Video: Ron Paul’s subcommittee hearing on the Federal Reserve

Tucked away quietly amidst the big headlines about contempt charges against Eric Holder and the Supreme Court’s ruling to uphold Obamacare as a Constitutional tax, a lesser known, but very important story seems to have all but slipped through the cracks. The U.S. House Subcommittee on Domestic Monetary Policy and Technology, chaired by Ron Paul, held it’s latest hearing on monetary policy and the Federal Reserve. Bringing down the Fed has been a lifelong passion of Paul’s, but only within the last few years has the idea gained much traction with others in Congress.

Since February of 2011 a total of 13 hearings have been held by Dr. Paul’s subcommittee. The latest entitled “Fractional Reserve Banking and the Federal Reserve: The Economic Consequences of High-Powered Money” was held on June 28th. Three distinguished witnesses were present to answer questions about the Federal Reserve’s policies and the dangers they pose to the United States’ economic and fiscal health.

The three witnesses this time around were, Dr. John Cochran, Dr. Joseph Salerno, and Dr. Lawrence H. White.

Dr. Cochran is an Emeritus Professor of Economics and Emeritus Dean at the School of Business at the Metropolitan State College of Denver.
Dr. Salerno is a Professor of Economics at the Lubin School of Business at Pace University.
Dr. White is a Professor of Economics at George Mason University.

Dr. John Cochran’s written testimony, entitled “Fractional Reserve Banking and the Central Banking as Sources of Economic Instability: The Sound Money Alternative” is available for reading in PDF format here.

Dr Joseph Salerno’s written testimony is available for reading in PDF format here.

Dr. Lawrence H. White’s written testimony is available for reading in PDF format here.

If you’d prefer you can watch the hearing below.

June 28, 2012 U.S. House Subcommittee on Domestic Monetary Policy and Technology – “Fractional Reserve Banking and the Federal Reserve: The Economic Consequences of High-Powered Money”

A complete list hearings by the House Subcommittee on Domestic Monetary Policy and Technology regarding monetary policy and the Federal Reserve is available at the Financial Services website.


What does a free market healthcare system look like?

Excerpts from an article entitled The Economics of US Healthcare at

US healthcare is no longer affordable for the average American. Healthcare is a scarce economic resource. Like all scarce resources, the production, distribution, and consumption of healthcare is best left to the free market. Any solution to healthcare must make healthcare more affordable.

The solution requires four basic changes. The four changes are simply the elements of a truly free market in healthcare as opposed to the convoluted system of cartels in place now.

1. Limit insurance to insurable conditions and eliminate all regulatory barriers to the provision of health insurance

Health insurance is a contentious topic, especially among healthcare providers. The healthcare profession tends to view insurers as the enemy. One cause of this contentious relationship is that healthcare providers provide healthcare to their patients, but the providers receive their payment from the insurance companies. Medicare is largely responsible for this change. Patients have come to expect that they will receive everything and that the insurer will pay for it. If patients were responsible for their payment and patients negotiated with insurers for reimbursement, patients would be far more selective about what care they received.

The concept of preexisting conditions is also a point of contention within the healthcare industry. On the surface, it does not seem fair that someone pays their premium for many years, then, after developing a life-threatening condition, they are denied further insurance.

Yet the concept of preexisting conditions is necessary for insurance companies to remain solvent. Nobody would expect an insurer to sell a term life insurance policy to a corpse. Nobody would expect an insurer to sell a homeowner’s policy to somebody whose home was already destroyed by a tornado. Health insurance is no different.

A free-market insurance industry would be allowed to sell policies against the treatment of leukemia. This treatment is catastrophically expensive, but because the condition is very rare, large numbers of people can pool their risk and make the premiums very inexpensive. No insurer is going to sell a policy against leukemia to somebody who has leukemia for the same premium as it would sell it to the general population. Any attempt by government to force insurers to cover preexisting conditions is a socialization of cost rather than an insurance.

Many disease conditions require therapy for long periods of time. Anyone who purchases insurance for the next year becomes vulnerable to losing insurability after the policy expires. The solution is to have insurance policies for many years or life. With a condition such as leukemia, there is no reason that insurers could not and would not offer policies covering people for their entire lives as long as they had no signs of leukemia at the time they enroll. The main reason we do not have health-insurance policies for life is that insurers are forced by government to cover conditions that are not insurable, such as the example of screening colonoscopies I gave earlier. The costs required to cover these uninsurable conditions for life make the policies so expensive that nobody will purchase them.

Rare conditions can be insured cheaply, but common conditions necessarily become more expensive to insure. At some prevalence, it becomes foolish to cover a condition via insurance rather than paying for it out of pocket when it arises. Uninsurable conditions such as the screening colonoscopy have to be paid for by the beneficiary. Any other payment scheme is a socialization of cost.

2. Eliminate the barriers to the production and delivery of healthcare, including licensing restrictions

Doctors and nurses are both cartels. It should come as no surprise that these cartels are resistant to competition. As with all cartels, barriers to entry increase over time, reducing competition. And as with all cartels, barriers to competition are disguised as assurances of quality. Quality is subjective; different consumers have different priorities. Licensing requirements are attempts to objectify what is purely subjective.

Standards used as points of information, on the other hand, are objective and can be used by consumers to determine their choice of provider. A truly free market in healthcare would have no licensing requirements, and assurances of quality would be handled via ratings agencies or certification boards. Decisions about which quality standards were important would be determined by consumers rather than providers.

Would anyone be able to set himself up to perform open-heart surgery? No! Open-heart surgery is a complicated procedure requiring many skilled people working together and a huge capital outlay for facilities. Neither the anesthesiologists, nor the technicians, nor the nurses, nor the hospitals are going to work with a quack heart surgeon; they have no desire to share liability with the quack.

Many doctors have the misconception that without licensure there would be no standards. Hospitals have credentialing processes. It is very likely that the process of credentialing would have little or no change in a free market. Hospitals would demand letters of reference and would continue to inquire where a heart surgeon received training.

Healthcare is not a single entity. There is a continuum of services with a continuum of expertise. The market is best suited to match expertise with complexity of service. Consumers would demand considerable expertise of heart surgeons. They would not likely demand the same expertise for the treatment of a sore throat. Certification of expertise would remain an important source of information, but consumers would decide what value to attach to any certificate, rather than certificates barring entry into any given service. Certifiers, including the educational institutions that grant degrees, would either be attentive to consumer demands or lose their prestige.

A free-market healthcare system would develop tiers of care. The lowest tier would provide services for the most common ailments. For example, one might see an alcove in Walmart where one could have blood pressure checked and routine blood tests performed. People would pay for these services out of pocket, and intense competition among providers would keep price down. The use of physician assistants and nurse practitioners to deliver primary care is a step in that direction.

A bone-marrow-transplant team would serve a much larger community. Teams would compete on the basis of quality of service. Consumers would purchase insurance against the need for a bone-marrow transplant. The insurers would set standards of quality for teams they would work with. Any attempt by insurers to compromise quality for cost on such a high-end service would likely lose insurance customers because the effect on premiums would be small. Cost would not be limitless, however. The market would determine the optimal price of quality rather than some government committee.

What about quacks? There will always be quacks selling snake oil. Licensure simply guarantees that the quacks are licensed quacks, which are arguably more dangerous. A market would develop information about providers. Just as consumers consult websites for product information before purchasing a car or a computer, they would consult analogous sites for information on physicians in their area.

What about snake oil? If a consumer wanted to try snake oil, they would be free to do so without a licensing agency standing in their way. Sometimes the official “experts” are quacks. For example, in the 1960s the medical establishment was going to wipe tuberculosis off the face of the earth by treating everyone with a positive skin test for TB with the drug INH. The experiment had to be stopped, however, when too many people died of liver failure.

Sometimes it is not clear what is snake oil and what is good medicine. There are many controversies today about nutrition, vaccines, and cholesterol. The market is the most efficient way of resolving these controversies, as long as people have access to information. Experts should be free to give advice and warnings, but consumers should be free to accept or reject the advice of experts.

Cartel privileges do not come without strings attached. The regulatory burdens on healthcare providers are the prices paid for privilege. Providers are being told what questions they must ask, how they must record the answers, what tests must be ordered, and what treatments must be prescribed. Pay-for-performance standards are being developed for hospital length of stay. If patients typically require four days of hospitalization to recover from pneumonia, then HHS will wave a magic wand and decree that hospital stays longer than three days constitute waste, fraud, and abuse. Patient therapy will be decreed the same way fuel-economy standards were imposed on American automobile manufacturers. That did not turn out too well for the American auto manufacturer.

Regulatory burdens plague American business in general and US healthcare in particular. There are so many regulations that no provider can possibly be aware of them all. Lawyers and consultants must be hired to advise what the law actually means. The complicated nature of the regulatory environment is intentional. When the law is so complicated that nobody understands its boundaries, then government agencies can terrorize every provider about compliance with the law.

3. Eliminate the barriers to the production and delivery of medicines and medical technology, including patents

Intellectual property (IP) has important implications for the cost and availability of pharmaceuticals and medical devices. Medicine tablets and pacemakers are both things that require property rights. Only one person can use a medicine tablet or pacemaker at a time, so property rights allow the owner to decide use and avoid conflicts with other people who would like to use the items.

Ideas, on the other hand, are not exclusive. My use of an idea, whether the idea represents a molecule or a gadget, cannot possibly impair the use of the same idea by another person or many other persons at the same time. Ideas do not require property rights to avoid conflicts. Patents serve only to grant monopoly privileges, thereby raising costs and decreasing innovation.

A common defense of pharmaceutical patents is that people would not invest such enormous amounts of capital to have drugs approved by the FDA without monopoly privileges and the extra profit they confer. The problem here, however, is the FDA and its barriers to production rather than the absence of monopolistic intellectual property rights. Inventors would have enormous advantages of first use of any idea. The retention of that advantage would require the development of brand loyalty. In a world without the FDA and patents, inventors would have to demonstrate safety and efficacy to the public, rather than government agencies dictating which drugs are to be used in which situations. Drug costs would be dictated by consumer demand rather than arbitrary decisions made by Medicare Part D. Competition would lower drug costs and improve delivery systems.

The United States has a peculiar combination of patents and cartels to ensure that pharmaceuticals are outrageously expensive. Drug companies are granted monopoly privileges over the supply of pharmaceuticals, and doctors are granted monopoly privileges over the distribution of pharmaceuticals.

Patients should be able to purchase whatever medications — including narcotics — they wish to use without the permission of a doctor. Patients would continue to seek advice from doctors about how best to treat their signs and symptoms of disease. Doctors would continue to diagnose ailments and make recommendations about how to treat them. Patients would be free to accept or reject that advice. Consider a patient with high blood pressure. The doctor prescribes lisinopril. The patient accepts the advice, he buys the medication, and his blood pressure falls to normal levels. After 20 years of taking lisinopril, why should the patient require a doctor’s permission to continue taking the medication?

Pharmaceuticals are much cheaper in Canada where US patent laws are not obeyed. Pharmaceuticals are much cheaper in India where a prescription from a physician is not required. The usual claims and concerns about patient safety are not validated by the experiences in Canada and India.

Doctors and nurses in the United States are caught in the middle of the war on drugs. Our lives are made miserable by preventing people from obtaining medications like Lortab. Pain cannot be objectively measured, so healthcare workers are forced to decide if patients are in pain or seeking euphoric effects. There are situations, such as the inpatient care of patients with sickle-cell anemia, where this conflict interferes with the proper care of the patient. Doctors should sell advice rather than dictate what medicines people take for their problems.

4. Eliminate the socialization of healthcare costs and the subsidies for being sick.

A subsidy is a government price control where members of a group pay less than the market cost for an item or service. All subsidies lead to a desire by those outside the privileged group to be included in the group. All subsidies lead to demand for the item being higher than it otherwise would be, and that always leads to prices being higher than they otherwise would be. Subsidies for illness are no exception. As a physician, I am asked to do more than diagnose illness and recommend therapies. I am asked to write letters excluding patients from jury duty. I am asked to write letters excusing patients from paying their electric bill on time. I am asked to sign applications for privileged parking spaces. I am asked to certify eligibility for scooters.

Prices are signals to producers and consumers on which behaviors would be profitable to change. Prices are set by voluntary exchange, which is the free market. Without voluntary exchange there are no prices, and without prices neither producers nor consumers know what to do. Subsidies interfere with the price mechanism. People will always demand more of something when they are spending some other person’s money.

Read the entire article, The Economics of US Healthcare by Gilbert G. Berdine, M.D.

What is Medicare, Really?

Excerpts from an article entitled, “The Economics of US Healthcare ” by Gilbert G. Berdine, M.D.

Unlike the tornado, not all healthcare costs are insurable events. There is a current recommendation for people aged 50 years or more to have a screening colonoscopy every ten years. This leads to earlier detection of colon cancer and greater likelihood of curative therapy. While a screening colonoscopy might be a very good idea, the age of 50 is not an insurable event. There is no risk to share. If one desires a colonoscopy at age 50, one must save the required funds before the 50th birthday. Any attempts to cover screening procedures by insurance are schemes to socialize cost.

The promotion of Medicare as health insurance for the elderly has led many Americans to expect that health insurance should cover all their healthcare costs including costs that are not insurable. The only way existing beneficiaries profit by inclusion of noninsurable costs is to force people with lower risks to join their insurance pool. The end result of this process is the demand for universal coverage that covers everything related to healthcare.

Medicare is called the third rail of politics. It is a very popular program with its beneficiaries. An examination of the costs and benefits to beneficiaries makes it clear why it is so popular. The Medicare tax is 1.45 percent of all income. The employer pays the same amount as an additional tax (the self-employed pay 2.9 percent to cover both employee and employer portions). A Medicare beneficiary would have to earn over $358,000 as an employee for the Medicare payroll tax to cover his or her average Part A benefit of $5,205.

According to the Census Bureau, in 2009 the mean income for persons 65 years or older was $29,718. The median income for this group was $19,167. As a group, the elderly pay $430.91 in premium for their Part A benefit of $5,205. Half of this elderly group paid $277.92 or less. The socialization of healthcare costs for the elderly via Ponzi finance has led to a national mythology of health insurance: Americans expect to pay less than $300 in “premium” for over $5,000 of healthcare.

Medicare has three major components. Part A pays for hospital and other inpatient services. Part B pays doctors’ fees and other fees for outpatient tests and procedures. Part D is the prescription-drug benefit. Part A is paid for largely by the Medicare payroll tax.

There is a common misconception that Medicare taxes pay for all Medicare services. Some Medicare beneficiaries pay an optional Part B premium to receive Part B benefits. This premium is only 25 percent of Part B income and only 27 percent of Part B expenditures. Medicare Parts B and D are both financed largely through general revenue. General revenue was the source of $211.7 billion of Medicare’s total income and expenditures. That is a lot of money even by the standards of the US Congress in 2011.

The Medicare trustees gave a warning about the coming bankruptcy of Medicare. This warning was based on the negative $0.7 billion in the Medicare trust fund. The trustees make projections about when the trust fund will be depleted. Some of the assumptions made for this projection seem wildly optimistic. One example is the trustees’ projection that the growth in expenditures will average 2.98 percent to 2019. The historical data show growth in expenditures of 12.81 percent since 1970 and 8.46 percent since 2000.

A number of people, including the former US comptroller General David Walker, have warned about Medicare’s unfunded liability. This liability is due to the demographics of the baby boom. As the baby boomers retire, they will be expecting payments. Income into Medicare will be insufficient to make these payments. The unfunded liability is the amount of money that is necessary to add to the current trust fund to ensure these payments can be made. The size of the unfunded liability depends on economic assumptions, and estimates range from $50 trillion to over $100 trillion. Regardless of which assumptions are used, it is clear that the money will not be there.

Read the full article.

The Economics of US Healthcare – Gilbert G. Berdine, M.D. – Mises Daily

A common misconception is that Medicare is a healthcare provider. The reality is that Medicare does not provide a single cent of healthcare. Medicare guarantees payment for certain services under certain restrictions. If either the payment becomes too low or the restrictions become too onerous, the healthcare for elderly people will vanish.

A far more damaging myth is that Medicare is a health-insurance plan for the elderly. Medicare is not insurance. Medicare is a scheme to socialize the healthcare costs of the elderly to the much larger group of working people. Medicare is not even a fiscally sound scheme to socialize costs; Medicare is a Ponzi scheme. Lest anyone think my characterization is hyperbole, here is what the US Securities and Exchange Commission states about Ponzi schemes:

What is a Ponzi scheme?

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.

Why do Ponzi schemes collapse?

With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.

The new investors are new workers entering the labor force. The promised return on investment is that healthcare will be paid for starting at age 65. Rather than funding a defined-benefit pension plan, the monies paid in are spent immediately for elderly beneficiaries, and anything left over is lumped together with general revenue. This particular Ponzi scheme is collapsing due to a large number of baby boomers cashing out. The Ponzi nature of Medicare has completely distorted the American view of insurance beyond recognition.

via The Economics of US Healthcare – Gilbert G. Berdine, M.D. – Mises Daily.