American libertarianism has become a useless, purely performative sort of politics. Many libertarians I know seem blinded to the fact that the American social contract has fundamentally changed in character. At least since the New Deal, the political reality is that government involvement in our lives has increased in irreversible ways. But while libertarianism has become a form of unhelpful critique, liberty remains as vital as ever before. If we want to fix the most broken areas of our society, such as criminal justice, education, and healthcare, we must embrace policy solutions that mirror the competition of ideas that defines a free society. This means transparency and accountability. Wherever government is involved, we need systems that allow governing ideas to compete. Our rules need clear metrics, decision-makers need the freedom to experiment, and we must reward their successes and quickly eliminate failures.

The philosophy of liberty as generally understood by America's founding generation — including all it implies about speech, property, and other natural rights — should always be a vital part of the American identity. Libertarians of every age have understood that the wisest political orders must safeguard basic freedoms.

Liberty forces us to take personal responsibility for our decisions in the knowledge that each of us is the author of our own life. It is the foundation of our moral culture. Liberty is also the basic condition for aesthetic and cultural progress. “Experiments in living” produce the brilliant variety of human ingenuity and expression on display in the free world. Finally, liberty allows people to innovate and compete to deliver superior goods and services, which creates prosperity. If entrepreneurs are free to fail or to succeed in the marketplace of ideas, and entitled to the fruits of their labor, talented individuals will devise beautiful new ways to enrich the lives of others.

Too few people today understand why the word "LIBERTY" is inscribed on our coinage and our identity as a nation. Though some mock liberty as an outdated or abstract concept, it is as central to the health of our civilization as ever before.

But liberty is not enough. And I no longer call myself a libertarian.

The philosophy of liberty is ultimately a philosophy of restraint. It explains what government shouldn't or can't do. In libertarian theories such as Robert Nozick’s, most of the functions of modern government vanish in favor of a “night watchman state” so minimal that one would be hard pressed to find a single real example in human history.

In today's complex world, most Americans agree that the government will play a critical role in our economy, for example in education, healthcare entitlements, and the provision of a social safety net. Despite this basic reality, there are hundreds of thousands of smart libertarians on the sidelines griping at their TV screens about government dysfunction. Too many libertarians are shouting "no" instead of trying to help improve our society.

These “get off my lawn” libertarians convulsively reject any form of state activity. You see them in Congress, where Tea Party and Freedom Caucus Republicans grandstand and obstruct policy rather than fix our government. You probably even know one or two people who are so blinded by their laissez-faire ideology that they can’t recognize good policy when it’s staring them in the face. Let’s go over a quick example to teach them the value of positive policymaking.

Until about 50 years ago, many of our fellow citizens were still dying because dialysis machines were scarce and unaffordable. As a society, we decided that nobody should die of preventable kidney failure, and we decided to pay for it. In 1972 President Nixon and a bipartisan Congress amended the Social Security Act to say that government would cover dialysis as a remedy to end-stage renal disease for any American who needed it.

The knee-jerk reaction from the libertarian right is that government shouldn’t be involved in healthcare at all. Your libertarian friend might interject: “In a wealthier society charity would pick up all these costs more efficiently.” But let’s be realistic: our country will never get rid of our system of state-sponsored healthcare. Even were such a thing possible, many might die in the transition period. The political reality in the US today is that we must continue paying for end-of-life kidney care for those who can’t afford it. Anything else is disgraceful.

The better question is: why does dialysis cost taxpayers well over $35 billion annually, or a full 7% of the Medicare budget? The answer is that the federal government is willing to sponsor lifesaving care for people experiencing severe kidney failure, but not willing to sponsor preventive treatments that could effectively keep Americans from progressing into kidney failure. Our government accidentally created an incentive against preventive treatment, and even worse, against technological and medical innovations that could improve our ability to address early-stage kidney disease!

Fortunately, this is a problem we can fix. Even a libertarian should agree that if government is already paying for end-of-life care, it should certainly cover preventive measures that keep patients healthy instead of shackling patients to grim dialysis clinics. Imagine if Medicare paid for diagnostic screenings well in advance of kidney failure, and reimbursed providers for keeping early-stage patients from sliding into end-stage renal disease. We would immediately unleash innovations in preventive medicine that would save billions of dollars and keep hundreds of thousands of people from passing the point of no return![1]

Unfortunately, the hardened, dogmatic form of libertarianism that one often encounters in America today adds little to our political discourse. But an optimistic creed which draws on the lessons of liberty can improve American government in powerful ways and tackle major problems in our country.

In a society governed by the rule of law, individual freedom typically finds expression in a market setting where entrepreneurs peacefully compete to produce superior goods for others. A free market is a kind of “spontaneous order” which channels our acquisitive drives and instincts for glory towards service. As Albert Hirschman argued, free markets transform the sin of avarice into a civilizing virtue. Wouldn’t it be great if we steered auri sacra fames towards solving challenging social problems typically addressed by government?

Any great policy does three things: it creates a clear but general incentive for government or private sector actors, it transparently tracks the performance of those actors, and then it holds them to account for their successes or failures. Rather than prescribing procedures or setting dozens of intermediate goals, policies should outline ultimate metrics, and give people creative license to pursue these metrics in the ways they judge best. As Philip Howard puts it, “human responsibility is the oxygen of accomplishment.” Rewarding entrepreneurs and government employees for successfully achieving specific outcomes — such as preventing the escalation of kidney disease — maximizes freedom and creates the conditions for bottom-up competition in the provision of public goods. Dialysis is just one example. Consider two others:

Criminal justice. We incarcerate seven times as many people as we did in the 1970s, and about 70% of people reoffend within three years of their release from prison. We know that certain jails, prisons, and re-entry departments are better than others at rehabilitating offenders, but we reward them all with the same fixed fees for supervising their wards and carrying out a thousand minor procedures.

What if instead of paying our corrections officers to “warehouse” detainees we incentivized them to successfully help people reintegrate into society? In this new paradigm, corrections budgets would expand for facilities, departments, and counties that successfully reduce their return to incarceration rates. This kind of transparent rewards system would motivate state employees to iterate and figure out what can really reduce our corrections population while also reducing crime in our communities.

This model works because it harnesses the creativity and free judgment of corrections officers towards achieving a valuable social outcome. We’ve seen it work in my home state of California, which implemented exactly this model for felon probationers in 2009. As soon as the bipartisan law passed, California probation departments radically shifted their cultures and began behaving like entrepreneurs: experimenting with cognitive behavioral therapy, education, and other rehabilitative techniques to see how they could most effectively drive down recidivism rates.

In the past decade this institutional shift has steered roughly 100,000 probationers away from prison, saving state taxpayers over a billion dollars. Men and women who might have wound up in prison have been able to build lives outside of our corrections system. Imagine if the rest of American criminal justice was free to innovate and improve in the same way!

Higher education. Elizabeth Warren, Bernie Sanders, and others are loudly calling for the federal government to forgive some or all of the $1.5 trillion in student loans outstanding in this country. But the reason we’re in this mess is that our colleges and universities are not preparing American students for the kinds of successful careers that would allow them to pay off their student debt.

The federal government disburses nearly $100 billion in Title IV student loans per year, and nearly another $30 billion in grants to colleges and universities. This massive aid package flows to institutions of higher learning regardless of whether their students succeed or fail in the workforce.Colleges and universities are completely unaccountable, and alumni salary data has only recently become available. Is it any wonder that tens of millions of people are struggling to pay off their student loans?

To a free-thinking entrepreneur who appreciates market incentives, it’s obvious that we should make Title IV funding contingent on the performance of our colleges and universities. Policymakers typically describe “performance” in terms of graduation or degree completion rates. But imagine if colleges and universities were rewarded with more aid and more scholarship students on the basis of the real earnings of their graduates.

In this world, schools would compete furiously to figure out how to best advance the careers of their students. They would address quantified skills gaps by focusing on vocational training, partner with large corporations in need of new recruits, offer classes in the evenings when full-time workers and single moms can attend them, and try out new blends of online and physical instruction. Instead of allowing accreditation agencies to decide what schools can and can’t teach, policymakers should reward schools for producing ultimate results based on metrics (like market salaries) that can’t be gamed.

There are obviously nuances — this kind of proposal would have to adjust rewards for the fact that some students are more likely to attain high-paying jobs than others, as well as institutions like arts colleges for which this model doesn’t make sense. But the basic philosophy is clear: give colleges and universities the liberty to experiment with different pedagogies and reward them for the result we care about most.

There are dozens of other non-partisan reforms to pursue in our country, at the federal, state, and local levels. Libertarians need to stop griping and start harnessing the best and brightest in the country to go do them. Our group, the Cicero Institute, is working with policymakers on both sides of the aisle to bring about reforms in healthcare, housing, and criminal justice that would help tens of millions of people and save tens of billions of dollars.

As Americans, we hold many values in common. The challenge is to promote sensible laws and institutions that bring about these shared values. We must ask: how can we expand opportunities for Americans to provide for ourselves and our families? How can we fight for reasonable costs of living instead of unaffordable medical bills, housing rents, and student loans? How can we prevent cronyism and corruption at the taxpayer’s expense? And how can we address the legacies of inequality that halter working-class citizens and threaten the unity of our republic?

Libertarians should not abandon bold, controversial ideas such as replacing our welfare state with direct “universal basic income” to the poor, legalizing most drugs, liberalizing our immigration policy, or drastically simplifying the tax code. But they should first apply their perspective to solve problems on which we all agree. Let’s channel our competitive drives and national genius into positive-sum projects in the service of others, whether in healthcare, criminal justice, education, or other areas of American life.

A more earthy, realistic American political philosophy will insist on the value of individual liberty while also recognizing that government will continue to be an instrument for solving social challenges. We must allow entrepreneurs and government employees to compete on the marketplace of ideas, transparently track their performance, and reward those who succeed. On a trellis of clear incentives, the vine of good governance may grow freely and flourish.

Our basic liberties have allowed a meritocracy of ideas to prevail in our country and made possible the past two centuries of economic growth and political progress. We can remain faithful to the insights that inspired our founding generation while also being honest about the realities of 21^st century government. What we can learn from libertarians is something that libertarians themselves seem to have missed: that the philosophy of liberty is both idealistic and pragmatic.

When we give entrepreneurs the freedom to innovate and reward them for delivering the social outcomes we care about, they deliver beautiful and unpredictable solutions. We can harness the energy of our great entrepreneurial culture to improve the lives of the least well-off and allow the best ideas to scale. We’re the best in the world at building innovative companies that transform lives across the globe. Let’s bring the same energy to championing policies that serve the American public in powerful, measurable ways.

The duty of the modern libertarian is to stop grousing about American government and start fixing it. If we remain true to the principle of LIBERTY and sustain a healthy respect for the creative energies of free people, we can transform our government and improve the lives of Americans across the country.

[1] As we have written elsewhere, preventive and in-home care models for patients with chronic kidney disease have been successful at lower costs. Medicare should embrace these models.

View original article on National Review.

No matter who holds power, individuals and groups have the right to spend money to communicate their ideas.

Since the landmark political-speech case Citizens United v. FEC (2010), there has been broad public support for campaign-finance reform, fueled by a deep suspicion of both politicians and moneyed interests. According to a Gallup poll before the 2018 midterm election, more than half of Americans view members of Congress as corrupt and beholden to special interests rather than to their constituents. Nothing has exacerbated those concerns so much as the decision in Citizens United, which empowers corporations and unions to advocate for political candidates and positions, so long as their efforts are not coordinated with candidates.

Many Americans are legitimately worried about special interests and corporations using campaign spending as a quid pro quo to gain political access and influence. Elections do need appropriate oversight. But we must be careful that oversight does not come at the cost of our constitutional right to speak, or — what is a necessary corollary of that right — our ability to spend money to use or build media platforms that communicate our ideas.

The first oral arguments of Citizens United demonstrate the unanticipated perils of campaign-finance regulations for speech. In that case, Chief Justice Roberts asked the federal government’s solicitor general whether some books could be banned under the current law: “It’s a 500-page book, and at the end it says, and so vote for X! The government could ban that?” The solicitor general, to the shock of the Court, affirmed that, under the current law, such a book could be banned and the author imprisoned. This exchange explains why the unconstitutional restrictions on political speech were overturned.

Our Founders understood that free speech helps protect Americans no matter who holds power. The Citizens United decision is a natural extension of the rights of individuals to speak freely; anything less would have betrayed the very concept of the First Amendment. As law professor John McGinnis wrote in the Los Angeles Times in 2016: “If the 1st Amendment protects an individual’s right to speak, then why . . . shouldn’t a group of individuals, banded together in a partnership or other association, also enjoy that right? And if an association has that right, why would it lose it when it takes corporate form?” Lest we forget: In 1964 it was a corporation, the New York Times, that fought for its constitutional right to publicly criticize racist government officials with impunity, and it won that right in the famous Supreme Court case of New York Times Company v. Sullivan.

The freedoms afforded to the press and to corporations are intimately tied to the freedoms of citizens to speak without restriction. If money cannot be used to make political statements, then the government can regulate who can buy or start media companies, and it can censor what kinds of statements and endorsements media companies and their investors can make and when. This means that independent journalism requires the liberty to spend money freely. One need only look to our own history to understand that governments cannot be trusted to impartially regulate the press. After passage of the Alien and Sedition Acts of 1798, Federalist-party officials prosecuted Democratic-party journalists who opposed them. Imagine that your political adversary is in charge of the government agency regulating the media’s political activities. Do you trust the government to make decisions about which news is fit to print?

It can be tempting to restrict political spending in order to make American politics “more fair.” But the dangers of arbitrarily silencing people with political-speech laws are far greater than the risks associated with disproportionate influence. Giving everyone an “equal voice” without violating everyone’s fundamental rights is an impossible chimera. Wealthy people can afford to advertise their views, but they are not the only ones with outsized influence  — others are able to shape perception through media or academic channels or to attract attention through their celebrity. The only way to equalize all speech would be to forbid all of it.

Contrary to the rhetoric of reformers, campaign-finance reforms often benefit the already powerful and well-connected elite. Special interests that have longstanding relationships wield a far more extensive arsenal of influence — political networking, nepotism, the revolving door, etc. — than simple campaign donations. In many cases, money is one of the few tools that grassroots advocacy groups and candidates have to employ in politics. The campaigns of independent and third-party candidates such as Ross Perot and Theodore Roosevelt (in 1912), who appealed to and performed strongly among voters from across the political spectrum, were possible only through substantial initial funding by private donors. If citizens were not permitted to use money to amplify their speech to take on the politically entrenched, the result would be disastrous for the American experiment in democracy: an ossified ruling class.

It is important to remember that ideas, not money, are the most powerful form of influence — and it shows in political-spending numbers. It might be surprising that heated elections such as those in 2016 elicited only about $6.5 billion in total campaign expenditures, which included spending by presidential candidates, Senate and House candidates, political parties, and independent interest groups. That is less than 0.2 percent of the federal government’s spending in just a single year. Given the stakes of control over the federal government, it is almost alarming that, as George Will has pointed out, U.S. presidential contests cost only about as much as Americans spend annually on Easter candy.

The reason there is so little money in politics is that in most races, cash is irrelevant to electoral results. As many as 80 to 90 percent of congressional races are “effectively predetermined” by factors such as the district’s partisan makeup and incumbency advantage — symptoms of gerrymandering, unlimited tenure, and other important, tangential issues. While advertising can help achieve basic name recognition early in campaigns, returns diminish quickly thereafter and rarely shift votes. In 1994, Stephen Levitt, the co-author of Freakonomics, did a famous study of congressional elections in which the same two candidates had faced each other more than once but who spent different amounts of money each time; Levitt found that a 50 percent increase in spending by one candidate caused only a 0.33 percent change in the vote. Moreover, political donations do not seem to sway legislators in favor of special interests. In a recent study, John Matsusaka of the University of Southern California found that at least 65 percent of the time, a legislator’s voting aligns with the wishes of the majority of constituents and that, in the remaining 35 percent of the time, voting most often aligns with the individual ideology of the politician rather than with the interests of their largest donors alone.

Rather than succumb to popular hysteria about money in politics, we ought to take a more philosophically rigorous view of the issue. Our Founding Fathers, while noting the potential danger of special interests, still believed that “factions” must play a role in democratic debate. James Madison and others understood that any attempt to abolish factionalism would limit freedom. In Federalist No. 10, Madison wrote that “liberty is to faction what air is to fire, an aliment without which it instantly expires. But it could not be less folly to abolish liberty, which is essential to political life, because it nourishes faction, than it would be to wish the annihilation of air . . . because it imparts to fire its destructive agency.”

The same must be said of speech.

Instead of eliminating the influences of special interests by restricting the liberties afforded to all citizens, in a large and diverse republic, Madison suggested, factions of citizens would compete to advance their ideological agendas. Adversaries such as the National Rifle Association and the Brady Center seek to organize like-minded citizens and rally political support through policy research, fundraising, advertising, and other means. Corporations and industry trade groups offer policy prescriptions that are then contested by non-governmental organizations and academics who rigorously analyze the policy prescriptions offered by those corporations.

Most political expenditures by interest groups aim to inform and excite the American public through legitimate avenues. Citizens who may oppose a competing interest should not silence that interest through legal restriction but rather signal their commitments by volunteering, contributing, and voting for their preferences. The importance of this approach is emphasized by the fact that some of the most effective special interests, such as the American Hospital Association, influence politicians primarily through slanted research, not financial contributions. Only about 2 percent of the AHA’s budget is spent on campaign contributions, but this understates its electoral activities, since AHA can mobilize hundreds of doctors for political efforts in a given congressional district without spending any money at all.

Even so, citizens should be vigilant and pay attention to the way that politicians interact with money, but the best way to moderate those interactions is to make them transparent. An example of this kind of reform is the un-adopted amendment that Representative Rodney Davis (R., Ill.) attached to to H.R.1 — the For the People Act of 2019, a campaign-finance-reform bill that the House passed this spring and that is unlikely to pass the Senate. Davis’s amendment would help voters know if their representatives’ campaigns are being financed largely by groups outside their district. Given access to information about campaign-finance expenditures, voters would be empowered to discern what constitutes unsavory politics and what does not. Imagine if all members of Congress wore NASCAR suits that labeled all of the major special interests that supported them — don’t you think lawmakers would start acting differently? As law professor Bradley Smith pointed out in 2010 in an essay in National Affairs, politicians are not obstinate: “Votes — not dollars — are what ultimately get put into ballot boxes. And it would make little sense to anger one’s constituents for a contribution that can only be used to try to win those constituents back.”

Madison believed that we should trust the ability of citizens to make political decisions to elect “fit characters” or to vote out unfit representatives. No amount of money can overcome the voter’s ultimate power. Fortunately, the Supreme Court in Citizens United maintained faith in the American citizen, declaring that “the right of citizens to inquire, to hear, to speak, and to use information to reach consensus is a precondition to enlightened self-government and a necessary means to protect it.”

Our citizens today are enfranchised irrespective of race, sex, and creed. We are, in this respect, more fit to make political decisions than any those in any previous political epoch. American citizens are afforded liberties by our forefathers, because the founders of our nation had confidence in their posterity to use and protect them wisely. The Founding Fathers did see the potential problems that liberties — those of citizens and of factions of citizens — could present a republic. Yet they knew that the freedom to speak was the foundation of any successful republic, and that any cure for the so-called problems of speech — as with other forms of liberty — would be worse than any of its associated illnesses.

…But ’tis a common proof,
That lowliness is young ambition’s ladder,
Whereto the climber-upward turns his face;
But when he once attains the upmost round.
He then unto the ladder turns his back,
Looks in the clouds, scorning the base degrees
By which he did ascend. So Caesar may.
Then, lest he may, prevent. And, since the quarrel
Will bear no colour for the thing he is,
Fashion it thus; that what he is, augmented,
Would run to these and these extremities:
And therefore think him as a serpent’s egg…

-Brutus, Act II Scene I, Julius Caesar

Our government is plagued by polarization, gridlock, and special interest capture which — combined with an overgrown administrative state and poor policy in many sectors — stall economic mobility and meaningful social progress. In this atmosphere, it’s intellectually tempting for policy thinkers to seize the reins of government and dictate technocratic solutions from the helm. Indeed, a virulent strain of top-down thinking has infected our nation’s capital. But the marketplace of ideas cannot function if constrained to legislators, regulators, and the small cluster of think tanks in their orbit.

It’s a tautology that any government action is top-down, but if it’s agreed that government is going to be involved in an industry, the highest and most effective role of government in a free society is to enable bottom-up, entrepreneurial innovation to solve the issues at hand. Rather than dictate how a sector should be run top-down, our policy goals should include creating frameworks that give entrepreneurs aligned incentives and maximal flexibility to experiment to achieve the agreed upon ends. Academics and policy makers do not have a monopoly on clever ideas and good judgment. They must abandon their hubris and instead champion policy frameworks that inspire and enable entrepreneurial individuals everywhere to improve education, healthcare, criminal justice, and other areas of society.

Although we support academic freedom, AEI’s role is to promote a certain set of values and we humbly suggest that it is the role of the board to remind its scholars of these values from time to time.

By way of example, a popular candidate for policy reform is America’s higher education system. Many colleges and universities are not preparing students for the workforce, as evidenced by the 2.5 million STEM jobs that will go unfilled in 2018. [1] 400,000 Associates of Arts students a year graduate from arts and identity studies programs with minimal prospects for either a job or a bachelor’s degree. Other reports find that many employers are unable to fill jobs because students are being steered into bachelor’s degrees instead of trade schools.[2][3] Meanwhile, 8 million Americans are currently in default on their student loans, and total student loan debt has reached a dizzying $1.4 trillion.[4][5]

Untethered subsidies to higher education institutions ruled over by a large centralized bureaucracy are a failed experiment in Soviet-style economics. Regulatory restrictions on which programs qualify for accreditation chill experimentation with apprenticeships, competency-based education programs, and other kinds of skills-based pedagogies. Instead, approaches that take into account the values and lessons of free enterprise would tie funding to specific quantitative goals such as higher average salaries over the years after college or higher percent employment rates. These metrics would incentivize entrepreneurs to innovate, compete, and profit when they succeed, or lose when they fail. The greater the aligned profit opportunity, the greater our success will be at making students successful.

There are many areas for values-aligned scholars to disagree and innovate. If the Federal government is going to spend money on education, perhaps it should grant money to state governments to experiment with rewarding schools for pioneering new techniques that successfully prepare their students for the workforce. An intelligent policy that solders school revenues to real student outcomes would allow creative new ideas to filter into our education system, first through vocational schools and then through traditional forms of higher education.

For decades the American Enterprise Institute has proudly advanced the ideals of free enterprise and a “pluralistic, entrepreneurial culture.” At the heart of the AEI’s commitment to enterprise is the understanding that great ideas come from unexpected places. Enterprise thrives in a system where truly innovative products go viral, and visionary entrepreneurs are rewarded for their unique contributions to human life. Competitive markets are an effective sieve for groundbreaking insights because they are open to all comers and generate ideas from the bottom-up.

AEI is rightfully admired for drafting sound policy suggestions across most facets of American government — producing genuinely bottom-up reform proposals across various policy areas, not just in education but also in healthcare, where AEI scholars have expounded value-based, preventive models that would deliver cheaper, higher quality health services to Americans.[6]Unfortunately, we are beginning to see symptoms of top-down thinking in AEI scholarship. This bias is most apparent in the AEI coverage of criminal justice reform, which seems to have fully surrendered to the Soviet mindset and makes technocratic judgments about which rehabilitation techniques to employ rather than advocating a systemic overhaul that aligns enterprise profits with developing creative solutions to recidivism from the bottom up.[7] [8] [9] But AEI’s scholarship on higher education has also displayed an anti-market drift.

At their best, AEI’s papers on higher education recommend bottom-up innovation and competition by holding schools directly accountable for preparing students for the workforce.[10] But in a recent series, several AEI scholars argue that the federal government should tie funding to student completion rates.[11][12] This is a shortsighted, top-down strategy for mending our higher education system. Incentivizing colleges and universities to graduate as many students as possible turns schools into degree mills, corroding the value of the college degree as a signaling mechanism. As noted, degree completion often bears no relation to a student’s prospects for a successful career after graduation.[13] This suggestion is not merely questionable policy; it goes entirely against the values and principles of AEI. The authors should be reminded to consider why liberty and free enterprise work and are a key part of our values.

These are minor examples, but working from the heart of DC, it’s very tempting to go along with the status quo and start prescribing top-down solutions. Emphasis on arbitrary intermediate metrics rather than ultimate social ends is characteristic of top-down policy thinking and inconsistent with the modest, democratic spirit of free enterprise. The leaders on the board of the American Enterprise Institute must take a stand for the values of enterprise and liberty and make sure that AEI scholars are advancing the Institute’s founding principles. Education in America will continue to be suboptimal until it embraces the principles of liberty and open innovation. The only major education reforms worth supporting are those that harness our shared values, such as frameworks that enable entrepreneurial teachers to compete, experiment, and innovate to better prepare students to succeed in the labor market — scaling the ideas that work and eliminating the schools that do not.

In translating these values into concrete policy, AEI researchers have much to explore and map out. Instead of a traditional income sharing agreement — which lends money to an individual student — the federal government could directly fund educational institutions themselves, for instance, and easily match existing IRS data on per-student educational program spending with the future salaries of students. Schools that produce high-earning graduates could then be allowed to take more students on government loans. There are many new ways for markets to work here.

Injecting entrepreneurial energy into a space is always superior to regulating it from above. While initial school credentialing is inescapable, it should be permissive. Educational institutions themselves should be the ultimate arbiters of which programs receive grant funding, not distant bureaucrats. Of course, colleges and universities will naturally be incentivized to cherry-pick the best students. Federal grants could adjust to reflect quantitative assessments of students’ parents’ salaries in order to create opportunity for the socio-economically challenged in a market-driven way. One course of study for AEI scholars is to consider how exactly to construct the rewards scale for different students. It may take several years to determine if a graduate will attain a high salary in the workforce, but as long as the reform doesn’t become a political football, the federal government and financial markets can disintermediate risks over medium timeframes.

Enabling entrepreneurial solutions instead of top-down techniques doesn’t mean that scholars can’t suggest ideas or give examples of what entrepreneurs might do — they just can’t prescribe exact implementation methods. In this new, competitive system, colleges and universities could try out various approaches such as:

Addressing quantified skills gaps by focusing on professions such as vocational nursing, K-12 education, and construction — and teaching work-ready skills.

Partnering with large corporations in need of new recruits; using industry certification programs to communicate with potential employers instead of traditional credentials; developing databases of regional businesses and their hiring needs. [14] Most mid-to-large companies would love dedicated recruiting programs, but do not currently have them.

Offering classes in the evenings when continuing-education students such as single moms and full time workers can actually attend them. Today, 30% of undergraduates in America are over the age of 25, and 25% of full-time college students are also working full-time.[15]

Tinkering with the ratio of online educational material to focused physical classroom time or 1-on-1 mentorship sessions; conducting prior learning assessments; concentrating classes into 8-week vs. 16-week terms and seeing what gets results and is profitable for all involved.

Rather than deciding exactly how the industry is going to work, enlightened scholarship will instead recommend a framework that allows schools to independently test which of these strategies work for them, with competition in the marketplace determining what scales. The best solutions for particular student demographics and geographical regions will vary, and the blend of techniques employed by a school will have to fluctuate in real-time in response to changing labor market conditions. A bottom-up, experimental approach is the only way to calibrate curricula to regional idiosyncrasies.

We hope that in the coming years the American Enterprise Institute will maintain their tradition of excellence and generate many other bottom-up, market-driven proposals for reforming higher education and other policy areas. The question is how to set a simple long-term goal, such as student career growth as measured by salary, improved health outcomes, or lower recidivism rates, and unshackle entrepreneurs to compete and innovate towards better solutions. In all domains, leading policy advisors should pair bold systems-thinking with intellectual modesty, and craft policies which embrace unforeseen nuance and local wisdom.

When our scholars eschew enterprise-driven frameworks we should consider reminding them what AEI stands for, and why. When profit incentives are aligned towards appropriate goals, the innovative spirit of free enterprise will always be better at solving complex social problems than edicts from on high.

[1] Smith, Lamar. “To fill STEM jobs, federal programs need to focus on results.” Committee on Science, Space, & Technology. December 20, 2017.

[2] Schneider, Mark and Matthew Sigelman. “Saving the Associate of Arts Degree.” AEI,

[3] McCarthy, Pat. “Leading Practices for the State’s Secondary Career and Technical Education Programs.” Office of the Washington State Auditor. December 19, 2017.

[4] https://studentaid.ed.gov/sa/about/data-center/student/portfolio

[5] Levitz, Eric. “We Must Cancel Everyone’s Student Debt, for the Economy’s Sake.” New York Magazine, February 9, 2018.

[6] Capretta, James and Lanhee Chen. “Yes, there’s hope for health care reform.” AEI, August 31, 2018.

[7] Streeter, Ryan and Brent Orrell. “Time to Set Politics Aside to Move Ahead on Criminal Justice Reform.” AEI, June 6, 2018.

[8] Duwe, Grant. “The effectiveness of education and employment programming for prisoners.” AEI, May 2018.

[9] Robinson, Gerard and Elizabeth English. “Give Prisoners a Second Chance.” AEI, October 18, 2016.

[10] We were excited to see Naomi Schaefer Riley defend this position in an extremely recent piece, see: Riley, Naomi. “Time for Colleges to Get Some Skin in the Game.” City Journal, September 11, 2018.

[11] Schneider, Mark and Kim Clark. “Completion Reforms That Work.” AEI, May 2018.

[12] Turner, Sarah. “The Policy Imperative: Policy Tools Should Create Incentives for College Completion.” American Enterprise Institute, May 2018.

[13] AEI scholar Sarah Turner briefly contemplates tying federal dollars to default rates on student loans, but worries that default rates are a lagging indicator. In our view, default rates are clearly a superior metric to degree completion. However the best metric is future salary, which is the real, if implicit, outcome at which American higher education aims.

[14] Monroe Community College in Rochester, NY has begun using this database model. See: Alvarez, Joshua. “The Twelve Most Innovative Colleges for Adult Learners.” Washington Monthly, October 2017.

[15] Kelly, ibid.

8VC traditionally invests in companies that tackle industry-wide problems by reimagining traditional paradigms and helping modernize some of our oldest technological infrastructure. That’s why we invested in and launched Esper, a platform that helps modernize the regulatory process in our oldest and most important institution: government. Esper’s mission is to help government regulators make data-driven decisions.

We witness first-hand as many of our innovative companies struggle to navigate complex regulatory landscapes. Overlapping and sometimes conflicting federal and state regulations can be costly and confusing to even the most seasoned entrepreneurs. Startups, which rarely have a team of lawyers and compliance specialists, often live in a shadow of legal uncertainty and are afraid to ask questions for fear of heightened scrutiny.

Meanwhile, regulators struggle to balance critical administrative tasks with shifting political priorities and urgent health and safety concerns from their constituents. Both federal and state regulatory agencies confront a staggering volume of rules: The Federal Register contains over 100,000 final rules and 1.08 million individual restrictions, and the average state code contains between 100,000 and 200,000 individual restrictions.[1] The sheer scale of work demanded of our agencies means that regulators seldom have time to properly evaluate and update policies with internal data and feedback from citizens, business owners, and other stakeholders.

At present, regulatory data such as cost-benefit analyses, lists of impacted industries, expiration dates, guidance documents, forms, and applications is scattered across the internet in turn-of-the-century websites like this one, or worse, in file cabinets. Regulators typically create a flurry of rules when a law is passed and revisit them only when a new law is enacted or they receive serious public complaints. There is no coordinated operating system to connect regulatory data points and flag which documents are affected by which legal events, so thousands of outdated, duplicative, and contradictory rules have accumulated at the federal and state levels.

It’s a daunting task for policymakers to revise the regulatory corpus. It would literally take years for the average citizen or business owner to parse out which rules apply to them, and recent economic literature has confirmed that regulations slow economic growth by an average of 2% per year.[2] Now more than ever, regulators face pressure by legislatures, governors’ offices, agency heads and others to conduct retrospective reviews and instill safeguards against excessive rulemaking. Many agencies have been ordered to review mountains of rules and conduct better cost-benefit assessments but aren’t sure how to begin.

Whatever one’s politics, making the administrative state more adaptive, intelligent, and transparent is vital for the American economy and for good governance. Indeed, modern software infrastructure with a coherent ontology for regulatory data is necessary to preserve our distinctly American tradition of checks and balances on government. Unless regulators can organize rules for themselves, legislators, and the public, our ship of state will be rudderless and adrift on a dark sea.

Esper is a software platform that allows administrative bureaucrats to run a fair, logical rulemaking process. Our company collates existing digital regulatory data to chart when a rule was last updated, when it will expire, and whether it contains a reference to a repealed law. This detailed analysis allows regulators to swiftly determine where to focus their attention and when they need to create, revise, or eliminate rules. In addition, Esper has built an algorithm that helps regulators compare their rules to similar rules in other jurisdictions (and was thrilled to find that regulators love being able to compete against their counterparts in other states!).

Esper’s product also equips regulators with a suite of tools to draft proposed rules, amend existing rules, and repeal outdated or costly rules. This workflow system is a significant departure from pen-and-paper or Microsoft Word-and-email exchanges. Regulators can now collaborate with each other, save amendments as drafts in a mutual library, and enter important information such as “how much will this rule cost?”, “who will this regulation impact?”, “how many businesses or individuals must comply?”, and “which special interest groups are lobbying to change this rule?”

We are making huge strides in capturing information on affected industries and persons and will ultimately be able to synchronize regulatory data with empirical data on the effects of rules. Esper also allows regulators to hold each other accountable to deadlines and specific goals, such as “update 50% of rules in Texas by the end of 2018.” The next evolution of the product will help agencies to synthesize public comments (e.g. number of complaints vs. encouragements) and enforcement data (e.g. number of penalties levied for non-compliance) to support data-driven policies.

Taken as a whole, Esper’s product features allow regulators to perform their jobs quickly, effectively, and verifiably. Deconstructing complex processes within government agencies allows governors’ offices, legislatures, and independent bodies to hold regulatory agencies to account, set new policy agendas informed by quantitative metrics, and track goals to completion. Government executives can now make more informed decisions about which sectors of an economy to monitor, how to allocate monetary resources and personnel, and when to reward or discipline appointed officials.

Technological infrastructure is transforming the ancient vocation of governance and rebuilding one of the largest, most broken industries in the world according to the principles of common sense. In the recent wave of blockchain enthusiasm we saw an obsession with new modes of governance and representation, from “liquid democracy” to “futarchy”, but we submit that the most important innovations in governance lie closer to home. Esper secured a contract with the state of Kentucky and a pilot in Arizona within a year of its inception, and several other states have expressed strong interest in the product. We’ve been very excited to see the rapid uptake of the product in line with our core investment thesis, but we’re not surprised. Esper’s technology completely revamps existing public policy infrastructure to enable real, living bureaucrats to govern in more thoughtful ways, and measure themselves more carefully against the will of the American people and their elected representatives.

Endnotes

[1] An individual restriction is a clause containing a legal requirement, such as shall, must, may not, prohibited, and required. See: https://www.mercatus.org/publications/regulation/comparing-regulations-across-us-states

[2] https://www.mercatus.org/publications/regulation/regulatory-accumulation-and-its-costs

The American federal government spends about $140B annually on prescription drugs. Medicare Part D, which reimburses drugs an American senior would pick up at the pharmacy, accounts for over $100B of this spending.[1] Medicare Part B, which reimburses drugs administered in a clinical setting, accounts for another $28B in spending a year.[2] The federal government relinquished all rights to negotiate the price of Part D drugs in the Medicare Modernization Act of 2003, but fortunately HHS can experiment with different negotiation strategies in Part B.

Medicare Part B covers drugs used to treat cancers, esoteric diseases, and other rare conditions. These drugs are often offered by only a single manufacturer and tend to be much more expensive than other drugs. For example, in 2016 Medicare Part B spent $2.2B dollars on prescriptions of Eylea (a macular degeneration treatment) and $1.6B on Rituxan (which is used to treat certain types of cancer and autoimmune diseases). Part B spending is growing at an alarming 11% annually, compared with 3.2% annually for Part D.[3]

Part B reimbursement operates on a “fee-for-service” model. Manufacturers sell drugs to wholesalers and distributors, who then sell drugs to providers such as physicians and hospital networks. Providers purchase drugs, and then are reimbursed by the federal government through regional “Medicare Administrative Contractors” for the average sales price of the drug (ASP) plus an “add-on fee” worth 6% of the price of the prescribed drug. This “buy-and-bill” system rewards providers for prescribing the most expensive drugs possible, and manufacturers are only too happy to inflate the prices of drugs before selling them to providers. The American taxpayer suffers the costs of this perverse arrangement.

To solve the buy-and-bill problem and drive down the price of drugs, HHS recently proposed a rule that would reimburse vendors (not physicians) at a price determined by indexing reimbursement to the price of drugs in 16 other developed countries. In a price-per-gram comparison of 27 Part B drugs across these countries, HHS found that, on average, Medicare Part B pays 1.8x the average sales price of drugs in other countries. A true international price index could therefore be expected to drive down Medicare Part B expenditures about 45%. According to the proposed rule, the international price index will pilot in 25 states, and roughly $10.5B of annual Part B expenditures will fall within the scope of the program.[4]

So far so good. A true price index would drive international markets for Part B drugs into new equilibria where the US saves billions of dollars a year and it would be more difficult for foreign governments to freeride on American R&D. However a crucial paragraph buried on page 40 of the proposed rule document reveals that HHS actually plans to impose a blunt 30% price control on selected Part B drugs rather than allow drug prices to dynamically respond to prices in the international marketplace. The paragraph reads:

CMS would also establish the model ‘Target Price’ for each drug by multiplying the IPI [International Price Index] by a factor that achieves the model goal of more closely aligning Medicare payment with international prices, which would be about a 30 percent reduction in Medicare spending for included Part B drugs over time, and then multiplying that revised index (IPI adjusted for spending reduction) by the international price for each included drug.

We reread the page a dozen times and were nonplussed when we realized that after defending the virtues of a price index, the authors of the rule actually just plan to multiply the price index by a coefficient to achieve a number that represents a 30% reduction in Medicare Part B payments. We hope that HHS has made a mistake and strongly suggest revising the document so that the price of any Part B drug is just directly pegged to the average of prices in the countries used to create the index. If the real aim of the document is to implement an arbitrary 30% price reduction over time, HHS should eliminate any references to price indices in this document.

A blunt price control defeats the entire spirit and purpose of an international price index, which is to allow prices of drugs to fluctuate naturally in response to aggregate demand and pricing strategies in foreign markets. Even if phased in gradually, a true price index would save taxpayers vastly more money (a ~45% price reduction would save 10–20 billion more than a 30% price index over the next decade). An adaptive index would also closely approximate an actual international market for drugs rather than the arbitrary rigidity of a Soviet price control.

This rule is currently in “advance notice for proposed rulemaking”, which means it must clear three more rounds of internal review and five rounds of external review before HHS can launch the pilot. There is plenty of time to correct this error and remove the paragraphs in question; we encourage HHS to do so.

The pharmaceutical industry is the largest lobby in the country by a huge margin, and PhRMA, the drug manufacturers trade organization, will certainly fight this proposal.[5] In the past it has successfully quashed several promising Medicare Part B pilot studies, including a program that would have paid for cancer drugs at the price of the least costly equivalent (where multiple drugs offer similar efficacy).[6][7] Nonetheless, we are optimistic that the Trump administration will be able to launch a pilot with a real price index, and are confident that a price index would save Americans billions on physician-administered drugs per year.

[1] https://oig.hhs.gov/oei/reports/oei-03-15-00080.pdf

[2] https://www.cms.gov/sites/drupal/files/2018-10/10-25-2018%20CMS-5528-ANPRM.PDF

[3]https://aspe.hhs.gov/system/files/pdf/259996/ComparisonUSInternationalPricesTopSpendingPartBDrugs.pdf

[4] The program will only operate in 25 states and will be restricted to (1) drugs incident to physician services, or 84% of Part B prescriptions and of this class, 2) only biologicals and single source drugs, or 90% of drugs in (1).

[5] https://www.opensecrets.org/lobby/top.php?indexType=i&showYear=a

[6] https://jamanetwork-com.ccl.idm.oclc.org/journals/jama/fullarticle/2521323?resultClick=1

[7] Of the 147 patients groups that lobbied against this pilot program, 110 were funded by the pharmaceutical industry. http://www.citizen.org/sites/default/files/patients-groups-and-big-pharma-money-report.pdf