Without pointing to evidence, the report asserts that the financial crisis was the product of irrational decisions both by lenders and borrowers and of major gaps in the structure of financial regulation. Ignored is the role of error and inattention by the regulators, notably including the Federal Reserve and the Securities and Exchange Commission; the deregulation movement in finance; lax enforcement of the remaining regulations; and failures of understanding by the economics profession. And thus the role of the Fed in forcing interest rates too far down, and keeping them too far down for too long, during the early years of this decade, and in neglecting growing signs of housing and credit bubbles (caused by low interest rates), goes unmentioned. Since senior economic officials in the Administration were implicated in these failures of regulation, and since the thrust of the report is that we need more regulation, it is not surprising that the report should give regulators a pass.

It should be a rule of regulatory reform that before the regulatory structure is changed, which is likely to be a time-consuming endeavor with at least some unanticipated consequences, the government make sure that the regulators are employing their existing powers to the full. And indeed just last week the SEC announced that it is imposing reserve and capital requirements on money-market funds, requirement that had they been in force last September would have reduced the systemic consequences of Lehman Brothers' collapse (see below). Had this rule been honored by the authors of the report, there would have been much less emphasis on structural reform, as in the proposed creation of new regulatory entities and the proposed expansion in the powers of the Federal Reserve.

The centerpiece of the Administration's proposal, and the only specific proposal in the report that I will discuss in this comment, is the proposal to authorize the Federal Reserve Board to regulate any financial enterprise that creates "systemic risk." The Fed would designate the enterprise a "Tier 1 Financial Holding Company," and having done so would have the same (perhaps even greater) powers that it has over commercial banks that are members of the Federal Reserve System. Its focus would be on "macroprudential" regulation--that is, on assuring that a failure of the Tier 1 FHC would not imperil the financial system as a whole. The Fed would be expected to limit the leverage of these firms (the debt-equity ratio in their capital structure) and take other measures to reduce the risk of failure, for example by forbidding them to engage in proprietary trading (that is, speculating with their assets). To prevent the gaming of this new regulatory power by firms that would go up to the very edge of whatever line was chosen to separate Tier 1 FHCs from other nonbanks, the Fed would have a broad discretion in so classifying financial firms.

Financial firms that are not commercial banks are now significantly larger sources of credit than banks, and they can create systemic risk. An example is (or rather was, because it is now defunct) Lehman Brothers, a broker-dealer. Lehman, among its other activities, was a dealer in the commercial paper and money-market markets. It would issue its own commercial paper (short-term promissory notes) to money-market funds and use the money it borrowed in this manner from the funds to buy commercial paper from (that is, lend to) nonfinancial firms with sterling credit records, such as Proctor & Gamble, that finance their day-to-day operations by issuing commercial paper. When, last September, Lehman Brothers became insolvent because of losses in other parts of its business, it could not repay its loans from the money-market funds or lend money to issuers of commercial paper. The commercial-paper and money-market funds froze, contributing to the credit crisis. Lehman was not among the largest nonbank financial enterprises, but because of its interdependence with other participants in the overall credit market its sudden collapse had serious repercussions.

Although the Federal Reserve claims that it lacked the legal authority to save Lehman from collapsing by lending it the money it would have needed to stave off bankruptcy, the claim is unpersuasive. Section 13(a) of the Federal Reserve Act authorizes the Federal Reserve to lend money to a nonbank provided the loan is "secured to the satisfaction of the Federal reserve bank." Lehman did not have good security for the loan it needed, but, in the emergency circumstances of a collapsing global financial system, the Fed could, it seems to me, have been "satisfied" with whatever security Lehman could have offered. If this interpretation seems a stretch, Congress could amend the statute easily enough to add "in the circumstances" or "in the sole discretion of the Federal Reserve Board," after "satisfaction," or it could delete the reference to security altogether.

But the fact that the Federal Reserve, has, as it seems to me, all the power it needs to prevent a nonbank that poses systemic risk from failing, and in failing carrying part or all of the entire financial system with it, is not a rebuttal of the Administration's proposal, because the government would like to be able to prevent the collapse of such enterprises rather than having to spend tens or hundreds of billions of dollars to save them. The first question to ask, however (it is not addressed in the Administration's report), is whether these enterprises that are not banks but might create systemic risk are already regulated. I mentioned money-market funds, which are regulated by the SEC, as are broker-dealers. One might think that closer liaison between the SEC and the Fed would go far to minimize the "macroprudential risk" posed by broker-dealers. Most important, if the Federal Reserve simply identified the firms that it believes pose systemic risk, a combination of market forces, public and legislative opinion, and the implicit risk of regulation would probably impel the firms to take steps to reduce the systemic risk that they pose. This possibility should at least be explored before the Federal Reserve is given enhanced regulatory powers.

After all, the principal reason--or so at least I think--for the financial collapse last September was that the regulators were asleep at the switch. They are now awake, indeed insomniac. If the Federal Reserve needs some additional staff, and perhaps authority to require financial information from financial enterprises that it does not at present regulation in order to identify the firms that pose systemic risk to the financial system, and perhaps some minor tinkering with the Federal Reserve Act to clarify its existing authority to deal with nonbank banks, these modest reforms can be adopted without restructuring the entire system of financial regulation, as the report proposes.

I am pessimistic about a recovery by the newspapers. One reason is the current economic situation. A serious, protracted economic crisis can result in changes in consumer behavior that persist after the end of the crisis. A change in consumption, even in some sense involuntary, can be a learning experience. People make what they think will be merely temporary adjustments in their consumption behavior to reduce financial distress but may discover that they like elements of their new consumption pattern; and businesses too, which have reduced their newspaper (and other print-media) ad expenditures drastically. They may never go back.

Newspaper ad revenues fell by almost 8 percent in 2007, a surprising drop in a non-recession year (the current economic downturn began in the late fall of that year), and by almost 23 percent the following year, and accelerated this year. In the first quarter of 2009 newspaper ad revenues fell 30 percent from their level in the first quarter of 2008. This fall in revenue, amplified by drops in print circulation (about 5 percent last year, and running at 7 percent this year--and readership is declining in all age groups, not just the young), have precipitated bankruptcies of major newspaper companies and, more important, the disappearance of a number of newspapers, including major ones, such as the Rocky Mountain News and the Seattle Post-Intelligencer. Falling revenues have led to layoffs of some 20,000 employees of the remaining newspapers. Print journalism has come to be regarded as a dying profession. Online viewership and revenues have grown but not nearly enough to offset the decline in ad revenues. Even the most prestigious newspapers, such as the New York Times, the Wall Street Journal, the Washington Post, and USA Today, have experienced staggering losses.

News, as well the other information found in newspapers, is available online for nothing, including at the websites of the newspapers themselves, who thus are giving away content. The fact that online viewing is rising as print circulation is falling indicates a shift of consumers from the paid to the free medium. The economic downturn has doubtless accelerated the trend, but economic recovery is unlikely to reverse it. To repeat my earlier point, many of the people who have switched under economic pressure to the free medium may find themselves as happy or happier and hence will not switch back when their financial condition improves.

Moreover, while in many industries a reduction in output need not entail any reduction in the quality of the product, in newspaper it does entail a reduction in quality. Most of the costs of a newspaper are fixed costs, that is, costs invariant to output--for they are journalists' salaries. A newspaper with shrinking revenues can shrink its costs only by reducing the number of reporters, columnists, and editors, and when it does that quality falls, and therefore demand, and falling demand means falling revenues and therefore increased pressure to economize--by cutting the journalist staff some more. This vicious cycle, amplified by the economic downturn, may continue until very little of the newspaper industry is left.

So what will happen to news and information? Online news is free for two reasons. First, in the case of a newspaper, the marginal cost of providing content online is virtually zero, since it is the same content (or a selection of the content) in a different medium. Second, online providers of news who are not affiliated with a newspaper can provide links to newspaper websites and paraphrase articles in newspapers, in neither case being required to compensate the newspaper.

As newspaper revenues decline, newspaper content becomes thinner and thinner--but by the same token so does the linked or paraphrased newspaper content found in web sites that have no affiliation with a newspaper. If eventually newspapers vanish, online providers will have higher advertising revenues (because newspaper advertising will have disappeared) and may decide to charge for access to their online news, and so the critical question is whether online advertising revenues will defray the costly news-gathering expenses incurred at this time by newspapers. Imagine if the New York Times migrated entirely to the World Wide Web. Could it support, out of advertising and subscriber revenues, as large a news-gathering apparatus as it does today? This seems unlikely, because it is much easier to create a web site and free ride on other sites than to create a print newspaper and free ride on other print newspapers, in part because of the lag in print publication; what is staler than last week's news. Expanding copyright law to bar online access to copyrighted materials without the copyright holder's consent, or to bar linking to or paraphrasing copyrighted materials without the copyright holder's consent, might be necessary to keep free riding on content financed by online newspapers from so impairing the incentive to create costly news-gathering operations that news services like Reuters and the Associated Press would become the only professional, nongovernmental sources of news and opinion.

A free press has been a foundation of democracies because the press spreads information about political and other developments. This is why one of the first moves totalitarian and other non-democratic governments make is to suppress the press. For example, the Iranian government has closed virtually all newspapers that are openly critical of the government. Nevertheless, I do not believe that the decline in the number of dailies, even if it rapidly accelerates, poses a major threat either to the viability of democracies, or to the spread of political and other information.

The main reason for this belief is that the Internet is far more efficient than newspapers in providing news, information, and opinion. This is obvious with respect to sports, financial developments, and weather since online updates are much more frequent than is possible even for the best papers. During the past 10 days of the Iranian election crisis, my wife and I turned mainly to the Internet for the very latest news and pictures on what was happening in Teheran and elsewhere in that country. These sources certainly included online editions of several newspapers, but also important were various online accounts by observers of and participants in the protests.

That the Internet is a more efficient provider of news and opinion than newspapers is seen in the fact that hardly anyone under age 40 now reads papers. Readership is also declining among older persons, but many of them continue to read papers- we subscribe to 3 daily and 2 Sunday editions- primarily because they built up strong habits of reading papers at breakfast or at other times. The lack of newspaper reading among younger persons is in small part a lifecycle effect, but mainly it is a strong predictor that the market for papers will continue to fall sharply.

The best newspapers, like the New York Times, Wall Street Journal, Financial Times, and Washington Post, not only present the latest news, in depth analysis of events, and selected opinions, but they certify the accuracy of what they are reporting through reputations built up over many years for objectivity, and care in checking sources. To be sure, they sometimes slant which facts to emphasize, or select stories that fit in with their particular points of view. Polls do strongly confirm that the great majority of journalists are liberal. Nevertheless, readers can usually have confidence in the news and other reports in the eminent papers.

Do online reports have a similar accuracy? I confess to being surprised by the huge numbers of men and women (including Posner and me!) who want to use the Internet to present their opinions and describe events they witness. Many millions of bloggers regularly report on everything from what they had for dinner to major political developments. Although the quality of these discussions varies greatly, many of them have gained reputations for rather accurate and unbiased reporting and analysis. A good example is the open source encyclopedia, Wikipedia, which has millions of entries that are continually updated. I have not read enough articles in Wikipedia to have an overall assessment, but I have been favorably impressed by most of those that I have read and can evaluate for their accuracy.

Although the printed newspaper industry is doomed, and will be missed by those of us that remember newspapers in their heyday, they are being replaced by good substitutes in the form of blogs, social networks like Facebook and Twitter, online news gathering by various groups, including newspapers, and other electronic forms of communication. People in democracies will continue to have access to independent and often quite accurate, reports on events in their own countries and most other parts of the world. In fact, the populations of undemocratic countries now have much greater access to what is happening in the world than they had in the past because it is far more difficult to suppress access to the Internet and other electronic forms of communication than it is to suppress newspapers.

So there is a basis for concern with the compensation of top management in publicly held corporations, but it is not a momentous concern and costly measures to ally it would not be justifiable. Modest measures, such as making it easier for shareholders to replace directors than under the existing, Soviet-style system in which shareholders vote for or against the slate proposed by management, and requiring full disclosure and monetization of all forms of compensation paid CEOs and other top executives, may be sensible; but nothing more should be attempted.

The solving of the overcompensation problem would have little if any effect on risk taking by bankers and other financiers, so probably any efforts to solve it should be postponed until the economy recovers from its present sickness.

A distinct problem is that of compensation of executives of firms that are owned or controlled by the federal government, such as General Motors, American International Group, Fannie Mae, and Freddie Mac, and (or) that are recipients of federal bailouts. These are troubled firms, and the concern is that management may try to funnel the federal moneys that the firms have received into dividends and bonuses so that shareholders and executives will be protected should the company fail completely. The danger in other words is that when a firm is teetering on the edge of bankruptcy, management may stiff the firms' creditors by funneling some of the firm's remaining assets to managers and shareholders. The time to deal with this problem, however, is when the bailout is made; suitable conditions can be attached to it. To instead appoint a "pay czar" to deal with executive salaries of bailout recipients on an ad hoc basis creates all the problems that Becker discusses.

These problems are especially grave with regard to General Motors and Chrysler, as these are fast-failing firms that need to be able to offer high salaries to attract able executives. Between efforts by the "pay czar" to limit these companies' flexibility in compensation, and the efforts by Congress to limit the companies' ability to import vehicles and close plants and dealerships, the government is doing to best to minimize its chances of ever recovering its $60 billion investment in the two firms. This is called shooting oneself in the foot, or, alternatively, politics as usual.

Still another distinct problem is that of compensation practices of banks and other financial intermediaries. Here the problem is not the compensation of top management, but the compensation of traders and other investment officers at the operational level. The concern is that compensating them on the basis of the profitability of the individual deals that they make motivates them to take excessive risks. Suppose a deal has a positive expected value, but there is a 1 percent chance that it will fail in a way that imposes heavy costs on the corporation, and perhaps, because of the chain-reaction effect of the failure of a major bank (as we saw last September, when Lehman Brothers went broke), on the financial system as a whole. The trader who makes the deal may not worry much about that risk, because a 1 percent annual risk of disaster is very unlikely to materialize in the short run; the probability that an annual risk of 1 percent will materialize in 10 years is only 10 percent (actually a shade less).

Financial firms that worry as they should about such a catastrophic risk (since the firm makes many deals, which multiplies the risk of disaster), typically try to reduce it by employing "risk managers" who review proposed deals. Because this method of limiting risk failed to avert the financial collapse of last September, there are suggestions that it be supplemented or replaced by rules limiting the cash bonuses paid to traders, instead compensating them in restricted stock of the corporation, which they cannot sell for a number of years, or authorizing the corporation to "claw back" any bonus they receive should the risk involved in one or more of their deals later materialize and reduce or eliminate the profit that the corporation made on the deals.

It might seem that top management would have all the incentive it needed to prevent its subordinates from taking risks that would jeopardize the solvency of the company. But that is not true, because the private cost of bankruptcy is truncated by limited liability (the shareholders cannot be forced to pay the corporation's debts), but the social cost, as we have learned, can include a devastating global economic shock.

An external cost is a conventional justification for regulatory intervention--in principle. But the specific suggestions for curbing risk taking by traders are problematic. There are many influences on the value of a corporation's stock besides the outcome of a particular deal, and a claw-back possibility can greatly reduce the present value of a bonus, as well as complicating the recipient's tax and other financial planning. I conclude that it is premature to start regulating compensation practices in the banking industry; there are other ways of reducing financial risk that are less problematic.

Notice that this problem has nothing to do with boards of directors' inability under existing rules to control the compensation of top executives, because traders are not top executives. Management has no incentive to overpay its subordinates! Nor has this problem anything to do with government ownership or control, or a risk of insolvency that might induce top management to try to appropriate a firm's remaining assets.

Any monkeying by government with compensation practices, especially below the top level of management and especially in financial firms, will impair the ability of American firms to compete with foreign firms. The banking business is thoroughly international, and unless all countries act in lock step with the United States in regulating compensation practices, many of our ablest financiers will be lured to foreign banks.

One can only hope that the appointment of a "pay czar" is merely a sop to ignorant public and congressional opinion, and that Mr. Feinberg will be suitably restrained in the exercise of his powers. Secretary of the Treasury Geithner seems unenthusiastic about the government's imposing more than cosmetic changes on corporate compensation. practices. More power to him.

The Administration wants every American to have medical insurance. The details are unclear, but the thrust of the Administration's plan is those who can afford to buy medical insurance, either directly or through their employer, would be required to do so and that those who cannot would have their insurance subsidized. The cost to the government alone of the Administration's program is estimated by the Administration itself to be $120 billion a year. How it will be financed remains up in the air, along with many other crucial details. Probably part of the cost will be defrayed by limiting the tax deductibiliy of employer-provided health insurance. But most of it, at least in the short run, will simply be added to the government's huge budget deficit--so huge that amounts like $120 billion are beginning to seem like small change.

The Administration claims that in the long run the aggregate cost of health care will actually fall. Indeed, the hope is that the $120 billion annual cost will not have to be funded at all, but instead will be offset by various reforms that the Administration proposes, including digitization of health records, allocation of greater resources to preventive care, and evaluating the performance of hospitals and other medical providers more carefully, to determine which medical procedures are really useful, and limiting reimbursement to providers accordingly.

I don't think the program makes fiscal sense. If enacted in anything like the form that the Administration is urging on Congress, it would be immensely costly and would thus add significantly to our national debt, which is already growing at a fast clip because of the decline of tax revenues as a result of the current depression and the immense government expenditures on trying to speed economic recovery.

Ignored in estimates of the cost of the health care program is the effect of insurance on the demand for medical services. When people, because they lack health insurance, have to pay for medical services or encounter long queues in hospital emergency rooms, they have an incentive to economize on medical treatment. If they have health insurance, the marginal cost of treatment in excellent medical facilities falls to the cost of a deductible or copayment; and it is the marginal cost that the insured consumer of medical services confronts--the cost of the health insurance premium itself is a fixed cost, which is not affected by how much treatment the insured receives. Because the supply of medical services is not highly elastic, an increase in the demand for those services will increase average as well as total cost.

I would not object if a program of universal health insurance could be financed by reducing or eliminating the tax deductibility of health insurance. But only a modest reduction, if that, in its deductibility is politically feasible. The reforms that the Administration contends will not only pay for the program but also reduce the aggregate costs of health care in the United States are probably pie in the sky. Digitization of medical records does increase efficiency: it makes it easier to change doctors, track health histories, and coordinate medical services. But the net savings are likely to be modest or even negative, because anything that lowers the average cost of a given quality of health care increases demand, just as broadening insurance coverage does.

Preventive care--another efficiency measure touted by health-care reformers--is potentially very costly, because by definition it provides health services to people who are not yet ill. Advances in preventive care are not limited to telling people to exercise and eat healthful foods, but increasingly are dominated by massive and costly programs of screening and follow-up. Such programs, and the treatments that ensue for persons found to have a treatable condition, may extend life, but often this means keeping alive very sick people who will require expensive care for the remainder of their prolonged life.

An effort to create a form of benchmark competition between hospitals and between doctors, by careful evaluation of outcomes and by using the results of the evaluation to calibrate reimbursement by insurers so that the best-performing health-care providers will be rewarded and the worst punished, is likely to founder on the difficulty of adjusting for differences in outcomes that are not attributable to the efficiency of the health-care provider.

In addition, efforts to limit treatment by limiting reimbursement, especially efforts by government to do so, are deeply unpalatable both to patients and to doctors and hospitals. A patient convinced by his doctor that a particular treatment is his only hope for continued life will not be reassured to be told that in the opinion of the government's experts, the treatment would not be cost-justified because it is very costly and is unlikely to be successful. Insurers, and employer health-benefits plans, try to do this kind of financial triage now, but their lack of success is reflected in the enormous annual cost of American health care.

A deep problem is the replacement, in the medical profession as in the legal profession, of a professional model of service with a business model. In the professional model, the service provider is assured a good but not extravagant income by limitations on competition, and in exchange he is expected to avoid exploiting the ignorance of patients as he could do by performing unnecessary or low-value procedures. In the business model, the service provider endeavors to maximize his net revenues. In the case of medicine, the disparity of knowledge between provider and patient, coupled with the fear and desperation that serious illness (or just the possibility of it) engenders, enables the profit-maximizing provider often to convince the patient to undergo costly low-value treatments. Certainly the profit-maximizing health-care provider will be very relucant to refuse to provide a treatment that the patient insists upon, his insistence being made convincing by the fact that insurance will pay all or most of the cost. Insurers do try to limit their costs by refusing to approve low-value procedures--but in the face of combined pressure by provider and patient, the insurer is often forced to back down.

To return to the initial puzzle of why our peer nations are able to provide what seems, judging by outcomes, a level of health equal or superior to that of Americans at far lower cost, the only convincing answer is that the health-care providers in those nations limit treatment. I am not sure of the explanation, but the possibilities include: the professional model is more tenacious in societies less committed to free markets and a commercial culture than the United States; more of their hospitals are public and more of their doctors are public employees, who are therefore salaried rather than entrepreneurial; and Americans, being less fatalistic than most other peoples, have a more intense demand for life-extending procedures. These are reasons why a national health plan modeled, as the Administration's appears to be, on the health plans of peer nations with much lower aggregate health costs is unlikely to work well, or at least to generate net cost savings.

Of course if people value extension of life very highly--and there is evidence that, in the United States at least, most people do--a very costly health care system may be cost-justified, in the sense that the benefits exceed the costs. Yet the benefits seem rather illusory, since the extra money we spend on health care does not seem to produce better outcomes. But international comparisons of health that are limited as they largely are to differences in longevity are crude. They ignore health benefits unrelated to longevity, such as the benefits conferred by cosmetic surgery and the possibility that the additional costs of health care in the United States enable people to live more dangerous, strenuous, or self-indulgent lives and by doing so confer utility.

Life expectancy is surely one supremely important measure of health since individuals in rich countries are willing to pay a lot even for small increases in their probabilities of surviving different ages (see the studies in the book "Measuring the Gains from Medical Research", ed. By Kevin M. Murphy and Robert Topel, 2003). Studies show that an additional year of life is worth over $120,000 to the typical American adult, apparently also including older adults, where "worth" is measured by willingness to pay for a one-year improvement in length of life. One can easily see without a lot of fancy calculations that the large sums Americans are willing to pay for improvements in health imply that they would pay a considerable fraction of their incomes in order to achieve significant improvements in their life expectancy, and also in their quality of life. Similar conclusions apply to other countries since the willingness to pay in different countries for an additional year of life varies approximately proportionately to their per capita incomes.

Although such calculations show that improvements in life expectancy are worth a lot to most people, national differences in life expectancies are a highly imperfect indicator of the effectiveness of health delivery systems.for example, life styles are important contributors to health, and the US fares poorly on many life style indicators, such as incidence of overweight and obese men, women, and teenagers. To get around such problems, some analysts compare not life expectancies but survival rates from different diseases. The US health system tends to look pretty good on these comparisons.

A study published in Lancet Oncology in 2007 calculates cancer survival rates for both men and women in the United States, the United Kingdom, and the European Union as a whole. The study claims that the most important determinants of cancer survival are early diagnosis, early treatment, and access to the best drugs, and that the United States does very well on all three criteria. Early diagnosis helps survival, but it may also distort the comparisons of five or even ten-year survival rates. In any case, the calculated five-year survival rates are much better in the US: they are about 65% for both men and women, while they are much lower in the other countries, especially for men. These apparent advantages in cancer survival rates are large enough to be worth a lot to persons having access to the American health system.

Several measures of the quality of life also favor the US. For example, hip and knee replacements, and cataract surgery, are far more readily available in the US than in Europe. The cancer survival and quality of life advantages enjoyed by US residents indicates that Americans get something for the large amount they spend on health care, but they do not indicate that the bang for the health buck is greater in the US, or even that the US health delivery system is reasonably efficient. Indeed, the American health system has several characteristics that may considerably lower its efficiency.

The American system ties medical insurance to employment by allowing company spending on medical premiums to be fully tax-deductible. Companies introduced health benefits during World War II in order to get around wage controls to be competitive in attracting employees. It was maintained as income tax rates increased during subsequent decades. This employer-based system is partly responsible for the high number of Americans who have no insurance coverage, since many small companies do not provide insurance to their employees. In addition, the system favors persons with high earnings since tax deductions for insurance premiums are worth more to them. A much better approach, so far opposed by President Obama, would provide a certain number of dollars each year to every person-perhaps $2500- as tax credits to be used only to buy health insurance and pay for medical care. Unused amounts in any year would be folded into health savings accounts (see my discussion of these accounts and other health care issues in posts for April 15, 2007 and January 13, 2008), and unused balances in any year would be carried over to spend in later years. This approach gives the same tax incentives to everyone, and it would encourage individuals to economize on their health care spending since unused balances would be available to spend in the future. It would also induce many persons without health insurance to get some since otherwise they lose access to this tax credit.

Health insurance is expensive in the US partly because most states mandate coverage of various health expenditures that have little to do with insurable risks. For example, the majority of states require insurance companies to cover the medical costs of all birth deliveries, even though these deliveries are mainly planned, and the expenses are known beforehand. The proper insurance approach would cover only unusual birth expenses caused by complications in the delivery and post delivery stages. By getting rid of unnecessary mandates, health insurance would become much cheaper, especially in states with the more onerous mandates.

The President wants to establish government-run health insurance companies to compete with private companies. This is a bad idea because experience from government-owned enterprises in other sectors conclusively shows that that they are run inefficiently, in good part because of political interference. Moreover, government enterprises do not compete fairly since they generally are subsidized, often generously and in hidden ways. Private health insurance companies in the US compete very strongly, although they are hampered by mandates and other regulations that frequently have nothing to do with effective and honest coverage of health needs.

The mercantilist policy of China and other East Asian countries has been attributed to the financial trouble that a number of these countries got into in the late 1990s when their governments were pursuing the opposite policy--that of encouraging imports and, in particular, foreign investment in their countries. As a result (much like the United States in the 2000s!) these countries accumulated large foreign exchange deficits, which ballooned when the investors shifted many of their investments to other parts of the world. The deficits reached a level at which the countries had to push interest rates up to depression-causing levels in order to prevent the flight of capital from reaching a point at which the countries' credit systems would collapse.

Once burned, twice shy; the East Asian countries switched to an export-first policy, which by enabling them to accumulate large dollar balances have prevented a recurrence of capital flight. I am calling it "mercantilist" but in part, perhaps major part, it should be viewed as precautionary--to prevent a repetition of the economic crsis of the 1990s. Yet China had already begun to emphasize exporting. The reason may lie in John Maynard Keynes's analysis of mercantilism. He argued that if domestic demand for goods and services is weak, perhaps because of a low propensity to consume, there is likely to be a lot of unemployment, as otherwise supply would exceed demand. By devaluing the currency and thus making exports cheaper and so increasing the demand for exports, government can increase employment, because the higher output is, whether consumed domestically or abroad, the more workers are needed. The Chinese population was (and is) poor, so domestic demand was weak, and overall demand and therefore output could be increased by pushing exports. The success of such a policy would depend on the foreign demand for goods that Chinese industry was able to produce at reasonable cost, but that demand proved to be strong. The large dollar balances accumulated as a consequence of the export-first policy were available for investment. As a result, China is today the world's largest creditor.

Should the United States and other debtor nations reduce their foreign borrowing, China's (and other East Asian countries') mercantilist policies will become less attractive because interest rates will fall. Moreover, as domestic demand in those countries grows, there will be pressure to make imports cheaper and to divert production from satisfying foreign demand to satisfying domestic demand. On both counts, trade balances will become more even.

But how even? Japan, despite its very high standard of living, had, until the current economic downturn, a strongly positive balance of trade. An unusually high propensity to save, coupled with an inefficient system for distributing consumer goods and services, keeps domestic demand down. It remains to be seen whether, as China's economy grows, it will become more like Japan, or more like the United States.

Sugar-sweetened sodas are high in calories, are drunk in great quantity, and because they have little nutritional value don't substitute for other foods; they are a net addition to caloric intake. The NEJM article estimates that consumption of such sodas adds an average of 125 to 150 calories per day to the average American's diet, and cites studies that estimate that the elasticity of demand for such products is about -1, so that a 10 percent soda tax tax could be expected to reduce consumption by about 10 percent, with the result, according to the author of reducing the average person's weight by about 2 pounds a year.

I am skeptical, because the author ignores the possibility of substituting untaxed sugar-sweetened foods or beverages. People who crave sugar will find no dearth of substitutes for sugar-sweetened sodas. Moreover, most consumers of these sodas are not and never will be obese. They may well be overweight, but all that that means is that they are heavier than the "ideal" weight calculated by physicians; if they are only slightly or even moderately heavier, the consequences for health or social or professional success are apparently slight.

To the extent that a soda tax would cause substitution of equally sugared foods, it would not only have no effect on obesity; it would yield no revenue--a material consideration because supporters of the tax hope, albeit inconsistently, that it will both reduce obesity significantly and contribute significantly to financing the Administration's ambitious and very costly program of health-care reform.

There are many obese Americans, in the sense of ones who are grossly overweight (with some being morbidly obese), and we should consider whether society should be concerned with obesity if not with mere overweight. Obesity impairs health, and, in most segments of the population it diminishes social and professional success as well, and so it can be regarded as self-destructive behavior. Some of it is involuntary--there are people whose genes make it virtually impossible for them to avoid becoming obese--but most obesity could be avoided by careful diet and exercise. The obese are people who by dietary choice and preference for a sedentary style of life have traded off the costs of obesity against the costs of being thin and have decided (at least in a "revealed preference" sense--they may not have consciously chosen a style of life that predisposes them to obesity) that the costs of thinness preponderate over the benefits. And in general we do not try to prevent people from making such tradeoffs.

But there are two situations in which preventing people from choosing the style of life that maximizes their utility can be defended (provided certain assumptions are made about cost and efficacy) on economic grounds. One is where consumers are unable to evaluate a product or to act upon their evaluation; another is where a voluntary transaction imposes costs on other people which the transactors do not take into account.

The first is a significant factor in the soda market. The sellers advertise very heavily to children, who do not have the knowledge or the self-control that they would need to be able to resist such advertising. In well-ordered households, the parents regulate children's access to television and the Internet and know they should limit the children's consumption of sugar-flavored drinks and do limit it. But in many modern American households, especially but not only those in which there is only one parent, children's access to soda and soda advertising is not restricted.

The solution, though, is not a tax on sodas, as such a tax would have only a small effect. A ban on advertising would be preferable; it would probably impose only slight costs on adult consumers of such drinks, because the advertising of such drinks contains little information. It is true that such a ban would reduce new entry into the soda market and that this might lead to higher prices, but if so that would reinforce the effect on sales of the ban on advertising.

As to whether by increasing obesity the sale of sugar-flavored sodas imposes costs on other people besides the buyers, the evidence is mixed. Obese people have more health problems than the non-obese and hence higher annual medical costs; they also lose more time at work because of illness. Their poorer health increases the medical costs of other people in their insurance pools and reduces the productivity of their employers, assuming realistically that employers cannot selectively reduce the wages or health benefits of their obese employees. Cutting the other way, obese people have a reduced life expectancy, and the shorter a person's life, the less an above-average annual cost of medical care translates into an above-average total (lifetime) cost. But assuming nevertheless that the net social costs of obesity are positive, this would be a ground for arguing for taxing obesity, but such a tax would be unacceptable as well as cruel. The alternative of a soda tax would be unlikely to have much effect, for the reasons stated earlier.

Are there better ways of fighting obesity, assuming it is worth fighting? Probably not. Education would probably have very little effect, because almost all people know that being fat has bad consequences and that eating foods rich in sugar and butter and not exercising increase the likelihood of becoming obese. Obesity is concentrated in the lower middle class, which contains a high proportion of people who have very high discount rates, which prevents them from giving significant weight to the future consequences of present behavior.

Children may be ignorant about the costs of obesity and the effects on it of sugar, but because of lack of self-control and children's inability to imagine themselves as middle-aged adults, I doubt that trying to educate them in the dangers of drinking sugar-sweetened beverages would be effective.

A tax on calories, or on high-calorie foods or ingredients, would be difficult to design and administer and would impose welfare losses, without significant offsetting wealth gains, on thin people. A further problem is that fattening foods, including sugar-flavored sodas, have fallen in price over time relative to fruits and vegetables and other healthful foods, so that a tax on calories would be highly regressive.

A modest measure would be to bar the sale or other provision of sugar-flavored sodas and other fattening foods in schools, and the substitution of nutritious low-calorie school lunches for the present fare. In addition, more school time could be allotted to physical education, which in recent years has diminished in most schools. The cost of these measures would be modest and they would have some effect in reducing obesity.

From the data presented by the authors of that article, only a very high excise tax on sugared beverages might reduce calorie intake enough to significantly affect the number of overweight and obese children and adults. According to these authors, sugar-sweetened beverages now account for about 10 to 15% of total calorie intake. They also claim that a review of various studies indicates that a 10% increase in the price of beverages reduces consumption by about 8%. These assumptions imply that a tax on beverages that increases its price by 10%-that means a 10 cent tax on a can of soda that sells for about $1.00- would slightly reduce the intake of calories from sodas by 0.8% to 1.2%. Even this overstates the total effect on calorie consumption, given that consumers who like sugar would substitute toward cakes, candies, and fruit drinks that naturally have lots of sugar. The result of this tax on beverages would be at most a very small reduction in the intake of calories and sugar. Indeed, it is quite possible that since consumers do not only buy products on the basis of their sugar and calorie content, these substitutions away from beverages and toward sweets and other drinks induced by a tax on beverages could actually increase calorie and sugar consumption.

In addition, as Posner indicates, there is little reason to tax the many consumers of sodas and other sweetened beverages who do not become obese, and whose consumption does not cause any social problems. That is why the usual recommendation is not to tax all drinking, but only heavy drinking, or better still only the heavy drinkers who cause auto accidents and other harm to innocent persons. A similar approach to the problem of overweight individuals would not tax consumption of beverages or fast foods, but would directly tax excess weight. Such a tax would be unusual to say the least, but it could be implemented if desired.

To me, calculations showing the minor effects of moderate taxes on sugared beverages on weight suggest that such taxes would be only the opening salvo in an effort to tax fast foods and other foods with many calories. One justification given by the authors of the New England Journal of Medicine article for caloric taxes is that the growing rate of obesity is partly due to ignorance of consumers, especially children, about the harmful health consequences of consuming many calories. It is also alleged to be partly due to the inability of consumers to act on the information they have because they are alleged to lack self control in their eating habits. These authors also argue that consumers who eat too much and become overweight impose costs on taxpayers since much medical care is financed out of government tax revenues. I do not find these arguments persuasive.

As Posner indicates, children without enough parental guidance and supervision are more likely than adults to be ignorant of the health consequences of high calorie intake, and children are also less able to exercise self-control over their eating. Very much offsetting this, however, is that the negative health consequences of being overweight and even obese will generally be significantly lower for children than for adults. The reason is that aside from very extreme obesity, the really harmful effects to overweight children will not usually kick in for another 25 or more years when they are in their forties or older. However, one can reasonably expect sizable progress during the coming decades in the development of drugs, such as lipitor, that will reduce the health consequences of high cholesterol and excess weight for heart conditions, diabetes, and some cancers. From that perspective, perhaps even ignorant and impulsive children are not acting so stupidly by indulging themselves in their eating since the future will likely see the development of drugs that will alleviate many serious medical conditions.

To be sure, taxpayers will pay for much of the cost of the development and use of these new drugs. This brings us to the argument that excess weight imposes costs on others through the health payment system. Yet such a health payment "externality" argument is hard to use consistently. Consider a person who significantly shortens his life because of heavy smoking, and thereby reduces the amount of public spending on him through social security, and subsidized health care. Would those who advocate taxes on beverages and other foods because obese persons make use of publicly funded health benefits support a subsidy to smoking if smoking cuts the use of health care and social security benefits? Clearly not, and nor should they. The same logic implies skepticism toward arguments to tax sugared beverages because obese persons make greater use of the health care system.

Many doctors and others who advocate taxing sugared beverages and fast foods at heart do not believe that consumer taste for sugar and fast foods should be taken into account in devising public policy. Perhaps not, but they have to advance better arguments than they have done so far to justify policies that interfere with the exercise of these tastes and desires.

I claimed in that post that the current Republican Party is trying to incorporate two inconsistent sets of beliefs: one is the support of competition and generally freer markets, and the other is the advocacy of interventionist policies on various social issues, such as gays in military, stem cell research, or in international affairs. Both these positions are often linked together as "conservative", but they involve contradictory views of government. I argued for a consistent conservative position that supports individual choices, and opposes big government. To be sure, government intervention may be required when individuals make decisions that impose sizable external costs (or benefits) on others that are not incorporated into their decisions. On this approach, however, the harmful (or beneficial) effects on others must be considerable before government actions would be justified because governments are generally so inefficient.

A blog by the excellent development economist William Easterly
(http://blogs.nyu.edu/fas/dri/aidwatch/2009/05/confused_american_liberals_and.html) suggests a different definition of conservative beliefs, as do some of those who posted on our blog. Easterly argues that the true definition of a conservative is someone who respects traditions and existing institutions, and who wants to limit change. Although that is a common definition of the essence of conservatism, I do not believe it is a consistent or sensible one. I do agree that considerable respect for what has survived and thrived in the past is warranted, and my anti-big government conservative would certainly respect institutions that have performed well for a long time. However, conditions do change, sometimes in crucial ways, and a sensible conservative philosophy would recognize the necessity of changing one's views when this happens, even when that goes against venerable traditions.

To take one example, until the latter part of 19th century, married women in England were not allowed to own personal property, including money, in their own name, Even though they had a long history in England and many other countries, such laws were discriminatory and undesirable. Note that some other countries, notably Islamic countries, did not have such laws. Another example: laws against divorce may have made sense in an environment where women did not work and had many children since women would have faced serious financial difficulties if their husbands divorced them (I say "may have" because laws might have protected women's rights to financial support if divorce had been allowed). For these reasons the great philosopher, David Hume, who was a strong supporter of freedom of choice, argued for laws against divorce. However, anti-divorce laws make little sense in the modern world when many married women work to earn a living, and they have few children. Therefore, a true conservative that generally opposes government involvement in private decisions would fully support laws that make divorce quite easy to obtain by both men and women.

Many comments on my discussion centered on the issue of abortion, and that is an especially difficult issue for someone who believes in individual rights. For there is an obvious conflict between the rights of women to control their bodies and their motherhood, and the rights of fetuses that might be far enough along in their development to be considered human beings. This is a very prominent example of the general difficulty of determining where to draw the line when the rights of children conflict with the rights of their parents. I do not claim to have a definitive resolution of this conflict in the case of abortion, or in some other parent-child conflicts. But I come down on the side of women's rights to make decisions about their body, except in very late term abortions where fetuses can survive outside a woman's body, and therefore can be considered real children.

Abortions often allow women to have children at later dates when they are better prepared emotionally and in other ways to have children. In effect, abortions in these cases would allow women to substitute children who would be born later, and would be better taken care of, for the fetuses that are aborted now. That seems to me to be a tradeoff worth making. Moreover, laws banning abortion would be difficult to enforce against wealthy women since they would be able to get abortions illegally under reasonably good conditions, including by going abroad. Poor women who want abortions would suffer the most from enforcement of an anti-abortion law, as they are the ones who mainly suffer from laws against the use of drugs and many other types of laws.

Conservatives are not isolationists on international affairs since they recognize that the interests of a country like the US are affected by what happens in other countries. This is clear in Reagan's successful efforts to wear down the Soviet Union during the Cold War, or in more contemporary efforts to anticipate terrorist attacks planned in other countries. However, just as with the use of government powers on purely domestic issues, conservatives would recognize that governmental foreign actions are usually very inefficient (as in conducting wars), and are often driven by special interests. A conservative philosophy would limit governmental international interventions to cases where the risks from not taking actions are very large, and the interventions reasonably straightforward.

It is apparent that global warming, abortion, and guns, in approximately that order, arouse particular emotions among many passionate self-described conservatives. About the first of these three issues, I wish to clarify my position briefly. I do not think there is much doubt that carbon emissions generated by human activities increase the amount of carbon dioxide in the atmosphere and by doing so raise surface temperatures. How much they raise them and with what consequences remain uncertain. I merely think that the risk of catastrophic global warming is sufficiently great to warrant more vigorous remedial efforts than have been attempted thus far by the United States.

About abortion, my personal position is the same as Becker's. I will add only that I think the legality of abortion should be determined by legislatures rather than by courts. I think Roe v. Wade was a mistaken decision, though probably one that we shall have to live with.

Similarly, I think private gun ownership should be a matter for legislative determination, rather than judicial. The Second Amendment is unclear about whether there is a right to own guns for personal self-defense or hunting, and I don't think delving into eighteenth-century documents argued to bear on the meaning of the amendment is a sensible way of doing constitutional law in the twenty-first century.

Some commenters seem to believe that because I am critical of the current conservative movement, I must be a liberal--maybe even a left-wing Democrat. To those commenters, disbelief in global warming, in the regulation of gun ownership, and in the criminalization of early as well as late abortions is a litmus test of "true" conservatism. There are, in fact, multiple conservatisms, as Becker and I have emphasized. Like Becker, I believe in limited government and so do not support government activities that cannot be justified convincingly by reference to considerations of economic prosperity, basic individual liberties, or domestic or national security. I do not favor the curtailment of individual liberties on the basis of religious beliefs, nostalgia for the "good old days," or traditional social beliefs (such as distaste for racial minorities or homosexuals) that cannot be related to economic, libertarian, or security values. One of Reagan's great political achievements was to unite the diverse conservatisms in a single political movement that managed to gain the support of a majority of the American people.

That unity has now dissolved, and it will require skillful political entrepreneurship plus overreaching by liberal politicians (or the kind of left-wing extremism that marred the late 1960s and early 1970s) to restore it.

The ideological division within the conservative movement has been compounded by a decline in intellectual and managerial competence--a tendency to substitute will for intelligence ("I believe it so it must be so"). Some commenters note the intellectual and ethical failings of liberals, and they are right to do so. But it is only at the Right, at present, that anti-intellectualism is embraced and extolled.