IDEAS ON LIBERTYIDEAS ON LIBERTY 412 The Economic Way of Thinking, Part 2 by RonaldNash The...

IDEAS ON LIBERTY

412 The Economic Way of Thinking, Part 2 by Ronald NashThe importance of subjective valuation in economics.

416 National Health Care: Medicine in Germany 1918-1945by Marc S. Micozzi, M.D.

Increased involvement of the German government in funding healthcare and medical research established a political-medical complex thatthe National Socialists later used in carrying out their exterminationpolicies.

421 Medicine and the Welfare State by Melchior PalyiThe march of authoritarian medicine from Bismarck and Lenin to themodern welfare state.

431 What Hunger Insurance Could Teach Us About Health Insuranceby Joseph Bast

An exercise in imagination helps to explain why we spend so much onhealth care.

435 The Freeway to Serfdom by Jane M. Orient, M.D.Pleas for "comprehensive health care reform" to "insure universalaccess" signal danger.

436 The Consequences of Managed Competition by Vincent W. Cangello, M.D.Limiting the physician's option to refer patients to specialists pointsthe way to lower quality health care.

438 The Coming Financial Collapse of Social Security by Peter J. FerraraThe Social Security trust funds are essentially a sham that cannotassure future financial security.

448 The Politics of the "Fair Share" by Gary NorthWhat will be everyone's "fair share" of judgment when the process ofpolitical theft produces economic disaster?

452 Book ReviewsJohn Attarian reviews Social Security: What Every Taxpayer ShouldKnow by A. Haeworth Robertson; Israel M. Kirzner's review ofMises: An Annotated Bibliography: A Comprehensive Listing of Booksand Articles by and About Ludwig von Mises, compiled by BettinaBien Greaves and Robert W. McGee; Peter F. Steele's review of TheRuling Class: Inside the Imperial Congress by Eric Felton; William H.Peterson reviews Prosperity Versus Planning: How Government StiflesEconomic Growth by David Osterfeld.

CONTENTSNOVEMBER

1993VOL. 43NO. 11

THEFREEMANIDEAS ON LIBERTY

Published byThe Foundation for Economic EducationIrvington-on-Hudson, NY 10533

President: Hans F. Sennholz, Ph.D.

Editor: John W. Robbins, Ph.D.Senior Editor: Beth A. Hoffman

EditorEmeritus: Paul L. Poirot, Ph.D.

AssociateEditors: John Chamberlain

Bettina Bien GreavesEdmund A. Opitz

ContributingEditors: Doug Bandow

Clarence B. Carson, Ph.D.Thomas J. DiLorenzo, Ph.D.Roger W. Garrison, Ph.D.Robert Higgs, Ph.D.John Hospers, Ph.D.Ronald Nash, Ph.D.William H. Peterson, Ph.D.Richard H. Timberlake, Ph.D.Lawrence H. White, Ph.D.

The Freeman is the monthly publication ofThe Foundation for Economic Education,Inc., Irvington-on-Hudson, NY 10533. FEE,established in 1946 by Leonard E. Read, is anon-political, educational champion of private property, the free market, and limitedgovernment. FEE is classified as a 26 USC501(c)(3) tax-exempt organization.

Copyright © 1993 by The Foundation forEconomic Education. Permission is grantedto reprint any article in this issue, except"National Health Care: Medicine in Germany 1918-1945," provided appropriatecredit is given and two copies of the reprinted material are sent to The Foundation.

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Bound volumes of The Freeman are available from The Foundation for calendar years1972 to date. The Freeman is available onmicrofilm and CD-ROM from UniversityMicrofilms, 300 North Zeeb Road, Ann Arbor, MI 48106. A computer diskette containing the articles from this month's issue isavailable from FEE for $10.00; specify either 31/2" or 5Vi' format.

Phone (914) 591-7230FAX (914) 591-8910

PERSPECTIVE

Voluntarism in Health:A Forgotten Solution

In a period of escalating medical andinsurance costs, the working poor are facedwith inadequate medical care. They arepeople who exist on the edge of poverty andlive without government assistance. Theyare proud and self-reliant. ...

The Bradley Free Clinic in Roanoke,Virginia, exists to meet the needs of ourcommunity's less affluent with respect anddignity. Our mission is to provide medical,dental, and pharmaceutical care to theRoanoke Valley's working poor using volunteer professional staff. We are one ofsome 140 free clinics across the countryoffering family practice medical care toindigent patients.

The success of the Bradley Free Cliniclies in voluntarism, a time-honored American tradition that is often left out of discussions on how to remedy our country's healthcare ills. Until the advent of Medicare andMedicaid in the early 1960s, numerous hospitals operated with the primary intention ofproviding health care for the disenfranchised. The Bradley Free Clinic and otherslike it have revived this forgotten method ofproviding health care for those unable toafford it. They have again made it possiblefor the medical community to care for thepoor without the costs imposed by bureaucratic intervention.

Physicians have been extending solaceto the poor for decades, usually in a veryquiet, low-key fashion; they do not needor wish publicity for these activities. Mostphysicians, then and now, hold that helping the poor is part of their professionalresponsibility. Free clinics provide an excellent opportunity for physicians to continue to help the poor in a clean, well-run,clinically contemporary setting. Throughthe coordination of their services, the physicians of Roanoke have proven this tobe true.

-JOHN M. GARVIN, M.D., writing inPhilanthropy, published by

The Philanthropy Roundtable

410

411

The Kingdom ThatGives Beethoven a C

What's happening in the world of artssubsidies says a lot about how moderngovernments are evolving. In the UnitedStates, there has been a contest betweenarts pressure groups and John Q. Publicover subsidizing distasteful and pornographic art, and John Q. has lost. Across theAtlantic, in Great Britain, arts administrators are in the process of turning the wholetheory of democracy upside down.

In Britain, the agency that doles out thesubsidies is the Arts Council. Its musicbranch has developed quite distinctivetastes in composers, and it has decided toput taxpayer money where its mouth is. TheIndependent, a leading London newspaper,found that it had adopted a formula tosimplify grant-giving, classifying composersinto four grades.

At the bottom of the heap are the grade Dcomposers who deserve no sUbsidy at all,old favorites like Johann Strauss and Edward Elgar. Grade C composers, a categorywhich includes Beethoven, are worth asubsidy of only 450 pounds per concert.Grade B composers, including heavies likeMahler, merit 1,000 pounds.

Hitting the jackpot, at grade A, accordeda subsidy of 2,000 pounds sterling per concert, are Harrison Birtwhistle and PeterMaxwell Davies. These gentlemen are notrugby players or Arctic explorers. They aremodern composers whose principal claim tofame is that the British public can't bear tolisten to their music.

This grading system has upset concertorganizers who naively supposed that itwas their job to put on concerts that people wanted to come to, not stay away from.One promoter, Michael Blackledge, pointedout that he filled all 750 seats in Bedford'sCorn Exchange when the concert featured politically incorrect Elgar and Delius,but that only 25 came when the approvedmodern composers were performed. Hefinds the grading system unworkable. "It'sartistic interference with people on the

PERSPECTIVE

ground who know their audience," he said.Years ago, when the idea of massive arts

subsidies was first proposed, arts insidershad reason to be worried. They were perfectly aware that what they were doingwasn't art as far as the general public wasconcerned. If democracy worked the way itwas supposed to, they would be left off thegravy train. Voters would communicatetheir desire for likeable music to their representatives, and they, in turn, would tellthe civil servants to give the public what itwants. Arts administrators, doing their democratic duty, would contrive subsidy programs boosting Viennese waltzes and leaving Birtwhistle and his chums down at thewine bar in the dustbin of history.

Fortunately for the insiders, none of thishappens. British arts administrators don'tsuppose for a minute that they are servantsof the people. Indeed, they have becomequite self-righteous about their duty to givethe public what it doesn't want. The musicdirector ofthe Arts Council, Kenneth Baird,was not apologetic or embarrassed whenasked about. the policy of emptying concerthalls with grade-A dissonance. "We arehappy with these categories," he said. "It isour duty to support the new and mostadventurous, given that that is the leastlikely to appeal to audiences and sponsors. "

Somewhere between John Locke andJohn Major democracy got left in the dustbin. The modern state does not function, asthe theorists hoped it would, to translatepopular desires into policy. It has given rise,as the arts subsidy scene clearly proves, toa more or less insulated class of publicofficials who use the power of the state toimplement their own prejudices.

We used to call this arrangement taxationwithout representation, and it used to makeus angry. -JAMES L. PAYNE


THE ECONOMICWAY OF THINKINGPART 2

by Ronald Nash

I n the first part of this eight-part series, welearned that economics is the basic study

of conscious, purposive human behavior.We also learned that the unavoidable fact ofscarcity in life requires human beings torank the things they regard as important andthen make choices. The subject of thismonth's essay is the fact that all economicvaluation is subjective.

Objective Theories ofEconomic Value

Anyone who observes how human beingsact in economic exchanges can easily seehow various things are thought to have morevalue than others. It is natural to wonderabout this fact. What is it about one thingthat makes it more valuable than another?Why do people want some things more thanothers? Why are some things so valued thatpeople are willing to make significant sacrifices in order to obtain them?

Until the late nineteenth century, econo-

Dr. Nash is a contributing editor to The Freemanand professor of philosophy and theology atReformed Theological Seminary in Orlando. Heis the author or editor of 25 books includingPoverty and Wealth (Probe Books) and SocialJustice and the Christian Church (UniversityPress ofAmerica).

mists and philosophers tended to regardeconomic value as objective. That is, thevalue of the economic good was thought tobe inherent in some way in that which wasvalued. One of the most influential of theseobjective theories of economic value appears in the writings of Karl Marx. Marxbelieved that the value of a good or serviceis determined to a great extent by its cost ofproduction. Suppose, for example, that allof the production costs (including the cost ofsupplies, labor, and everything else) tomake a pair of shoes amount to $40. Thevalue of those shoes (while new) then cannever be less than $40, according to thisview. The value here is objective in thesense that a number of factors, havingnothing to do with human preferences andwants, have given those new shoes thatvalue.

Marx and others set forth a labor theoryof value which held that economic goodsderived their value from the quantity oflabor required to produce them. Thus, eventhe machines used to manufacture shoeswere valuable because they were "frozenlabor time. "

A little reflection should quickly raisedoubts about any theory that holds thateconomic value is inherent in the good orservice. For one thing, consider how many

412

THE ECONOMIC WAY OF THINKING 413

At an auction, itemssold can bring pricesfar above or belowtheir original purchaseprice, depending onhow important thatitem is to the peopleattending the auction.

times retail merchants end up selling for lessthan their cost.

I happen to be a stamp collector. About ayear ago, I paid $3.00 for a recently issuedU.S. stamp in a strip of three. The personfrom whom I purchased the strip of threecoil stamps had paid 30 cents for them at thepost office. Just last week, a similar strip ofthree stamps sold at an auction for over$100. What happened to make these stampsdifferent was a set of tiny plate numbers thatappear once every 50 or so stamps in a coilroll. In this case, stamps with this particularset of plate numbers have turned out to beextremely rare. What is the "true value" ofstamps like this? Is it the 30 cents charged bythe post office or the $3.00 charged by theretail merchant I dealt with or the muchhigher price at which strips like this are nowtraded? The simple answer is that the valueof any economic good is no more and no lessthan what some individual will offer inexchange for it.

Another way to see the flaw in the beliefthat economic goods possess some intrinsic,objective value is to attend an auction. Itemscan bring prices far above or below theiroriginal purchase price, depending on howimportant that item is to the people attending the auction. The same principle is atwork in the case of pawn shops and fleamarkets. Suppose one day that you arebrowsing through such a place and comeacross something that used to belong to your

family; perhaps it is associated with important events in your childhood. Since theperson who sold this object to the merchantmay have not attached the importance it hasfor you, he may have parted with it for a fewdollars. Because of the value you impute tothe object you might, ifnecessary,be willingto pay several hundred dollars for the sameobject.

Or consider two diamonds of equal sizeand quality. Imagine that one is simplyfound on the ground by chance; no effort ordanger was involved in its discovery. Imagine that the second diamond comes out of adiamond mine where an enormous investment has been made in building and operating the mine. The men who work in suchmines have a difficult and dangerous job.And so we have two diamonds: one costlittle or nothing, while the second was produced at enormous cost. Imagine next thatour two diamonds happen to be offered forsale at the same auction. The two diamondsmight easily sell for similar prices. What thisshows is that the value of the two diamondsbears no relation to their respective costs.

At this point, someone might raise anobjection to the conclusion I draw from thediamond example. My example illustratesthe fact that value and cost are not necessarily related. But does it not show, mycritic might say, that value still bears arelationship to the objective properties orcharacteristics of the thing? My example

414 THE FREEMAN • NOVEMBER 1993

stipulated that the two diamonds were similar in size and quality. Does it not followthat their similar "value" reflects the factthat their objective characteristics are somuch alike?

It is true that the two diamonds hadsimilar objective properties. It is also true(in my example) that they sold for prices thatreflect a similar value. In this particularcase, the closely related prices only reflectthe fact that two buyers placed much thesame value on them; this might well havebeen a function of the objective features ofthe diamonds. After all, if two things arepractically the same, they can be substitutedfor each other. The hamburgers I can buy atthe McDonald's on the north end oftown areindistinguishable from those I can buy fromthe McDonald's at the south end of town.Because they are so much alike, most potential buyers will treat them as equal invalue. But the economic value is not inherent in the hamburgers any more than it is inthe diamonds. The value is imputed to thething by an individual valuer. Obviously,people take the objective features of thingsinto account when imputing such value.

It would be a mistake to assume that justbecause two diamonds or two hamburgerssell for the same price, they must thereforebe equal in "objective value." What twobuyers are willing to exchange for an articlereflects their separate personal valuation ofthat good. It is possible that two diamondsofdifferent size and quality might sell for thesame price. Any number of personal, subjective considerations might lead two buy-ers to offer the same price for goods withdifferent properties. On the other hand, twosimilar diamonds might sell for differentprices at auction, if buyers do not imputesimilar value to them.

In the last third of the nineteenth centuryseveral economists began to argue that economic value is entirely subjective; it existsin the mind of the person who imputes valueto the good or service. If something haseconomic value, it is because someone values it; it is because that good or servicesatisfies a human want. The idea of imputation became central in economic thought.

The older, objective view of economicvalue tended to focus exclusively uponphysical things and the ways humans soughtto fulfill their purely material desires. It alsogave inordinate attention to the role thatmoney played in human efforts to bridge thegap between what people had and what theywanted. However, the subjective revolutionin economics changed all this. Once economists recognized the personal and subjective ground of economic value, economistsbroadened their horizon to include all purposive human actions in their field of study.The scope of economics was expanded toinclude things other than money and material goods.

Many people value such things as truth,love, honor, friendship, virtue, and charitymore than they value money, cars, clothes,and houses. Because such people ranktruth, love, and honor so high in theirpersonal value scales, their economicchoices will reflect this ranking. The conscious, purposive actions of such people canbe explained by economists who hold to asubjective theory ofeconomic value. All thevalues a person holds affect the decisions hemakes.

It is important to recognize that wheneconomists state that economic value issubjective, they do not restrict the subjective ground of economic value to personaltastes. The fact that Jones and Smith imputedifferent value to the same good does notnecessarily reflect their differing tastesabout the good. The value that people impute to things is also related to such factorsas different information, different interpretations of information, different expectations, and different quantities they alreadypossess. It may also reflect varying degreesof alertness to new opportunities. Far moreis involved in the subjective approach toeconomic value than personal taste. Butwhat is clear is that economic value isalways imputed value.

A Religious ObjectionMany religious people who are not econ

omists find it difficult to reconcile claims that

THE ECONOMIC WAY OF THINKING 415

economic value is subjective with their conviction that value is always objective, absolute, and unchanging. Some might thinkthat accepting the view expressed in thisessay would commit them to believing thatall values are relative and subjective. Thefallacy in such reasoning should be obvious.Even ifwe should discover that some values(in one sense of the word value) are subjective and relative, it would not follow that allvalues are.

Much of the problem at this point arisesfrom the fact that the word value is ambiguous. It may refer (1) to that which peopledo in fact value or (2) to that which peopleought to value. We all recognize that manypeople value things that they ought not tovalue, and that they fail to value things thatthey ought to value.

We sometimes express the difference between these two senses ofvalue by using thewords desired and desirable. All that isrequired for something to be desired is forsomeone in fact to desire it. Butjust becausesomething is desired, it does not follow thatit is desirable, that it ought to be desired. Ineconomics, value reflects the extent towhich something is desired; it does notmirror that thing's desirability. Economistshave ways of measuring the degrees towhich people desire things; obviously, thisis something quite different from attemptingto measure how desirable it is. No matterhow much people ought to desire something, the economic price of that thiQ-g willreflect only how much some individual iswilling to pay for one additional unit of it.The price of an economic good reflects theextent to which individuals desire it; and thisis something quite apart from the question ofhow desirable or worthy it is.

Religious people, whether they are economists or not, need to keep two thingsdistinct. The first is the degree to which anindividual may want X, a fact that reflectswhere X ranks in that individual's personalscale of values. The second is the need ofindividuals to alter the rankings in theirpersonal scales of values to conform to whatthey ought to want. Christians, for example,are undoubtedly correct when they judge

that their Scriptures oblige them to changethe evaluations of themselves and others inorder to bring them more in line with theevaluations stated in the Bible. While thistask is clearly important, it is an activity thatfalls under a different heading than economics. Economic exchanges in the real worldwill mirror only the actual subjective valuethat individuals have imputed to the goodsbeing exchanged. Any number of things,including conversion, may affect the waypeople rank things in their personal valuescales. Whenever such a change in subjective value occurs, it will have an obviousimpact on the judgments people make aboutthe costs they are willing to incur to haveone more or one less unit of some good.The result is that the array of goods produced and traded in the market will changeas the personal value scales of individualschange.

The theory of subjective economic valuedoes not imply that all economic choices areequally good in a moral or religious sense.Anyone is within his philosophical and theological rights to criticize particular economic choices. No defender of the marketeconomy is required to defend all the goodsproduced by the market. It seems clear,therefore, that any objection to the theory ofsubjective economic value on theological ormoral grounds is mistaken. In fact, it is fromChristian theology that economics borrowed its central concept of imputed value.Telling people that certain values ought tobe ranked higher in their preference scales isthe proper task of the pastor, moralist,theologian, or spiritual counselor. The economist simply deals with how people do infact make their choices with regard to theallocation of scarce resources.

Looking AheadBecause of its importance, the notion of

subjective economic value will be encountered repeatedly through the rest of oureight-part series. The ability of the reader torecognize these appearances will be an important sign of developing adeptness in theeconomic way of thinking. D


NATIONAL HEALTHCARE: MEDICINE INGERMANY 1918-1945by Marc S. Micozzi, M.D.

Today we are concerned about issuessuch as doctor-assisted suicide, abor

tion, the use of fetal tissue, genetic screening, birth control and sterilization, healthcare rationing and the ethics of medicalresearch on animals and humans. Thesesubjects are major challenges in both ethicsand economics at the end of the twentiethcentury. But at the beginning of the twentieth century the desire to create a morescientific medical practice and research hadalready raised the issues of euthanasia,eugenics, and medical experimentation onhuman subjects. In addition, the increasinginvolvement of the German government inmedical care and funding medical researchestablished the government-medical complex that the National Socialists later used toexecute their extermination policies.

The German social insurance and healthcare system began in the 1880s under Bismarck. Ironically, it was part of Bismarck's"anti-socialist" legislation, adopted under

Marc S. Micozzi, M.D., Ph.D., a physician andanthropologist, directs the National Museum ofHealth and Medicine in Washington, D.C.,which recently brought from Berlin the exhibition, "The Value ofthe Human Being: Medicinein Germany 1918-1945," curated by ChristianPross and Gotz Aly.

the theory that a little socialism wouldprevent the rise ofa more virulent socialism.

By the time of Weimar, German doctorshad become accustomed to cooperatingwith the government in the provision ofmedical care. The reforms of the WeimarRepublic following the medical crises ofWorld War I included government policiesto provide health care services to all citizens. Socially minded physicians placedgreat hope in a new health care system,calling for a single state agency to overcomefragmentation and the lack of influence ofindividual practitioners and local services.The focus of medicine shifted from privatepractice to public health and from treatingdisease to preventable health care. Duringthe German "economic consolidation" of1924-1928, public health improved undernew laws against tuberculosis, venerealdisease, and alcoholism, with new advisorycenters for chemical dependency and counseling bureaus for marriage and sexualproblems.

Medical concerns which had largely beenin the private domain in the nineteenthcentury increasingly became a concern ofthe state. The physician began to be transformed into a functionary of state-initiatedlaws and policies. Doctors slowly began to

416

see themselves as more responsible for thepublic health of the nation than for theindividual health of the patient. It is onething to see oneself as responsible for the,'nation's health" and quite another to beresponsible for an individual patient'shealth. It is one thing to be employed by anindividual, another to be employed by thegovernment.

Under the Weimar Republic these reforms resulted in clearly improved publichealth. However, the creativity, energy,and fundamental reforms found in socialmedicine during the Weimar Republic seemin retrospect a short and deceptive illusion.Medical reformers had wanted to counterthe misery inherited from the first WorldWar and the Second Empire on the basis ofcomprehensive disease prevention programs. In the few years available to thesocial reformers, they had remarkable success. But in connection with these reformsthe doctor's role changed from that of advocate, adviser, and partner of the patient toa partner of the state.

Where traditional individual ethics andChristian charity had once stood, the reformers posited a collective ethic for thebenefit of the general population. Privatecharity and welfare were nationalized. Thementally ill, for example, having been literally released from their chains in the nineteenth century and placed in local communities and boarding housesin regular contactwith others (the so-called "moral therapy"),were returned to state institutions to become the ultimate victims of state "solutions. "

With the world economic crisis of 1929,welfare state expenditures had to be reduced for housing, nutrition, support payments, recreation and rehabilitation, andmaternal and child health. What remained ofthe humanistic goals of reform were statemechanisms for inspection and regulation ofpublic health and medical practice. Economic efficiency became the major concern,and health care became primarily a questionof cost-benefit analysis. Under the socialistpolicies of the period, this analysis wasnecessarily applied to the selection of strong

417

persons, deemed worthy of support, and theelimination of weak and "unproductive"people. The scientific underpinning of costbenefit analyses to political medical carewas provided by the new fields of geneticsand eugenics.

Genetics and EugenicsAt the same time as these economic and

political developments, the application ofnineteenth-century scientific discoveriesbegan to make their way into twentiethcentury public health and medical practice.Charles Darwin's studies on natural selection were of course based upon animalpopulations living in nature and not humanpopulations living in complex societies. Butthe biological basis of natural selection gaverise to a concept of "survival of the fittest"in human civilizations. This term was coinedby the British social anthropologist HerbertSpencer, and the concept led to "SocialDarwinism. "

Darwin's theories (developed in parallelwith Alfred Russel Wallace-another British natural scientist) had been publishedprior to full elucidation of the principles ofgenetics. With subsequent understandingand acceptance of the science of genetics,the underlying basis of natural selectioncould more completely be described. Whilescientists still did not understand what madeup the gene (awaiting Watson and Crick'sdiscovery of DNA in the 1950s) they beganto search for outward expression of innergenetic tendencies. In the absence of beingable to pinpoint individual genes, theysought outward expression of genetic"types." These "typologies" were largelybased upon external measurements of thebody.

Much of this work was carried out byGerman anthropologists and physicians (often one and the same at that time) in newlyacquired colonies in German East andSouthwest Mrica, prior to the loss of thesecolonies to Allied protectorates in WorldWar I. Such work resumed following thewar, however, and by 1927 the opening ofthe Kaiser Wilhelm Institute of Anthropol-


ogy, Human Genetics, and Eugenics wascelebrated in Berlin as the advent of the"German Oxford." The annual report of theInstitute in 1932 stated: "The term eugenicsmeans to establish a connection between theresults of the studies in human genetics andpractical measures in population policy."

Under the new "scientific understanding" of human biology provided by geneticsand its implementation under eugenics, poverty, for example, would become merely anexpression of degeneracy (Entartung) andgenetic inferiority. "Inferior" and "superior" became natural terms used by personsof nearly all political persuasions, as readilyas the terms "handicapped," "impaired,""socially dependent," or "disadvantaged"are used today.

Life Unworthy of LivingFollowing World War I there had been

concern among some in Germany that thewar had decimated the ranks of the qualifiedand strong while weak, unqualified, andinferior people had been spared. Many feltthat scant resources should not be wasted onthe sick and suffering. The philosophy of theunimportance of the individual in favor ofthe people (das Yolk) led to the belief thatindividuals who had become "worthless,defective parts" had to be "sacrificed ordiscarded. "

Alfred Hoche, a neuropathologist (asFreud had been) and Karl Binding, a lawyer,published a pamphlet in 1922, The Sanctioning of the Destruction of Life Unworthy ofLiving. Binding relativized the legal andmoral prohibition, "Thou shalt not kill,"and Hoche alternated between economicand medical arguments. Neurologists inSaxony formally discussed the topic, "AreDoctors Allowed to Kill?" A physician inDresden pointed out' 'the contradiction thatmany persons (reformers) demand an end tothe death penalty for crimes, but the samepeople are for putting imbeciles [sic] todeath." By the time the National SocialistParty came to power in Germany, the mentally ill and the mentally retarded had begunto be sterilized and to be subjected to

euthanasia in large numbers in Germangovernment institutions.

National Socialism and theNation's Health

No profession in Germany became sonumerically attached to National Socialismin both its leadership and membership aswas the medical profession. Because oftheirphilosophical orientation toward finding amore scientific basis for medical researchand practice, government funding for research, and the practical benefits of acquiring university positions and medical practices from the many banned and exiledGerman Jewish doctors, many physicianssupported Nazi policies. One of the firstNazi laws, passed July 14, 1933, was the"Law for the Prevention of Progeny ofHereditary Disease," intended to "consolidate' , social and health policies in theGerman population and prohibit the right ofreproduction for persons defined as "genetically inferior." After 1933, the connectionbetween the theory and practice of politicized medicine advocated by many in Weimar Germany became actual in Nazi Germany.

A "Genetic Health Court" consisting ofjudges and doctors made decisions aboutforcible sterilization. As "advocates of thestate," doctors prosecuted those personscharged with being "genetically ill" in sessions lasting generally no more than tenminutes and from which the public wasbarred. In 1935, an adjunct law allowedforcible abortion in such cases up to thesixth month ofpregnancy. A total of 300,000to 400,000 were sterilized and approximately 5,000 (nearly all women) died as aresult of these operations. After 1945, it wasargued to the Restitution Claims Commission of the German Bundestag that the"Law for the Prevention of Progeny ofHereditary Disease" not be considered inthe same category as subsequent NationalSocialist race laws and other Nazi abuses.The sterilization law had been drafted earlier under the Weimar Republic as part ofprogressive health reform, and as late as

NATIONAL HEALTH CARE: MEDICINE IN GERMANY 1918-1945 419

1961 was defended by an expert at the MaxPlanck Institute on the basis that "everycultured nation needs eugenics, and in theatomic age, more so than ever before."

German Youth and EuthanasiaFollowing the sterilization laws, the Na

tional Socialists next implemented a strategy of euthanasia to solve the remainingproblem of those whose conception andbirth had preceded these laws. The pediatrician Ernst Wentzler, while developingplans to improve care in the German Children's Hospitals in Berlin, personally decided (as consultant to Hitler's Chancellery)on the deaths of thousands of handicappedchildren. Hans Nachtsheim placed deliveryorders for handicapped children for his pressure chamber experiments on epilepsy. Joseph Mengele delivered genetic and anthropological "material" from Auschwitz to theKaiser Wilhelm Institute and conducted hisinfamous twin experiments on the childvictims of the Holocaust.

Julius Hallervorden at the Kaiser WilhelmInstitute for Brain Research at Berlin-Buchcarried out several research projects basedon euthanasia programs. Hallervorden andothers systematically collected the brains oftheir patients who had been killed, taughtthe murdering doctors how to dissect, andcooperated closely with institutions wheremurdered children had previously beengiven thorough examinations and tests. During interrogation by an American officer in1945, he stated, "I heard that they weregoing to do that. . . and told them. . . if youare going to kill all these people, at least takethe brains . . . . There was wonderful material among these brains-beautiful mentaldefectives, malformations and early infantile disease. I accepted these brains, ofcourse. Where they came from and howthey came to me, was really none of mybusiness." The collection was until recentlykept by the Max Planck Institute (formerlythe Kaiser Wilhelm Institute) in Frankfurtand used for brain research.

In a system in which so many wereroutinely condemned to die, the temptation

proved strong to use human subjects inmedical experimentation prior to their tragicand terrible deaths.

The Luftwaffe had developed aircraftwhich could climb to altitudes of nearly60,000 feet, altitudes unattainable by Alliedfighter aircraft. However, tolerance of thesealtitudes on the part of pilots had not yetbeen tested. Trials on volunteers at altitudesabove 36,000 feet had to be discontinued dueto severe pain. For this reason, lethal altitude experiments in pressure chamberswere conducted on 200 victims held prisonerin Dachau concentration camp in a programcalled: "Trials for Saving Persons at HighAltitude. "

Many German ships were also being sunkin the North Atlantic and North Sea, and thesame group of medical investigators conducted painful ice bath experiments on 300Dachau prisoners in a research programentitled "Avoidance and Treatment of Hypothermia in Water." Other medical experiments were carried out with chemical andbiological warfare agents and infectious diseases.

Following World War II much of this datawas kept classified by Allied military authorities on the basis of national security.Debate continues to this day on the validityof these experiments and the ethical implications of any use of such data.

The Banality of EvilWe now know the end of this historical

horror story of massive crimes against humanity and the leader of the thousand-yearReich burning in a bunker in Berlin. But it isnot so easy to recognize the steps on thepath down the slippery slope when we don'tyet know the end of the story-as today wedo not know which social health reforms incombination with which new medical technologies have the potential to plunge modern society over a brink in which disastermight result. Is legalized abortion a newform of medicide? Is doctor-assisted suicidea step toward positive euthanasia? Is modern genetic testing and the Human GenomeProject the first step to a new eugenics? Is


Dr. Robert Ritter of the GermanNational Department of Health(right) and his associates carriedout anthropological measurementsand genealogical research. Theyprepared fingerprints and photographs in order to ascertain the"proportion of gypsy blood" in allof the Sinti and Roma of "GreaterGermany."

Nazi medicine was implementedby apolitical-medical complex, ascientific and social philosophyimposed by a totalitarian regime.

FROM THE EXHIBITION, "THE VALUEOF THE HUMAN BEING."

health care rationing, which is always a result of government involvement in medicalcare, a step toward the new definition of "lifeunworthy ofliving"? Is our present "qualityof life index" a new way of saying it?

Nazi medicine was implemented by apolitical-medical complex-on the basis ofpolitical health care-a scientific and socialphilosophy imposed by a totalitarian regime. It should never happen again, butcould it ever happen again?

In the United States the medical profession operates in a mixed (not a nationalsocialist) economy which does not yet havethe institutionalized mechanisms of controland regulation of Weimar Germany-and ina democratic political system which thankfully does not have the political ideology ofthe Third Reich. But the "banality of evil"described by Hannah Arendt in the ThirdReich may stem largely from a governmentbureaucracy in which 90 percent of thepeople think 90 percent of the time aboutprocess-not purpose. Does the modernbureaucratization of medicine hold any realrisk for a possible return-with new healthreforms and new medical technologies-tosome of the horrors of National Socialistmedicine? Removal of personal responsibility ("I was only following orders"), personal authority, and personal choice in abureaucratized system may leave less and

less room for individual ethics in the conduct of medical science and practice.

Politicized medicine is not a sufficientcause of the mass extermination of humanbeings, but it seems to be a necessary cause.The Nazi Holocaust did not happen forsome inexplicable German reason; it is notan event that we can afford to ignore because we are not Germans or not Nazis. Thehistory of Germany from 1914 to 1945 is atelescoping of modernity-from monarchy,war, and collapse to democracy and thewelfare state, and finally to dictatorship,war, and death.

Medical ethics is the responsibility of allmembers of a society, not just doctors andscientists. Medicine and science alone donot have the answers to such questions as:When does life begin? When should it end?Are humans just the sum of their geneticparts or genetic programs? While bioethicists debate, individual medical choices aremade a million times a day among doctors,patients, their families, and increasingly thegovernment. The product of all thesechoices ultimately constitutes the ethical,legal, and social framework in which thepractice ofmedicine and ofmedical researchare conducted. In the end it is the preservation of freedom that will guide us to thebest application of new health reforms andtechnologies in the future. D


MEDICINE AND THEWELFARE STATEby Melchior Palyi

The essential idea of the Welfare State isas old as known history. Its concept and

mechanism-the systematic dispensing,through political channels and without regard to productivity, of domestic wealthwere at the very core of the Greco-Latin citystates, of the medieval city, and of thepost-Renaissance absolute monarchy. Inthe city republics, ancient and medieval, itmeant bloody civil wars. Their constantlyrecurring violent quarrels about constitutional issues disguised bitter class warfare toseize the power that was dispensing allbenefits. Most of them went on the rocks oftheir internal struggles for economic privileges. A Lorenzo Magnifico in Florence orthe Oligarchy of the Ten in Venice managedto "save" their cities-by grabbing the powerand robbing the citizens of every vestige ofpolitical freedom and civic rights. JacobBurckhardt's allegation that the orgy of paternalism under Emperor Diocletian resultedin governmental money recipients larger innumber than the taxpayers, might be applicable to many other doomed civilizations.

France's Henry IV in the sixteenth century promised a chicken in every pot. Herbrilliant Colbert in the seventeenth centuryand Prussia's enlightened Frederick theGreat in the eighteenth, these forerunners of

Dr. Palyi (1892-1970) taught at the Universitiesof Kiel, Gottingen, Berlin, Chicago, Wisconsin,and at Northwestern University. This essay wasadaptedfrom Compulsory Medical Care and theWelfare State (Chicago: National Institute ofProfessional Services, 1949).

modern dictators, gloried in calling themselves the first servants of the nation. Theirpolice state used the welfare state as itsinstrument, fa~ade, and justification, as domodem dictatorships. In democracies thewelfare state is the beginning and the policestate the end. The two merge sooner or later,in all experience, and for obvious reasons.

The "mercantilist" princes of the sixteenth and eighteenth centuries developedthe basic tenets of the modern welfare statein a piecemeal fashion. Originally theirprime concern was the balance oftrade-thewant of gold and silver. To that, domesticpolicy was subordinated, except when political motives were uppermost, such as thefear ofhunger riots which occurred time andagain in England under the Tudors andStuarts, forcing them to dispense humanitarianism. The craving for export surplusesled logically to promoting production. Amateurish welfare policies followed and soonbecame a determining factor in domesticpolitics.

The Welfare-Police StateIn central Europe the eighteenth century

was marked by the "Despotism of Virtue," exercised by benevolent rulers likeJoseph II of Austria. The intolerance andintransigence of the "humanitarian tyrant"had no small role in provoking revolutions.The German Kameralists of the period, whotaught the technique of civil government,developed systematically the blueprint of

421


the welfare state (Wohlfahrtstaat) of a territorial scope, far beyond medieval citylimits and as the heart of the police state(Polizeistaat). Even the words are eighteenth-century German. This tradition ofbureaucratic rule-for the alleged good ofthe subjects-was the heritage taken overby Bismarck.

Bismarck's fundamentally significant rolein modern history is rarely understood. Hismiddle-of-the-road socialism was the connecting link between the old autocrats andthe coming totalitarians. He thought hecould overcome Marxism by his own brandof state socialism-just as Fabian socialists,Keynesians, and New Dealers profess thattheir middle-of-the-road statism keeps thetotalitarian wolf from the door.

What Bismarck did accomplish was torevolutionize the old authoritarian school bygiving it a quasi-democratic twist and bybasing it on a superbly organized, technically well-trained, and thoroughly disciplined bureaucracy. His police-welfare (orwelfare-police) state had firm roots as nonehad had before. The substance of a militarymonarchy was wrapped in a parliamentarycloak. Share-the-wealth popularity was tobe dispensed legally by an all-powerful andefficient administration.

Welfarism in OperationEven more interesting than to follow the

historical records of the welfare state is towitness directly its contemporary gyrationsand its ties with other facets ofpublic policy.This writer was "conditioned" to the problems by early acquaintance with the pettyinside-politics in the welfare monarchy ofthe Habsburgs. His conscious interestdates back to his studies in German universities from 1910 on, when the great mastersof the German Historical School still wereexerting intellectual leadership. The German public, and most Europeans for thatmatter, stood under the spell of Bismarck'sforceful personality, without realizingwhere that spirit was leading. The intelligentsia was infatuated already with thethen still misty ideal of the welfare-dispens-

Otto von Bismarck(1815-1898)

ing Iron Power. So was the populace on thestreet.

It was my good fortune, in particular, tocome in close contact, as their student andassistant, with the two most original thinkers and most brilliant personalities of theperiod: Lujo Brentano and Max Weber, theforemost social scientists of their age. Theywere scholars of encyclopedic scope and ofstatesmanly stature, animated by the ethosof their belief in liberty and justice. As trueliberals, they stood in matters oflabor policyfor trade unionism, the eight-hour day, andfor factory legislation, as far as compatiblewith domestic free enterprise and international free trade. They were opposed todogmatic laissez-faire-which meant paternalism in labor relations-as well as topaternalism in government. Realizing thathistory is the record of the eternal battlebetween the power and the people, they sawclouds rising that most of their contemporaries ignored: the aggressive economic nationalism and the congealing, overbearingbureaucratism of the Neo-Welfare State.They saw the unique part Bismarck's Second Reich played in the revival of authori-

MEDICINE AND THE WELFARE STATE 423

tarianism and fought it as a threat to theprogress of occidental civilization.

As early as 1881, Lujo Brentano warnedthat adventuring into governmentalizedmedicine is the first step toward the NeoWelfare State, which in turn opens up a roadto national catastrophe-in the long run.The run was too long and too slow to beunderstood. Other more urgent problemsoccupied our minds. The warning was practically forgotten by 1919 when I gave my firstcourses as an instructor at the MunichGraduate School of Commerce on Insurance and on Cooperatives. Compulsorymedicine seemed to be well established anda minor problem. In-between years, spenton (unfinished) medical studies, provided noinkling of its practical functioning. The prevailing academic pattern naively accepted agovernmentalized pseudo-insurance as achapter of Sozialpolitik (welfare policy),differing from other insurance only by itsnon-profit character. And it was defended asan alleged necessity in industrial society.

IntermezzoWe were preoccupied with the Versailles

treaty, the great inflation and domestic andinternational reconstruction, and the sweeping out of the moral and material debris leftover by Ludendortf. Europe's fatal fourteenyears of transition after World War I beganunder the Lenin nightmare and ended withthe Hitler chimera. True liberals weredriven into an unholy and futile alliance withthe middle-of-the-roaders.

After years of experience and study ininternational banking and public finance, Ibegan to see that what most of my academiccolleagues accepted and defended as anaccomplished fact, the Bismarckian socialinsurance, was worm-eaten at its very roots.What have "high finance" and internationalaffairs to do with the poor man's compulsorysocial insurance? A great deal, as I foundout, and with more than finance. For onething, the social insurance funds gave thewelfarist Weimar government a dangerousfoothold in the nation's capital market andtaught it to grab for other footholds.

For another thing, I stumbled upon thediscovery that German compulsory medicine was more expensive than private healthinsurance and gave less in exchange. Ontop of that, it was badly infected withcorruption.

Insight into some of these shortcomingscame about through my friendship with anoutstanding socialist leader, old EduardBernstein. He was one of the three or fourearly apostles of the Marxian creed. But helacked the fanatic dogmatism of the others.He became famous by speaking out in the1890s what every Marxist knew and nonedared to say-that history was not marchingaccording to the time-table of the classwarfare theory. For this, he was temporarilyostracized by his own party. Through hishonest eyes, I began to see that everythingwas not in order in the medical Utopia. Themore I looked into it, the more disquietingthe picture became.

From Weimar to HitlerThe welfare state was moving into the

great depression. My work at the verycenter of German and international bankingput me at a vantage point from which toobserve closely the world-wide growth ofWelfarism. It was intimately tied up with thepolitical scene of the 1920s, with its globalmoney management and fictitious pacifism.It was supported by monopolistic wagestructures, governmentally promoted international cartels, inflated gold exchange standards, by a centrally manipulated capitalflow on the one end and by reckless spending on the other. It had to break down sooneror later.

In many ways Hitler's rise was startlinglyrevealing. That one-third of the otherwisesober German people voted Nazi, and over10 percent Communist, was bad enough.But what about the rest, the three or fourbourgeois parties and the Social Democrats? Why didn't they resist instead ofletting the power slip without a singleshot into the hands of notorious gangsters?The Social Democrats and the tradeunions behind them constituted the world's


oldest, largest, best organized, and mostintelligent labor movement. Why did theysurrender shamefully and let themselves bedisarmed?

The Weimar Republic catered to the tradeunions and raised the wage level artificially,at the same time bestowing subsidies andhigh tariffprotection on the heavy industriesand the big landowners, the Prussian Junkers. Once a nation is entangled in the meshesof the welfare state, the demagogue who candraw out of his hat more welfare for morepeople has every chance in a crisis. TheBismarckian paternalism could be turnedinto Ludendortf's planned economy by amere switch of the bureaucratic gear, whichthen could be shifted without grinding intothe welfare state of the Weimar Republic.As that got into trouble, the ultimate ofdemagoguery, the combination of ultranationalism and super-welfarism, had a fieldday. By that time, the socialists as well asthe middle classes were so intoxicated withthe ideas of an allegedly inevitable statepaternalism that the moral fiber had becometoo weak to generate resistance.

Humanitarians in DisguisePerhaps the most spectacular "social"

aspect of Nazism was its emphasis on nationalism. That was not accidental. Thehealth, or rather sickness, propaganda employed by Bismarck elevated that aspect ofsocial welfare to a prime political issue. Justwhy were such ruthless men as Bismarckand Hitler so profoundly interested in thephysical well-being oftheir subjects-and inhigh birthrates!-while totally indifferent,nay, inimical to their mental integrity! Butafter a fashion so were their predecessors inthe Mercantilist age, especially the ministers of the imperialistic Bourbons and thepower-lusty Hohenzollerns. And so aretheir successors to this day.

Evidently, more than humanitarianismwas at stake. Watching the world-widegrowth of compulsory health insurance,from Icelandic fishermen to coal miners inChina, I noticed something that seemed tobe overlooked: that all modern dictators-

Communist, fascist, or disguised-have atleast one thing in common. They all believein social security, especially in coercingpeople into governmentalized medicine.

A selected list of men who have claimedcredit for, or have been credited with, introducing or strengthening and expandinggovernmentalized medical care reads like anextraordinary Who's Who:

Prince Otto von Bismarck, Chancellor ofGermany (1884);

Franz Joseph I, Emperor of Austria (1888);Franz Joseph I, King of Hungary (1891);Wilhelm II, "the Kaiser" of Germany

(1911);Admiral Miklos Horthy, reorganizing the

scheme as Regent of Hungary (1927);Nicholas II, Czar of Russia (1911);Vladimir Lenin-Ulianof, founder of modern

dictatorship in Soviet Russia (1922);Joseph Stalin-Dzhugashvili, almighty Prime

Minister and dictator of the U.S.S.R.;Joseph Pilsudski, Marshal and para-dictator

of Poland (1920);Alexander I, King and dictator of Yugosla

via (1922);Antonio de Oliveira Salazar, the professor

dictator of Portugal (1919 and 1933);Benito Mussolini, Prime Minister and the

Duce of Italy (1932 and 1943);Francisco Franco, military dictator of Spain

(1942 and 1945);Yoshihito, Mikado of Japan (1922);Hirohito, Mikado of Japan (1934);Carol II, pseudo-constitutional King of Ro

mania (1933);Joseph Vargas, President and would-be dic

tator of Brazil (1944);Juan Peron, President and boss of the mil

itary junta of Argentina (1944);Adolf Hitler, Chancellor, the Fahrer of

Germany (1933, etc.);Pierre Laval, Prime Minister of France

(1930), later executed for his fascist activities;

Ambroise Croizat, Communist Minister ofLabor in France (1945);

Georgi Dimitrov, the late chief agent of theglobal Comintern, Premier of SovietizedBulgaria (1948);


Josip Broz, alias Tito, Prime and ForeignMinister, dictator, general secretary of theCommunist Party of Yugoslavia (1947);

Boleslaw Bierut, President and dictatorialfigure-head of Satellite Poland (1947);

Klement Gottwald, President of the Sovietized Republic of Czechoslovakia (1948).

This list of power dynamos-or symbolsof power-with bleeding hearts for humansuffering is by no means complete. Complete data on some of the Satellite and LatinAmerican bosses are not available. Someothers are missing because they do notqualify technically for membership in theclub of recognized full and semi-dictatorsand of paternalistic rulers "by the grace ofGod" or otherwise, having been elected inordinary democratic procedures and stillexposed to new elections. But who wouldhave foreseen that an easy-going, moneygrabbing politician like Laval was to becomea sort of second-hand Mussolini? Most certainly Laval claimed and wielded, about1930, less than a fraction of the discretionaryand arbitrary power the British Health Minister wields at this writing. And there aremore Pierre Lavals and Aneurin Bevansaround in what we call the democratic worldthan the unsophisticated might assume.They manage to be re-elected again andagain and strive to rule by blank delegationsof power, immune from judicial controlsand supported by rubber-stamp parliamentstypical of "advanced" welfare states oftwentieth-century vintage.

Socialist NationalismIndeed, out of the ashes of the welfare

states that went down unsung in the tumultuous depression new and much more imposing ones have risen since. It seems thathistory·· is running in cycles, progressingfrom what is known as National Socialism towhat is recognized as Socialist Nationalism.

Ever since Bismarck, great dictators andlittle demagogues compete with one anotherand with the humanitarians in courting thefavor of the ailing, the lame, the blind, thepoor, the underprivileged, and the aged. In

World War I, Ludendorff used Germany'ssocial insurance, then Europe's most "progressive," for propagandizing Teutonic social and cultural superiority. Today, Britishand French propagandists vie with eachother in eulogizing the respective securityplans. But Stalin outdoes all of them. "Government insurance in the U.S.S.R. is asource of pride of the Soviet workers beforethe whole world. It is one ofthejewels in thecolossal edifice of Socialism. It is one of thetestimonials to Stalin's deep solicitude forhis fellow men by which we are all warmedand heartened, " said Trud, the organ of theSoviet trade unions, in 1937.

The great French visionary, Alexis deTocqueville (De la Democratie en Amerique,1840), warned more than a century ago thatdemocracies like ours may succumb to a newand soft technique of governmental benevolence that .subdues all individuality. Thesuspicion that the solicitude of notorioustyrants for the welfare of their subjects musthave something to do with the politicalnature of the medical security systems wasone consideration that inspired this study.

From Bismarck to Lenin:Origin and Rise ofCompulsory Medicine

Obligatory health insurance started moderately enough-in Prussia. Compulsion under a law of 1845 was left in the hands ofmunicipal administrations, with no government subsidy involved, and no contributions from employers. The anti-socialist lawof 1878 suppressed many of labor's voluntary associations for sickness benefits. Thenext step was the governmentalization ofthe associations' functions.

It was no mere accident that the ideological forefathers of Nazism, Adolf Wagnerand Eugen Diihring, happened to be the"brain trusters" behind Bismarck's "nationalistic socialism to end international socialism," using his own terms. When, onJanuary 1, 1884, his compulsory sicknessscheme went into operation it literallystarted a new era-a new age in the historyof welfarism.


Bismarck's role in modem history israrely spoken of nowadays. Undoubtedly,his political and administrative "genius"has shaped history down to our times. Hisrevolutionary innovation in welfare policywas preceded five years before, in 1879, bythe imposition of a protective tariff thatstarted Europe's internecine commercialwarfare which endures to this day. And itwas followed by the introduction in 1889 ofuniversal military service covering even themiddle-aged manhood. This started a rearmament race leading into total wars withthe objective of annihilating entire nations.

The shrewd Iron Chancellor-the dictatorin constitutional disguise, quoting M. J.Bonn's epigram-meant to kill several birdswith one stone when he embarked on hisprogram of appeasing labor. The reason,announced in the November 17, 1881, message of Emperor William I, to offer something positive to labor, not merely the repression of socialists by police force, mayhave been born of genuine worry over theunrest of the working classes due to the longdepression that had engulfed Europe since1875. But the true motive has been pointedout in the penetrating Bismarck biography(Vol. III, pp. 370-371) of Erich Eyck: "Tohis mind the State, by aiding the workers,should not only fulfill the duty ordered byreligion, but it should obtain in particular aclaim on their thankfulness, a gratitude thatwas to be shown by loyalty to the government and by loyal pro-government votes inelections. " In other words, it was the oldfashioned attempt of the monarchy to allyitself with the plebs against the "aristocracy" in between the two. However, thesocial insurance legislation did not stop theMarxists from returning in increasing parliamentary strength. The attempt to subduethe socialist movement by appeasementended in a political fiasco.

Prince"Bismarck found other satisfaction.The state socialism of His Highness wasdirected against the business interests andLiberal (free trade) Party. The latter hadaccepted the principle that workers shouldbe forced to insure themselves but stood fortheir freedom to choose their own, non-

governmentalized agencies. What was evenworse from the militarist point of view, theLiberals were blocking time and again theChancellor's requests for armaments. TheReich he created had almost no revenues ofits own other than from import duties andexcises. It had to rely on contributions fromthe states which were available only throughunpleasant parliamentary procedures. Thenew social insurance organizations were toplace their resources at the federal government's disposal, saving Bismarck the embarrassment of going, when need arose,with his hat in hand to a reluctant Reichstag.

Above all, the new system was an offshoot of his economic and political philosophy. Bismarck was a tradition-bound reactionary, altogether resentful of modernindustrial development, although he himselfowned a small paper mill. As did many ofthe ultra-conservative contemporaries ofhisJunker class, he trusted agriculture andhandicraft but frowned on large-scale industrial enterprise and on trade unionism. Tocheck both, if they had to be tolerated, wasone of his goals. Governmentalizing andthereby controlling, through an appropriatebureaucratic apparatus, the providing ofmedical, accident, and old-age care and ofdeath (burial) benefits seemed an obviousway to put the reins on laissez-faire capitalism as well as on labor.

The Spread of the IdeaThis approach conformed to the paternal

istic make-up of his mind-as it conforms tothe paternalism of modern dictators and ofhumanitarian social workers. It is no mereaccident if pseudo-liberals bubble over withpraise of the arch-reactionary PrussianJunker's medical security legislation. It wasespecially palatable to the bureaucracy ofthe Habsburg Monarchy.

The West resisted at first. It still wasimbued with the nineteenth-century tradition of individual freedom and responsibility. But even before World War I its resistance began to soften under the fascinationof the power emanating from WilhelminianGermany and under the German propa-


ganda that labor's patriotism has to bebought by social concessions. Shortly before or during that war, Britain, Norway,Iceland, Russia(!), etc. introduced modifiedreplicas of the German compulsory panelsystem, followed by more countries after1918. A dead and defeated Bismarck provedto have a wider spiritual influence than theliving and victorious one ever enjoyed.

The triumphant march of authoritarianmedicine received a fresh boost at the outsetof the great depression when, among others,France, after a decade of political oratoryand wrangling on the subject, instituted asystem of its own. It was modeled on theGerman but with significant modifications.

However, 1943-46 was the most crucialtime since 1881-84 in the Western history ofcompulsory health service. It was the hourof the liberation from Nazi occupation, withthe parliamentary systems of the liberatednations in a semi-chaotic condition, andwith Communists either in cabinet posts orhaving decisive influence in public affairs.As a result, far-reaching legislation washurried through, which under normal conditions, would have run into serious obstacles. In France, in November 1944, a newsocial security law of communistic coloringwas voted in a virtually empty Chamber ofDeputies. Left-wing rule in Belgium wasresponsible for its sickness scheme of 1944.It was also under abnormal wartime andpost-war conditions that Italy and Holland"reformed" their sickness plans. New planswere put into operation or the old ones wererevamped thoroughly in Australia, Argentina, Brazil, Chile, Spain, the Russian satellite countries, Costa Rica, Ecuador, and ofcourse in Britain. Legislation has beenpassed, but is not as yet in effect in threeCanadian provinces and in Sweden.

Hitler, the HumanitarianIt is a fact, and a very remarkable one,

that the great demagogues of our age appearto be greatly worried about the health oftheir subjects. Noone was more so thanAdolf Hitler. His racism was the last wordin "biological" demagoguery, unless the

new anti-hereditary biology of the Sovietsexceeds it, an expression of the identicalnationalistic purpose. In terms of politicalresults, it was a most effective demagoguerydue to its emphasis on health and virility. Asa committee report on health insurance ofthe Canadian House of Commons put it(March 16, 1943): "During the early years ofHitler's regime, the government's medicalprogram was looked upon by many observers as one of the greatest props of thetotalitarian state."

Before coming to power, the Nazis wereviolently critical of the social insuranceset-up, considering it a weapon in the handsof their enemies, the Social Democrats.They objected especially to the extravagance and corruption in compulsory medicine and to its alleged effect in "softening"German manhood. Thereby they earned theapplause of doctors as well as of businessmen and the approval of the disgruntledmiddle classes. They promised thoroughgoing reform and drove their oppositionhome so forcefully that Chancellor Bruningwas constrained to introduce in 1931-32several measures affecting the medical caresystem which were most unpopular withlabor. A three-day waiting period beforecash benefits became available was mademandatory. A small tax ("deductible") onprescriptions and a levy of 50 Pfennigs oneach quarterly sickness ticket of the patientwere imposed. This charge of 20 cents inAmerican money per quarter, imposed onpatients many of whom were unemployed,resulted at once in cutting the number ofapplications by about one-quarter! Butthese "deflationary" measures, togetherwith the liquidation of the totally bankruptunemployment insurance, also had the consequence of arousing an ill-feeling amongthe workers which had no small influence inbringing down the house of the WeimarRepublic. Bruning took the blame; Hitlergot the credit.

Once in power, the latter soon reversedhis strategy. The ill-famed Dr. Ley, boss ofthe Nazi labor front, did not fail to see thatthe social insurance system could be usedfor Nazi politics as a means of popular


demagoguery; as a bastion of bureaucraticpower; as an instrument of regimentation,and as a reservoir from which to draw jobsfor political favorites and loanable funds forre-armament. Briining's extra tax on panelpatients was cut in half. By 1935, withHitlerian full employment under way, thefew pennies of extra tax represented apurely nominal charge. The sting was takenout of it.

The Fuhrer gained in popularity by reducing to negligible proportions an unpopularmeasure which he himself had instigated.He lost no time in making a positive contribution of his own to the organization ofcompulsory medicine by extending it in 1939to small business (handicraft), by tighteningit in Austria (1938), and by establishingcompulsory health care in occupied Holland(1941). One of his last "social" measures, inMarch 1945, was to have workers in certainirregular types ofemployment included. Buthis attempt to abolish the autonomy of thepanels and to regiment them by centralization had been checked by the concertedresistance of the medical profession, thepanel bureaucracy, and public opinion. Similar abortive attempts at complete bureaucratization of the panels were made underthe Kaiser in 1909 and in the Weimar Republic's revolutionary days in 1919. Thesame goal is on the Social Democratic Party's agenda again in 1949.

Of all totalitarians who have written theirnames in the book ofmedical economics andpolitics, Lenin's will have to be printed inthe largest capital letters . His was (1917) thefirst complete cradle-to-grave plan, the firstplan embodying complete nationalization ofmedicine. His influence on the West did notmake itself directly felt until World War II.Since then, wherever Russian bayonets takeover, the Soviet blueprint of social securityfollows. Even more important to us is hisideological influence, embodied in the Beveridge Plan of 1943, that in turn appears tobe spreading over Western Europe, LatinAmerica, and the Antipodes.

Lenin and Bismarck had in common thepaternalistic philosophy of governmentwhich included the supremacy of a trained

and solidly disciplined bureaucracy overwhat they both considered the anarchy ofthe unregimented marketplace. To both, the"little man" was either financially or at anyrate morally incapable of caring for his ownfuture. Both were motivated by an insatiablethirst for power and utilized to their ownpolitical advantage the alleged responsibility of the State for controlling the insecurities of industrial life. Social insurance orsocial security was essential to their conceptofthe Good Society. It involved a regimentedsociety ruled by their own superior wisdom.

From Social Insurance toSocial Security

Actually, Lenin and his followers werethoroughgoing admirers of the Prussian bureaucracy. Soviet planning was built, at theoutset, on the pattern of German militarymanagement in World War I. But there theideological community of the two authoritarians ended. Bismarck presented hisproject in the name of the Christian idea ofthe state, confusing it with the state idea ofeighteenth-century enlightenment. (Hismuch vaunted "Christianity" did not interfere with Bismarck's violent opposition toany sort of factory law, such as to enforceminimum hygienic requirements.) Leninwas a genuine revolutionary, basing hisCommunism on a purely materialistic philosophy. To the one, private ownership ofthe means ofproduction was sacrosanct butwas to be regimented; for the other, it wasto be wiped out altogether. Bismarck had tocompromise with resisting parliamentaryforces led by the industrialist Stumm. Eventhe trade unions were opposed tooth andnail; they could not foresee-nor did Bismarck, ofcourse-that some day they themselves would have the power to use thescheme for more power. Lenin, by 1922,having wiped out parliamentary resistance,possessed power absolute as no sovereignhas had since Genghis Khan.

Two basic types of governmentalizedmedicine resulted. The Prussian bureaucratcreated the obligatory health insurance of acomparatively limited scope. What the Rus-


sian Bolshevist has bestowed might be described as compulsory health security ofan unlimited medical orbit. Perhaps theyshould be distinguished as governmentalized vs. socialized medicine. In the one, thebeneficiaries are "insured"; in the other,they are "registered."

That social insurance a la Bismarck andsocial security a la Lenin are different indegree only-that the dynamic potentials ofthe one tend to carryover into the othermay astonish those who do not realize thatBismarck's famous "personal rule," thatwas to wreck his nation's democracy, was aconscious if abortive attempt aiming basically at the same political goal which wasto materialize in the Politburo (and in Hitlerism).

Lenin vs. BismarckBismarck's system meant to be, in ap

pearance at least, what its name indicated:insurance, even if without a true actuarialfoundation, and a subsidized, involuntaryplan. At the outset, the insured were to beclassified according to risks and to receivecash benefits in proportion to their contributions; a surplus, the equivalent of profit,was to be accumulated as an emergencyreserve to guarantee the insurers' (panels')solvency; each type of risk incurred was tobe offset by appropriate premiums; preferably, the risks were to be distributed byre-insurance; etc. These are axioms ofsound insurance management, most closelyapproximated at present by the Swiss panelsamong European cooperative systems ofmedical care.

Nothing of the kind is aimed at in theBolshevist pattern, the all-embracing program of Comrade Lenin. The same holds inprinciple for the compulsory set-ups basedon Leninian security ideals now in operationin France and Britain. There, too, the pretense of businesslike management has beenalmost totally abandoned.

Bismarck's humanitarianism was limitedoriginally to the worker dependent onhourly wages. Thus the range of personsfalling under the compulsion was defined.

This type of legislation, which still predominates on the Continent, restricts panelmembership to employees and their families, or to the "economically weak" groupscomprising the income brackets not aboveskilled factory labor.

In Lenin's kind of world there is, supposedly, one kind of income recipient only. Allare in the same boat; all need the samesupport. The idea of medical insurance forthe underprivileged is inflated into equalmedication for everybody. Everyone according to his needs is the underlying axiom.From a humanitarian device of restrictedconfines, the idea has grown into allembracing, Communistic dimensions-onpaper. In reality, the industrial populationonly is "secured."

In Soviet Russia, from 1922 to 1938,nationalized industry-i.e., the government-carried the cost of socialized medicine in the form of a 6.5 percent "payrolltax" (25 percent for all social security) withrecourse on the national budget to covereventual deficits. Industries, not labor, wereto pay the bill. Similar systems with minormodifications are now being set up in thesatellite countries. In the 1948 Bulgarianscheme, for example, the self-employed arethe only ones to pay contributions-which isone way to hasten their elimination-withall benefits of medical service freely dispensed to everyone.

Of course, Lenin's promises and Stalin'spractices are worlds apart. Since 1938, thetrade unions, the workers, had to take overabout 8 percent of the total cost. Hazardclasses were re-introduced, and the contributions graded accordingly. Medical benefits have been greatly deflated, while thenumber of persons covered has risen fourfold in the decade since 1928. And the Soviethealth plan has developed into a forcefulmethod of disciplining labor. Cash benefitsto adult workers, for instance, are availableonly at the rate of 50 percent of their wagesafter two years of uninterrupted work in thesame industrial unit; 60 percent, 80 percent,and 100 percent accrue if they stay three,six, and more years, respectively. Motherhood benefits are guaranteed by the Soviet


constitution but are paid only to women whohave worked at least seven months in thesame plant.

But the aristocracy of Soviet officialdomand labor receive all the sickness care theircountry is able to give, including richlyendowed sanatoria and rest-homes in theCaucasus and the Crimea. And Stalin claimscredit for being the Great White Fatherdispensing health security to all of his subjects.

Minimum or Maximum toBe Provided?

After World War II, Western Europe'smedical schemes were not revolutionized byopen adoption of Lenin's plan. But the lattergave a tremendous impetus in a directionthat has been under way ever since Bismarck. The original German set-up wasmeant to be, to repeat, health "insurance."The weight of the entire scheme rested oncash benefits per day of lost income. Benefits in kind-medical services properwere supplementary only, largely left to thedecision of the individual panel which had abroad autonomy in disposing of the meanson hand, even in determining the percentagelevy on payrolls. The emphasis on cashbenefits and on the autonomy of the panelswas a basic feature of that original planwrested from Bismarck by the Parliamentary opposition.

It did not take two decades to reduce to afraction ofthe total the share ofcash benefitsin the disbursements of the German panels.Once services in kind become the mainstayof the sickness scheme, it turns into a queerinstrument of wealth redistribution. (Allother branches of social insurance, with thepartial exception of workmen's compensations for accidents, are restricted to cashdisbursements.) Contributions cease to bearany relation whatsoever to the risk involved. Policing by physical controls over amost vital sector of private life takes theplace of actuarial calculation.

Thus, the difference between the Bis-

marckian and the Leninian patterns tends tofade out. But still, the contrast between theold and the new approach reaches into everycorner of the problem. Paternalistic as theBismarckian scheme was, it did not intendto free the individual ofall responsibility. Heor she was to be secured to the extent onlyof absolute necessities. An irreducible minimum of health care and of income guarantee was to be dispensed, no more. Accordingly, cash benefits had to be much smallerthan the actual income of the recipient whenworking. Medical services were to offer asmuch as was objectively necessary to restore health; but the patient was not to bepampered, and his incentive to care forhimself and for his family was not to beimpaired.

The postulate of economic self-reliance inspite ofcompulsory "insurance" permeatesall medical schemes built on the Bismarckian pattern. The beneficiaries are supposedto carry a major share of the costs by theirown contributions and partly also by "deductibles." As to disbursements, theyshould be kept at a minimum by thriftyadministration of the panel and by sharpcontrol over its spending. Otherwise, thereis to be no interference with medical practice. In short, business-like management isthe idea of compulsory insurance proper,presupposing business-like units to do thejob in a decentralized, more or less competitive fashion, if under supervision by theauthorities.

The latest editions of the Welfare Stateabandon the misleading claim of offering asystem of insurance which would implysome sort of quid pro quo between premiums paid and benefits received. In medicine,instead of providing the barest minimum, itpromises the desirable maximum. Its objective is to fulfill a social function; the emphasis in lip-service is on what the State allegedly owes its citizens. The securityorganization is centralized; its administration tends to be fully governmentalized.Ultimately, all medical personnel is to benationalized, as we shall see. D


WHATHUNGERINSURANCE COULDTEACH Us ABOUTHEALTH INSURANCEby Joseph Bast

T o understand what lies at the heart of the. failure of our current health-care financ

ing system, imagine, if you can, what theworld would be like if we tried to buy foodthe same way we buy health-care services.

You could go to work tomorrow morningand hear your boss tell you the following:The company has decided to offer a newbenefit: hunger insurance. The companywill purchase a hunger insurance policy foryou that covers about 95 percent of yourfood costs whenever you enter a grocerystore or restaurant, and a smaller share ofthe miscellaneous snacks and condimentsyou purchase from street vendors and thecorner drugstore. To pay for the new benefit, the company will withhold some ofyourpay-about $100 a week or so.

Effect on ConsumersWhat effect would hunger insurance have

on you, a consumer of food? If you're likeme, you will probably start to eat more ...and eat better, more expensive foods. Whyeat hamburger when you can have tender-

Joseph Bast is President 0/ The Heartland Institute in Chicago.

loin? Why settle for beer when the finestwines cost you just as little? Why eat atMcDonald's when you can eat, for nearlythe same price, at Chez Paul?

If there were such a thing as hungerinsurance, some of us would stop checkingprices before we ordered food, just as wedon't check prices when we ask for medicaltreatment. Some of us would order fancyand expensive foods that we wouldn't orderif we really had to balance the price againstthe improved taste . . . just as we orderunnecessary and expensive tests to get justa little more peace of mind.

And if there were hunger insurance, someof us would overeat until we were so roundand fat that our health was endangered, justas we see millions of people in Americaasking for and receiving unnecessary surgery and medication that actually endangerstheir health.

Effect on ProvidersWhat effect would hunger insurance have

on the providers of food? Put yourself in theshoes of a grocery store manager. Youwould start stocking more caviar and lessCheese Whiz, wouldn't you? Rather than

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lose customers to fancier (and more expensive) establishments, you would carpet youraisles, hang chandeliers in the lobbies, andhave distinguished-looking fellows withwhite gloves push people's carts down theaisles!

Every grocery store would offer an impressive array of products, from the veryfinest meat department to the best stockedliquor counter (providing state law allowedit). That the store next door has the sameexpensive freezers and wine cellar mattersnot at all: Cost, you understand, is noobject. "Overinvesting in new technology, "you ask? Hey, the insurance company paysfor it all! And if we don't offer it, customerswill cross the street and shop there. Youknow you would.

What if you were a lousy grocery storemanager who just couldn't keep costs downand quality up? Before hunger insurancecame along, you would be forced out of themarket by stores managed by sharper people able to cut costs without sacrificingquality. Customers wouldn't patronize yourestablishment, and you'd be out ofbusiness.But with hunger insurance, you can passalong your higher costs to the insurer, so thecustomer never knows how inefficient youare! So you get to stay in business despiteyour inefficiencies. Out ofgratitude, you mayeven spend a little money lobbying to makesure hunger insurance is always available!

If there were such a thing as hungerinsurance, the price of food would begin tosoar, just as the price of health services hassteadily risen faster than the price of othergoods and services. Financed by hungerinsurance companies, grocers and restaurateurs would sell more food and of a fanciervariety than if they faced customers whopaid with their own money, just as healthcare practitioners today are free to overtreatand overprescribe. Food sellers would overinvest in expensive and under-utilizedequipment and pass the cost along to theinsurers, just as hospital administrators today buy too many MRIs and CAT scannersand pass along the expense to health insurers. And inefficient, low-quality providers offood would stay in business rather than be

forced out by better competitors, just ashigh-cost providers of health care are tolerated in today's health-care marketplace.

Effect on InsurersWhat would happen to insurers if hunger

insurance were provided? The premiumsthey charged at first were based on pastlevels of food consumption and prices. Asconsumption expands and prices rise, insurers have to raise their premiums again andagain. The exploding number of insuranceclaims buries them in paperwork. The businesses that pay the insurance premiumswill, of course, be outraged by all this."Find a way to control these rising costs!"they will demand. "The rising cost ofhungerinsurance is making us less competitive withbusinesses in other countries!"

The insurers will hire an army of "managed-eating" experts who will search thegrocery bags of the insured for signs ofunnecessary products,just as today's healthinsurers have hired experts in "managedcare" to review health services utilization.People will resent this intrusion into theirpersonal dietary habits, just as they resentthe managed care experts second-guessingtheir health concerns. People with hungerinsurance will find ingenious ways to avoidthe managed-eating experts, and the eventual results will be higher, not lower spending... just as businesses with managedcare programs today are discovering.

Effect on the UninsuredSome people in our imaginary world will

be uninsured: They won't have hunger insurance because their employers are toosmall to afford to offer this new benefit, orbecause they are self-employed or unemployed. Or, in their effort to control costsand make money, some hunger insurers willrefuse to cover people who are high foodrisks-the hoarders, the people with exceptionally delicate palates, and the bulimics.They will offer cheaper rates to others:beer-drinking football fans, people whocan't smell, and anorexics.

WHAT HUNGER INSURANCE COULD TEACH US 433

The uninsured will be hurt the most byhunger insurance because they will see theprice offood bid up and out ofreach by thoselucky enough to have hunger insurance. Thefoods that were once plentiful and inexpensive will now be unavailable or high-priced,just as health insurance has replaced inex-pensive general practitioners with expensive specialists, and inexpensive but slowworking therapies with expensive but quicksurgical procedures.

Those who lack hunger insurance will beseen standing with their noses pressed tothe windows of our beautifully carpeted andchandelier-lit grocery stores and restaurants, just as millions of Americans todaycrowd the emergency rooms of state-of-theart hospitals whose beds are between onethird and one-quarter empty.

Effect on Elected OfficialsWhat would happen to our elected offi

cials if hunger insurance existed? Civilrights activists and well-meaning peoplewithout much understanding of economicswould campaign against for-profit hungerinsurers, denouncing them for being heartless in their discrimination against peoplewith eating disorders. They would condemnthem for profiting from the provision ofsomething so fundamental to human life asfood. "Food is a right, not a privilege," theywould say. "The high administrative costsof the hunger insurers are what is causingthe problem. We should abolish privatehunger insurance companies and replacethem with a single provider of food. "

And since experience will have so convincingly shown that the current hungerinsurance system is inefficient and unjust,our enlightened elected officials would eventually yield to the public's demands and pass"play or pay," forcing businesses to buyhunger insurance for all their employees, or"national hunger insurance," where government acts as the single payer ofall hungerinsurance claims.

The nation will face a difficult choice:Either abandon the idea that all food shouldbe paid for by hunger insurance, or impose

draconian rationing measures, price controls, and restrictions on new investments infood processing and delivery technologies.If we can judge by what is happening todayin the health-care arena, the advocates ofrationing will dominate the debate.

Commissions will spring up everywhereto determine whether a carrot is more valuable to the community's welfare than agrape, and a grape more valuable than abanana; just as commissions are being created at this very moment to decide whethercapping 1,000 teeth is "worth more" thanextending a person's life for one week bykidney dialysis. The issue will be addressedas ifjustice and virtue, rather than economics and incentives, were at the heart of theissue.

The LessonsWhat ifthere were such a thing as hunger

insurance? This little exercise in imagination teaches us quite a bit about why wespend too much on health care. In its simplest form, the lesson is that we rely toomuch on insurance to pay for our healthcare expenses. This reliance makes us poorconsumers, encourages health care providers to provide too much, and allows andeven encourages inefficiency and waste.

Sometimes things that should be obviousjust aren't. Ninety-five percent of all hospital bills, for example, are paid for by privateor government insurance. Can the same besaid of any other industry? Is it merelycoincidence that costs are rising so muchmore rapidly in health care than in otherindustries?

The solution to the nation's health-carecrisis is not, of course, to abolish healthinsurance. Health expenses are an insurablerisk, and because they can be substantial itcertainly makes sense for people to buyinsurance. But insurance should not besimply pre-payment for routine medical expenses. When insurance is used for thispurpose, it leads to overuse and all theproblems we saw with hunger insurance.

Insurance, instead, should be limited toprotecting us from what are now called


catastrophic risks. We should self-insureagainst small and routine health expenses,and ask our insurance coverage to "kick in"only for large and unpredicted expenses.These are the kinds of expenses true insurance is designed to cover. And becausesuch expenses are only seldom incurred, theadministrative costs and paperwork involved with "real" insurance are far lessthan that involved with insurance as prepayment.

The policy questions, then, are these:How can we wean our nation off its "addiction" to health insurance? And how canwe replace insurance provided by an insurance company with self-insurance from ourown savings? The answers lie in changing apublic policy responsible for creating ouraddiction in the first place.

Medical Savings AccountsWe rely so heavily on insurance to pay our

medical bills because the tax code rewardsemployer-paid insurance and penalizes selfinsurance. Employer-paid health insurancepremiums are tax-deductible business expenses for our employers, so they don'tcount as taxable income at the end of theyear. Money spent paying medical billsdirectly, in contrast, is not tax-deductible.We must pay out-of-pocket medical expenses with what is left of our paychecksafter Uncle Sam has taken his tax share.

The tax code has a dramatic effect on ourdecision to buy health insurance, and on thedeductibles and copayments our insurancepolicies contain. Employer and employeeSocial Security taxes (15.3 percent), federalincome taxes (15-36 percent), and state andlocal income taxes (approximately 8 percent)can reduce one dollar of pre-tax income to43 cents or less of post-tax income. Payingfor health care with post-tax dollars, then,requires earning one dollar to buy 43 cents'worth of service. Having an employer purchase a health insurance policy, on the otherhand, means a dollar's worth of earningsbuys an entire dollar's worth of insurance.

The way to correct this situation is tofollow the path blazed by Individual Retire-

ment Accounts, or IRAs. IRAs encourageus to put away money for retirement byallowing us to deduct the amount of ourcontributions from our income when calculating our income taxes. Medical SavingsAccounts, or MSAs, would operate thesame way, but money deposited into theaccounts could be withdrawn only for medical expenses.

By giving the same favorable tax treatment to self-insurance as is now given toemployer-paid health insurance, we can begin to break our national addiction to healthinsurance. Many of us would choose topurchase insurance policies with muchhigher deductibles-perhaps as high as$4,000 a year-if the premium savingsachieved by switching policies were routedinto our personal savings account and allowed to accumulate over time.

Two organizations have designed MSAplans that are fair and affordable for allAmericans. They are the National Centerfor Policy Analysis, in Dallas, Texas, andthe Council for Affordable Health Care, inWashington, D.C. Several bills now pendingin Washington would create MSAs.

ConclusionEnabling people to self-insure against

small and routine medical expenses may notsound as exciting and promising as "national health insurance" or "play or pay." ButMSAs offer the best way to control spendingwithout life-threatening rationing, ineffectual price controls, and all the other nonsolutions being discussed by politicians today.

Our fictitious world with hunger insurance reveals how over-reliance on healthinsurance is at the very root of our nation'shealth-care problems. The solution to theseproblems is not to pass price controls orimpose more regulation on health-care providers. All that is required is a change in thetax code encouraging people to pay for theirown health care out of personal savings.

Isn't it nice to know that, sometimes,complicated problems really do have simplesolutions? D


THE FREEWAYTO SERFDOM

by Jane M. Orient, M.D.

Wouldn't it be wonderful to have all themedical care you needed or wanted,

without ever worrying about the bill?And wouldn't it be wonderful to drive to

work every day without ever paying a toll orstopping at a red light?

The second question usually provokesmuch more critical thought than the first.Before people vote the money to build afreeway through their downtown, a lot ofinconvenient objections are raised.

The first is this: Do we want to tear up themain business district of town?

The idea of "comprehensive health carereform" to "assure universal access"should stimulate the same thought process.To build such a system, you start by destroying the insurance and medical systemthat we already have.

Remember what happened in 1965. Before Medicare was enacted. The majority ofsenior citizens had insurance. After Medicare, they just had Medicare. Their privateinsurance policies were all torn up.

At first, that seemed okay, or even wonderful. Everybody seemed to be gettingmore for less, or even for free. Now, Medicare is bankrupt, and we're just beginning tosee the effects of government rationing. It'sas if we built an Interstate into every town

Dr. Orient practices private medicine in Tucson.She is also Executive Director ofthe AssociationofAmerican Physicians and Surgeons.

and hamlet and then stopped repairing thebridges.

When we build a freeway, we don't necessarily destroy all the other roads. In Britain and Germany, private medicine is allowed to coexist with nationalized medicine.But in Canada, it isn't. If you're a Canadianand want something the government isn'twilling to pay for, or you want it now insteadof three years from now, you have to go tothe V nited States.

A lot ofproponents of' 'universal access"want to close the private escape hatch. Theywant no other roads-just the freeway. Ofcourse, there may be some back alleys orsecret tunnels or special facilities for Congressmen, but those won't provide American-class medical care to ordinary folk.

Some think we don't need other roads ifwe have a freeway_But remember what afreeway is: a controlled access road.

That's what "universal" access meanstoo. Sure you have the "right" to get on thefreeway, just as you have the "right" tomedical care in Canada (or the "right" tocomprehensive care in the V.S. if you belong to a "managed-care" plan). But youcan only get on the freeway from the onramp_ There is no tollgate or stoplight - butthe traffic might be backed up for miles andmoving imperceptibly.

In Canada, you don't have to pay to getmedical care. In fact, you are not allowed to

435


pay. Once the global budget is reached inCanada, that's it. The on-ramps are closed.It doesn't matter if you have money. Hospital beds are empty for lack ofmoney to paynurses, and CT scanners sit idle all night forlack of money to pay a technician. But ifsome people are allowed to pay, Canadiansfear that some people might get better carethan others.

(Unti! recently, this concern did not applyto dog owners. They could buy a CT scan fortheir dog, but not for themselves.)

American "managed-care" plans-a favorite model for would-be reformersresemble the Canadian system in that patients don't have to pay at the time ofservice. (At least, they don't have to payvery much.) But they do have to go throughthe gatekeeper, who keeps a sharp eye onthe budget.

Unlike the people in toll booths on theNew Jersey Turnpike, managed-care gatekeepers don't collect the toll. But thatdoesn't mean that nobody pays.

Even if we abolish payment at the time ofservice, medical care must still be paid for.The only choice is to pay in advance or topay later. With government programs, we


often borrow money and commit our greatgrandchildren to pay.

Another problem with the freeway is thatyou can only go where the freeway goes. Ifthere's a roadblock at your exit, you can'ttake that exit.

Countries that promise "universal access" are pretty good at paying for wellbaby checks and vaccines and doctor visitsfor the common cold. Those are exactly thethings most people are able to afford forthemselves.

The roadblocks are at the exits that leadto the hospital. The global budgeters "contain costs" -ration health care-by denying those things that you do need insuranceto pay for: heart surgery, radiation treatments for cancer, hip replacements, thingslike that. Out of "compassion," reformersmay open another exit: the one that leads tothe cemetery. Do you think it's accidentalthat euthanasia and "universal access" areon the agenda at the same time? Whengovernment gets involved in providinghealth care, health care must be rationed.

If you want to see reality, don't lookat Disneyland. Look at the Santa AnaFreeway. D

THE CONSEQUENCES OFMANAGED COMPETITIONby Vincent W. Cangello, M.D.

Under managed competition the primarycare physician takes complete charge of

the patient's health care. The primary carephysician is encouraged, and often finan-Dr. Cangello is a private practitioner in Oakland,California.

cially rewarded, to limit and reduce thenumber of patients he refers to a medical orsurgical specialist.

Under managed competition, a femalepatient, for example, loses her prerogativeto see a gynecologist unless she first obtains

THE CONSEQUENCES OF MANAGED COMPETITION 437

the permission ofher primary care physicianto make such a visit.

The limiting of referrals, a basic conceptof managed health care, is in direct conflictwith the structure of American medicaleducation and the medical profession. Suchlimits can cause primary care physiciansgeneral practitioners-to prescribe care atlevels that exceed their knowledge andtraining. When this occurs, the patient runsthe risk of receiving improper care.

Evidence of this was provided by American Medical News on September 14, 1992,when it was reported that malpractice lawsuits filed against primary care physicians ison the rise while those against surgicalspecialists is declining.

Timothy Morse of St. Paul Fire and Marine Insurance Company, which insures30,000 doctors in 43 states, told AmericanMedical News that "Well over 50 percent ofour claims made and over 65 percent of allour claims paid are coming from failure todiagnose and improper treatment. "

Medical patients should know that thebody of medical information facing today'smedical students is so immense that it isvirtually impossible for anyone doctor tobecome expert and stay abreast of all itsadvances.

Physicians specialize in order to master asubject, not merely in order to make moremoney, as they are often accused. Such anaccusation fails to show appreciation for andgives no credit to the students who chooseto be specialists for the "security of mastery" or for the enjoyment of the workinvolved.

Americans today want the best care available, regardless of cost and despite anyreluctance to reform bad health habits. Theywill bring suit against the doctor if they don'tget it. With that reality in mind, medicalstudents who choose to become primarycare physicians are taught to respect the

limits of their ability and to seek the benefitof consultation with medical and surgicalspecialists, without hesitation, whenevernecessary.

This basic tenet of the American medicaltraining, which has produced a quality ofhealth care envied throughout the world, isdiscouraged by the "primary care/gatekeeper" concept of managed competition.

A review of British medical history demonstrates that any reduction of communication between primary care physicians andtheir consultants leads to the separation andeventual isolation of the primary physiciansand guarantees an overall lowering of thequality of health care available to theirpatients.

Frank Honigsbaum, an American physician, studied these phenomena and wrote inhis report "Division in British Medicine"(Kogan Page Ltd., 1979): "To the worldoutside, the medical profession [in England]appears to form a unitary whole. " In reality,however, "Doctors nearly every where aredivided into two main classes-GeneralPractitioners and Specialists-and the gapbetween them grows wider every year. Forthis, the advances in knowledge are mainlyresponsible. " He emphasized that' 'It is theongoing intellectual partnership and exchange of knowledge occurring between thegeneralists and specialist [the traditionalpractice in the U.S.] that keeps the qualityof medical care at its best."

If this partnership is disturbed, as it wasin the British National Health Service, thequality of care diminishes throughout thesystem, and especially at the primary carelevel.

A correct diagnosis and proper care at theoutset of a patient's illness will do more toreduce the cost of care than any restrictionofappropriate consultation. It would be betterto err on the side of an unnecessary consultation than not to have one at all. D


THE COMINGFINANCIAL COLLAPSEOF SOCIAL SECURITY

by Peter J. Ferrara

T he first officially recognized financialcollapse of Social Security occurred in

1977. Government projections at that timeshowed, and everyone agreed, that withoutmajor changes Social Security would beunable to pay all of its promised benefitswithin a couple of years, with a yawning,continually growing deficit after that time.

Consequently, by the end of the year,Congress and President Carter dramaticallyincreased Social Security taxes and trimmedbenefits. Payroll tax rates increased repeatedly through 1990, for a total increase of 30percent. Moreover, the maximum income towhich this tax rate applied was increasedsharply from $16,500 at the time, and indexed to increase every year thereafter.Today this maximum taxable income is$57,600.

The American people were assured overand over by President Carter, the SocialSecurity Administration, and the rest of theWashington political establishment thatthese changes guaranteed the financialsoundness of Social Security' 'for the rest ofthis century and well into the next one." 1

But by 1980 Social Security was already indeep financial trouble again. The govern-

Mr. Ferrara is afel/ow at the Heritage Foundation. He is the author of Social Security: Prospects for Real Reform (Cato, 1985).

ment's annual financial report for the program showed that without a change in thelaw, the program might not be able to pay itspromised benefits as early as 1981.2

To address this second financial crisis, abipartisan commission headed by AlanGreenspan developed a package of tax increases and benefit cuts enacted early in1983. The truth is that if the economy hadcontinued to perform as it had in the 1970s,with high inflation and periodic sharp recessions, the system would have collapsedagain within four years. But price inflationwas sharply reduced in the 1980s, and theeconomy continued to grow for about eightyears after 1982 without a recession, andthen slid into a relatively shallow slump.Consequently, another quick collapse wasavoided.

But Social Security's long-term financialproblems are another question. A key strategy of the Greenspan Commission was todevelop a large surplus in the Social Security trust funds from 1990 to about 2010, tobe used to help finance the retirement of thehuge baby boom generation starting after2010. However, the latest government projections show the expected surplus shrinking into relative insignificance. Moreover,the so-called Social Security trust funds inany event are not a store of financial re-

438

serves that can assure the future ability ofthe program to pay its promised benefits.

Repeated financial crises are an inherentfeature of the Social Security system. TheSocial Security trust funds are essentially asham that cannot assure future financialsecurity. Today's young workers will neverreceive the benefits currently promised tothem by the program.

An Inherent ProblemMost people seem to imagine that Social

Security operates like a traditional fullyfunded retirement program. In such a system, the tax payments of current workersare saved and invested to finance their ownfuture benefits. As a result, a huge financialreserve is built up sufficient to finance accrued benefits at any point in time. Thisreserve is used to finance benefits duringretirement years, while current workers atthat time will be building up their own reserves to finance their own future retirement.

Social Security, by contrast, fundamentally operates on a pay-as-you-go basis. Thetax payments of current taxpayers are notsaved and invested to finance their ownfuture benefits. Rather, most current taxpayments are immediately paid out to finance the benefits for current retirees. Future benefits for present taxpayers are to bepaid out of the future tax payments of futureworkers when today's taxpayers are in retirement. Consequently, large cash reservesto finance benefits are never developed insuch a system.

Such a pay-as-you-go system is quitevulnerable to any adverse development thatmay upset the delicate balance betweenexpected future taxes and expected benefits. If unemployment rises, revenues fromthe payroll tax will fall from expected levels.Ifprice inflation accelerates, indexed benefitpayments will increase faster than expected.If retirees live longer than expected, benefitexpenditures will again grow faster thanprojected. If the birth rate drops, fewerworkers will be available to pay promisedbenefits in the future that are already paidfor and relied on by current workers. These

439

and many other possible developments canquickly tip a pay-as-you-go system intofinancial crisis, leaving it without sufficientfunds to pay promised benefits.

None of this is a concern in the firstgeneration under a pay-as-you-go system.When such a system is begun, a full generation of taxpayers begins to pay taxes, butthere are no beneficiaries entitled to benefitsbased on past tax payments. In a fullyfunded system, these initial tax paymentswould have to be saved and invested tofinance the future benefits of current workers. But, of course, these initial tax payments are not saved and invested under apay-as-you-go system. Consequently, in thestart-up phase of such a system, there is noconcern over bankruptcy, or the inability ofthe program to pay promised benefits. Tothe contrary, the system is awash in unclaimed funds, and the only issue is howmuch to payout in virtually free windfallbenefits to early retirees. Since the firstretirees pay little or nothing for their benefits, it is easy to pay them only what can becomfortably paid out of the initial incomingrevenues. The beneficiaries will be gratefulfor the windfall benefits they receive.

After the first generation under such asystem, however, this situation completelyreverses. The retiring generation will thenhave paid taxes for an entire lifetime and willhave built up enormous benefit claims. Atthis point, there are no more unclaimedsurpluses and no more free benefits to passout. The issue instead becomes whethertaxes from current workers will be sufficientto finance promised benefits. If not, thenCongress must raise taxes or cut benefits, instark contrast to the vote-buying spendingsprees of the first generation.

During its first 40 years, Social Securitywas in its start-up phase, and short-termfinancial solvency was not an issue. Instead,free windfall benefits were paid out toretirees.

But by the mid-1970s, sufficient benefitobligations had accrued to make financing aproblem. Adverse economic developmentssoon developed to tip the system into financial failure. Inflation soared in the 1970s,


sharply increasing benefit payments indexed to inflation. At the same time, periodic sharp recessions caused unemployment to rise and wage growth to fall, sharplyreducing expected revenues. The combination of these economic difficulties causedthe first two financial crises of the systemdescribed above. The primary cause of thethird wave of financial collapse of SocialSecurity, however, will be demographic, asdiscussed further below.

The Trust Fund FraudEven if Social Security attempted to de

part from the principle of pure pay-asyou-go financing and developed a substantial trust fund reserve, future benefits wouldnot be any more assured because of theessentially fraudulent nature of the SocialSecurity trust fund system. Any remainingSocial Security revenues after benefits arepaid are lent to the federal government inreturn for new, specially issued governmentbonds which are held by the Social Securitytrust funds. The federal government thenspends the borrowed Social Security revenues on other programs. The Social Securitytrust funds hold no assets other than thesegovernment bonds.

When Social Security revenues are insufficient to finance current benefits, the government bonds held by the trust funds are tobe turned into the federal government forthe cash needed to finance the benefits. Butthe government holds no cash or otherassets to back up the Social Security bonds.The trust fund assets are claims against thefederal government, government IODswhich will have to be financed out of increased federal taxes or increased federalborrowing. In other words, the trust fundsare part of the national debt which must bepaid when Social Security needs the money.

As a practical matter, these Social Security trust funds are nothing more than astatement of the amount that Social Securityis legally authorized to draw from generalfederal revenues in the future, in addition topayroll tax revenues. Therefore, if the Social Security trust funds hold $1 trillion at

some point, that statement even if true,would not mean that the Social Securitysystem is financially sound. Quite to thecontrary, it would mean that Social Security

.would have an additional $1 trillion claimagainst the taxpayers, in addition to theclaim against them for payroll taxes.

Because the Social Security trust funds donot hold any real assets, just a claim againstfuture tax revenues, a growing trust fund byitself does not mean that paying for theretirement of future generations will be anyeasier economically. It just means that moreof this burden will be met out of incometaxes and federal borrowing rather thanpayroll taxes.

The inherent financial problems of SocialSecurity could be successfully addressed ifthe system were changed so that it accumulates reserves in a fully funded system andthose reserves are invested in productiveassets in the private sector. But that wouldrequire the government to own so much ofthe private sector through the Social Security trust funds that it would fundamentallychange our entire economic system in anunacceptable way. Consequently, financialproblems of Social Security can be solvedonly by shiftirig to a private system ofdecentralized investment accounts controlled by workers individually or throughvoluntarily organized groups.

The Looming Retirement ofthe Baby Boom Generation

As indicated above, the primary cause ofthe next foreseeable financial crash ofSocialSecurity is a destabilizing demographicproblem. The huge baby boom generation isnow entering middle age. Around 2010, thishuge generation will start to retire, causingSocial Security benefit expenditures to rise.This generation will continue to have amajor effect on Social Security spending forthe following 40 years.

But something has happened to makematters worse. Starting in the early 1960s,after the development of the birth controlpill, birth rates in the United States declinedprecipitously. With the legalization of abor-

THE COMING FINANCIAL COLLAPSE OF SOCIAL SECURITY 441

tion in the 1970s, the fertility rate, or lifetimebirths per woman, fell below 2.0 in the early1970s. It continued to decline to a low ofabout 1.7 per woman, eventually stabilizingat these low levels until the end of the1980s.

As a result, the baby boom was followedby a baby bust. This means that at the sametime the huge baby boom generation will beretiring, causing benefit expenditures tosoar, the generation of workers that is supposed to finance their retirement paymentsout of current taxes will be relatively small.

The devastating impact of this demographic double whammy on Social Securityis shown by the Social Security Administration's own long-range financial projections. We can examine these projectionsunder the most widely cited intermediateset ofassumptions. Table 1(on the followingpage) shows the results under these projections if we combine all three trust fundsfinanced by the payroll tax-the Old-Ageand Survivors Insurance trust fund (OASI),the Disability Insurance trust fund (DI) , andthe Hospital Insurance trust fund (HI).These three trust funds together are referredto as the OASDHI trust funds.

With the huge baby boom generationentering its peak-earning middle-age years,and paying Social Security taxes on itsearnings, the program should be doing quitewell financially right now. Indeed, as indicated previously, the government's plan isfor Social Security to depart somewhat fromits usual pay-as-you-go policy during thisperiod and accumulate some substantialtrust fund "reserves" to help finance theretirement of the boomer generation.

But Table 1 shows that under the' 'intermediate" assumptions, tax revenues for allthree trust funds combi~ed start to fall shortof benefit promises in 2005, only twelveyears from now. The federal governmentmust cover these deficits by raising taxes,cutting other spending, or increasing thetotal federal deficit and federal borrowing.Besides tax revenues, the Social Securitytrust funds receive imputed interest incomeon their trust fund bonds. But since thefederal government must pay the interest on

the bonds, which it does by issuing additional bonds to Social Security in theamount of such interest, that interest doesnot help the government pay its promisedSocial Security benefits. To finance thesebenefits, the federal government must comeup with the full amount of cash needed toclose the deficit between Social Securitytaxes and Social Security expenditures. Effectively, the Social Security trust fundsmust begin redeeming some of their bondsfor cash to cover these deficits, thoughcounting the additional bonds received forinterest each year the total trust fund assetsmay continue growing for a few more years.

As shown in Table 1, this annual SocialSecurity deficit grows to almost $40 billionper year in constant 1993 dollars by 2010. By2015, this annual deficit grows to $120 billionin 1993 dollars. By 2020, the annual deficit isan incredible $226.5 billion in 1993 dollars.The federal government again must eitherraise taxes, cut other spending, or increasethe total federal deficit and federal borrowing by these amounts in order to pay allpromised Social Security benefits, even before the Social Security trust funds areexhausted. The financial impact of the longterm Social Security financing crisis willstart to hit less than a dozen years from now.

But that is not all. The federal governmentfinances about 75 percent of Medicare PartB, also called Supplementary Medical Insurance (SMI), out of general revenuesrather than payroll taxes. SMI pays doctors'bills and other health expenses, while Medicare Part A, or Hospital Insurance (HI),which is financed entirely by payroll taxes,provides coverage for hospitalization.Table 1 also shows the projected amount ofthis general revenue contribution for 8MIeach year. The federal government mustcome up with these funds each year as wellthrough either federal taxes, reductions inother spending, or increased governmentborrowing.

The general revenue contribution this fiscal year for SMI is about $48 billion. ButTable 1 shows that by 2005 this will almostdouble to about $91 billion in constant 1993dollars. By 2010 the general revenue con-


Table 1General Revenues Needed for Social Security

and Medicare Before Combined Trust Funds Are ExhaustedIntermediate Assumptions

Annual Deficits BetweenTax Revenues and Expenditures

for All Social SecurityTrust Funds Combined (OASDHI)Constant 1993 Dollars (Billions)

Annual General Revenue Total General RevenuesSubsidies for Medicare Required for Social

Part B Security and MedicareConstant 1993 Dollars Constant 1993 Dollars

(Billions) (Billions)

20052006200720082009201020112012201320142015201620172018

2.56.6

12.119.428.938.750.465.582.6

100.2121.7139.8159.6180.8

90.695.8

100.3104.6108.7112.3119.3125.7131.7137.2142.2149.5156.2162.3

93.1102.4112.4124.0137.6151.0169.7191.2214.3237.4263.9289.3315.8343.1

Source: Calculated from 1992 Annual Report of the Board ofTrustees of the Federal Old-Age and Survivors Insurance and DisabilityInsurance Trust Fund (April 3, 1992); 1992 Annual Report of the Board of Trustees of the Federal Supplementary Medical InsuranceTrust Fund (April 3, 1992).

tribution for SMI will grow to about $112billion. Counting the $39 billion deficit inSocial Security, this adds up to a totalgeneral revenue burden on the Federal government that year to finance all promisedSocial Security and Medicare benefits ofabout $150 billion in 1993 dollars. This isagain before the Social Security trust fundsare even exhausted.

By 2015, this general revenue requirement to pay promised benefits grows to$263.9 billion in constant 1993 dollars. Paying all promised benefits in that year forSocial Security and Medicare alone wouldconsequently create a total federal deficitalmost as large as today's federal deficit,unless taxes are raised or other spendingcut. By 2018, the general revenue drain topay all promised benefits would grow to$343.1 billion in 1993 dollars.

Counting the imputed interest on the government bonds held by the Social Securitytrust funds, all three trust funds combinedactually hit their peak in nominal dollars in

2011, as shown in Table 2. In constant 1993dollars, the combined trust fund assets in2011 would total about $915 billion. Yet, thisis only 75 percent more than current SocialSecurity trust fund assets, which will totalabout $525 billion for all four trust fundscombined this year. Moreover, as alsoshown in Table 2, the projected trust fundassets in 2011 would only be sufficient bythemselves to cover about one year and fourmonths of projected Social Security expenditures. Yet, the current Social Securitytrust assets of $525 billion are sufficient tocover about one year and four months ofprojected benefit expenditures as well.Therefore, relative to the size of SocialSecurity and the general economy, the totaltrust fund assets at their nominal peak in2011 will not be significantly larger thantoday. Indeed, the largest the trust fundsever grow relative to expenditures underthese projections is only one year and ninemonths worth of expenditures in 2005.

Consequently, the government seems to


*Assumes continued revenue from Taxation of Social Securitybenefits and trust any remaining funds needed to pay benefitsare raised by insuring payroll tax rates.Source: Calculated from 1992 Annual Report of the Board ofTrustees of the Federal Old-Age and Survivors Insurance andDisability Insurance Trust Fund (April 3, 1992).

Table 3Total Social Security Tax Rates Needed

to Finance All Promised BenefitsAfter Trust Funds are Exhausted*

(Current Rate is 15.3%)Intermediate Assumptions

deteriorate further, making the specter ofthe financial collapse ofSocial Security evenmore immediate.

After 2011, the projected Social Securitytrust funds decline, as the deficit betweentaxes and expenditures begins to exceed theannual interest on trust fund bonds paid bythe issuance of new bonds. The federalgovernment must continue to raise funds tocover the entire deficit between taxes andexpenditures during this period, in theamounts shown in Table 1, effectively redeeming trust fund bonds equal to the entiredeficit amount each year.

The total combined trust funds would beexhausted under these projections by 2019.Paying all promised Social Security benefitsafter that time would require huge payrolltax increases sufficient to close the deficitbetween taxes and expenditures in the system each year. The necessary tax increasesare shown in Table 3. Paying all benefitspromised to young workers entering thework force today would require a totalSocial Security payroll tax rate of about 27percent, compared to 15.3 percent today. Inother words, projected revenues, even under the intermediate assumptions, would be

Table 2Projected Reserves for All SocialSecurity Trust Funds Combined

Intermediate Assumptions

As a PercentConstant of Annual

Nominal 1993 Social SecurityDollars Dollars Expenditures

(Billions) (Billions) (OASDHI)

1993 524.3 524.3 1330/01994 596.1 575.3 1420/01995 670.1 622.5 149%1996 746.7 667.0 155%1997 825.6 709.2 160%1998 907.6 749.5 165%1999 992.1 787.5 169%2000 1079.0 823.8 172%2001 1169.1 858.4 174%2002 1259.8 887.2 175%2003 1350.4 913.9 176%2004 1440.9 938.4 176%2005 1531.9 961.3 177%2006 1616.3 972.3 172%2007 1690.8 976.6 168%2008 1754.5 974.4 162%2009 1807.0 966.6 157%2010 1847.6 953.0 151 %2011 1850.2 914.8 139%2012 1810.6 859.6 125%2013 1726.2 788.1 110%

2014 1594.3 701.0 95%2015 1411.9 598.6 79%2016 1143.6 464.7 59%2017 785.3 306.4 37%2018 232.2 87.1 10%2019*

*Total trust funds combined are exhausted in 2019.Source: Calculated from 1992 Annual Report of the Board ofTrustees of the Federal Old-Age and Survivors Insurance andDisability Insurance Trust Fund (April 3, 1992); 1992 AnnualReport of the Board of Trustees of the Federal HospitalInsurance Trust Fund (April 3, 1992).

be failing to accumulate substantially largerSocial Security trust funds. In fact, everyyear the projected growth in Social Securitytrust fund accumulations is getting smallerand smaller. What was cited as the incredible projected Social Security trust fundsurplus a few years ago is now an incredibleshrinking Social Security trust fund surplus.Within a few more years, we can expect theprojected Social Security trust funds to

20202025203020352040204520502055206020652070

20.25%22.61%24.470/025.45%25.82%26.02%26.38%27.04%27.860/028.600/029.170/0


sufficient to cover only about half of promised benefits.

So far we have only discussed the' 'intermediate" projections. We must examine aswell the projections under the so-called"pessimistic" assumptions. These assumptions are actually quite plausible. The "intermediate" assumptions assume regularprice inflation of 4 percent per year, after aperiod of ups and downs, while the "pessimistic" assumptions assume regular priceinflation of 5 percent per year. The intermediate assumptions similarly assume regularunemployment of 6 percent per year, whilethe pessimistic assumptions assume unemployment of 7 percent per year. A criticalassumption for projected payroll tax revenues is the rate of growth of real wages. Theintermediate assumptions assume real wagegrowth of 1.1 percent per year, while thepessimistic assumptions assume real wagegrowth of 0.6 percent per year. Actual experience in recent decades has been roughlyhalfway between these two assumptions.

Another critical assumption for futurerevenue is the fertility rate or rate oflifetimebirths per woman. The intermediate assumptions assume an ultimate regular rateof 1.9 while the pessimistic assumptionsassume a regular rate of 1.6. Actual experience over the last 20 years has again beengenerally between these two rates, withexperience in most other Western industrialized countries even lower.

Still another major assumption is life expectancy in retirement. The intermediateassumptions assume life expectancy at age65 grows about 20 percent over the next 75years. The pessimistic assumptions assumethat such life expectancy grows 40 percentfor males and 32 percent for females overthis period. No one can know for sure, butgiven the potential developments in hightechnology medical care and other advancesover the next 75 years, the pessimistic assumptions certainly seem quite plausible andmay even underestimate the real possibilities.Indeed, from 1940 to 1990, life expectancy atage 65 grew about the same rate for males asassumed in the pessimistic assumptions andat an even faster rate for females.

Under these quite plausible "pessimistic" assumptions, tax revenues for all thesetrust funds combined start to fall short ofbenefits in 1996, only three years from now,as shown in Table 4. In that year, the federalgovernment would have to come up with anadditional $16.1 billion in 1993 dollars to paypromised benefits. The short-fall grows to$45.9 billion in 2000, and $100 billion in 2006,again in 1993 dollars.

Table 4 also shows that the annual generalrevenue contribution for SMI would grow to$77.6 billion in 1993 dollars by 2000. Counting the $45.9 billion Social Security deficit inthat year, the total general revenue burdenon the federal government to finance allpromised Social Security benefits is $123.5billion in today's dollars. By 2006, just overa decade from now, this total general revenue requirement grows to $205.3 billion,again even before the trust funds are exhausted.

All three Social Security trust funds combined actually hit their peak in nominaldollars under these projections in 1999, asshown in Table 5. In constant 1993 dollars,the combined trust funds would total $527.6billion in 1999, about the same as today.Indeed, the projected total 1999 trust fundassets would be sufficient to cover just overone year of benefit expenditures by themselves, compared to one year and fourmonths for the current trust funds. Consequently, under these projections, the expected Social Security trust fund buildup tohelp fund the retirement of the baby boomgeneration never occurs.

The combined trust funds under theseprojections would be exhausted in 2007just 14 years from now. Paying all SocialSecurity benefits in 2010 would require anincrease in the total Social Security payrolltax rate of about one-third, to about 20percent from the present 15.3 percent, asshown in Table 6. By 2020, the total SocialSecurity payroll tax rate would have toalmost double to about 27 percent. In otherwords, total Social Security revenues bythat date just 17 years from now would onlybe sufficient to pay about half of all SocialSecurity benefits. In later years, paying all


Table 4General Revenues Needed for Social Security and Medicare BeforeCombined Trust Funds Are Exhausted, "Pessimistic" Assumptions

Annual Deficits BetweenTax Revenues and Expenditures

for all Social SecurityTrust Funds Combined (OASDHI)

Constant 1993 Dollars(Billions)

Annual General Revenue Total General RevenuesSubsidies for Medicare Required for Social

Part 0 Security and MedicareConstant 1993 Dollars Constant 1993 Dollars

(Billions) (Billions)

19961997199819992000200120022003200420052006

16.120.927.636.545.954.762.871.180.489.8

100.0

61.364.568.773.077.682.185.890.595.2

100.6105.3

77.485.496.3

109.5123.5136.8148.6161.6175.6190.4205.3

Source: Calculated from 1992 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and DisabilityInsurance Trust Fund (April 3, 1992); 1992 Annual Report of the Board of Trustees of the Federal Supplementary Medical InsuranceTrust Fund (April 3, 1992).

benefits promised to young workers entering the work force today would require atotal Social Security payroll tax rate of over

40 percent, an increase ofalmost three timesthe current rate of 15.3 percent. In otherwords, projected Social Security revenues

Table 5Projected Reserves for All Social Security Trust Funds Combined

"Pessimistic" Assumptions

199319941995199619971998199920002001200220032004200520062007*

Nominal Dollars(Billions)

513.1574.6629.9664.9694.8715.7722.9713.3684.8631.5551.9444.7308.4121.6

Constant 1993 Dollars(Billions)

513.1540.0557.7561.7559.0548.4527.6495.7453.3396.6329.8253.4167.462.8

As a Percent of AnnualSocial Security Expenditures (OASDHI)

128.0%131.0%131.0%127.0%123.0%116.0%109.0%

99.0%88.0%74.0%60.0%45.0%29.0%10.5%

*Total Trust Funds combined are exhausted in 2007.Source: Calculated from 1992 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and DisabilityInsurance Trust Fund (April 3, 1992); 1992 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund(April 3, 1992).


*Assumes continued revenue from Taxation of Social Securitybenefits and trust any remaining funds needed to pay benefitsare raised by insuring payroll tax rates.

Source: Calculated from 1992 Annual Report of the Board ofTrustees of the Federal Old-Age and Survivors Insurance andDisability Insurance Trust Fund (April 3, 1992).

Table 6Total Social Security Tax Rates

Needed to Finance All Promised BenefitsAfter Trust Funds Are Exhausted*

(Current Rate Is 15.30/0)"Pessimistic" Assumptions

under these assumptions would be sufficientto cover only about one third of promisedbenefits.

But even this is not the worst plausiblescenario. Economic performance in the1990s could be like the 1970s, with unemployment rising and real wages falling behind rapidly rising inflation. At the sametime, high-tech medical breakthroughscould rapidly advance old-age life expectancy beyond even the "pessimistic" assumptions, while fertility rates could fall toWestern European levels at or below thepessimistic assumptions. Some or all ofthese quite possible developments wouldcreate even more gaping deficits, and require even more draconian tax increases topay promised benefits.

But tax increases approaching two tothree times current levels could never beadopted. Indeed, the current payroll tax isalready far too high, seriously hamperingeconomic growth and limiting job opportunities for today's workers. The payroll tax isbasically a tax on employment. To theextent it is borne by employers, it discour-

2010201520202025203020352040204520502055206020652070

19.78%22.97%26.97%31.49%35.52%38.38%40.08%41.21%42.54%42.28%46.33%48.18%49.90%

ages them from hiring. To the extent it isborne by workers, it discourages them onthe margin from working as much as oth~r

wise. The overall result is fewer jobs, lesswork, and slower economic growth. Here,as elsewhere, the result oftaxing something,in this case employment, is that there is lessof it.

Indeed, one study estimated that just thepayroll tax rate increases that went intoeffect in 1988 and 1990, raising the totalpayroll tax rate from 14.3 percent to 15.3percent, ultimately eliminated one millionjobs and reduced GNP by $25 billion peryear. 3 In a society supposedly deeply concerned about employment opportunities,the tax burden the government places onemployment is absurd. The debate shouldbe over payroll tax cuts, not increases. Inany event, increases of the magnitude necessary to pay promised Social Security benefits in the future are clearly economicallyand politically infeasible.

As a result, today's workers will neverreceive the benefits currently promised tothem by Social Security, even though theyare paying thousands ofdollars each year forsuch promised benefits, and will do so fortheir entire careers.

ConclusionThe long term financial crisis of Social

Security is not the only problem justifyingthe abolition of the system. The program'spayroll taxes are now so high that even if allthe promised benefits are somehow paid,these benefits would still represent low,below-market returns, on the thousands ofdollars today's young workers must pay intothe system each year for their entire careers.For most young workers the benefits wouldrepresent a real rate of return of around 1percent or less, and to many the returnwould be close to zero, or even below zero.These workers could now receive muchhigher returns and benefits investingthrough the private sector. Average-incomeworkers could accumulate over half a million dollars in today's terms by retirement,and more than a million for two-earner


average-income families, for the same sumsnow paid into Social Security. This makesthe inevitable inability of Social Security topay even the currently promised inadequatebenefits all the more troubling.

The Social Security benefit structure isalso rife with inequities, paying some workers much less in returns on their tax dollarsthan others. Indeed, many workers areforced to pay for benefits under SocialSecurity that they can never even qualify foror receive. Most fundamentally, Social Security deprives workers of the freedom tocontrol the large sums they are now payinginto the system each year. The long-termfinancial problems of Social Security shouldnot be allowed to obscure these many othercritical problems.

Social Security's financial problems, aswell as the other problems discussed above,can ultimately be solved only by shifting toa fully funded system of private savings andinvestment. Such a system would avoid theinherent vulnerability of pay-as-you-go financing and accumulate a vast reserve ofeconomically productive private sector assets to back up benefits. Through such asystem, young workers could also obtain themuch higher returns and benefits now avail-

able to them through the private market, inthe process accumulating large family nesteggs in their retirement accounts. Workerswould also have control and freedom ofchoice over the large sums they would payinto and accumulate in such a system. Thesame market returns would be available toeveryone, and workers could tailor theirbenefit packages to suit their personal needsand preferences. They would never ~ave topay for benefits they did not need or couldnot even qualify for.

Such private systems have been adoptedin recent years in Chile and, in part, in GreatBritain, and have been broadly popular inboth countries. There is no reason why sucha system could not be adopted in the UnitedStates as well. D

1. This statement was quoted over and over again from the1978 Annual Report of the Board of Trustees of the FederalOld-Age and Survivors Insurance and Disability InsuranceTrust Funds (Washington, D.C.: U.S. Government PrintingOffice, May 15, 1977), p. 3.

2. 1980 Annual Report of the Board of Trustees of theFederal Old-Age and Survivors Insurance and Disability Insurance Trust Fund (Washington, D.C.: U.S. GovernmentPrinting Office, June 17, 1980).

3. Aldona and Gary Robbins, Effects of the 1988 and 1990Social Security Tax Increases, Institute for Research on theEconomics of Taxation, Economic Report #39, February 3,1988.

Politicized MedicineThe right to health care services and benefits, which somany are proclaiming today, is merely the right to seizeincome and wealth from other individuals through thebody politic. The essays in Politicized Medicine providethe reader with a thorough understanding of why further government intervention into health care will makematters worse.Essays include: "The Economics of Medical Care,""Free Medicine Can Make You Sick," "Why I LeftEngland," "Socialized Medicine: The CanadianExperience," and "National Health Care: Medicine inGermany, 1918-1945."

175 pages, $14.95 paperback(Please add $3.,00 for shipping and handling.)


THE POLITICS OF THE"FAIR SHARE"

by Gary North

D aniel Patrick Moynihan, U.S. Senatorfrom New York and former Harvard

professor, has told the press not to blameCongress for spending too much money,since "we can't do anything about it."

Don't blame those who are leading thenation into a debt disaster? Don't blamethem because they cannot stop themselves? Senator Moynihan may have beenindulging in verbal playfulness-enhancinghis reputation for being a kind of mischievous Irish leprechaun. What he is saying,however, is that those who pass the legislation should not be held politically accountable. Because the voters continue to returnthese people to office, it appears that thevoters agree. Worse, it appears that thevoters want more of the same. They maysay that they want Congress to stop spending in general, but they are not willing tosay that Congress should stop specifically.If voters will not vote in terms of the needto stop spending specifically, their call tostop spending generally has no teeth init-no political sanctions. The politiciansrespond only to political rewards andthreats. There are no great rewards forspending less on specific projects. On thecontrary, there are penalties. The politicians

Dr. North is president ofThe Institute/or Christian Economics in Tyler, Texas.

vote accordingly: more spending on specificprojects.

Out of ControlIf someone is both out of control and is a

threat to others, he is supposed to be placedunder restraint by the civil authorities. Whathappens when it is the civil authorities whoare out ofcontrol? We are seeing the answerto this question. We are eyewitnesses to alooming disaster-a disaster financed by ourmoney and resources.

Political institutions in a free society donot become a threat to the voters overnight.The process takes a long time. Economistsprefer to explain the process of decline interms of incentives: Somehow, destructivebehavior is being subsidized. Political scientists explain such defects as products ofpoorly designed political institutions. Sociologists appeal to broad social forces thatpressure politicians to do destructive things.Moralists search for evil intentions on thepart of those who hold power. Theologiansmay go so far as to say that destructivepolitical orders are God's judgment on rebellious societies. Everyone has his favoriteexplanation. Everyone wants to lay blamesomewhere ... usually somewhere else.Almost everyone wants to evade responsibility. And that is the heart of the problem.

448

In the Hearts of the People

In the eighth century B.C., the prophetIsaiah warned the nation of Judah: "Howthe faithful city has become an harlot! It wasfull ofjustice; righteousness lodged in it; butnow murderers. Your silver has becomedross, your wine mixed with water: Yourprinces are rebellious, and companions ofthieves; everyone loves bribes, and followsafter rewards. They do not defend the fatherless, nor does the cause of the widowcome before them" (Isaiah 1:21-23). But hedid not lay the blame solely on the rulers; helaid it on the whole nation: "Alas, sinfulnation, a people laden with iniquity, a broodof evildoers, children who are corrupters!They have forsaken the LORD, they haveprovoked to anger the Holy One of Israel,they are turned away backward" (Isaiah1:4).

Isaiah recognized that the rulers wererepresentatives of the people. The rulers didevil things because the people in their ownlives were also doing evil things. This is notto say that all the people were guilty ofrebellion. The prophet Elijah was told that aremnant still existed in Israel: a small groupof seven thousand people who had notbowed to Baal (1 Kings 19: 18). But themajority of the nation was involved in rebellion. Their political institutions had notpreserved the nation from evil.

Friedrich Hayek wrote in 1944 in TheRoad to Serfdom that in a political order thatpromotes compulsory wealth transfers, theworst people will rise to the top. The lure ofpower increases when power is concentrated at the top. The ruthlessness requiredto rise to power in such a power-drivenpolitical order will ensure that the worst geton top. He wrote this in the era of AdolfHitler and Joseph Stalin.

Hayek's critics denied his argument.They denied that it was socialism as suchthat allowed Hitler and Stalin to come topower. They insisted that other factors musthave been involved. But from 1944 to the fallof the Soviet Union in 1991, the worst keptrising to the top in the countries with themost centralized economies.

449

Friedrich Hayek(1899-1992)

Hayek blamed the economic system: socialism. The West's socialists blamed thepolitical system: anti-democracy. The Communists blamed counter-revolutionary forces: saboteurs. But almost nobody blamedthe people who lived under tyranny.

Long before Lenin appeared on the scene,European intellectuals and politicians hadaccepted the economic premise of Communism: the need to establish a state that wouldredistribute wealth from the rich to the poor.It was not some raving liberal or radical whocreated the modern system of compulsorywelfare; it was the conservative Germanpolitician, Otto von Bismarck, who did so inthe late 1870s. The common people rejoiced,just as Bismarck knew they would. Eventoday in Germany there are millions ofcommon workers who still believe thatCommunism at least protected them andtheir jobs, despite their long-term poverty.The ideal of the welfare state still is dominant in the one society that experienced thenightmare of both National Socialism andInternational Socialism: Germany.

oa:«Ioa:~«~


The Politics of "Fair Shares"

When a politician speaks of everyonepaying his fair share of taxes, he alwaysmeans the rich should pay a higher percentage of income than the poor. Meanwhile,politicians offer to the middle class-theeligible voters who actually vote-their fairshare of the loot that will be stolen fromothers by means ofthe ballot box. Almost noone questions the legitimacy of using theballot box to confiscate the wealth ofothers.The debate centers around who should paytheir fair share-' 'someone else' ,-andthose who will collect their fair share: "us."

One question is never raised in public:What will be everyone's fair share of judgment when the political theft process produces economic disaster and political revolution? Everyone assumes that disaster canbe deferred at least until after the next election. Everyone assumes that the bills willcome due later: "Someone else will have topay them." But eventually, bills come due.

When they do, societies face their moment of truth. As Hayek says, the worst willthen be ready to rise to the top. Blame willbe placed, but on whom? On which groups?The politics of revenge will be the greattemptation. The politics of envy will have alarge constituency.

At that point the remnant must be prepared to announce the truth. What is thetruth? In the words of cartoonist Walt Kelley's Pogo Possum, "We have met theenemy, and he is us." This is simply anextension of Isaiah's prophetic observation:"All we like sheep have gone astray; wehave turned everyone to his own way; andthe LORD has laid on him the iniquity of usall" (Isaiah 53:6). This must be our confession before we blame the intellectuals andthe politicians.

The Culture of SpendingThe remnant faces a barrier to this truth in

today's pre-crisis political economy. Thosewho are willing to say no to their fair shareare few and far between, especially in thecenters of political power. Those who insist

on their fair share have the earof Congress.How did this happen?

James L. Payne has offered a unique andpowerful thesis to explain why this hashappened. The reason why Congress continues to pass huge spending bills in the faceof massive annual deficits, he says, is thatCongressmen live in a nearly closed universe in which the vast majority of thepeople they talk to or hear from want themto spend tax dollars on specific projects.This closed universe is the culture ofspending. 1

Lobbyists in Washington rarely lobbyagainst spending proposals. Constituentsrarely write letters opposing specific spending proposals. Colleagues rarely organizemajor defenses against specific spendingproposals. This even includes political liberals who we might think would opposealmost all military spending. Hearing nothing else, most politicians eventually learn toplay their favorite instruments in this symphony of spending.

If this thesis is correct, Payne says, thenthe longer a politician stays in Washington,the more consistently he will vote for spending. He will be assimilated into the culture ofspending. Payne offers statistical evidenceto show that this is exactly what happens.

Payne argues that the culture of spendingrests on two assumptions: the presumptionof government efficiency and the philanthropic fallacy. It is presumed by almosteveryone that the civil government can andshould use its monopolistic coercive powersto "make things better" by imposing negative sanctions (taxes) on certain groups inorder to grant positive sanctions (benefits)to other groups. This is the underlyingtheoretical assumption of the politics of thefair share.

Three-quarters of all government spending now goes to the purchase of personalgoods and services that individuals couldbuy for themselves, not the purchase ofusual public goods: police, courts, roads,etc. Citizens who oppose such wealth transfers are regarded as opponents of the publicgood, when in fact they are merely trying toretain more of their own wealth to do for

THE POLITICS OF THE "FAIR SHARE" 451

themselves what civil government plans todo for them, minus 50 percent for handling(approximately what it costs the government to administer its programs).

Just about every special interest wantsmore spending. Politicians find ways to givethis to them. The culture of spending rollson. Writes Rupert Penmant-Rea, the retiringeditor of the 150-year-old British weeklymagazine, The Economist: "If lobbying hasa shrine, it is in Washington, D.C. Noself-respecting lobbyist can feel his career isfulfilled until he has made the pilgrimagethere, and mastered the rites of the priesthood. There are about 80,000 lobbyists inWashington, twice as many as ten years ago.They even have their own American Leagueof Lobbyists, which I hope is a deliberateparody. "

But this phenomenon is not strictly American. "In all Western democracies," hesays, "lobbying has long since become amature industry." In early days, lobbyistsasked for more specific spending and specific tax relief. But in the 1970s, everyonegot into the game. Then the taxpayersstarted to complain. The politicians turnedto borrowing and inflating the currency."More spending, more taxes, more borrowing, more inflation: each stage of the sequence damaged general economic welfarewhile benefiting the organized rowdies."Today, he believes, the special interests arefacing governments that have run out ofresources. He predicts that governmentswill now turn to that age-old favorite: protectionism.2 This will reduce almost everyone's wealth.

The False Morality of theWelfare State

Every culture rests on moral presuppositions. The culture of state spending rests ona false one: the widespread belief that the

state is a morally legitimate instrument ofcoercive wealth redistribution. Until thismoral presupposition is abandoned by mostvoters-a moral conversion which mayhave to be stimulated by the attentiongetting occurrence of national bankruptcy(deflationary or inflationary)-there are nobelievable technical solutions to the cultureof spending. Technical political solutionsare necessary but not sufficient for overcoming the culture of spending, which is areligiously grounded viewpoint. This deeplyreligious impulse is made clear in JackDouglas' monumental book, The Myth ofthe Welfare State, which should be a companion volume to The Culture ofSpending.

In a society in which a majority of votersaccept the role of the state as a source ofwealth redistribution as morally valid, therewill be widespread negative consequences.Politically, voluntary cooperation will bereplaced by interest-group politics and theconfiscation of private wealth. The worstwill begin to rise to the top. This willeventually lead to an economic crisis and aloss of confidence in the prevailing socialorder. It is then that principled men must sayno to the politics of the fair share. They mustbe ready to present both amoral critique ofthe culture of spending and a technicalcritique. It is not enough to show enraged,envy-driven voters that the welfare state hasfailed to deliver the goods. Voters must bereminded that their own false morality hasled them into a crisis, and that repentance-a change of mind-is necessary forsocial healing. The culture of spending mustbe shown to be the moral low ground, notjust an inefficient solution to the problem ofscarcity. D

1. See James L. Payne, The Culture of Spending (SanFrancisco: leS Press, 1991).

2. "An editor's farewell," The Economist (March 27,1993), p. 17.

452

BOOKSSocial Security: What Every TaxpayerShould Knowby A. Haeworth RobertsonRetirement Policy Institute, Washington, D.C.Order from: Retirement Policy Institute,Publications Division, P.O. Box 240242,Charlotte, NC 28224 • 1992 • 321 pages$40.00 cloth; $14.95 paperback

Reviewed by John Attarian

M isunderstandings surrounding SocialSecurity are on a scale comparable to

its size and impact on our national life.Millions ofAmericans believe that they onlyrecover in benefits what they paid in taxes;that their taxes are "invested" in a "trustfund" accumulating assets to pay "insurance"; that benefits are "bought and paidfor, " an "earned right" which is "guaranteed." This misunderstanding, "the mostserious threat to Social Security in theimmediate future," prompted A. HaeworthRobertson, ChiefActuary ofSocial Securityfrom 1975 to 1978, to produce an excellenthandbook for taxpayers.

In clear, readable text, assisted with numerous helpful charts and tables, Robertsonfirst describes the basics of Social Security-the benefit system, costs, the payroll taxsystem, and the two basic methods forfinancing Social Security: current-cost financing ("pay-as-you-go"), whereby current taxes pay current benefits; and advancepayment, whereby current taxes accumulate a large trust fund to pay future benefits.The next 17 chapters address selected topics, e.g., actuarial assumptions, inflationand cost of living adjustments, how SocialSecurity determines behavior, and Medicare.

Robertson masterfully describes two keymeasures of Social Security's financial condition, "actuarial deficits" and "accruedliabilities," often confused in the publicmind. "Actuarial deficits" are the excess ofprojected future costs over projected future

income. Social Security's total actuarialdeficit, including Medicare, is an eyepopping $13.2 trillion over the next 75 years."Only the foolhardy would continue toignore the longer range financial problemsprojected for the Social Security program.. . . It is a question ofwhether we are makingpromises we will not be able to keep."

,,Accrued liabilities" are the presentvalue of future benefits which have accruedas of a certain date. As of January 1, 1990,Social Security's unfunded accrued liabilities were $12 trillion. That is, "we havemade promises worth $12 trillion more thanwe have collected in taxes [to honor them]. "

The situation is even bleaker than Robertson reports. The 1990 annual report ofSocial Security's Board of Trustees, whichhe consulted, predicted exhaustion ofSocialSecurity's trust funds in 2043 (2023 underpessimistic assumptions); 1993's reportprojects exhaustion sooner: in 2036 (pessimistically, in 2017). Medicare's 1993 reportprojects trust fund exhaustion in 1999 (pessimistically, in 1998).

Social Security's looming financial crisisis rooted in demographics. As the hugebaby-boom generation retires, Social Security's costs will soar, but our falling fertilityrate means fewer and fewer taxpaying workers will support each beneficiary. Thus theenormous actuarial deficits. "Unfortunatelythese long-term projections and their significance do not appear to be widely knownand understood by the public or the Congress or the Administration."

Social Security is widely misunderstoodpartly because its low initial cost fosteredcomplacency. Also, being poorly informedabout the program, the media misleads thepublic. And government use of insuranceterminology ("trust fund," "contribution,"etc.) creates a false impression of SocialSecurity's nature. Hence, government andpublic alike take an unacceptable "head inthe sand" approach.

For example, the Supplementary MedicalInsurance .program myopically estimatescosts only' three years ahead. And in avaluable discussion of the actuarial assumptions about our future fertility rate, produc-

tivity, and death rate which the Social Security Administration uses to project SocialSecurity's future status, Robertson cogentlyargues that the SSA's assumptions are toooptimistic, and that pessimistic projectionsshould be used, to avoid unforeseen negative developments.

Discussing Medicare, Robertson acknowledges that the "third party payer"principle contributed heavily to our soaringhealth care costs by destroying incentivesfor cost control, and cautions against national health insurance: "it is questionablewhether there is anything inherent in anationally designed and managed systemthat would not also work in a decentralized,free-enterprise system . . . . If individualfreedom of choice is relinquished to attain auniform social insurance structure, it maysoon be relinquished in other areas of life aswell. "

Social Security's march to the abyssprompts the thought that dismantling itwould be the wisest policy. Unfortunately(if understandably), Robertson asserts thatabolishing Social Security is "out of thequestion," that social insurance is "absolutely necessary" in modern society. Hedoes call for change, which might entail aseparate scheme for young people.

Also, Robertson inadvertently illustratesthe philosophical muddle of America's welfare state. He argues that Social Securitywill give us our money's worth if designedon the principles of maximum individualfreedom of choice consistent with the national interest, maximum individual opportunity and incentive, and government provision of only those benefits an individualcannot provide for himself. Yet he alsocontends that "Social Security is a programof social insurance. It emphasizes socialadequacy. It pays benefits according topresumed need, " and that in such a program"no attempt is made" to relate a givengroup's benefits to the taxes it paid to qualifyfor them. That this is an admission thatAmerica's largest welfare program appliesthe evil Marxist principle "From each according to his ability, to each according tohis need," escapes his notice.

453

Nevertheless, Social Security's meritsoutweigh these flaws. Its thoroughness, accessibility, and comprehensiveness make itindispensable for everyone concerned aboutSocial Security, including opponents.

Best of all, Robertson is unflinchinglyhonest. He repeatedly warns taxpayers thatthey face substantially higher taxes unlessSocial Security is radically altered; that thenotion of entitlement is dangerous; thatmisunderstandings about Social Securityare abetting an ' 'alarming' , decline in asense of responsibility for oneself; that future costs will probably exceed the SSA's"most likely" projections; that general revenue financing would encourage disregardfor the future; and that "It is clearly inappropriate . . . to rely upon some undefinedgood fortune to enable us to continue ourpresent Social Security program withoutpaying substantially higher costs." Heemerges as a believer in Social Securityhaunted by a vivid awareness of its costs andperils, and blessed with an honest man'sdetermination not to disserve his reader byminimizing them. After so much calculateddeceit in federal budget policy in recentyears, Robertson's courage and candor arejust what the doctor ordered. D

John Attarian is a free-lance writer in AnnArbor, Michigan with a Ph.D in economics, andan adjunct scholar with the Midland, Michiganbased Mackinac Center for Public Policy.

Mises: An Annotated Bibliography: AComprehensive Listing of Books andArticles by and About Ludwig vonMisesCompiled by Bettina Bien Greavesand Robert W. McGeeThe Foundation for Economic Education,Inc., 1993 • 408 pages. $29.95

Reviewed by Israel M. Kirzner

This is, quite simply, an extraordinarywork. The reference, in its title, to an

"annotated bibliography," is grossly, al-


most laughably, inadequate as a descriptionof it. Even its subtitle fails to convey itsphenomenal and fascinating scope. Thisbook not only provides a "comprehensivelisting" of relevant material; it provides inmost cases, excerpts from, or succinct characterizations of, the material referred to.This has resulted in an encyclopedic treasurehouse of materials and information regarding Mises, his works, and the reactionsofhundreds upon hundreds ofreviewers andauthors to his ideas and his writings. Dozensof future doctoral dissertations could beplanned based on the wealth of informationand bibliographical citations included here,covering sources spanning some 80 yearsand translated from many languages. As abibliographical compilation this is utterlyunique. Its compilers richly deserve doctorates of their own for the scholarship andindefatigable research which this work soobviously reflects.

Some of the material included here (forexample, the full translations of a number ofthe reviews-including one by Knut Wicksell-of Mises' 1912 first German edition ofThe Theory of Money and Credit) will beextremely valuable for the historian of economic thought. Many of the excerpted reviews of the early editions of Mises' Socialism provide fascinating insights into theinterwar mentality on the topic. It is certainly not surprising to read that as ardent asocialist as Harold Laski described Mises'book as an "extravagant and often ignorantdiatribe" (p. 162). It is an eye-opener to readthat as eminent an economist as FrankKnight dismissed the entire debate concerning economic calculation as "largely soundand fury," declaring that "Socialism is apolitical problem . . . and economic theoryhas relatively little to say about it" (p. 162).Some of the material provides arresting(often wry) commentary on personal aspects of Mises and his relations with otherscholars. For example, one reads (on p. 253)with a certain fascination, University ofVienna Professor Hans Mayer's tribute toMises on his 70th birthday, bearing in mindMises' own description of Mayer as havingpreoccupied himself, during Mises' years at

the University ofVienna "with mischievousintrigues against me (Notes and Recollections, p. 94)." Among so many thousands ofpieces of information-the index containsmore than 2,500 entries-certain parallelsand contrasts pop out, adding to the interestof the volume. (As an example: A passagecited [on p. 322] from a German-language1974 book by Engel-Janosi concerningMises' openness in his famed Privatseminar, to the articulation of opposing views,seems to be a verbatim parallel to a 1973German-language newspaper article byM. Steffy Browne, cited on p. 311.)

If the bibliography ofMises' own works isspectacularly exhaustive (going far· beyondthat outstandingly valuable earlier bibliography compiled by Bettina Bien Greavesand published by The Foundation for Economic Education in 1970), it is the "listing"of books and articles about Mises (goingonly up to 1982-while the book reviewsinclude items from later years) which is mostextraordinary. CertainlY no economist hasever before been accorded this kind ofattention. Listed are not only books andarticles about Mises, but books and articlesin which the slightest reference to Mises ismade. One can only marvel at the detectivework that must have gone into the trackingdown of such references in unpublisheddoctoral dissertations (as on pp. 325, 332,349, 355, 371), in the autobiography of apriest (p. 347), in a letter to Business Week(p. 324), or in a 1981 Spanish-languageBuenos Aires article arguing that Mises'views do not contradict those of Aquinas(p. 381).

I would be less than candid if I did notregister my fear that the inclusion of manyreferences (for example those to somewhatrepetitious laudatory assessments of Misesat special commemorative occasions, orthose to rather trivial comments, or thosewhich appeared in obscure, ephemeral publications) may lead the critical outsidereader to dismiss the entire volume as apious exercise in hagiography. This wouldbe most unfortunate and quite unfair. Although the inspiring and utterly splendidloyalty of Bettina Bien Greaves to Ludwig

von Mises shines through this work, she andProfessor McGee have bent over backwardsto include the negative (often outrageous!)comments of the critics of Mises, as well asthe praise ofMises' admirers. Certainly thiswork valuably records the reactions of hundreds of writers to the work of Mises, thechampion ofliberty. But its lasting scholarlyvalue lies in its being an important, objective,and remarkably researched source concerning Mises, the eminent economic theorist.

I confidently expect that many of us willbe consulting this wonderful volume againand again. Bettina Bien Greaves, RobertMcGee, and The Foundation for EconomicEducation are to be warmly congratulatedon this valuable contribution to the growingMises literature. As the value ofMises' owncontributions to economic understandingwill come to be more and more widelyrecognized in the years to come, the significance of the patient and dedicated researchwhich culminated in this work will be sure toincrease correspondingly-and to be correspondingly appreciated. DDr. Kirzner is Professor of Economics at NewYork University.

The Ruling Class:Inside the Imperial Congress

by Eric FeltenThe Heritage Foundation, 214 MassachusettsAvenue, N.E., Washington, DC 20002222 pages. $24.00 cloth; $2.95 abridgedpaperback edition

Reviewed by Peter F. Steele

T 'he Ruling Class: Inside the ImperialCongress is a definitive study of the

workings of the late twentieth-century federal government using Congress as the focalpoint. It is very successful in its descriptionofa byzantine Congress and its schemes and"scams. " It is an ideal companion to MartinL. Gross' The Government Racket: Wash- .ington Waste From A to Z since it providesa window to the wasteful programs and pork

BOOKS 455

barrel projects born in a Congress bent uponcreating a "Barnumoconomy" in a "Barnumocracy. "

Probably the most cogent evidenceFelten's work provides is that many Congressmen have truly abdicated their responsibilities as legislators while avoiding accountability for the laws made and thepositions taken.

Chapters one through eight, respectivelytitled as "Sleight of Hand," ·"The Bullies'Pulpit," "Legislating Backwards," "StaffInfection," "The Grand Inquisitors,""Other People's Money," "Not-So-Innocents Abroad," and "The Re-election Machine," all define the present system, contradictory to the limited and fair governmentoriginally propounded by our Founding Fathers after the American Revolution. Chapter nine enumerates helpful suggestions forhonest reforms in Congress. Those in oursociety and government who do care aboutmatters across political, economic, and social lines would find the material in thischapter worth the cost of the book. DMr. Steele is afree-lance writer from Stamford,Connecticut.

Prosperity Versus Planning: HowGovernment Stifles Economic Growth

by David OsterfeldOxford University Press. 285 pages. $39.95cloth; $19.95 paperback

Reviewed by William H. Peterson

David Osterfeld in his Prosperity VersusPlanning, a scholarly and most worth

while book supported by the Cato Institute,argues on both theoretical and empiricalgrounds that government planning and economic growth don't mix, that the interventionist paradigm spells planned chaos, that itis deadly to development at home andabroad, that, again, it is wiser to work withthan flout the law of opportunity cost.

Professor Osterfeld accordingly sees foreign aid as mainly counterproductive to


Third World development, underwriting asit does entrenched governments which soondetect a way to maintain power and accumulate private wealth in Switzerland andother havens for "hot money. " He cites thework of Lord Peter Bauer and Africaneconomist George Ayittey on how foreignaid has grievously set back African andother development. And he sees that attacksin the United Nations and elsewhere onforeign investment and multinational corporations are blind to the benefits of privateforeign investment, technology transfers,and job creation in viable Third Worldindustries competing in world markets.

He especially excoriates both the U.N.' sBrandt Commission Report, North-South:A Program for Survival, and the UnitedNations Code of Conduct on the Transfer ofTechnology adopted in the early 1980s.These documents condemn "market failure" and recommend government-to-government assistance along with Third Worldinterventionism in such forms as government regulation, price controls, and stateowned enterprises so to control what theUnited Nations regards as inappropriatetechnology. Said the Brandt Report, forexample: "The poorer and weaker countrieshave not been able to raise much money oncommercial terms. For them, Official Development Assistance or aid is the principalsource offunds. . . . An increase in total aidmust remain a high priority . . . . The overall flow of wealth must increase . . . . Theoverwhelming proportion of aid money hasbeen usefully spent [and has] done much todiminish hardships in low-income countries."

Professor Osterfeld rejects these tenets asuntrue and holds the free market and notgovernment intervention is a much moreeffective and far less costly method of regulation. Here he stresses the role of economic calculation in explaining why stateowned enterprises and central planning ingeneral are doomed to failure. Economiccalculation, based on free markets, per-

ceived opportunity costs, and private property rights, permits the price system including interest rates to best "regulate," i.e.allocate, goods and other scarce resourcesto their most urgently desired applications.Economic calculation is at the center ofeconomic development, the very secret ofthe North's long-time economic success andperhaps of Western Civilization itself.

The plight of the interventionists andsocialists, notwithstanding elaborate planning boards and Five-Year Plans, is thatwithout the benefit of economic calculationthey are flying blind, that they are the bland·leading the bland. And hence they are wideopen to corruptible temptation and perversepolitical pressures. Osterfeld quotes Mises:"No single man can ever master all thepossibilities of production, innumerable asthey are, as to be in a position to makestraightaway evident judgments of valuewithout the aid of some system of computation. "

Amen. D

Dr. Peterson is an adjunct scholar at the Heritage Foundation and a contributing editor ofThe Freeman.

As we preparedfinal proofs for this issue,we learned ofthe sudden death ofDr. DavidOsterfeld on September 26,1993, at age 43.Dr. Osterfeld was a professor of politicalscience at St. Joseph's College, Rensselaer,Indiana, and an adjunct scholar at theHeritage Foundation.

David Osterfeld's first Freeman articlewas published in 1972 while he was a graduate student at the University ofCincinnati.Over the years he contributed more than adozen articles-all carefully researched,meticulously doc~mented, cogently written.His September 1993 Freeman essay, "Overpopulation: The Perennial Myth," was reprinted in Man and Nature, FEE's recentlypublished anthology on environmentalissues.

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