms
inspectors and abandon nuclear projects that A. Q. Khan, the Pakistani
scientist and black marketer, had started to build in the Libyan desert.
The saber-rattling formula could have been applied more effectively
against the gathering Iranian nuclear threat than it was. After the 2003
invasion of Iraq, the Iranian regime may have halted secret work on its
own nuclear arms, according to the still-controversial National Intelligence Estimate of 2007. But Tehrans moment of panic passed, and it
resumed its nuclear program. Today the prospect of nuclear payloads atop
Irans ballistic missiles fills Israel and other Middle East capitals with dread.
Clear signals, overawing military power, and, most of all, the credibility to strike with massive armed force have been lacking in the past
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four-year effort to persuade Iran to halt its nuclear programs. Instead,

the Obama administration mixed its messages, pleaded with Israel not
to bomb Iran unilaterally, and placed all its faith in economic sanctions.
International embargoes alone have never persuaded a rogue adversary
to renounce its nuclear aims or regional aggression. Rogue adversaries
North Korea and Iraq, for examplehave entered into arms agreements
but later found ways to evade their obligations, rendering the accords
mere scraps of paper. In attempting to halt Iranian nuclear progress,
Washingtons moves seem half-hearted. It takes unflinching warnings
and convincing military strength to dissuade an adversarial rogue from
calling ones bluff.
L ES S E R RO G U E S
Not all the former Soviet clients persisted in belligerent behavior after the
demise of their patron. Compared to the axis-of-evil threesome, the lesser
rogues degenerated into dysfunctional states.
Cuba, the former Foreign Legion of the Soviet empire, withered on
the vine without Moscows largess in oil shipments and financial credits. Havanas military forces shrank to half their former size in the post
Cold War period. Its bankrupt communist model now serves as a faint
beacon to likeminded Latin American socialists in the Castro mold. But
Cuban subversion in South America, so much a bane during the 1970s
and 1980s, has dissipated.
Bill Clinton first used the term rogue states at the presidential level in
1994, singling out Iran, Libya, and similar states for posing a clear and
present danger to Europe.
Sudan, the former lifeboat for terrorists of all stripes, from Carlos the
Jackal to Osama bin Laden, lowered its political profile as terrorist mecca.
It asked bin Laden to leave in 1996 and turned over the Jackal to the
French. Two years ago, it split into two countries as ethnic and religious
turmoil fractured what had been the largest geographical state in Africa.
Khartoum did open its territory to Irans arms trafficking for Gaza-bound
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weapons to Hamas, an Iranian proxy movement arrayed against Israel.

But mostly it hunkers down.
Rogue life cycles have been much more transitory than those of
traditionally grounded powers.
When North and South Yemen unified in 1990 to form the Republic of
Yemen, the State Department removed the Marxist-orientated South Yemen
from its terrorist listing. Today, a chaotic Yemen is in the grip of a low-grade
insurgency with an Al-Qaeda-affiliated terrorist network. Washington backs
the government with drone strikes and special operations teams.
Syria also lost its front-rank rogue status. Damascus switched its dependency from the Soviet Union to Iran, the ascending regional power. The
House of Assad, clinging to the slender reed of the Alawite minority in
Syria, desperately needed Irans help. Since the Alawites are religiously
aligned with Irans Shiite population, this new master-client relationship
possesses a religious dimension as well. Years before anti-Assad protesters
took up arms against the Damascus government, as they are doing now,
Syria and Iran cooperated closely in furthering Tehrans goals in Lebanon
among that countrys Shiite minority by arming and steering Hezbollah,
the Lebanese Shiite terrorist and political movement. This collaboration
aimed to disconcert Israel and further Iranian ambitions for an outpost on
the Mediterranean.
F U T U R E RO G U E S
The downward trajectory of the contemporary rogues channels the history of previous mavericks. Like asteroids, rogues have often burned
themselves out upon entry into the great-power atmosphere, especially
if their protector weakens or dies. These adversarial entities lack the staying power of normal powers, which rely on legitimate commerce and
routine diplomatic interactions. Garrison states are unviable, especially
in our democratizing, globalized era of life-sustaining trade, air travel,
and instant telecommunications. Even within hermetically sealed North
Korea, cell phones intrude with messages and pictures of a richer and happier outside world.
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Rogue life cycles have been much more transitory than those of traditionally grounded powers. Myanmar, for instance, abruptly veered off the
pariah path two years ago. It has embarked on limited reform and opened
a window to the West.
Changes are afoot north of the Korean demilitarized zone.
Moreover, rogues depend on the patronage and protection of stronger

powers. The original freestanding rogues in the immediate postCold War
period have either fallen apart (Libya, Yemen, Sudan) or sought shelter
under the eaves of a major patron. North Korea needs China. Syria cannot
survive without Iran. Cuba is bailed out by Venezuela with subsidized oil.
Even Iran, whose technological sophistication and abundant oil reserves
place it in a category apart from other rogue players, looks to Russia and
China to run its diplomatic interference at the United Nations.
Just as no man is an island, no rogue can be utterly alone for long. A
comforting thought in the long haul, this truth means that in the nearterm, a rogue regimes possession of nuclear arms leaves the United States
and its allies little recourse other than some form of engagement, either
diplomatic or armed.
Special to the Hoover Digest.
Available from the Hoover Press is Foreign Policy

for America in the Twenty-first Century: Alternative
Perspectives, edited by Thomas H. Henriksen. To order,
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I M M I G R AT I O N
The Immigration
Imperative
Immigrants are unlikely to be complacent about the freedom and
opportunity that for them were once only a dream. By Jeb Bush and
Clint Bolick.
One of the invariable rules of economics is that if government erects an

obstacle to goods or services that people desire, the market will find a
way around it. So it is that two young entrepreneursDario Mutabdzija,
an immigrant from Sarajevo, and Max Marty, the son of Cuban immigrantscame up with the idea of Blueseed, taking aim at the inadequate
supply of American visas for enterprising foreigners.
Blueseeds object, as the New York Times describes it, is to create a visafree, floating incubator for international entrepreneurs off the California
coast near Silicon Valley. The idea is to anchor a large ocean vessel twelve
miles offshorejust outside U.S. territorial limitswhere foreign entrepreneurs who are unable to obtain one of the few American visas available
every year can transact business with Silicon Valley firms and investors.
The venture is backed by PayPal co-founder Peter Thiel, among others.
Mutabdzija and Marty say their business is a response to overly restrictive immigration laws that make it extremely difficult for foreign talent to
enter the United States. The ship may sound like a crazy idea, says John
JEB BUSH is the former governor of Florida. CLINT BOLICK is a research fellow at
the Hoover Institution and the director of the Center for Constitutional Litigation
at the Goldwater Institute. They are the authors of Immigration Wars: Forging
an American Solution (2013, Threshold Editions), from which this article is taken.
113
Feinblatt of the Partnership for a New American Economy, but it illustrates how seriously flawed the immigration system here is. Bob Dane
of the Federation for American Immigration Reform was quoted by the
Associated Press as saying that the whole thing is a perfect metaphor for
how in corporate America, the practice to grow talent and incubate business locally is drifting awayquite literally.
The floating entrepreneurial fortress may never drop anchor. But the
fact that enterprising minds came to float such an idea speaks volumes
about the disastrous state of American immigration policy. Historically
a beacon of unfettered opportunity, our nation now turns away in epic
numbers the worlds best and brightest. In the process, we are systematically laying waste to our economic future.
A M E R I C A N DE CLI NE O R AME R I CAN PR O GRES S ?

America is different from any other country in many ways, but most significant is that our national identity derives not from a common ethnicity but
from a set of idealsnot just life, liberty, and the pursuit of happiness, but
individualism, faith, family, community, democracy, tolerance, equal opportunity, individual responsibility, and freedom of enterprise. Those ideals are
set forth in our nations founding documents and enmeshed in its institutions.
But though our nation was founded on those ideas and continues largely to hold fast to them, America does not hold a monopoly over them.
Quite the contrary: millions of people around the world cherish them and
strive toward becoming Americans. Immigrants created our nation, and
immigrants throughout our history have reinvigorated our ideals.
Immigration is an integral part of Americas lifeblood, no less today than
in years past. Almost by definition, people who move to another place by
choice are more fervent about their destination than many of those born
there by chance. That is especially true of America, whose principal beacons are freedom and opportunity. Newcomers drawn by those beacons
tend to value themnot unlike religious convertswith the great passion
that derives only from past deprivation. Immigrants are unlikely to be
complacent about the freedom and opportunity that for them were once
only a dream, and were gained through great effort and sacrifice. Our
nation constantly needs the replenishment of spirit that immigrants bring.
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Our current immigration policy, however, does not fully reflect the
importance of immigration to our nation. Our immigration laws are so
complex, cumbersome, and irrational that millions of people have circumvented them and entered our country illegally, inflicting grave damage to
the rule of law that is our nations moral centerpiece. Others have given
up and either tragically abandoned their hopes of becoming Americans or
have gone home, depriving us of their energy and talent forever.
In corporate America, the practice to grow talent and incubate business
locally is drifting awayquite literally.
Debates over immigration policy are older than our nation, and the
arguments pro and con have not changed much over the centuries.
Traditionally, our immigration policy has been premised on the belief
that an unlimited number of people around the world want to move
here. Thus our policy primarily needed to address who and how many
would be allowed to come. Today, however, there are two conditions
unlike any before, and each will exert a significant impact on American immigration:
Americas population is no longer growing on its own, so that most if
not all growth for the foreseeable future will come from immigrants.
Indeed, immigrants already make up half of all growth in the American
workforce.
For the first time, America is being forced to compete with other countries for immigrants and the needed skills they bring.
Those two realities require a significant rethinking of the premises
underlying immigration policy. Left to its current path, the American
economy is in a state of decline. Since World War II, the United States
gross domestic product (GDP) has averaged 3 percent annual growth:
enough to sustain great prosperity, upward mobility, and a generous
social-welfare net. But the Congressional Budget Office projects that
future GDP growth will average between 2 percent and 2.4 percent a year.
In fact, that projection may be far too generous. In light of the anemic
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GDP growth of the past several years, by fall 2012 a 2 percent annual
growth rate was being viewed as a reason to celebrate.
The decline in economic growth is attributable, among other factors, to
fewer workers supporting more retirees, an increasing regulatory burden
that stifles hiring and enterprise, the lack of a coherent energy policy, an
education system that produces too few skilled graduates, and a massive
debt that weighs heavy on the economy. If we could increase GDP growth
to 4 percent annually, as advocated in a recent book, The 4% Solution, it
would lead to greatly increased economic opportunities and prosperity
and sharply reduced deficits.
To put that into perspective, doubling our growth rate from 2 percent
to 4 percent would create over $4 trillion in additional economic activity over ten years: more than the entire current GDP of Germany. And it
would generate $1 trillion in new tax revenues.
Restoring economic growth will require a number of policy changes,
including a greater emphasis on free markets, free trade, entitlement
reform, and education reform. But a critical component of future economic growth is immigration reform.
Our national identity derives not from a common ethnicity but from a set
of ideals. Millions of people elsewhere in the world share those ideals.
Immigration increases a countrys human capital, explains Nobel laureate and Hoover senior fellow Gary S. Becker, a contributor to The 4%
Solution. That is to say, it increases the number of workers available to
help businesses expand or innovators make that next big breakthrough. By
increasing the size of a countrys workforce, immigration can also increase
a countrys gross domestic product. And because many immigrants are
young, a healthy inflow of them can provide the economic growth and
tax revenues that older and retired workers depend on. Indeed, over the
past twenty-five years, the countries that have experienced the greatest
economic growth have also had the highest rates of immigration.
But under the dysfunctional U.S. system, immigration for skills and
labor represents only a small fraction of the people allowed legally into
our country. People who enter on temporary student and worker visas
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often have to return to their native countries because there are not enough
green cardsthe authorization of permanent residency leading to citizenship. Meanwhile, millions of other immigrants, lawfully admitted
under an overly broad concept of family reunification, may not contribute
as much to economic growth; and millions of others reside here unlawfully because there are too few ways to immigrate lawfully.
For the first time, America is being forced to compete with other
countries for immigrants and the skills they bring.
To meet Americas economic needs, we must overhaul our immigration policy. That requires political courage and leadership. Instead, our
political system in recent years has responded to the challenge with
paralysis. Democrats and Republicans, liberals and conservatives, are
equally to blame. We believe the chasm over immigration policy can be
bridged by recourse to two fundamental values: recognizing the central
role of immigration in Americas identity and prosperity, and adhering
to the rule of law in enforcing our immigration policy. If we embrace
those core values in deed as well as word, we can formulate a fair and
effective immigration policy that will help restore Americas leadership
in its third century.
It is perhaps more essential than ever before that we bring in enough
young, energetic, hard-working, and talented immigrants. As in other industrialized nations, Americas birthrate has fallen below the level
needed to replace the current population. That places enormous strains
on our social welfare system, as fewer and fewer workers sustain an everexpanding population of elderly beneficiaries. The late Hoover fellow and
Nobel Prizewinning economist Milton Friedman, whom we both greatly
admired, once famously remarked, Its just obvious you cant have free
immigration and a welfare state. A corollary is that we cannot sustain a
generous social-welfare program (or even one less generous than the current version), a system upon which millions of Americans depend, if we
do not increase the numbers of productive, contributing participants in
our workforce. And demographic trends strongly suggest that the only
way we can do that is through immigration.
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An enormous sand sculpture of the Lincoln Memorial serves as a backdrop for photos of
new U.S. citizens and their families at the South Florida Fairgrounds in February. Ensuring
American prosperity means continuing to welcome ample numbers of hard-working newcomers into the American family. The alternative, failing to harness the vitality of immigrants, will consign our nation to a bleak future.
R E VE R S I N G T HE B R AI N D R AI N
The challenges are most acute in meeting the need for high-skilled
immigrants. American schools simply are not producing enough highly
trained graduates in mathematics, science, engineering, and technology.
Other countries produce a disproportionate number of those graduates,
according to numbers cited in Darrell M. Wests Brain Gain. The disparities are glaring and sobering: 38 percent of Korean graduates earn
degrees in science and engineering, along with 33 percent of Germans,
28 percent of French, 27 percent of British, 26 percent of Japanese
and just 16 percent of Americans. The number of engineering and science PhDs earned by U.S. citizens actually has fallen by more than 20
percent in the past decade.
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ZUMA Press/Allen Eyestone
Our educational deficiencies have created what Microsoft executive

vice president Brad Smith describes as an economic paradox: Too many
Americans cant find jobs, yet too many companies cant fill open positions, he told the Wall Street Journal. There are too few Americans with
the necessary science, technology, engineering, and math skills to meet companies demand.
The United States creates 120,000 jobs each year requiring a bachelors
degree in computer science, yet produces only 40,000 graduates annually with such degrees. Only 4 percent of American high schools offer
advanced-placement classes in computer science. If we dont increase the
number of Americans with necessary skills, said Smith, jobs will increasingly migrate abroad, creating even bigger challenges for our long-term
competitiveness and economic growth.
Obviously, we need to improve K12 education to produce graduates
who can satisfy the demands of a high-tech economy and compete with
graduates from other countries. But until we do, there is no substitute
for attracting and welcoming large numbers of students and professionals from foreign countries if we have any hope of maintaining American
prosperity and leadership in the world economy.
Fortunately, we have for many years attracted a vastly disproportionate share of the worlds greatest scientists, engineers, and entrepreneurs.
Indeed, more than one quarter of all U.S. scientists and engineers are
foreign-born, notes Edward Alden in The Closing of the American Border.
Richard Florida, author of The Rise of the Creative Class, argues that our
nations biggest competitive advantage in the world has been its status
over the last century as the worlds most open country. That openness has
fueled American leadership in the technology revolution. Indeed, more
than one-third of U.S. Nobel Prize winners have been foreign-born, a
proportion that increased to half between 1990 and 2001. By 2000, more
than half of the PhD-level engineers in the United States were foreignborn. In Silicon Valley, immigrants have started a vast share of new companies, including Google, Intel, and eBay.
Moreover, immigrants are growing ever more central to our knowledge
economy. In 1999, American-born scientists were granted 90,000 patents,
compared to 70,000 from scientists from all other countries. But by 2009,
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more patents were being granted to foreign-born scientists (96,000) than

to Americans (93,000), according to Brain Gain.
The economic benefits from high-skilled immigration are enormous.
In a very real way, immigrants are the fuel of Americas economic engine.
Continued American leadership in technology is absolutely vital to
economic growth. In his recent book, The New Geography of Jobs, Enrico
Moretti, a University of California, Berkeley, economics professor, finds
that every high-tech job in a metropolitan area produces five service jobs
in the local economy, compared to 1.6 service jobs created by every job in
the traditional manufacturing sector.
But if we continue our current misguided immigration policies, the
supply of highly skilled foreign workers will dry up. Congress recognized
this in the 1990s when it began to increase the number of H-1B visas for
highly skilled foreigners to 115,000 in 1999 and 195,000 in 2001. But
in the aftermath of 9/11, the increased numbers were not renewed. H-1B
visas now are capped at 65,000 a year, with an additional 20,000 visas for
foreign students earning advanced degrees from American universities.
Those numbers are hopelessly inadequate to preserve Americas leadership role in technology. Indeed, the quotas for highly skilled foreign
workers are so low that in some recent years the slots were filled within
days. Nearly all of the H-1B visas are secured by workers sponsored by
major companies, with the result that few highly skilled foreign workers
are available to small firms or to start their own companies. The numbers
are too small, and the process is complicatedit often costs sponsoring
companies $40,000 to $50,000 in attorney fees to secure a visa for each
worker.
The shortage of H-1B visas was worsened with the passage of the American Recovery and Reinvestment Act of 2009. Buried inside was a provision called the Employ American Workers Act, which restricted H-1B
visas for any company that received federal recovery assistance. Within
days of the president signing it into law, Matthew J. Slaughter, professor
and associate dean at the Tuck School of Business at Dartmouth University, told the Wall Street Journal, a number of U.S. banks reneged on job
offers extended months earlier to foreign-born MBA students. The net
result, says Slaughter: Lost ideas. Lost jobs. Lost taxes.
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The problems with the initial work visas are just the start. Once here,
even as they are building lives in America, highly skilled immigrants face
severe numerical limits and long waits for green cards, the visas that provide
permanent legal residency and lead to citizenship. As of 2007, one million
skilled workers were waiting as long as ten years for the 140,000 green cards
available each year for skilled workers. Compounding the problem is that
no single country can account for more than 7 percent of the green cards;
highly skilled immigrants from India, who have started more U.S. companies than immigrants from the next four countries combined, are limited to
the same 9,800 annual green cards as those of every other country.
Milton Friedman once famously remarked, Its just obvious you cant
have free immigration and a welfare state.
Workers on temporary visas cannot switch jobs or even earn a promotion without starting the application process all over again, and their
spouses often are forbidden to work. As a result, despite their critical
importance to the economy, many highly skilled immigrants are returning home or going to other countries, taking their talent and capital with
them.
One American visa quota that often goes unfilled is for investorsand
that is because the requirements, usually including an initial investment
of $1 million, are so onerous that few can meet the criteria for one of
the 10,000 visas available each year. But even if it were easier to attain
such visas, that might not be the best way to promote immigrant-created American businesses. A 2007 study published by the Ewing Marion
Kauffman Foundation reported that among American high-technology
firms started by immigrants, only 1.6 percent were founded by people
who immigrated for the purpose of starting a business. More than half
were created by foreigners who came to the United States to study, and 40
percent by people who came here to work.
V I S A C H O K E H O LD
Clearly it is vital to open the pipeline to these skills and entrepreneurial potential. Yet American immigration policy runs completely contrary
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to that need. The biggest stumbling block is family reunification. A

sizable majority of visasnearly two-thirdsare allocated every year
for that purpose, with work-based visas and political asylum sharing the
remainder. Family reunification extends not only to parents and minor
children but also to aunts, uncles, cousins, and adult children, who in
turn then become entitled to bring in their relatives in a never-ending spiral referred to as chain migration. Unlike work-based immigrants, who
by definition contribute to the economy, many family-based immigrants
do not enter the workforce and are net consumers of social services. But,
for the most benevolent of reasons, family reunification has become the
main driver of immigration policywhile crowding out opportunities
for working immigrants who would make a tremendous contribution to
American prosperity.
Even traditionally insular China and Japan are liberalizing immigration
rules for highly skilled professionals.
No other major developed economy gives such a low priority to workbased immigration, observe economists Pia M. Orrenius and Madeline
Zavodny, who report that the United States allocates the smallest share
of permanent-resident visas to work-based immigrants. The Economist
observes that for more than a decade America has been choking off its
supply of foreign talent, like a scuba diver squeezing his own breathing
tube.
Countries that once looked longingly at Americas economic stature are
taking advantage of our immigration-policy follies. Canada, for instance,
even though it has only one-tenth the population of the United States,
issues more employment-based visas than we do. Even traditionally insular China and Japan are liberalizing immigration rules for highly skilled
professionals. Foreign entrepreneurs can get a visa for Chile in a few weeks,
which has led to the creation of five hundred new companies started by
immigrants from thirty-seven countries in only two years. Many of those
who flock to Chilecon Valley, as it has been dubbed, would rather have
gone to America, but couldnt face a decade of immigration humiliation,
reports the Economist.
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New York Mayor Michael Bloomberg, himself a wildly successful businessman, says that reforming a broken immigration system is the single
most important step the federal government could take to bolster the
economy. Among the many steps we need to take to restore American
economic growth and prosperity, none offers a more immediate return
than improving our immigration system. Immigration reform has a great
advantage over other changes that can increase human capital, notes
Gary Becker. It is something that can be done almost immediately. If the
federal government changed the relevant laws and admitted highly skilled
people into the country, the United States would see those new immigrants contributing to the economy within a year. Thats a straightforward
step toward greater prosperity, and one that will pay dividends for years
to come.
By contrast, failure to harness the vitality of immigrants will consign
our nation to a bleak future. To ensure future American prosperity means
continuing to welcome ample numbers of hard-working newcomers into
the American family.
Excerpted from Immigration Wars: Forging an American Solution (2013, Threshold Editions). 2013 by the
Foundation for Floridas Future and Clint Bolick. Reprinted by permission of Threshold Editions, an imprint
of Simon & Schuster, Inc.
Available from the Hoover Press is The Debate in the

United States over Immigration, edited by Peter J. Duignan
and Lewis H. Gann. To order, call 800.935.2882 or visit
www.hooverpress.org.
123
EDUC AT ION
A Bar Exam for

Teachers?
In theory, its a promising idea. But in practice . . . By Chester E.
Finn Jr.
As president of the American Federation of Teachers, the late Albert

Shanker was instrumental in creating the National Board for Professional
Teaching Standards (NBPTS) and much else in the education-reform
world. Now Randi Weingarten, the current president of the AFT, is tryingearnestly and imaginativelyto return the organization and its
(present) leader to the pantheon of real reformers.
Their new and much-ballyhooed proposal, contained in a report
titled Raising the Bar, revives the Shanker-era idea of a bar exam
for entering teachersand charges the NBPTS with putting it into
practice.
Andrew Rotherham of the blog Eduwonk came out within hours
with multiple doubts, some of which worry me, too. But lets start by
crediting Weingarten and her organization with a serious proposal to
raise standards for new teachers as part of a broader effort to strengthen
the profession.
Their proposal has three pillars. The secondbut most important, so
far as Im concernedis this:
CHESTER E. FINN JR. is a senior fellow at the Hoover Institution, chairman of
Hoovers Koret Task Force on K12 Education, and president of the Thomas B.
Fordham Foundation.
124
Teaching, like other respected professions, must have a universal

assessment process for entry that includes rigorous preparation centered on clinical practice as well as theory, an in-depth test of subject
and pedagogical knowledge, and a comprehensive teacher performance assessment.
My eye went immediately to the phrase in-depth test of subject . . . knowledge, and I combed the rest of the document seeking
more on that topiconly to be dismayed by how little is actually said
on the matter, other than that the NBPTS is supposed to figure it out.
There is no hint of what in-depth knowledge might mean for a U.S.
history teacher versus a geometry teacher versus an art teacher, nor
does it address what sort of testing arrangement might gauge whether an individual possesses enough of it. (We know that the current
arrangementwith most states relying heavily on the Praxis II test
does not do this well. We also know that some states do not take on
this issue at all.)
The two other pillars, I have to admit, gave me pause. The first says
all stakeholders must collaboratea recipe for stasis and mediocrity if
Ive ever seen one. And the third assigns primary responsibility for setting
and enforcing the standards of the profession to members of the professionpracticing professionals in K12 and higher education. In other
words, elected officials, employers, taxpayers, and parents can jolly well
butt out; the standards governing classroom entry are none of their business. (I guess thats true for think-tankers, too.)
Back to the universal assessment: I can easily understand why
the AFT is giving that assignment to the NBPTS, but Im not sure
that organization is up to itparticularly the knowledge part. They
administer very elaborate and expensive appraisals of teaching practice
to veteran classroom practitioners, but Ive never seen the National
Board show much interest in subject-matter knowledge. Pedagogy, yes.
Even lesson planning. But not the causes and consequences of the
Civil War or the ways that atoms combine to form molecules. Indeed,
Ive seen scant evidence that the powers-that-be at NBPTS even care
much about such mundane stuff as content knowledge. (This part of
125
the job, at least for grades K8, should have been assigned to the Core
Knowledge Foundation.)
All of which is to say, the devil lurks prominently in details that are
yet to be developed, not in the impulse to raise entry standards for teachers. (Unsurprisingly, this union-developed proposal deals only with new
teachers, not with whether veteran instructors need to meet any standards
of any sort.)
The Rotherham critique includes four more notable points:
Is the AFT planbilled as leveling the playing fieldreally just a
sneak attack on Teach for America and other alternative routes into
a fast-decentralizing profession? Excellent question.
What if we dont know as much as we like to presuppose? In a few
subjects and grade levels, there is bona fide research-based knowledge
and best-practice tradecraft. But what truly makes a great tenth-grade
English teacher or twelfth-grade government teacher? asks Andy.
Another solid question.
For state policymakers, how demanding teacher tests are is as much
(often more) a labor-market issue as an educational one. A legitimate
concern indeed. Its far easier to find (and pay for) a top-notch algebra
teacher to fill an opening in Boston or Austin than in the Mississippi
delta or rural Idaho. Thats why states have long been free to determine
their own certification norms and Praxis passing scores. Can a field this
big and diverse truly accommodate a single high bar? This is so for
other fields, too, which is why its easier for newly minted attorneys to
pass the bar exams of some states than others.
Finally, and perhaps most fundamentally, what if education isnt really
like law or medicine, but more like business or journalism (or thinktankery), where credentials are valued but weighted alongside other
factors because there isnt a field-wide core of knowledge or skills all
practitioners must have? Rotherham is not entirely correct on this one,
however. Law and medicine do have field-wide cores of knowledge
but only up to a point. Intellectual-property lawyers and personal-
126
injury ambulance chasers dont have a whole lot in common, nor do

ophthalmologists and gastroenterologists.
Some of these are unanswerable within the framework of the AFT
proposal and the NBPTS, the more so once it rounds up all stakeholders. But lets not doom this baby at birth. Lets welcome its arrival, wish
it good health, cross our fingers (maybe even help if asked), and stand
by till it can walk by itself. Thanks, Randi, for a proposal that would
make Al proudand that could conceivably do American education
some good. Or could just as easily create nothing except false hope and,
possibly, some damage.
Reprinted from Education Next (www.educationnext.org). 2012 by the Board of Trustees of the Leland
Stanford Junior University. All rights reserved.
Available from the Hoover Press is Reroute the

Preschool Juggernaut, by Chester E. Finn Jr. To order,
127
C A LIF ORNIA
California, Here I Stay

If not the Promised Land, its still a land of promiseone where
statism may finally be meeting its match. By Victor Davis Hanson.
Californias agricultural abundance is boundless. Its multidimensional

declinefiscal, commercial, social, and politicalalso sometimes seems
endless.
Not just in its finances but almost wherever you look, the states
vital signs are dipping. The unemployment rate lingers around 10
percent. In the reading and math tests administered by the National
Assessment of Educational Progress, California students rank near the
bottom, though their teachers earn far more than the average American teacher. According to a study published by a public-policy group
at Stanford, Californias various retirement systems have amassed $500
billion in unfunded liabilities. The penal system is the largest in the
United States, with more than 165,000 inmates. Some studies estimate that the state prisons and county jails house more than 30,000
illegal aliens, at a cost of $1 billion or more each year. California has
the nations largest population of illegal aliens, on whom it spends an
estimated $10 billion annually in entitlements. They also deprive the
Golden States economy of billions of dollars every year by sending
remittances to Latin America.
Meanwhile, business surveys perennially rank California among the
most hostile states to private enterprise, largely because of overregulation,
stifling coastal zoning laws, inflated housing costs, and high tax rates. EnviVICTOR DAVIS HANSON is the Martin and Illie Anderson Senior Fellow at the
Hoover Institution.
128
ronmental extremism has cost the state dearly: oil production has plunged
45 percent over the past twenty-five years, even though Californias Monterey Shale formation has an estimated 15.4 billion barrels of recoverable
oil, according to the U.S. Energy Information Administration. Geologists
estimate that 3 trillion cubic feet of natural gas sit untapped as well. Those
numbers could soar with revolutionary new methods of exploration.
Many Californians feel they played no part in the states current problems
and refuse to surrender to those who did.
Between the mid-1980s and 2005, the states aggregate population

increased by ten million Californians, including immigrants. But that
isnt the good economic news you might think. For one thing, seven million of the new Californians were low-income Medicaid recipients. Further, as economist Arthur Laffer recently noted in Investors Business Daily,
between 1992 and 2008 the number of taxpayers entering California was
smaller than the number leaving3.5 million versus 4.4 million, for a net
loss of 869,000 tax filers. Those who left were wealthier than those who
arrived, with average adjusted gross incomes of $44,700, versus $38,600.
Losing those 869,000 filers cost California $44 billion in tax revenue over
two decades, Laffer calculated.
Worst of all is that neither the legislature nor the governor has offered
a serious plan to address these problems. Soaring public-employee costs,
unfunded pensions, foundering schools, millions of illegal aliens, regulations that prevent wealth creation, an onerous tax code: the story of all
the ways in which todays Californians have squandered a rich natural and
human inheritance is infuriating.
S T I L L W EL C O MI NG , STI LL PR O MI SI N G
So why, you might ask, would anyone stay here?
For some of us, family heritage explains a lot. Sometime in the 1870s,
my maternal great-great-grandmother homesteaded our farm and built
the farmhouse in which I currently live, near what is now the town of
Selma. I grew up working alongside her grandsonmy grandfather, who
was born in the same farmhouse in 1890 and died there in 1976. He
129
worshiped California. Even in his eighties, he still marveled at the states

unique combination of rich soil, lengthy growing season, huge aquifer,
and water flowing down from the Sierra Nevada. He planted most of the
fruit and nut trees growing in my yard today. On my fathers side, my
great-grandfather helped found the nearby Swedish colony of Kingsburg,
where a plaque in a municipal parkthankfully not stolen during a recent
wave of bronze theftsmarks Hanson Corner, the site of the ancestral
family farmhouse.
Between 1992 and 2008 the number of taxpayers entering California was
smaller than the number leaving.
My mother, a 1946 Stanford law graduate, was one of the states first
female appellate court justices and would lecture me about the brilliance
of Californias four-level court system. My fathera Pat Brown Democrat
convinced that technical training was in short supply for the influx of
Southeast Asian and Hispanic immigrantshelped found a vocational
junior-college campus in the 1970s. Countless Californians are like me:
determined to hold on to the heritage of our ancestors, as well as our
memories of better times and the property on which we grew up. We feel
that we played no part in our states current problems, and were reluctant
to surrender to those who did.
Another draw to California is its culture. The California way, casual and
even flaky, can sometimes become crass and self-indulgent; for evidence
of that, just visit Venice Beach or Berkeleys Telegraph Avenue. But at its
best, California still creates a 49er bustle of self-invention that makes
little allowance for class, titles, or hierarchy.
As someone who established a classics program with mostly minority
students at California State Universitys Fresno campus, I can attest that
real talent is often found unfettered by hierarchy. In a state with no majority culture, where it is almost impossible to determine a persons income
by race, dress, accent, or bearing, performance tends to trump reputation
or appearance. The proverbial millionaires and billionaires whom I see
drinking coffee on University Avenue in Palo Alto on Monday are dressed
no differently from the loggers I talk with in the Huntington Lake bar in
130
the Sierra on Friday. Some of the wealthiest farmers in the world are indistinguishable from their tractor drivers. In California, one earns respect
more from what one does than from what one has done.
Some of the reasons people began migrating to California havent changed,
even in the twenty-first century: dysfunctional politics cannot so easily mar
what nature has so abundantly bestowed. California will always be warm,
dry, and beautiful, and it boasts an unparalleled diversity of climate and
terrain. This past winter, I could leave my Sierra cabin (altitude 7,200 feet,
with twenty feet of snow piled nearly to the roof) in the morning, drive
down to 70-degree afternoons on my farm in the Central Valley, and arrive
in the evening at the Stanford University campus, with its cool bay breezes.
Whats most striking about California isnt its rugged mountains, gorgeous
beaches, and vast plains, but their proximity to one another. That nearness
is an obvious incentive for Californians to stay put. In the winter, when
Midwesterners fly to Arizona and New Yorkers go to Florida, Californians
are never farther than a few hours drive from the coast.
The stuff of any civilization remains food and fuel, and California has
more of both than any other state.
This beauty is economically profitable as well. Thanks to its climate,

California can grow three crops a year, while most states struggle with one
or two. The long growing seasonplus great soil, plenty of irrigation, vast
agribusiness economies of scale, and technological support from nearby
universitiesmeans that Californias farms can produce almost twice the
usual tonnage of fruits and vegetables per acre. Not only are Californias
cotton, wine, fruit, and dairy industries more productive than any in the
world; hundreds of millions of affluent Asian consumers translate into
skyrocketing export-commodity prices for the states farmers. This year,
beleaguered California farmsfighting water cutoffs, new regulations,
and encroaching suburbanizationwill nonetheless export over $17 billion worth of food overseas. In so mild a climate, moreover, outdoor construction is an all-year enterprise. Its hard to believe that the worlds most
productive farmers and most innovative builders would pack up and leave
without a fight.
131
California also possesses enormous natural wealth in oil, gas, minerals,

and timber. With commodity prices high and new technologies for energy
exploration emerging all the time, the dollar wealth below Californias
surface is greater than ever. The existential stuff of any civilization remains
food and fuel, and California has more of both than any other state. So we
wait for sanity to return to our officials, as our natural untapped wealth
grows ever more valuable.
Ballot measures demonstrate how California can burst into conservative
anger at any moment.
And no explanation of Californias appeal would be complete without

mentioning how many top universities it hosts. In most rankings of the
worlds universities, Stanford, Caltech, UC-Berkeley, and UCLA make
the top twenty. The industries that best explain why California is still the
worlds eighth- or ninth-largest economySilicon Valley, the Los Angeles
aerospace industry, Napa Valley wineries, and Central California agricultureoriginated in the research and development programs of the states
vast public university system.
True, that system faces considerable budget pressure and has increasingly adopted a highly politicized and therapeutic curriculum. The California State University, in particular, has lowered its standards, admitting
students who dont meet traditional GPA and test-score thresholds, so that
more than half of entering freshmen must enroll in remediation courses.
But the states fifty-year-old master plan for higher educationwhich
instituted a tripartite arrangement of junior colleges, the California State
University system, and the elite ten-campus University of California
remains viable. The schools still draw top scholars from around the world.
And students come as well, especially engineering and computer students
from China, India, South Korea, and Japan. Many end up settling here.
Even in these bad times, its difficult to destroy such an inspired system.
WH EN W E VE ALL H AD E NO U G H
Another reason to feel hopeful about California is that its reaching the
theoretical limits of statism. To pay for current pensioners, the state sim132
ply cant continue to bestow comparable defined-benefit pension packages

on new workers, no matter how stridently the public-sector unions claim
otherwise. And as public insolvencies mountwith Stockton, Mammoth
Lakes, and San Bernardino seeking bankruptcy protection a year after
Vallejo emerged from itpublic blame is finally shifting from supposedly
heartless state taxpayers to the unions. The liberal unionism of an aging
generation is proving untenable, as we saw in recent ballot referenda in
which voters in San Diego and San Jose demanded that public-worker
compensation plans be renegotiated. Cities and counties have to cut back
or go broke.
Californians are also fickle and can turn on a dime. For all its loud
liberal credentials, the state is as likely to cut government as to raise taxes.
Over the years, Golden State voters have passed ballot propositions limiting property taxes, outlawing free public services for illegal aliens, ending
racial preferences, demanding three strikes incarceration for repeat felons, and abolishing bilingual education programs in public schools. The
state and federal courts and Sacramento bureaucracies challenge most
expressions of this kind, but the ballot measures demonstrate how California can explode into conservative anger at any moment. No wonder the
Democratic state legislature regularly tries to change the ballot process.
Even in bad times, its difficult to destroy a system as inspired as
Californias public universities and colleges.
At some point, the states southern border will finally be closed, and
with it the unchecked yearly flow of illegal immigrants. The economic
downturn in the United States, globalized new industry in Mexico, and
increased border enforcement have already resulted in lower numbers of
illegal entrants. And with an enforced border, California will see not only
decreased remittances to Mexico and Latin America and a reduced draw
on state services but also, perhaps, a change in attitude within the states
largest ethnic group. After all, illegal immigration warps the politics of
the Mexican-American community, which constitutes more than 40 percent of the states population. The unlawful entry of Mexican nationals
into California not only ensures statistically that Mexican-Americans as a
133
group suffer from disproportionate poverty rates; it also means that affluent third- and fourth-generation Mexican-Americans become part of a
minority receiving disproportionate state help.
Without influxes of massive numbers of illegal immigrants, California
Latinos could soon resemble California Armenians, Japanese, and Portuguesewhose integrated, assimilated, and intermarried ethnics usually
earn more than the states average per-capita income. With controlled borders, Chicano-studies departments should eventually go the way of Asian
studies and Armenian studiesthat is, they would become small, literary,
and historical, rather than large, activist, and partisan. Indeed, the great
fear of the liberal Hispanic hierarchy in government, media, and academia
is that without illegal immigration, the conservative tendencies of the Hispanic middle class would cost the elites their positions as self-appointed
spokespersons for the statistically underachieving.
To grasp a final reason for optimism about Californias future, you need
to understand that many of the states political problems result from a
bifurcation between the populous coastal strip from San Diego to San
Francisco, where the affluent make state policy, and the vast, much poorer
interior, from Sacramento to San Bernardino, where policy dreams about
immigration, agriculture, public education, and resource use become
nightmares in practice. But this weird juxtaposition of such different societies within one state is starting to change. Hispanic Redwood City, nestled next to tony Atherton and Palo Alto, now has as many illegal aliens
per capita as do distant Madera and Tulare. Living in high-priced Bel-Air,
Brentwood, or old Pasadena no longer shields one from crime or from the
decay of the California transportation system.
On the congested coastal strip, building regulations, zoning absurdities,
and environmentalist prohibitions on new construction prohibit almost
anyone under forty from acquiring a house without a sizable inheritance
or an income in the upper six figures. Elites in Santa Monica and Menlo
Park are starting to notice that their once-premier public schools dont
perform at the level that one might expect from the astronomical sales,
income, and gas taxes. Shutting down thousands of acres of irrigated farmland in the states interior, at a time when foreign buyers are lining up to
buy California produce, translates into higher prices at the Santa Barbara
134
food co-op. Soon, even professors and well-paid bureaucrats may learn
that illegal immigration, cumbersome regulations, and terrible elementary
schools affect them as well.
The four-part solution for California is clear: dont raise the states
crushing taxes any higher; reform public-employee compensation; make
use of ample natural resources; and stop the flow of illegal aliens. Just
focus on those four areasas California did so well in the pastand in
time, the state will return to its bounty of a few decades ago. Many of us
intend to stay and see that it does.
Reprinted by permission of City Journal (www.city-journal.com). 2013 The Manhattan Institute. All
rights reserved.
Available from the Hoover Press is Failing Liberty 101:

How We Are Leaving Young Americans Unprepared
for Citizenship in a Free Society, by William Damon. To
135
I NT ERVIEW
Scalia on Scalia
Supreme Court Justice Antonin Scalia on the follies of the Living
Constitution and legislative intent. Peter Robinson talks with
perhaps the most fascinatingand scathingjurist in the nation.
Peter Robinson, Uncommon Knowledge: Nominated by President

Reagan and confirmed in the Senate by a vote of 980, Antonin Scalia has
since 1986 served as an associate justice of the Supreme Court of the United States. Justice Scalias most recent book, written with Bryan Garner, is
Reading Law: The Interpretation of Legal Texts. Mr. Justice Scalia, welcome.
Justice Antonin Scalia: Thank you, Peter, glad to be here.
Robinson: From Reading Law: We seek a return to the oldest and most
commonsensical interpretive principle: in their full context, words mean
what they conveyed to reasonable people at the time they were written.
Mr. Justice, in this 236th year of our republic, why should it be necessary
to devote more than four hundred pages to a commonsensical principle?
Scalia: That is a very good question. The reason, as explained in the
first part of the book, is that we have sort of gone off the rails. Nowadays,
especially with regard to the Constitution, the accepted viewand the
view stated by my court repeatedlyis that the words dont necessarily
mean what they were understood to mean at the time, but can be given
new meaning; its up to the court to say what they mean today. They mean
today what they ought to mean today and it is up to the court to decide
that. Thats new, but it all comes under the title the Living Constitution.
ANTONIN SCALIA is an associate justice of the Supreme Court of the United States.
PETER ROBINSON is the editor of the Hoover Digest, the host of Uncommon
Knowledge, and a research fellow at the Hoover Institution.
136
Robinson: The Living Constitution, we will get to that phrase.

Scalia: I hate it.
Robinson: You make that clear, again and again in Reading Law; it is like
picking up cosmic background radiation from some distant cataclysmic
event. From the book: Since the mid-twentieth century, there has been
a breakdown in the transmission of . . . [our] heritage. Again: Over the
past fifty years especially, we have seen the judiciary . . . take control of
. . . territory that ought to be settled legislatively. Once again: Some
commentators have claimed since the mid-twentieth century . . . that all
language is ambiguous. Fifty years ago, something terrible happened.
What was it? What went wrong? Why did it happen then?
Scalia: Wow. We dont try to explain why it happened then. It did happen then. The time that that philosophy took over is about the time of the
Warren court. There
had been hints of
it earlier, I suppose,
but it was never the
accepted philosophy
of the judiciary. The
Living Constitution
notionthe notion that all words are ambiguous and it is really up to
the court to give them meaningis much more attractive to academics
than it is to judges. It is really the academy that brought all of this into the
prominence and into the majority status that it now enjoys.
Robinson: So the courts lag the academy?
Scalia: Yeah, I think probably there were law professors that were espousing these views before the courts adopted them.
Robinson: Reading Law once again: The purposivist . . . derives the
meaning of text from purpose and not purpose from the meaning of text.
Thats related to the Living Constitution or thats distinct?
Scalia: Thats distinct. Look, there are two things that the book urges
lawyers to be and judges to be. Number one is textualists. The point you
just made is a point urged by someone who is not at all a textualist. He
doesnt want to be bound by the text at all. He just looks at what was the
purpose of this text, and any purpose can be identified at an infinite num-
137
ber of levels, at the top of which is: do good and avoid evil. Depending on
what level of generality you pick, you can make a very narrow statute into
a very broad statute because the broad purpose that it seeks is this, and
therefore, even though the text does not specifically address that particular
question, the question ought to be answered that way because of this text.
Thats a person who is not a textualist; he is a purposivist.
Even for the average citizen its seductive to think that the Constitution
means what it ought to mean. . . . Anything I care passionately about, its
right there in the Constitution.
Even if you are a textualist, though, and you say, yes, we are bound
by the text, you can give the text the meaning it bore at the time or you
can sayindeed many of the Living Constitutionalists say, we are all
textualists now. They all start with the text, but they dont end with it.
They dont give it the meaning it had when the people adopted it. Thats
especially important when you are dealing with a constitution because a
constitution takes out of the democratic process certain particular items.
Youre tampering with democracy when you remove items that the people
really never agree to remove.
The death penalty is a good example. Ive sat with four colleagues
who thought it was unconstitutional, even though it is absolutely clear
that the American people never voted to make the death penalty unconstitutional. When the Eighth Amendment was adoptedthe cruel and
unusual punishments clausethe death penalty was the only penalty
for a felony. It was the definition of a felony. Every state had the death
penalty. Nobody could plausibly claim that the American people said no
state shall have the death penalty. But Ive sat with four colleagues who
have taken that position and say the death penalty is unconstitutional
because it ought to be, because nowadays we ought to consider it cruel
and unusual.
That distorts democracy. It ought to be up to the American people to take something out of democracy. The Constitution does not
require you to have the death penalty. If you think its a bad idea,
138
persuade your fellow citizens and abolish it, as many states have done.
To say that the American people rendered it beyond the pale of democracy is absurd.
Robinson: From Reading Law: Originalism does not always provide an
easy answer, or even a clear one. Originalism is not perfect. But it is more
certain than any other criterion. . . . It is not too late to restore a strong
sense of judicial fidelity to text. This book, for that matter your entire
career, represents a sustained determined effort at restoration. Are you
optimistic?
Scalia: Thats an unfair question, especially after last term. I dissented
in the last six cases announced last term. I dont know. I dont know that
Im optimistic. The fight is worth fighting, win or lose. You know, Frodo
in The Lord of the Rings. You soldier on. The problem is that the other
approach is enormously seductive. Even for the average citizen its seductive to think that the Constitution means what it ought to mean: its a
Living Constitution; anything I care passionately about, its right there
in the Constitution. People used to say when they dont like something
thats going on, there ought to be a law. There used to be a comic strip
that there ought to be a law about people playing boom boxes in the park,
and stuff like that. People dont say that anymore; they say its unconstitutional if they really care passionately about it. And it is even more
seductive to judges. Its a wonderful thing to have a constitutional case
and youre always happy with the result because it means exactly what you
think it ought to mean.
Ive sat with four colleagues who thought [the death penalty] was
unconstitutional, even though it is absolutely clear that the American
people never voted to make the death penalty unconstitutional.
Robinson: Let me ask that last question in a slightly different way, but its
the same question. I was talking to a friend here at Stanford Law School
who said, When Antonin Scalia was nominated to the Supreme Court
in 1986, in the legal academy, at prestigious law schools, originalism was
considered dead and gone. Now, if you dont have some pretty good origi-
139
E RR O R S
Robinson: Stanley Fish, the reviewer in the New York Timesalmost in
spite of himselfcalled Reading Law compelling readable. I agree. The
prose is just terrific. Almost the most fun in my judgment are the thirteen
falsities exposed.
Scalia: Yeah, it was fun.
Robinson: Lets take a couple of those. First, the false notion that
words should be strictly construed. . . . Strict constructionism, as
opposed to fair-reading textualism, is not a doctrine to be taken seriously. Whereupon I Googled Antonin Scalia plus strict constructionism, and you know what, a lot of people think you are a strict constructionist. Explain that.
Scalia: You should not interpret language strictly, nor should you interpret it sloppily. You should interpret it reasonably. Strict constructionists
give a bad name to serious textualists, who say language should be interpreted reasonably. The First Amendment is the example I always give. If
you were a strict constructionist, you would have to believe that Congress
could censor handwritten letters because all the First Amendment says
is Congress shall make no law abridging the freedom of speech or of the
press. A handwritten letter is not speech, it is not the press, so it could be
censored, right? No. I mean, a proper understanding of the First Amendment is speech, press, it means . . . theres a figure of speech where the part
stands for the whole. . . . I used to know that.
Robinson: Synecdoche.
Scalia: Brilliant. Did you have a Jesuit education?
Robinson: I did not, but I grew up in upstate New York where the English teacher said just think of Schenectady. So synecdoche . . .
Scalia: Synecdoche. I think speech and press are synecdoche standing for
the conveyance of ideasexpressionwhether it is done by semaphore,
by Morse code, by burning a flag (so long as it is your own flag). Youre
free to express yourself.
140
EPA/Matthew Cavanaugh
nalists on your faculty, your law school is not to be taken seriously. That
is overwhelmingly the work of one man.
Scalia: You give me hope, Peter.
Supreme Court Associate Justice Antonin Scalia points out that the
Living Constitution notionthe notion that all words are ambiguous and
it is really up to the court to give them meaningis much more attractive
to academics than it is to judges.
141
Robinson: Another falsity from Reading Law: The false notion that
committee reports and floor speeches are worthwhile aids in statutory
construction. Mr. Justice Scalia, you have no interest in probing the
intent of the legislature?
When the courts interpret provisions of the Constitution they ought,
as John Marshall said, to give those provisions an expansive meaning,
because they have to be used in situations that cannot possibly be
envisioned now.
Scalia: You will rarely find a court that does not say the object of the
construction is to discern the intent of the legislature. They say that all the
time. I think Aristotle said that. I think its wrong; at least its wrong in a
democracy. We are, as the famous line from the Massachusetts Constitution says, a government of laws and not of men. We are governed by
the laws that Congress enacts, not by the unexpressed intent of whoever
wrote them. If they meant up when they said down, thats their problem.
Frankly, even if the legislative history is utterly clear about that, too bad.
Were governed by the laws. Thats point one: you shouldnt be worried
about their intent anyway, you should be worried about what was promulgated to the people; thats what theyre governed by.
Secondly, even if you were interested in legislative intent, are you going
to find that in legislative history? For one thing, in a multi-member body
its very hard to understand what the intent was beyond the words that
they all voted on. Other than that, they could have voted for them for
very different reasons. Just because one or two of them say, I think the
language does this, the rest may not have felt the same way. The notion
that you can pluck statements from a couple of legislators or even from
a committee reportwhich is usually written by some teenagersand
very often not even read by the committee, much less by the whole house,
much less by the other house . . . the notion that that somehow is reflective of the intent of the whole Congress and of the president who had to
sign the thing, I mean it truly is the last surviving fiction in American law.
You have to engage in a willing suspension of disbelief to accept this.
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Robinson: One last falsity: The false notion that the Living Constitution is an exception to the rule that legal texts must be given the meaning
they bore when adopted. The argument of course is that the framers were
wise men; they understood that they were constructing a document for
the ages, so they left a little play in the joints. They permitted this thing to
breathe, to expand, to adapt; and the body charged with executing these
expansions and adaptations is the judiciary.
Scalia: No, they knew there would be need for change and that is why
they had an amendment provision, as some constitutions did not. This
Constitution could be amended. If you listen to John Marshall in the Bank
of the United States case, what enables the application of the Constitution
to new situations that cant be envisioned by the framers is not the ability
of the courts to change the meaning of the Constitution, but rather when
the courts interpret provisions of the Constitution they ought, as John
Marshall said, to give those provisions an expansive meaning, because
they have to be used in situations that cannot possibly be envisioned now.
Thats the way in which the Constitution is expandable and flexible, not
by being amendable through the courts.
Robinson: Has the political and legal culture evolved such that we amend
the Constitution much too seldom?
Scalia: By we you mean the people, through the formal amendment
process?
Robinson: Yes.
We are governed by the laws that Congress enacts, not by the
unexpressed intent of whoever wrote them.
Scalia: The court does it all the time. I am sometimes asked if I would
amend any provision of the Constitution, and actually the one provision
I would amend is the amendment provision. It is very, very difficult to
amend itinfinitely more difficult than it was when that provision was
written. It takes a two-thirds vote of each house to propose the amendment, and then it has to be approved by three-quarters of the states. I figured it out once: if you took a bare majority in the smallest states by population, something less than 2 percent of the population could prevent a
143
constitutional amendment. Thats probably too severe, and its certainly

much worse than it was. The disparity in population between California
and Rhode Island is so much greater than what existed at the framing. I
would amend that.
CO N G R E S S A N D TH E CO U R T
Robinson: A question from the audience: is there a negative effect on the
judiciary of the modern confirmation process? You were confirmed 98 to
zip. Those days are over, arent they?
Scalia: I think they are over. My explanation for why theyre over
isI told you that all this stuff really begins with the Warren court,
or at least that is when this Living Constitution philosophy takes over.
I think it took the American people a while to figure out what was
going on, maybe thirty years. But once they have figured out that the
Supreme Court is essentially rewriting the Constitution, term by term,
the old criteria for appointing and confirming judges no longer apply.
I mean its fine to get somebody who is a good lawyer, thats very nice;
and somebody with a judicial disposition, wonderful; somebody who is
an honest man and so forth, thats all very good. But the most important thing is, what kind of a new Constitution will this person write?
Will he put in the things that I like and take out the things I dont
like? Thats what has been going on in recent confirmation processes, at
least where the Senate is not overwhelmingly in controlthe filibusterproof controlof one party. Judge so-and-so, do you think theres a
right to abortion, or whatever you hate or love? You dont? Well I think
it is there, and my constituents think it is there, and I am not going
to put you on the Supreme Court. Thats what is going on. It ought
to go on. As much as I hate that process, I prefer it to the alternative,
which is just letting the Supreme Court without any political control
rewrite the Constitution term by term. If they are going to be doing
that, I would like some popular control, even if its in this byzantine
fashion that amounts to a mini Constitutional Convention every time
we appoint a new justice.
Robinson: The corruption of the process stems from the high bench, not
from the Senate Judiciary Committee?
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Scalia: Yes, they are doing what you would expect them to do and what
I say they ought to do. If that is what the Supreme Court is doing, thats
what the Senate ought to do, much as I dislike the whole thing.
Robinson: How much of the Living Constitution is due to the feckless
unwillingness of Congress to tackle difficult issues?
Scalia: I dont think thats a good excuse: Congress hasnt done it, so we
must do it. Where do you get that from? Its not the job of judges to do
those things which the peoples representatives have for whatever reason
decided not to do, even when theyre feckless. I do not think its up to the
court.
Robinson: All right. You are not a safety net.
Scalia: Oh God, certainly not.
Robinson: Thank you very much, Mr. Justice Scalia.
Scalia: Thank you, Peter.
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VALUES
The Drug War and

the Damage Done
Some wars cant be won. By Gary S. Becker and Kevin M. Murphy.
President Richard Nixon declared a war on drugs in 1971. The expectation was that drug trafficking in the United States could be greatly reduced
in a short time through federal policing. The war on drugs continues to
this day, of course. The cost has been high in terms of lives, money, and
the well-being of many Americans, especially the poor and less-educated.
By most accounts, the gains have been modest at best.
The direct monetary cost to American taxpayers of the war on drugs
includes spending on police, the court personnel used to try drug users
and traffickers, and the guards and other resources spent on imprisoning
and punishing those convicted of drug offenses. Total current spending is
estimated at over $40 billion a year.
The costs dont include many other harmful effects of the war on drugs
that are difficult to measure. For example, over the past forty years the
fraction of students who have dropped out of American high schools
GARY S. BECKER is the Rose-Marie and Jack R. Anderson Senior Fellow at the
Hoover Institution and a member of Hoovers Working Group on Economic Policy
and Shultz-Stephenson Task Force on Energy Policy. He is also the University Professor of Economics and Sociology at the University of Chicago. He was awarded
the Nobel Memorial Prize in Economic Sciences in 1992. KEVIN M. MURPHY, a
senior fellow at the Hoover Institution and a member of the Shultz-Stephenson Task
Force on Energy Policy, is the George J. Stigler Distinguished Service Professor in
Economics at the University of Chicago.
146
has remained large, at about 25 percent. Dropout rates are not high for
middle-class white children, but they are very high for black and Hispanic children living in poor neighborhoods. Many factors explain the
high dropout rates, especially bad schools and weak family support. But
another important factor in inner-city neighborhoods is the temptation to
drop out of school to profit from the drug trade.
The total number of inmates in state and federal prisons in the United
States has grown from 330,000 in 1980 to about 1.6 million today. Much
of the increase in this population is directly due to the war on drugs and
the severe punishment for people convicted of drug trafficking. About 50
percent of the inmates in federal prisons and 20 percent in state prisons
have been convicted of either selling or using drugs. The many minor
drug traffickers and drug users who spend time in jail find fewer opportunities for legal employment after they get out of prison, and they develop
better skills at criminal activities.
Though the war on drugs may have induced lower drug use through
higher prices, it has probably also increased the rate of addiction.
Prices of illegal drugs are pushed up whenever many drug traffickers are
caught and punished harshly. The higher prices traffickers get for drugs
help compensate them for the risks of being apprehended. Higher prices
can discourage the demand for drugs, but they also enable some traffickers to make a lot of money if they avoid being caught, if they operate on a
large enough scale, and if they can reduce competition from other traffickers. This explains why large-scale drug gangs and cartels are so profitable
in the United States, Mexico, Colombia, Brazil, and elsewhere.
A T O U G H RE SPO NSE MAY B ACKFI R E

The paradox of the war on drugs is that the harder governments push the
fight, the higher drug prices rise to compensate for the greater risks. That
leads to even larger profits for traffickers who avoid being punished. Thus
larger drug gangs often benefit from a tougher war on drugs, especially
if the war mainly targets small-fry dealers and not the major drug gangs.
Moreover, to the extent that a more aggressive war on drugs leads dealers
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ZUMA Press/Keith Dannemiller
to respond with higher levels of violence and corruption, an increase in

enforcement can worsen the costs imposed on society.
The large profits for drug dealers who avoid being caught and punished encourage them to try to bribe and intimidate police, politicians,
the military, and anyone else involved in the war against drugs. If police
and officials resist bribes and try to enforce antidrug laws, they are threatened with violence and often fear for their lives and those of their families.
Mexico offers a well-documented example. Probably more than 50,000
people have died since Mexicos antidrug campaign started in 2006. (If
the same proportion of U.S. residents were killed, the toll would stand at
150,000. This death toll is many magnitudes greater than American losses
in the Iraq and Afghanistan wars combined, and is about three times the
number of American deaths in the Vietnam War.) Many of those killed
were innocent civilians and the military personnel, police officers, and
local government officials involved in the antidrug effort.
There is considerable bitterness in Mexico because the bulk of drugs
produced and transshipped there go to the United States. Drug cartels
in Mexico and several other Latin American countries would be much
weaker if they were selling drugs only to domestic consumers (Brazilian
and Mexican drug gangs also export a lot to Europe).
The main gain from the war on drugs claimed by its advocates is a lower incidence of drug use and drug addiction. Basic economics does imply
that under given conditions, higher prices for a good lead to reduced
demand for that good. The magnitude of the response depends on the
availability of substitutes for the higher-priced good. For example, many
drug users might find alcohol a good substitute as illegal drugs become
more expensive.
But the conclusion that higher prices reduce demand only under given
conditions is especially important in considering the effects of higher
prices attributable to the war on drugs. Making the sale and consumption
of drugs illegal not only raises drug prices but also has other important
effects. For example, while some consumers are reluctant to buy illegal
goods, drugs may be an exception because drug use usually starts while
people are teenagers or young adults. A rebellious streak may lead them to
use and sell drugs precisely because those activities are illegal.
Brothers Angel, two, and Edwin, four, play at guns in Jurez, a Mexican city suffering from
violent struggles among drug-trafficking mobs. Large drug gangs often benefit from a
tougher war on drugs, which can drive up prices and eliminate competitors. Across Mexico,
upwards of 50,000 people have died since an antidrug campaign started in 2006.
More important, some drugs, such as cocaine or heroin, are highly

addictive. Many people addicted to smoking and to drinking alcohol manage to break their addictions when they get married or find
good jobs, or as a result of other life-cycle events. They also often get
help from groups like Alcoholics Anonymous, or by using patches and
other cigarette substitutes that gradually wean them from their addiction to nicotine. It is generally harder to break an addiction to illegal
goods such as drugs.
Drug addicts may be leery of going to clinics or to nonprofit anonymous groups for help. They fear they will be reported for consuming
illegal substances. Since the consumption of illegal drugs must be hidden
to avoid arrest and conviction, many drug consumers must alter their lives
to avoid detection.
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Usually overlooked in discussions of the effects of the war on drugs is

that the illegality of drugs stunts the development of ways to help drug
addicts, such as the drug equivalent of nicotine patches. Thus, though the
war on drugs may well have induced lower drug use through higher prices,
it has probably also increased the rate of addiction. The illegality of drugs
makes it harder for addicts to get help breaking their addictions. It leads
them to associate more with other addicts and less with people who might
help them quit.
About 50% of inmates in U.S. federal prisons and 20% in state prisons
have been convicted of selling or using drugs.
Most parents who support the war on drugs are concerned mainly
about their children becoming addicted rather than being occasional or
modest drug users. Yet the war on drugs may increase addiction rates and
may even increase the total number of addicts.
WH A T W OU L D L E G ALI TY LO O K LI KE ?
One moderate alternative to the war on drugs is to follow Portugals lead
and decriminalize all drug use while maintaining the illegality of drug
trafficking. Decriminalizing drugs implies that people cannot be criminally punished when they are found to be in possession of small quantities that could be used for their own consumption. Decriminalization
would reduce the bloated U.S. prison population because drug users
could no longer be sent to jail. Decriminalization would make it easier
for drug addicts to openly seek help from clinics and self-help groups, and
would make companies more likely to develop products and methods that
address addiction.
Some evidence is available on the effects of Portugals decriminalization
of drugs, which began in 2001. A study published in 2010 in the British Journal of Criminology found that since decriminalization, imprisonment in Portugal on drug-related charges had gone down; drug use among
young people appeared to have increased only modestly, if at all; visits
to clinics that help with drug addictions and diseases from drug use had
increased; and opiate-related deaths had fallen.
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Decriminalization of all drugs in the United States would be a major

positive step. In recent years, states have begun to decriminalize marijuana, one of the least addictive and less damaging drugs. Marijuana is
now decriminalized in some form in about twenty states, and is de facto
decriminalized in some others. If decriminalization of marijuana proves
successful, the next step would be to decriminalize other drugs, perhaps
starting with amphetamines. Gradually, this might lead to full decriminalization of all drugs.
Though decriminalization of drug use would have many benefits, it
would not, by itself, reduce many of the costs of the war on drugs, since
those involve actions against traffickers. These costs would not be greatly reduced unless selling drugs were also decriminalized. Full decriminalization on both sides of the drug market would lower drug prices,
reduce the role of criminals in producing and selling drugs, improve
many inner-city neighborhoods, encourage more minority students in
the United States to finish high school, substantially lessen the drug
problems of Mexico and other countries involved in supplying drugs,
greatly reduce the number of state and federal prisoners and the harmful effects on drug offenders of spending years in prison, and save the
financial resources of government.
The lower drug prices that would result from full decriminalization
may well encourage greater consumption of drugs, but they would also
lead to lower addiction rates and perhaps even to fewer drug addicts, since
heavy drug users would find it easier to quit. Excise taxes on the sale of
drugs, similar to those on cigarettes and alcohol, could be used to moderate some, if not most, of any increased drug use caused by the lower prices.
For several reasons, large drug gangs often benefit from a tougher
war on drugs.
Taxing legal production would eliminate the advantage that violent

criminals have in the marketplace. Just as gangsters were largely driven
out of the alcohol market after the end of Prohibition, violent drug gangs
would be driven out of a decriminalized market. Since the major costs of
the drug war are the costs of the crime associated with drug trafficking,
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the costs to society would be greatly reduced even if overall drug consumption increased somewhat.
Gangsters were largely driven out of the alcohol market after the
end of Prohibition. Violent drug gangs, too, would be driven out of
a decriminalized market.
The decriminalization of both drug use and the drug market wont be
attained easily, as there is powerful opposition. The disastrous effects of
the American war on drugs are becoming more apparent, however, not
only in the United States but beyond. Former Mexican president Felipe
Caldern has suggested market solutions as one alternative to the problem. Perhaps the combined efforts of leaders in different countries can
succeed in making a big enough push toward finally ending this long,
enormously destructive policy experiment.
Available from the Hoover Press is Drug War Deadlock:

The Policy Battle Continues, edited by Laura E.
Huggins. To order, call 800.935.2882 or visit www.
hooverpress.org.
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H I ST O R Y AN D CU L T U R E
Turning Points
Communism may have ended, but history hasnt. The great story of
empires, revolutions, and human strivings continues to unfold. By
Niall Ferguson.
We yearn for turning points. Just as economists have predicted nine out
of the past five recessions, so journalists have surely reported nine out of
the past five revolutions. Every election is hailed as epoch-making. Every
president is expected to have a new foreign policy doctrine. A minor
redesign of a mobile phone is hailed by devotees of the Apple cult as a
paradigm shift.
The point about paradigm shifts, as Thomas Kuhn pointed out in The
Structure of Scientific Revolutions, is that they dont happen every other
year. They are slow, because even when a new insight is rightdazzlingly
right in hindsightvested interests and other forms of inertia resist its
adoption. The same is true for big political discontinuities. They just dont
happen that often.
Over the past year there have been many elections, not only in the
United States but also in France, Mexico, the Netherlands, Russia, South
Korea, Taiwan, and Venezuela. In China a new standing committee of the
Politburo was named, after a selection process so opaque as to be papal.
In countries like Egypt, Libya, and Yemen, there was no mistaking
the revolutionary character of the change as the misnamed Arab spring
continued its evolution into an Islamist winter. But in other places the
NIALL FERGUSON is a senior fellow at the Hoover Institution and the Laurence
A. Tisch Professor of History at Harvard University.
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political changes hardly qualified as turning points. In France a jaded

left mounted one last feeble rally against economic reality. In Mexico
the old regime, in the form of the Institutional Revolutionary Party,
returned to power. Contrary to expectations, anti-European populists
lost in Holland and the genial Mark Rutte was re-elected. In Russia,
Vladimir Putin abandoned his pretense of being prime minister and
returned to his real job as president. Turning points? Turn over and go
back to sleep.
The great English historian A. J. P. Taylor said of the year 1848 that
German history reached its turning point and failed to turn. This verdict could in fact be applied to most countries in most years.
History is like an oil tanker. It does not turn on a dime. Mankind sails
forward through time in seas that are sometimes calm, sometimes stormy.
At times it seems almost becalmed, at other times it can do twelve knots.
Depending on who captains the ship, it veers sometimes to port, sometimes to starboard. When it changes direction, the turn is generally slow.
The things that change suddenly on an oil tanker are the emotions of
the crew. Nine hundred and ninety-nine days out of a thousand, they obey
their orders and do their work. But very occasionally there is a drama. The
men mutiny and the captain is clapped in irons. Or pirates board the ship.
Such events are what historians love to study and call revolutions. Still, the
ship plows onward.
The real turning point may have been not 1989 but 1979, the year Deng
Xiaoping visited America and Chinas economic reforms began in earnest.
In other words, do not expect 1989 to happen every yearand dont

exaggerate how big a turning point even 1989 was. Nearly a quarter of a
century ago, Francis Fukuyama hailed an unabashed victory of economic
and political liberalism . . . the Triumph of the West.
It seemed so true. Who could forget the thrill of that nightNovember 9, 1989when the Cold War ended not with Armageddon but with
a street party? Yet, as I write, the Peoples Republic of China is poised to
overtake the United States in terms of gross domestic product (adjusted for differences in purchasing power) in 2017. If you invested in the
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West in 1989 you fared much worse than if you had invested in the Rest.
Emerging stock markets have risen by a factor of five since 1989; the U.S.
market, fourfold; Europe, less than threefold.
One attractively simple way of thinking about the world is to say
that wealth, and with it power, are shifting from the West to the Rest.
In that sense, the real turning point was not 1989 but 1979, the year
Deng Xiaoping visited the United States and Chinas economic reforms
began in earnest. From that point, the great divergence of the West
from the Rest came to an end, and the world embarked on a great
reconvergence.
C H A N G E , S LO WLY B U T SU R E LY
But the reality is more complicated than suggested by phrases like the
post-American world.
There are six slow-acting drivers of historical change in our time, as in
most of recorded history. A common error is to focus on only one. They are:
1. Technological innovation
2. The spread of ideas and institutions
3. The tendency of even good political systems to degenerate
4. Demographics
5. Supplies of essential commodities
6. Climate change
The first three essentially explain why the West has lost some of its
predominance. But the others remind us that, in that wonderful line
often attributed to Bismarck, a special Providence watches over children,
drunkards, and the United States of America.
Measured (crudely) in terms of international patents granted by country of origin of applicant, the West no longer leads. Japan has been out in
front of the United States for nearly twenty years and, in the past decade,
first South Korea and then China have overtaken Germany to take the
third and fourth places.
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Measured (less crudely) with standardized tests of mathematical attainment at age fifteen, the West has also slipped. In the most recent report
published by the Organization for Economic Cooperation and Development, the gap between teenagers from the Shanghai district of China and
those from the United States was as big as the gap between the Americans and their Albanian contemporaries. The silver medal went to young
mathematicians from Singapore, the bronze to their counterparts in Hong
Kong, then came South Korea, followed by Taiwan. Proficiency at math
isnt everything, of course, but societies that teach the average student so
much better than the West does are probabilistically more likely to turn
raw genius (which is pretty randomly distributed through humanity) into
Nobel Prizes.
The third driver of changenearly always overlooked by political scientistsis the tendency of even the best systems to degenerate as rentseeking special interests grow on the body politic like barnacles on a ships
hull, and civic virtue yields to human frailty. Westerners are justly proud
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of their various democratic systems, and Americans in particular regard

their Constitution as the worlds best. Yet every comparative study of institutional qualityfrom the World Economic Forums Global Competitiveness Index to the World Banks Worldwide Governance Indicators
tells the same depressing story. In many Western countries there has been
a perceptible decline in the rule of law. Among the worst cases are South
European cradles of democracy Greece and Italy, which receive shockingly bad scores from the World Economic Forum. In the United States,
meanwhile, the World Bank reports marked declines since 2000 in the
control of corruption, regulatory quality, accountability, and government
effectiveness.
This great degeneration helps explain the slowdown in growth and
productivity we have witnessed in the West in the past decade. We cannot blame it solely on the financial crisis, nor on the fact that (as the
economist Robert Gordon recently argued) the information technology
revolution has delivered much less than its own hype led us to expect.
The world is changing not just because the Rest have got better, but also
becausequite independentlythe West has got worse. Indeed, much
of the developed world today reminds me of what Adam Smith said
about China in The Wealth of Nations: It has reached a stationary state
in which growth is near zero and prosperity is enjoyed only by a corrupt
bureaucratic elite.
W H A T C A RD S D O E S AME R I CA H O LD ?
Nevertheless, there are three important reasons why the United States
is more likely to escape this condition of stasis than Southern Europe
or Japan.
History, like a huge ship, doesnt turn on a dime.
First, partly because of immigration, partly because of fertility, and

partly because of inefficient health care, the United States is aging much
less quickly than countries like Japan and Germany. By 2050, according
to the United Nations, more than a third of Japanese will be sixty-five or
over. For Germany the figure will be 31 percent. Even in China, more
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than a quarter of the population will be older than sixty-four. But for the
United States, the figure will be just 21 percent. Chinas labor force will
start to shrink in the 2020s. That will not happen in the United States.
Second, unlike Europe and Japan, the United States is one of the global
big five in terms of mineral wealth, with known reserves of fossil fuels and
minerals worth at least $30 trillionmore than Australia, Saudi Arabia,
and China, though less than Russia. In particular, the United States is
poised to profit from an energy revolution that has seen shale gas leap
from 1 percent of U.S. natural gas production in 2000 to 35 percent
today. American natural gas is a quarter the price of East Asian and a
third the price of German. The combination of an increasingly competitive labor market and cheap energy is going to spark a remarkable recovery
of U.S. manufacturing in the near future.
Finally, as the world warms and climate becomes more volatile, North
America will fare better than East Asia. Natural disasters will happen, of
course, as super storm Sandy reminded us. But there will be more on the
other side of the Pacific. Good luck to Asias coastal megacities. They will
need it.
Already things look better for the United States than for the rest of
the West. The International Monetary Fund projects 2.3 percent growth
next year, compared with 1.2 percent for Japan and 0.7 percent for the
eurozone. That divergence will persist.
Even the best systems degenerate as rent-seeking special interests grow
on the body politic like barnacles on a ships hull.
In America, the economic trends toward self-sufficiency and manufacturing recovery may encourage a new phenomenon: liberal isolationism, as the country reverts to its default aversion to foreign entanglements. By contrast, Europe and Japan will continue to languish,
denying themselves the relief of higher immigration or nuclear power,
stagnating under piles of debt that will become harder and harder to
finance. In these stationary states, populism will take uglier forms.
After more than half a century, European integration may turn into
disintegration.
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Meanwhile, in the mobile states of the developing (and still growing)

world, there will be more bourgeois revolutions, in the classical sense
of revolutions against autocracy led by aspirant middle classes. Already,
according to Credit Suisse, more than 300 million Chinese adults have
wealth of between $10,000 and $100,000, while close to 20 million
have wealth above $100,000. These people are discovering that their
hard-won private property needs to be protected by the rule of law, and
that the biggest threat to that is a corrupt Communist Party, which they
are increasingly able and willing to criticize in online microblogs.
Things look better for the United States than for the rest of the West.
In the big emerging democraciesIndia, Brazil, Nigeriathere is less

need for a bourgeois revolution. Indeed, Dilma Rousseff, the Brazilian
president, recently declared that she wants a middle-class Brazil. In
North Africa and the Middle East, by contrast, the bourgeois revolutions
have begun. It was in Libya that the following graffito was seen: We want
a constitutional role and for the president to have less authority and the
four-year presidential term should not be extended. That is the authentic
voice of 1848, though it remains to be seen whether Arabia will truly turn
at this turning point.
The American empire-in-all-but-name is leaving the Middle Eastern stage, having dominated the region since the 1970s andI would
arguehaving sparked the revolution by toppling the most vicious of
the Arab dictators. Now the real contest is between those who would
impose a medieval legal order on Arabia, as the ayatollahs imposed it
on Persia after 1979, and those who dream of the long-awaited Islamic reformation, which would allow Muslims to coexist in peace with
modernitynot to mention with the state of Israel, modernitys representative in the region. The choice between the Iranian and the Turkish (or Indonesian or Malaysian) models should not be hard to make.
Yet the Arabs may have to endure a period of sectarian warfare before
that reformation can occur.
The hardest question to answer, as the great tanker of history slowly
turns, is whether the two dominant powers of the age, America and
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China, will be able to maintain what Henry Kissinger has called coevolution, or whether they are doomed to re-enact the rise of the
Anglo-German antagonism that culminated in world war nearly a century ago. Will it be Chimericaor what Noah Feldman has christened
Cool War?
Or blazing hot war? The approaching centenary of 1914 is a sobering
reminder that while elections may come and elections may go, it is wars
that change historys direction most decisively. World War I did not sink
the human ship, but it certainly sank the first age of globalization. Should
a similar conflict occur in our time, we shall know that world history has
reached a turning point. We must hope it will only turnand not keel
right over.
Reprinted by permission of the New York Times. 2012 The New York Times Co. All rights reserved.
Available from the Hoover Press is Eric Hoffer: The

Longshoreman Philosopher, by Tom Bethell. To order,
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H I ST O R Y AN D CU L T U R E
The Present-Minded
Professor
The president of the United States recognizes Hoover senior fellow
Sidney D. Drell for his scientific achievements and for working toward
a more secure world. By Lori Ann White.
Hoover senior fellow Sidney D. Drell was among twelve distinguished
researchers presented with the National Medal of Science by President
Barack Obama in a February ceremony at the White House.
An emeritus professor of theoretical physics at SLAC and a member
of Hoovers Shultz-Stephenson Task Force on Energy Policy, Drell was
recognized for contributions to quantum field theory and quantum chromodynamics, application of science to inform national policies in security and intelligence, and distinguished contributions as an adviser to the
United States government.
Stanford Professor Lucy Shapiroalso a member of the Shultz-Stephenson Task Forcewas another of the twelve scientists honored with
the medal. Shapiro is in the Department of Developmental Biology at
Stanfords School of Medicine, where she holds the Virginia and D. K.
Ludwig Chair in Cancer Research.
The medal recipient selections had been announced in late December.
It was a surprise Christmas present, Drell said. Obviously, I was very
pleased to hear the news.
SIDNEY D. DRELL is a senior fellow at the Hoover Institution, a member of
Hoovers Shultz-Stephenson Task Force on Energy Policy, and a professor of theoretical physics (emeritus) at the SLAC National Accelerator Laboratory at Stanford University. LORI ANN WHITE is a science writer at SLAC.
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National Science & Technology Medals Foundation/Ryan K. Morris
Drell made many significant contributions to particle physics and

quantum theory during his tenure at SLAC, including research on quantum electrodynamics, which describes the interactions of matter and light,
and quantum chromodynamics, which describes the behavior of quarks
and gluonstwo of the most fundamental constituents of matter.
Working with SLAC research associate Tung-Mow Yan, he formulated
the Drell-Yan process, which explains what happens when a quark in one
particle and an antiquark in a second particle annihilate into an electron
and a positron.
And while serving as deputy director of SLAC for almost thirty years during its heyday as a groundbreaking particle-physics facility, Drell also established himself as a trusted adviser on national security issues. He was one of
the original members of JASON, a group of academic scientists established in
1960 that advises the government on issues of national importance. He has
chaired panels on national security in both the House and the Senate, consulted for several national security agencies, and served on the Presidents Foreign
Intelligence Advisory Board and the Presidents Science Advisory Committee.
Drell was among the first to grasp the need for space-based reconnaissance,
and in 2000 was one of ten scientists honored as founders of national reconnaissance as a space discipline by the U.S. National Reconnaissance Office.
Among his many awards and honors, Drell garnered a 1984 MacArthur
Foundation genius grant recognizing his work in international security;
the 2000 Enrico Fermi Award, the nations oldest award in science and
technology; the Heinz Award for contributions in public policy; and the
National Intelligence Distinguished Service Medal.
He is also a member of the National Academy of Sciences, the American
Academy of Arts and Sciences, and the American Philosophical Society.
Speaking of the February 1 ceremony at the White House, Drell said,
The president was very complimentary about my work and was photographed with my family, who included son Daniel Drell and daughters
Joanna Drell and former SLAC director Persis Drell, who stepped down
in October 2012 after leading the lab for five years. I felt very privileged,
very honored, he said.
Drell earned his PhD from the University of Illinois at Urbana-Champaign in 1949 and then tested the waters at Stanford University as a phys-
Hoover senior fellow Sidney D. Drell accepts the National Medal of Science from President Obama in February. Stanford Professor Lucy Shapiroanother member of Hoovers
Shultz-Stephenson Task Force on Energy Policywas also among the honorees.
ics instructor before accepting a faculty position at the Massachusetts

Institute of Technology. Before long, Stanford had drawn him back: in
1956, he was one of the leaders of a talented group of researchers lured
West by the promise of using linear accelerators to study particle physics.
After SLAC was founded in 1962 as the site for such an accelerator, Drell
followed its legendary first director, Wolfgang Pief Panofsky, to the lab.
Drell was one of the leaders in the then-evolving theory of quantum
electrodynamics, and important to me since I was testing the theory experimentally. It passed, said SLAC director emeritus and Nobel laureate Burton
Richter. At SLAC, besides doing his own first-class theory work, he created a
group that attracted many of the most promising young physicists of the day,
many of whom went on to become leaders of the field. We worked together
for many years, and I am delighted at this well-deserved recognition.
163
Drell served as deputy director of the lab from 1969 to 1998 while conducting his own research and shepherding young theorists. One of them,
retired SLAC physicist James BJ Bjorkenco-author of two textbooks
with Drellsaid of his long-time teacher, colleague, and mentor: Hes
a wise man. The word wisdom fits him even better than intelligence,
though hes got plenty of both, of course.
Drell moved to the Hoover Institution after his retirement from SLAC
in 1998. At Hoover he has focused on nuclear nonproliferation and has
written a number of books, papers, and reports on the subject, all published by the Hoover Institution Press. He is one of the principals in this
effort, along with Hoover senior fellows George P. Shultz and William J.
Perry and Hoover visiting fellows Henry Kissinger and Sam Nunn. Their
work was profiled in a recent book, The Partnership: Five Cold Warriors
and Their Quest to Ban the Bomb, by Philip Taubman.
I join Sids legions of friends and colleagues in congratulating him on
this richly deserved award, said Shultz, who has worked extensively with
Drell. Sid is more than an outstanding physicist. He has used his vast
knowledge to improve national and international security, most especially
in our efforts to get better control of nuclear materials with the goal of
eliminating the threat posed by nuclear weapons.
SLAC Director Chi-Chang Kao said, We are very pleased Sid has
received this recognition. He has spent a lifetime serving his country by
expanding the boundaries of our knowledge of the natural world and by
using his discoveries to make us all safer. I cannot think of anyone more
deserving of this award.
Reprinted by permission of SLAC National Accelerator Laboratory at Stanford University. 2013 by the
Board of Trustees of the Leland Stanford Junior University. All rights reserved.
Available from the Hoover Press is Reykjavik Revisited:

Steps Toward a World Free of Nuclear Weapons, edited
by George P. Shultz, Steven P. Andreasen, Sidney D.
Drell, and James E. Goodby. To order, call 800.935.2882
164
IN M E M O R I AM : PE T E R J . D U I G N AN
Our Man in Africa

The late Hoover fellow Peter J. Duignan: an honest and faithful
chronicler of the continent he loved. By Robert Hessen.
Peter J. Duignan, who passed away last November, was one of the most
productive and prolific American historians of the twentieth century. He
wrote, co-authored, or edited forty-five books, and if his articles, essays,
speeches, and monographs were collected, they would fill several hefty
volumes.
One cannot discuss Peter as author and scholar without linking him to
his collaborator and co-author, Lewis Gann, who died in 1997, thereby
ending an intellectual partnership that spanned four decades. The two
men could hardly have had more different backgrounds.
Peter was born and raised in San Francisco, where his father was a fireman. He learned about life as a street-smart Irish Catholic boy, and was
toughened by the ethnic slurs and harsh blows dealt out by the German
brothers who were his teachers at the St. James Catholic School. This
proved to be good background for his work as a truck driver, a longshoreman, and a bakers assistant, not to mention his combat service in the
Pacific. By contrast, Lewis, born in Germany in 1924, came from a wellto-do middle-class family. He grew up in a home surrounded by books
not merely in German, but also French, English, and Latin.
Now, where would a young man from Germany and one from the
Mission district have crossed paths and thus launched their scholarly partnership? Why, in Rhodesia, of course. When they met in 1958 each was
PETER J. DUIGNAN was a senior fellow at the Hoover Institution. ROBERT HESSEN is a senior research fellow (emeritus) at the Hoover Institution.
165
studying the history of the former British colony. They quickly discovered
that they both were ardentthough not uncriticaldefenders of Britain
and its colonial empire.
Peter and Lewis were dissenters, revisionists, and realists, who were
skeptical about the ability of the newly independent nations of Africa to
become multiparty democracies free of censorship and corruption. They
refused to conceal their views or join the chorus of optimists who claimed
that mostor allof Africas problems could be attributed to the colonial
empires built by Europeans.
As Lewis wrote in 1993, he and Peter were [nearly] alone in predicting
that newly independent Africa might have to cope with military coups,
corruption, ethnic strife, and other afflictions. [But] the great majority of
Africanists, particularly in the United States, did not wish to criticize the
new countries, lest they be regarded as racists. Peter and Lewis regarded
realism and truth-telling as higher values than courting popularity and
concealing their actual views. They paid a high price for their candor,
often being excluded from scholarly conferences or not being invited to
review books in the leading journals of African history, and often their
books were either ignored or harshly reviewed.
Peter was an intellectual matchmaker, finding scholars throughout the
world who could comprehend and interpret the African materials.
Yet they persisted, largely because Peter had a strong vision of what he
wanted to create at the Hoover Institution. Peter, whom Lewis called a
born empire builder, created the major center in North America and
perhaps the world for the study of Africas history. As curator of the African program, Peter relentlessly pursued source materials. Far from being a
passive hoarder of papers that might languish unopened for years or even
decades, Peter was an intellectual matchmaker, finding scholars throughout the world who could comprehend and interpret the materials.
Peter was daring and creative in his search for materials that might
otherwise never have left Africa. Once, for example, he hit upon the idea
of asking former president Herbert Hoover to write to the prime minister
of South Africa in order to enable Benjamin Pogrund, a journalist, to
166
Duignan family
Hoover senior fellow Peter J. Duignan (19262012) became curator of

Hoovers African Collection in 1959 and director of its African Studies
program in 1965. Longtime collaborator Lewis Gann called Duignan a
born empire buildercreator of the major center in North America and
perhaps the world for the study of Africas history. Gann wrote that he
and Duignan were [nearly] alone in predicting that newly independent
Africa might have to cope with military coups, corruption, ethnic strife,
and other afflictions.
167
track down, film, and ship to Hoover a vast cache of political ephemera
and the newspapers of outlawed radical organizations, such as the South
African Communist Party. To escape having such material detected and
confiscated by the police, Peter arranged for the most sensitive materials
to be sent through the U.S. embassys diplomatic pouch. Peter, I suspect,
would have made a first-class spy.
I would like to describe a more painful incident in Peters career. In 1985,
during Ronald Reagans second term in the White House, a vacancy arose
in the National Archives. Peter was the front-runner to become the next
archivist of the United States, and he was backed by W. Glenn Campbell,
Hoovers then-director and a leading adviser to the president. Peter wanted the job and was confident he would be nominated. But a letter signed
by the governing council of the Society of American Archivistsmost of
whom had never met him or interacted with himclaimed that Peter
was not qualified, which was absurd given Peters quarter century of work
as an archivist, collection builder, administrator, and organizer of conferences and symposia. His candidacy was derailed by a startling disclosure
about Peters past. Someone discovered that he had supported Reagan in
1980, as a member of Democrats for Reagan. This meant, his opponents
claimed, that he was politically tainted and could not be entrusted with
materials whose use or suppression might benefit one political party or
harm the other. The New York Times and the Washington Post jumped on
the anti-Duignan bandwagon, and his nomination did not go forward.
Peter was a dissenter and a realist, skeptical about the ability of the
newly independent nations of Africa to become multiparty democracies
free of censorship and corruption.
Peter was resilient after this disappointing episode, so his productivity

did not decline. But he did turn his writings away from Africa to other
fields of interest. Here too, as collaborators, he and Lewis were dissenters,
for example, arguing that Hispanic immigrants to the United States were
largely pleased, rather than oppressed, and documenting Americas positive role in rebuilding Europe after World War II. They also took unfash168
ionable positions on such issues as the origins of the Cold War, the future
of NATO, immigration reform, and the defects of bilingual education.
Earlier, I suggested that Peter might have made a first-class spy. I am
certain, from first-hand experience, that he was a good friend and colleague, and an extraordinary scholar and writer. I shall miss his good
humor and his forceful personality, as will all of us who were fortunate to
have known him.
Available from the Hoover Press is NATO: Its Past,

Present, and Future, by Peter J. Duignan. To order, call
169
H OOVER ARC HIVE S
Taiwans Tragedy
New light on how American diplomats struggled to steer Taiwan
away from crisis in 1947. By Hsiao-ting Lin.
In late February 1947, an anti-government uprising occurred on Taiwan, a former Japanese island colony recently returned to China after the
end of World War II. Agents from the Tobacco Monopoly Bureau had
confiscated contraband cigarettes from a forty-year-old widow in Taipei.
She begged for their return, but one of the agents hit her with a pistol,
prompting the surrounding Taiwanese crowd to challenge the agents. As
they fled, an agent fired into the crowd, killing a bystander. The crowd
protested to both the police and the gendarmes, but was mostly ignored.
On the morning of February 28, violence flared, quickly spreading to the
rest of the island. Later, the uprising was violently suppressed by the ruling
Chinese Nationalist government and resulted in the death of numerous
civilians, making it a critical impetus for the Taiwan independence movement as well as a deep-seated source of bitterness among the Taiwanese
toward the Chinese mainlanders.
The political hangover of the so-called 228 Incident was tremendous
and continues to haunt Taiwans politics today. Those who favor Taiwanese independence offer the tragedy as evidence that mainlanders are not
qualified to govern Taiwan and that the island should be politically separate from China. Mainlanders on Taiwan and their descendants argue that
mainlanders were also the victims of this tragedy. One of the most salient
aftereffects of the 228 Incident was the eventual imposition of martial law
HSIAO-TING LIN is curator of the East Asia Collection and a research fellow at
the Hoover Institution.
170
across the island and an era of political repression known as the White
Terror. It was not lifted for more than thirty-eight years.
A little-known fact is the role played at the time by an American diplomat with a military intelligence background, George H. Kerr, whose papers
are among the Hoover Archives unique historical collections. Kerr played a
crucial role both in the midst of the incident and in its aftermath, obliquely
redirecting Nationalist policy during a time of great danger and uncertainty.
Born in Pennsylvania, Kerr studied in Japan from 1935 to 1937, after
which he went to Taiwan and taught English in Taipei until 1940. Given
his personal experience in Japan and colonial Taiwan, Kerr soon became a
Taiwan expert in the Navy after he returned to the United States to serve
as a lieutenant in the Naval Reserve. In early 1942, while working as an
analyst and consultant on Taiwan in the War Department, Kerr drafted a
memorandum that explored alternatives for the postwar settlement of the
island, advocating some form of international control; the creation of a
security base in the south of the island; and the use of Taiwans abundant
agricultural, forestry, and water resources for reconstruction. The draft
was later developed into an official memorandum in July 1942, when his
superiors at the Far Eastern Division of the Military Intelligence Service
were asked to state the divisions views about Taiwans occupation as part
of a general American war strategy.
In the memo, Kerr suggested that China would not be able to assume
exclusive control of Taiwan, for two reasons: too few Chinese administrators and technicians available to manage the islands complex economy,
and the ever-present dangers of an intolerable exploitation by Nationalist
political leadersarmy and party cliqueswhom he considered a curse
on China. It was evident to Kerr that Taiwan was many years ahead of the
mainland in technological organization and standards of living. As Kerr
saw it, the Nationalist government had no surplus of trained manpower
to spare for the job that would have to be carried out in a postwar Taiwan.
Kerrs memorandum generated little enthusiasm, but his observations
proved to be largely correct. Shortly after the Chinese took over Taiwan
in October 1945 from the defeated Japanese, the Nationalists policies,
involving such important issues as the disposition of Japanese assets and
economic reconstruction, cultural reintegration and language, and partic-
171
Hoover Archives
American diplomat George H. Kerr drafted an eyewitness report about the

clash in Taipei that sparked the 228 Incident of February 1947, describing both the initial beating of a cigarette vendor and the machine-gunning
of protesters who approached the governors offices. Kerr had already
spent several years looking into the options for postwar control of Taiwan,
stating as early as 1942 that China would be unable to handle exclusive
control of Taiwan because of corruption and administrative shortcomings.
172
ipation in political activity, all led to bitter disputes with the local Taiwanese, who felt that their living conditions and political status had grown
worse. A U.S. intelligence report concluded as early as January 1946 that
attempted seizure of private property by mainland Chinese had caused
resentment among the people of Taiwan, the breakdown of law enforcement, and discrimination against Taiwanese. Believing that the anti-Chinese feeling needed to be explored, Taipei-based members of the Office
of Strategic Services (OSS), the forerunner of the CIA, conducted a survey throughout the island. According to George Kerr, then serving as the
American vice consul in Taipei, the surprised Taiwanese were boldly asked
by the OSS staff whether they would prefer continuing Chinese rule, a
return to Japanese administration, or a future under United Nations trusteeship, with the United States as trustee.
The political hangover of the 1947 uprising was tremendous, and it
Hoover Archives
continues to haunt Taiwans politics today.
Provincial authorities suspected that Kerr was trying to protect Japanese interests on the island and that he had a hand in the OSS intrigue.
They tried to have Kerr removed from Taipei, but failed.
An estimated 80 percent of the native-born Taiwanese industrial workers
lost their jobs in 1946. By January 1947, local commodity price indices had
risen 700 percent for food, 1,400 percent for fuel and building materials,
and 25,000 percent for fertilizer. Taiwans capital goods and rice frequently
vanished into the mainland black market. Corruption became so prevalent that beginning in 1947, relief supplies from the United Nations Relief
and Rehabilitation Administration were allegedly shrinking by half as they
passed through the hands of Chinese officials. Within a year of the Chinese
takeover, middle-class Taiwanese were on the verge of bankruptcy.
Crises on both sides of the Taiwan Strait between the fall of 1946 and
early 1947 shaped the context of fear and uneasiness in Taiwan, eventually
leading to the bloody February 28 Incident. On January 6, 1947, General George Marshall had abandoned his mediation efforts between the
Nationalists and the Communists and returned to Washington. Taiwanese
increasingly felt that full-scale civil war on the mainland was imminent.
173
At the same time, rumors spread everywhere: Taiwan had been sold to the
United States in return for a huge military credit. Or the island was to be
returned to Japan under General Douglas MacArthur, now supreme commander for the Allied powers in Japan.
Taiwans currency, tied to the mainlands finances, depreciated rapidly,
and the provincial administration was gradually losing control of the economy. On February 14, a riot briefly closed Taipeis rice market as citizens
struggled to buy ever-smaller amounts at increasing prices. Fear gripped the
island, and large-scale robberies took place in the towns and cities.
By the time the bloody incident broke out on the evening of February
27, the local Taiwanese, who had already been harboring feelings of frustration about unemployment, inflation, and corruption, had reached their
breaking point. The uprising spread to many of the islands other urban
centers as Taiwanese and government forces battled for control of the
infrastructure, including office buildings, railway stations, and police stations. A few anti-Chinese groups were organized, such as the Communistinspired 27 Brigade. They looted machine guns, rifles, and grenades
from military arsenals in central and southern Taiwan. The armed groups
shot or wounded Nationalist soldiers, and this in turn precipitated the
house arrest or execution of those who had participated in the uprising.
Across the Strait, Chiang Kai-shek was shocked at the news. Unable to
ascertain how serious the condition was, Chiang had few alternatives but
to rely on the personal judgment and suggestions of the key Nationalist
officials on the island, especially provincial governor Chen Yi.
U.S. agents asked surprised Taiwanese whether they would prefer
continuing Chinese rule, a return to Japanese administration, or a future
under United Nations trusteeship.
On March 2, a February 28 Incident Settlement Committee composed

of prominent Taiwanese was organized to negotiate with Chen. In the
first week of March, representatives met with Chen and presented a list
of thirty-two demands for reform of the provincial administration. They
requested, among other things, greater autonomy, abolition of the trade
174
This photo shows a street disturbance at the start of the 228 Incident of
1947. Thousands of people lost their lives and many more were arrested
in violence that began in Taipei and spread throughout the island. Open
discussion of the incident was taboo in Taiwan for decades.
monopoly, free elections, surrender of Nationalist forces to the committee, an end to government corruption, and control over the police and
military. Their demands moved toward the undertaking of fundamental
political reform under the rubric of self-government.
By March 7, Chen, dumbfounded and obviously losing his patience,
cabled Chiang requesting that the government send reinforcements to
Taiwan to restore order. Chiang agreed. To him, consolidating the Taiwan
backyard was now criticalhis troops were engaging in increasingly
strenuous battles with the Communists on the mainland. Nevertheless,
he found it a painful decision. Chiang confided to his diary that he was at
a loss, unsure what to do about the Taiwan crisis when the military crises
in North China and Manchuria had already confounded him abysmally.
175
On March 8, Nationalist reinforcements arrived from the mainland.

Chen Yi soon declared martial law throughout the island and announced
that the Settlement Committee was illegal, accusing it of becoming part of
a revolt. Nationalist forces launched a crackdown, squelched the opposition
to the government, and helped reassert control by the middle of March.
Thousands of people, including both Chinese mainlanders and Taiwanese,
were killed or imprisoned for their real or perceived dissent, leaving the
local Taiwanese victims with a deep-rooted bitterness toward the Nationalist
authorities, and by extension, all Chinese mainlanders. The conflict was a
forbidden topic until 1987. In the years since, it has become the subject of
numerous, albeit divided and conflicting, studies and memorials.
TH E A M ER I C A N R O LE R E APPR AI SE D
Americans in the Far East watched all these events unfold, and the role
they played in Taiwans bloodshed deserves our careful scrutiny. On January 10, 1947, more than a month before the 228 Incident, Ralph J. Blake,
the American consul in Taipei, wrote to his superiors in the embassy in
Nanjing about public uneasiness in Taiwan. These anxieties had spawned
speculation and many rumors, he wrote, and reflected the uncertainty of
political and economic conditions on both the mainland and the island.
Surprisingly, Blakes report revealed that representatives of a group of
well-educated men, with whom the mayor of Taipei was said now to be
associating himself, had investigated Taiwans problems and concluded that
any crisis on the mainlandeither full-scale war or economic collapse
would ignite a crisis in Taiwan, during which a struggle for control would
ensue. If the crisis did occur, Blake went on to report, then representatives
of this group would ask three things of the United States. They would ask
America to refrain from transporting mainland troops to Taiwan as was done
after the Japanese surrender. They would ask that America send technical
and administrative advisers to Taiwan to help it through a crisis in which
they were determined not to be engulfed. And they would ask America to
lend financial and material support to rehabilitate commerce and industry.
George Kerr recounted that on January 15 this group of educated elites
drew up a petition to General George Marshall, the new secretary of state
in the Truman administration. Kerr claimed that more than 150 signatures
176
were attached, some of them spokesmen for organizations or groups of private citizens, representing about 800 people in all. But when the petition
was ready, leaders of this group suddenly decided to delay presentation to
the U.S. consulate in Taipei. Instead, they now intended to appeal to the
Nationalist government in Nanjing, hoping that it might induce Chiang
Kai-shek to intervene in Taipei. But nothing happened after their appeal.
At one point, the American consul recommended an immediate
American intervention.
A month later, in mid-February, the group at last brought to the consulate the long petition addressed to General Marshall. Its crucial point was
that the shortest way to reform the malfunctioning Taiwanese provincial
government was to completely depend on a United Nations joint administration on the island and to cut political and economic links with China
for some years. The group sought American support in fulfilling this goal.
There is no indication that the petition was sent to Washington or to
the U.S. embassy in Nanjing. This is hardly surprising; Blake had long
made it clear that as an official body, the American consulate in Taipei
should not be allowed to have an interest in the Taiwan problem and that
its official relations were with Taiwanese provincial authorities, not local
Formosan groups.
Chen Yi declared martial law and Nationalist forces launched a
crackdown. Thousands of people, both mainlanders and Taiwanese, were
killed or imprisoned.
But the situation changed dramatically after the bloodshed. On March

3, representatives of the group of well-educated Taiwanese submitted
a new version of the petition to the consulate. Instead of asking for a
United Nations joint administration in Taiwan and cutting their ties
with China for some years, they now urged American assistance in seeking
direct U.N. intervention pending final transfer of sovereignty to China.
Moreover, the group advocated resistance to the present Chinese govern-
177
178
ment if it sought military funds or failed to meet the popular demands

for reform. Under heavy pressure from George Kerr, the American consul
backed down and changed his non-intervention stance. Blake now concluded in his latest report to the State Department, dated March 6, that
the only solution available was an immediate American intervention in
its own right or on behalf of the United Nations to prevent disastrous
slaughter by the Chinese forces. Blake went on to argue that American
prestige was high and the local people profoundly desired intervention.
Notably, his analysis was sent out two days before Chinese reinforcements
arrived and major bloodshed began.
On March 10, two days after the Nationalist troops had arrived and
begun their crackdown throughout the island, Kerr submitted a new
memorandum to the American embassy in Nanjing. Realizing that there
was now little hope of bringing the island under U.N. trusteeship as a
result of the Nationalist military suppression, Kerr shifted his stance, suggesting that Washington now encourage Chiang Kai-shek to replace Chen
Yi with a civil provincial administration. To prevent strategically important Taiwan from falling to communism as a result of the massacre, Kerr
meanwhile urged that U.S. economic assistance be rendered to a newly
reformed provincial administration.
Despite this subtle shift of stance on Chinas policy toward Taiwan, as
revealed in the memorandum, Kerr was now being widely resented by
the Chinese Nationalists as the major source of the islands turmoil. On
March 17, Kerr was ordered to leave Taipei for the embassy in Nanjing,
where Ambassador John Leighton Stuart assigned him the task of prepar-
In March 1947, two days after Nationalist troops had launched a crackdown on Taiwan, Kerr realized there was little chance of a U.N. trusteeship for Taiwan. Instead, in this memorandum to the U.S. embassy (left),
Kerr suggested that Washington push Chiang Kai-shek to replace provincial governor Chen Yi and promise to aid a reformed administration. Ultimately Chen was replaced, and the ambassadors report urged the United
States to consider Taiwan a special economic area.
179
ing a comprehensive report on the recent turmoil in Taiwan. He would

never come back to his consular post in Taipei.
Having made himself unwelcome in both China and Taiwan, Kerr may
not have foreseen that his March 10 memorandum would nonetheless
trigger a series of political developments in Taiwan. His idea of giving
economic aid to a newly organized administration on Taiwan was incorporated into Stuarts official report to Washington. The ambassador suggested that Taiwan should be treated as a special economic area and [to]
employ a group of American advisers to aid in developing its economics. Ostensibly the ideas focused on economic advantages, but Stuart also
argued that the changes could secure the goodwill of local Taiwanese and
the realization of enlightened democratic principles.
Washington soon responded to Stuarts suggestion. On April 2, Undersecretary of State Dean Acheson cabled Stuart, saying assistance in economic development for Taiwan appeared sound in principle.
Perhaps more striking in hindsight, Kerrs memorandum of March 10
might have served as an indirect catalyst in speeding up the Nationalist reorganization of Taiwans provincial administration. When Chiang
Kai-shek met with Stuart on March 29, the American ambassador, who
apparently concurred with Kerrs idea, was polite and yet bold enough to
suggest that Chiang appoint a civilian officialpreferably T. V. Soong,
who had recently stepped down from the premiershipas Taiwans new
governor. Stuart reminded Chiang that with such a man in charge and the
emphasis on civil rather than military administration and on economic
restoration, one could hope for better treatment of the islanders and a
generally more honest and enlightened administration.
The ambassador argued that economic changes could secure the goodwill
of local Taiwanese and support enlightened democratic principles.
It should be stressed that at first Chiang had no intention of replacing

Chen Yi, as he still did not believe that Chens disposition of the Taiwan
uprising was entirely wrong and deserving of his removal. When Chens
dismissal seemed inevitable, and after T. V. Soong had shown no interest in
taking up the new position, other possible candidates surfaced, including
180
several Nationalist military chiefs and Chiangs son, Ching-kuo. Chiang

ruled out all these possibilities. But now that he needed to take American
sensibilities into account, there was no escape.
Nanjing began restructuring Taiwans provincial administration and
recruiting more Taiwanese elites into the political apparatus.
U.S. policy thus moved toward creation of a certain kind of politicaleconomic arrangement on Taiwan, though at this point no one imagined
the importance this new policy direction would take after 1949, when
the defeated Nationalists retreated and relocated themselves to the island.
In mid-April 1947, Kerr completed his memorandum on Taiwan for
Stuart, who revised it and passed on the final version to Chiang Kai-shek
and other Nationalist high officials. In the memorandum Kerr re-emphasized the importance of preventing communism from infiltrating Taiwan
after the uprising. Kerr acknowledged that there could be no question
that Formosan-Chinese have felt loyalty to the Central Government and
toward the Generalissimo. Yet he also warned that after the massacre,
a local form of communism is not only possible but is believed to be a
highly probable development if economic organization collapses under
the pressure of continued military occupation.
Kerr now distanced himself from the idea of placing Taiwan under
U.N. trusteeship. Whether genuinely or expediently, he instead advocated
prompt and fundamental reform of the provincial mechanism that should
encompass both the Formosans and the mainlanders. The goal, he wrote,
would be to return the island to its former high level of political allegiance and of economic production.
Four days after receiving the memorandum, Chiang Kai-shek declared
that Wei Daoming, a civil official who had recently been the Chinese
ambassador to the United States, would succeed Chen Yi as Taiwans provincial governor.
P I C K I N G UP TH E PO ST-TR AG E D Y PI EC ES
With the recommendations from the American embassy, which were
essentially inherited from George Kerrs ideas, Nanjing began restructurHoover Digest 2013 No. 2
181
ing Taiwans provincial administration and recruiting more Taiwanese

elites into the islands political apparatus. The newly organized Taiwan
provincial authorities now consisted of fourteen members, half of them
Taiwanese with mainland experience. The great majority of Chen Yis
cohorts were replaced by new appointees, and among them, a considerable proportion also were Taiwanese. Although the new provincial head
was given jurisdiction over the islands armed forces, his civil and military
authority was substantially curtailed.
Ambassador Stuart was outwardly pleased with the new political arrangements, which he deemed a step forward as regards the susceptibilities of the
Taiwanese. Kerr, however, was more wary. On the eve of his departure from
China to return to Washington on April 28, Kerr reminded his superiors in
both the embassy and the State Department that it was too early to know if
the new provincial governors service abroad, especially in the United States,
would be played up locally to create an encouraging aura of liberalism. He
pointed out that the new governors prospects for success would depend
on the influence he could exercise over the military, the well-entrenched
bureaucracy left by Chen Yi, and the policies so far espoused by Nanjing,
which had led to the bloody episode.
The turmoil sowed a tiny seed for the islands market economy in the
decades to come.
Kerrs misgivings were mostly correct. To be fair, Wei Daoming, during

his year and a half in office, made an honest effort to undo the ill effects of
Chens administration. He publicly expressed support for free enterprise
on the island. A number of government enterprises, such as the match
companyformerly a monopolywere newly opened to private operation and investment. Mining and industrial concerns, jointly operated by
government and private interests, were also turned over to private hands.
Meanwhile, the Monopoly Bureau was changed to the Public Sales
Bureau, which was then revamped by restricting the number of commodities it could sell to retailers. The Trade Bureau was reorganized into
a new Material Supply Bureau to streamline its handling of commodities
sold abroad and produced by publicly owned enterprises, and its response
182
to the demands of private enterprises. The reform of the two bureaus,

one scholarly work maintains, tremendously increased the number of private enterprises, allowing local Taiwanese businesspeople to conduct their
affairs with more freedom and certainty than before.
In the aftermath of the February 1947 tragedy, a gradual shift in Taiwans political and economic policy and thought began to emerge, sowing
the tiny seed for the islands market economy in the decades to come.
Americans like George Kerr played an unrecognized but no less significant
part in this historical development.
Available from the Hoover Press is The Struggle across

the Taiwan Strait: The Divided China Problem, by Ramon
H. Myers and Jialin Zhang. To order, call 800.935.2882
183
On the Cover
Sun-drenched Andros, second-largest of the Cyclades islands in Greece, is
well-watered and green, a rarity in its arid neighborhood. The rivers that
cross the island drew settlers thousands of years agoCarians, Pelasgians,
Phoenicians, Cretans, Ioniansand today water a placid island where figs,
olives, mulberries, apples, and almonds grow on terraces and in deep valleys. Spring water is plentiful enough to be bottled and exported, though
it was Dionysiusgod of winewho was the islands ancient patron.
This 1949 travel poster in the Hoover Archives shows a typical view
looking inland from the sea, the architecture hinting at the waves of history that washed over the island. The towns on Andros are known for
their variety: tower houses, built in dangerous times, with thick walls,
lookout perches, gun emplacements, even chutes to pour boiling oil down
on intruders. Mansions, much more graceful and airy, to showcase the
wealth of the vanished Venetian era and the rich trade in silk. In later,
secure times the inhabitants built smaller, square houses with flat terracotta roofs and large windows facing the sea. Ornate dovecotes, as in this
poster, are another prominent feature.
As on other Greek islands, the sea dominates. A bronze statue of the
Unknown Sailor seems to be hailing a ship from the waterfront of Chora,
the islands capital. Just ahead of him in the old harbor is not a ship but
the ruins of a Venetian fort, which stood firm against seaborne invaders
from the thirteenth century until 1943, when it was destroyed by German
bombers.
Many sons of Andros have gone to sea. One in particular sailed to America and found his fortune there. Pericles Pantageshe later changed his first
name to Alexanderran away from his father and shipped out at the age of
nine. He worked his way through San Francisco and the wilds of the Klondike gold rush before striking it rich in Seattle as a sharp-elbowed vaudeville
impresario and later film producer. The theaters he owned or operated in
the Western United States and Canada made up the famous Pantages Circuit, which featured vaudevilles biggest acts on long-term contractsand
184
the occasional roller-skating

bear. The theaters were built
in a fantasy classical style
the impresario liked to call
Pantages Greek. Eventually
Pantages moved to Los Angeles, where his masterstroke,
the Art Decostyle Pantages
Hollywood Theater (opened
in 1930), still stands, its
career having stretched from
Eddie Cantor to The Lion
King.
But the Greek King,
as Pantages styled himself,
ran aground on the shoals
of Hollywood scandal. In
1929 he was accused of raping a young dancer. At the time he was fifty-three, illiterate, and said to
be worth $30 million. Sentenced to prison, he won a new trial and was
acquitted after his attorney was allowed to challenge the accusers morals.
But the trials had exhausted much of his fortune and health, and he died
in 1936.
Pantages might have made his fortune closer to home, as many Greek
shipping magnates did, especially at Andros. The island depicted in this
postwar painting, though, is a quieter place: it has emerged from years of
occupation and conflict and is watching a growing number of its young
people drift elsewhere for jobs and education. Today it is quieter still.
The inhabitants of Andros number about ten thousand; in 1900 there
were eighteen thousand. Greeks, on the islands or on the mainland, are
shouldering their way through terrible financial storms. But on Andros,
the waters still tumble placidly out of the lion-headed springs of Sariza
and the sea still beckons.
Charles Lindsey
185
Board of Overseers
Marc L. Abramowitz
Victoria Tory Agnich
Frederick L. Allen
Jack R. Anderson
Martin Anderson
Barbara Barrett
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Peter S. Bing
Walter E. Blessey Jr.
Joanne Whittier Blokker
William K. Blount
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William K. Bowes
Richard W. Boyce
Scott C. Brittingham
James J. Carroll III
Robert H. Castellini
Rod Cooper
Paul L. Davies Jr.
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John B. De Nault
Steven A. Denning*
Dixon R. Doll
Susanne Fitger Donnelly
Joseph W. Donner
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186
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Robert G. ODonnell
Robert J. Oster
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George J. Records
Christopher R. Redlich Jr.
Kathleen Cab Rogers
James N. Russell
Richard M. Scaife
Roderick W. Shepard
Thomas M. Siebel
George W. Siguler
William E. Simon Jr.
Boyd C. Smith
John R. Stahr
William C. Steere Jr.
Thomas F. Stephenson
Robert J. Swain
W. Clarke Swanson Jr.
Curtis Sloane Tamkin
Tad Taube
Robert A. Teitsworth
L. Sherman Telleen
Peter A. Thiel
Thomas J. Tierney
David T. Traitel
Victor S. Trione
Nani S. Warren
Dean A. Watkins
Dody Waugh
Jack R. Wheatley
Lynne Farwell White
Paul H. Wick
Norman Tad Williamson
Richard G. Wolford
*Ex officio members of the Board
187
The Hoover Institution on War, Revolution and Peace was established at Stanford University
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WILLIAM C. EDWARDS
CHARLES B. JOHNSON
TAD AND CICI WILLIAMSON
H OOVER DIGE ST 2013 N O . 2

Taxes
The Economy
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Health Care
The Constitution
The Middle East
Intelligence
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Immigration
Education
California
Interview: Antonin Scalia
Values
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In Memoriam: Peter J. Duignan
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RESEARCH AND OPINION

THE HOOVER INSTITUTION STANFORD UNIVERSITY

RESEARCH AND OPINION

Research and Opinion on Public Policy

The Hoover Digest offers informative writing on politics, economics, and

The Hoover Digest (ISSN 1088-5161) is published quarterly by the Hoover

2013 by the Board of Trustees of the Leland Stanford Junior University

Chairman, Board of Overseers

Tad and Dianne Taube

Senior Associate Directors

Counselors to the Director

HOOVER DIGEST 2013 NO. 2 S P R I N G

The Bills Come Due

Focus on the Factions

Taxing the Poor

Patching the Debt Ceiling

And the Cliffs Keep Coming

Hoover Digest 2013 No. 2

Crash? What Crash?

Unwieldy and Unwise

ObamaCares Unhealthy Assumptions

Hoover Digest 2013 No. 2

The Free-Market Cure

Are You Smarter than the Constitution?

A More Powerful Message

Mission Never Quite Accomplished

What Ever Happened to Bahrain?

The Threat Multipliers

Hoover Digest 2013 No. 2

Keeping the Peace

The Road to Rogue

The Immigration Imperative

Hoover Digest 2013 No. 2

A Bar Exam for Teachers?

California, Here I Stay

The Drug War and the Damage Done

H I S T O R Y AND CUL TURE

Hoover Digest 2013 No. 2

The Present-Minded Professor

Our Man in Africa

Hoover Digest 2013 No. 2

The Bills Come Due

Hoover Digest 2013 No. 2

Hoover Digest 2013 No. 2

Illustration by Taylor Jones for the Hoover Digest.

Hoover Digest 2013 No. 2

Hoover Digest 2013 No. 2

High tax rateson both labor income and consumptionreduce the

Hoover Digest 2013 No. 2

Hoover Digest 2013 No. 2

reforming immigration policies so that we can substantially increase our

New from the Hoover Press is Government Policies

Hoover Digest 2013 No. 2

Focus on the Factions

Hoover Digest 2013 No. 2

or consumption taxto reduce the risk of political intrigue. There is,

The president obsesses about the increases in income inequality,

Hoover Digest 2013 No. 2

Hoover Digest 2013 No. 2

Illustrations by Taylor Jones for the Hoover Digest.

W H Y A F L AT CO NSU MPTI O N TAX ?

It is, of course, difficult to work an immediate transition from an

Hoover Digest 2013 No. 2

tion, such as a recapitalization or merger. It takes little ingenuity to use