Ten (Mostly) Hayekian Insights for Trying Economic Times

by David Azerrad

WITH THE COUNTRY CRAWLING out of the worst recession since the Great Depression, it’s no surprise that the economy is on everyone’s mind. According to the latest Gallup poll, seven in 10 Americans point to economic issues as the most important problems facing the country.

These worries about the economy inevitably give rise to debates about the government’s proper role in hastening recovery and forestalling future recessions.

On the one hand are those who call for interventionist policies to stimulate the economy. According to this view—espoused by many on the Left—the government ought to spend more. We need another stimulus, they say, as the initial $800 billion one was not large enough to revive a sluggish economy.

While economists do not agree on whether such interventionist prescriptions actually work, there is no question that stimulative fiscal policies swell the deficit and contribute to our ballooning debt. As Clive Crook of the Financial Times put it: “What the stimulus gives, the debt projections take away.”

A less sanguine set of ideas about the prospect of government-fueled recoveries comes from Friedrich Hayek, the author of the classic Road to Serfdom and one of the most important economists of the 20th century.

In a new essay published by The Heritage Foundation, Bruce Caldwell, the Director of Duke University’s Center for the History of Political Economy and the editor of The Collected Works of F.A. Hayek, distills the key Hayekian insights on what to do—and not do—during difficult economic times.

Caldwell’s conclusion: “We usually don’t have the necessary knowledge to intervene effectively in the economy, and the political process is such that, even if we did, we still likely would get bad policy, coupled with an ever-growing government sector.”

With a little help from public choice theorists, here then are the 10 Hayekian insights for trying economic times:

1. Recessions are bound to happen. Shifts between periods of economic growth and periods of stagnation or decline are a necessary and unavoidable part of a freemarket monetary economy. Downturns are not aberrations but rather painful and necessary medicine for restoring equilibrium to the economy.

This insight, however, does not mean that all recessions are natural: Government meddling in the economy—e.g., keeping interest rates too low for too long—will lead to malinvestment—too many investment projects get started that cannot ultimately be sustained—and culminate in a recession.

2. Central planning and excessive regulation sure don’t work. The desire to plan and to subject the economy to the rule of experts endangers liberty. As Hayek succinctly noted: “The more the ‘state’ plans, the more difficult planning becomes for the individual.”

Hayek argued that central planning, if fully implemented, would lead to disastrous economic results and ultimately to restrictions on political and personal freedoms.

3. Some Regulation is necessary. Hayek made it clear that he was not advocating a system of pure laissez-faire, but one with a general system of rules that would enable individuals to carry out their own plans. Hayek’s contribution was to stress the importance of institutions—a market system, in a democratic polity, with a system of well-defined, enforced, and exchangeable property rights, protected by a strong constitution, and operating under the rule of law, in which laws are stable, predictable, and equally applied.

4. A stimulus will only stimulate the deficit. Past experience with trying to fine-tune the economy shows that counter-cyclical fiscal and monetary policy can sometimes make matters much worse (as in the 1970s). Wise politicians would therefore be advised not to meddle, however much their instincts tell them to show voters they’re doing something.

5. The economy is too complex for precise forecasting. As Yogi Berra could have said: “I hate making economic predictions. Especially about the future.” It’s not that we don’t know anything, but rather that what we do know reveals the limits of our knowledge, and consequently, of our ability to plan and forecast. When the knowledge problem is joined with other political and economic obstacles, the hope of getting rational policy out of Washington becomes very dim.

6. Remember the rule of unintended consequences. History shows that when trying to realize certain ends—particularly when their achievement involves interfering with the workings of the price mechanism—all sorts of pernicious effects will occur that were not part of the original plan (see #10).

Hayek was not altogether opposed to experimentation and change, but thought that piecemeal change is always preferable to wholesale attempts to remake society anew.

7. You won’t believe how much you’ll learn in Econ 101. While Hayek repeatedly pointed to the limitations inherent in a discipline that deals with a complex system like the economy, the basic principles of economics—scarcity, supply and demand, division of labor, etc.—can explain a lot about the world and help rule out certain inappropriate policy responses (e.g. price ceilings).

A good economics course will therefore help to identify more appropriate policy responses— responses that utilize markets rather than fixing prices or trying to legislate specific outcomes.

8. Leave social justice out of it. Free markets necessarily lead to an unequal distribution of wealth and, just as inevitably, fuel calls for egalitarian social justice, as anyone who’s read the editorial page of The New York Times or perused The Huffington Post knows. Hayek viewed such cries as misguided and dangerous.

First of all, he denied that justice applies to an impersonal market process: A person’s or an organization’s actions may be just and unjust, but the market process is not planned and the income distribution it generates has nothing to do with justice.

Secondly, the egalitarian demands of those who clamor for social justice violate the principle of the rule of law. If people differ in their attributes, then different people will necessarily experience different outcomes. The only way to get similar outcomes for different people is to treat them differently.

Lastly, redistributive schemes presume that we possess knowledge that we, in fact, can never possess (see #5).

9. Nothing beats the free market. Hayek admitted that if we had more knowledge we could do a lot more to improve the world through planning and regulation. But we don’t, and in the world of dispersed knowledge we live in much of the knowledge we actually do possess is due to the workings of the market mechanism.

In a world that is filled with unpredictability, where the man on the spot has only his own small bit of local (and sometimes tacit) knowledge, market signals provide information on which he can base his decisions. His decisions, together with those of millions of others, feed into the system to form the prices that emerge. Bad decisions and mistakes are constantly made, but in a market system, errors made by some are opportunities for others, and the latter’s profit-seeking actions help to correct them.

The self-regulating market system, when it is functioning well, reduces some of the unpredictability that we all face in the economic arena and helps to coordinate our actions with those of millions of others. It also allows individuals to act on their own local knowledge and thereby allows others to make use of that knowledge even though they do not possess the knowledge themselves.

10. As a rule of thumb, government cures are not only worse than the disease, but lead to further disease. When you consider that bureaucrats have an incentive to maximize bureaucracy, that politicians who seek reelection—and which ones don’t?—have an incentive to increase spending and decrease taxes, and that corporations have an incentive to squeeze out the competition through government conferred advantages, you’ll conclude that the free market remains our best option (see #9).

Mr. Azerrad is Assistant Director of the B. Kenneth Simon Center for American Studies at The Heritage Foundation. This article is based on a longer essay with the same title by Bruce Caldwell, editor of The Collected Works of F. A. Hayek. That essay, published February 1, 2011, is available at www.heritage.org/Research/Reports/2011/02/Ten-Mostly-Hayekian-Insights-for-Trying-Economic-Times.

Should We Rein in Federal Power with a Constitutional Convention?

ON A VARIETY OF FRONTS—Medicaid mandates, individual health insurance mandates, national education standards—state governments are vigorously pushing back against an overweening federal establishment. This resistance to federal power includes a number of folks who are promoting a remedy that has never yet been employed in our nation’s history—a convention for considering constitutional amendments. As provided for in Article V of the U.S. Constitution, states have the power to call on Congress for a constitutional convention when two-thirds of them agree to do so. We asked Matthew Spalding, Vice President of American Studies at The Heritage Foundation, for his thoughts on this idea.

The Insider: In spite of numerous political convulsions in our history, we’ve never had an Article V convention. Why do you think that is so?

Matthew Spalding: An Article V amendments convention has been a debated proposition since the very beginning. Madison understood this when he argued at the Constitutional Convention that “difficulties might arise as to the form, the quorum etc. which in constitutional regulations ought to be as much as possible avoided.” He recorded some of these questions in his convention notes: “How was a Convention to be formed? By what rule decide? What the force of its acts?” Combine these with the fact that no such amending convention has ever occurred (that is, there is no precedent) and too many serious questions are left open and unanswered. This absence of guidelines or rules makes an Article V convention a risky venture, and one that legislators have historically avoided.

Legislators have threatened an Article V convention as a way of encouraging Congress to take action on a certain issue. In these instances, the threat of an Article V convention (with all of its unknowns) is considered dangerous enough that Congress proposes the desired amendment through the usual congressional method. Such an action is not an unreasonable aspect of a constitutional strategy, but very different from claiming that we should actually have such a convention as a matter of course.

TI: Some scholars think an Article V convention could be limited to considering specific amendments. Do you think that is the case, or not?

MS: The largest question is whether an amendments convention can be limited to specific amendments or even topics. The pro-convention argument assumes that the power to limit the convention is inherent in the power to call the convention in the first place. I’m not so sure that follows: The text says that upon application of the states Congress “shall call a Convention for proposing Amendments,” not for confirming a particular amendment already written, approved, and proposed by state legislatures (which would effectively turn the convention for proposing amendments into a ratifying convention). Indeed, it is not at all clear as a matter of constitutional construction (and doubtful in principle) that the power of two-thirds of the states to issue applications for a convention restricts, supersedes, or overrides the power of all the states assembled in that convention to propose amendments to the Constitution. When Madison later pointed to an Article V convention as a way to solve the Nullification Crisis (as did Lincoln during the Civil War), an amendments convention was understood to be free to propose whatever amendments thought necessary to address the problems at issue.

TI: Shouldn’t we pursue an Article V convention as an option for constitutional reform? What gives you hope that we can reform the federal government without an Article V convention?

MS: Serious scholars will undoubtedly continue to debate the historical record and speculate about the possibility of an amendments convention under Article V. But the argument that, as a matter of course, we should spend considerable time, money, and effort right now to design, plan, and implement a convention—despite the unknowns and risks involved—is both imprudent and potentially dangerous. It is a distraction that inevitably gets bogged down in a debate over technical details, taking valuable attention and focus away from the substance of the constitutional reforms themselves. Claims of the ease and efficacy of an Article V convention are also misleading to the many committed and well-meaning reformers and activists who are serious about constitutional change in the United States.

There are several very good constitutional amendment ideas circulating, and a strong consensus is beginning to coalesce around a few. We should be careful not to undermine those good efforts by tying them intrinsically to the dubious process of an Article V convention.

There may be a time in extremis when an Article V convention is our last option to try to preserve the Constitution. But just when there seems to be a national awakening to reestablish constitutional principles, American politics at the state and national level is moving in the right direction and a decisive election is on the horizon. That dark time is not now.

The Medicaid Disaster Ahead

by Roger Stark

THE PATIENT PROTECTION AND AFFORDABLE CARE ACT (PPACA, or Obamacare), passed last spring, will create a greatly expanded Medicaid program. This expansion is expected to make up one-half of the cost of the law, pegged by CBO at $1 trillion over just the first 10 years. It will also compound the problems of what is arguably the worst health insurance plan in the country. Medicaid has expanded massively beyond its original intent in 1965 and is now one of the two or three largest budget items for nearly every state. Because of low provider reimbursements, many patients have difficulty finding care. The number of doctors who are not seeing new Medicaid patients grows larger each year. The new health care law will add at least 23 million new patients to Medicaid rolls without providing for more physicians and nurse practitioners, which can only compound the access problem. And after more than 40 years, there is little evidence that Medicaid has improved the health of the poor.

A History of Rising Costs

The current Medicaid program began with the passage of the 1965 Social Security Act. The Medicaid entitlement commits the federal government to providing health services, regardless of cost, to all U.S. residents who meet the eligibility requirements. When created in 1965, eligibility was defined as: (1) all children in families with incomes of less than 133 percent of the federal poverty level (FPL); (2) all adult caretakers of eligible children; (3) elderly people not receiving supplemental social security benefits; (4) the legally blind; and (5) the disabled.

The program has always been an entitlement, with no defined limit on the number of beneficiaries or the cost of the program. The current Medicaid program is now the largest health insurance system in the United States and is the largest means-tested health care program in the world.

The cost of the current Medicaid program is shared between federal and state governments. Each state receives federal money on a sliding scale based on average personal income, with poorer states getting a higher percentage of federal funds. At present, the average match for Medicaid spending is 57 percent in federal money and 43 percent in state funds.

Incentives to Expand. The original purpose of requiring states to match the federal funds they receive for Medicaid was to control costs. The thinking of congressional sponsors was that state lawmakers would be cautious about obligating the money of their own taxpayers to fund a federal program. In practice, the exact opposite has occurred.

When a state spends one dollar for education, it gets one dollar of education services. On the other hand, when a state spends one dollar on Medicaid, it effectively gets at least two dollars of health care—its own plus the matching federal funds. Far from being cautious, state lawmakers feel they are leveraging federal dollars by expanding their own Medicaid program. Their reasoning is that limiting their own state’s spending only leaves federal money on the table, which will simply go to other states.

Federal lawmakers face similar incentives. Each federal dollar spent on Medicaid leverages a state dollar for the program, so members of Congress feel they get the full political credit for expanding government coverage of health care, while spending only half the money. In reality of course, state and federal legislators have only one source of money—the American taxpayer.

By the Numbers. Medicaid spending is now the fastest growing item in the budgets of nearly every state in the country, accounting for 21 percent of the average state budget in 2008. And that proportion is expected to grow, according to the National Association of State Budget Officers. For 2008, Medicaid expenses for federal and state governments combined were $339 billion. The Centers for Medicare and Medicaid Services projects this number will reach $523 billion by 2013, a 54 percent increase in just five years.

Spending for the current Medicaid program will double by 2017, and by then it will consume 6 percent of the nation’s gross domestic product, according to the Congressional Budget Office. The program’s average growth rate of 8 percent per year makes it the fastest- growing federal entitlement program. In the years since it was enacted, Medicaid has grown at twice the rate of health care price inflation, and significantly faster than inflation in the general economy.

In the area of cost containment, Medicaid has never lived up to the promises made for it. The 1965 cost projection for the program in its first year was just under $500 million. The actual cost in the first year was double that figure, $1 billion. By 1970, the cost of the program had grown by 500 percent to $5 billion, during which time the price level increased by only 23 percent.

By 2007, Medicaid’s total cost (state plus federal spending) was a staggering $336 billion, despite the fact that only two-thirds of potential Medicaid recipients are signed up at any one point in time.

Medicaid now represents almost 15 percent of the $2.1 trillion in total annual health care spending in the United States. In 2007, this single program accounted for fully 7 percent of all federal spending.

Making Health Care Worse

Expanding Medicaid has not been a cost-effective way of increasing health insurance coverage because many enrollees simply substitute free public insurance for the private insurance they already have. Economists Jonathan Gruber of MIT and Kosali Simon of Cornell University have calculated this “crowd out” effect for recent expansions of eligibility. They estimate that 60 percent of recent enrollees ended up dropping the private coverage they already had.

Is There a Doctor Here? Free insurance might seem a bargain, until enrollees need to find a doctor, and that can be a challenge because of the program’s low reimbursement rates. Even though Congress over the past 20 years has steadily reduced the Medicare program’s doctor reimbursements in real terms, Medicaid reimbursements still win the race to the bottom. Despite consistent declines in Medicare payments, Medicaid payments still average only 60 percent of what Medicare pays to doctors.

Low reimbursement rates have led some doctors to stop taking Medicaid patients altogether. From 1999 to 2003, the percentage of physicians accepting all new Medicaid patients dropped from 48.1 percent to 39.4 percent, according to a survey by Julie Schoenman and Jacob Feldman for the Project HOPE Center for Health Affairs. Schoenman and Feldman also found that the percentage of physicians who stopped accepting new Medicaid patients completely increased from 26.4 percent to 30.5 percent. The unfortunate, but predictable, consequence of low doctor reimbursement is a decrease in access to health care for Medicaid recipients.

Other People’s Money. Doctors have also responded to low reimbursement rates by shifting costs to patients who pay cash or who have private insurance and to over-treat some conditions (in order to earn fees for more services). In a 2004 paper published by the National Bureau of Economic Research, economists Mark Dugan and Fiona Scott Morton estimate that the cost shifting adds 10 percent to 15 percent to the price of private health insurance.

One of the major reasons health insurance costs so much today is the rise of third-party payment, and Medicaid is a major component of that problem, too. Today 87 percent of U.S. health care is paid for by someone other than the patient receiving the services. When things are free to the consumer, he has no incentive to match the value he receives with the cost of the resources used, and overconsumption follows. If the overutilization problem in Medicaid is similar to that in Medicare, the overuse could be as high as $50 billion per year. These factors making private health insurance more expensive only compound the “crowd out” problem by making free health insurance that much more attractive.

Medicaid has also discouraged job advancement and entrance into the job market for thousands of people. Getting a raise or a better paying job puts low-income workers at risk of losing their Medicaid benefits. And as the scope of Medicaid has increased, the number of people discouraged from job advancement has likewise increased.

Better Health? One of the greatest misconceptions in today’s health care debate is that having health insurance is the same thing as having quality health care. Medicaid demonstrates how misguided that notion is. A number of studies show that Medicaid recipients fare no better and in some cases fare worse than people who have no health insurance at all. And they fare far worse than those with private health insurance. For example, a 2010 study published by the journal Cancer found that throat cancer patients on Medicaid were 50 percent more likely to die compared to privately insured patients with throat cancer; but throat cancer patients without health insurance were also 50 percent more likely to die than those with private insurance. A 2010 study published by the Annals of Surgery found that surgery patients on Medicaid experienced longer stays, higher total hospital costs, and were more likely to die in the hospital than surgery patients with private health insurance. Uninsured patients who underwent surgery were 25 percent less likely to die in the hospital than surgery patients on Medicaid. And a 2011 study published by the American Journal of Cardiology found that Medicaid patients who underwent coronary angioplasty were 59 percent more likely to have a stroke or heart attack than were privately insured patients receiving the same treatment. Medicaid patients were more than twice as likely to a have a major heart attack after angioplasty as were patients without health insurance.

Obamacare will usher nearly 25 million additional people into this very system.

The New Medicaid

The national health care reform law greatly expands and changes the Medicaid program starting in 2014. This “new Medicaid” will provide health insurance to anyone in the country who earns less than 133 percent of the Federal Poverty Level and is under age 65. The FPL is currently $10,830, so any individual making less than $14,400 will be eligible. For a husband and wife, 133 percent of the FPL is $19,400.

The details have not been worked out, but presumably, the new Medicaid will be administered through the existing state Medicaid agencies. Mandatory rules, regulations, and oversight, however, will come from the federal government.

Instead of 50/50 state-federal cost sharing, the new program will be paid for exclusively by federal taxpayers for the first three years. From 2017 until 2020, the percent paid by state taxpayers will gradually increase from zero to 10 percent, with this 10/90 state-federal split extending indefinitely. Since state taxpayers are also federal taxpayers, expanding Medicaid means higher taxes no matter what the federal/state split is. The overall costs of the Medicaid expansion are estimated to be $445 billion from federal taxpayers and $21 billion from state taxpayers between 2014 and 2019. This $466 billion represents approximately half of the overall estimated future costs of the new health care reform law.

States will continue to have the choice of opting out of Medicaid. However, because the vast majority of funding (100 percent initially, then 90 percent indefinitely) will come from the federal government, opting out will not save states much money. The temptation for state lawmakers will be that they get to distribute benefits without having to raise taxes to pay for them.

According to Medicare’s actuary, 24.7 million additional people will enroll in Medicaid as a result of Obamacare. The PPACA mandates that everyone in the country must have health insurance. Because this individual mandate may cause previously uninsured people to “come out of the woodwork,” this estimate may be too low.

As discussed above, Medicaid’s low reimbursement rates make it hard for Medicaid patients to find care. The new law does not provide for an increase in physician pay except for primary care on a limited basis. Thus, as demand explodes after 2014, access to health care services is likely to become dramatically worse for Medicaid patients.

Real Reform

The Congressional Budget Office estimates that before Obamacare, Medicaid was on a path to consume almost 6 percent of the nation’s GDP by 2017. Adding 23 million more recipients makes this cost problem worse. The country cannot afford to pay for Medicaid in its present form. Reform will be necessary in order to avoid the program’s financial collapse.

Congress passed a fairly broad Medicaid reform package in 1995. That bill gave block grants to the states, gave states more individual control, and eliminated the program as a federal entitlement. President Clinton vetoed the bill, although a year later he signed a bill that reformed welfare using similar principles.

Had the 1995 reform bill been signed into law, the Medicaid program would be on a much sounder financial footing today.

Many Medicaid reform proposals have been recommended through the years. Some of these, such as negotiating discounts for services, increasing provider fees to keep patients out of emergency rooms, and controlling drug costs, do not address the underlying problem of funding a broad health care entitlement.

There is virtually no evidence that any of these ideas would significantly impact the cost or the effectiveness of Medicaid. On the other hand, such initiatives as health savings accounts, pursuing fraud aggressively, tightening eligibility requirements, and using block grants to states have been shown to be effective in controlling costs in both health care and welfare.

Rather than compounding the existing Medicaid problems, the new federal health care law should be repealed. There is no logical reason to enlarge a bankrupt entitlement.

Dr. Stark is a health care policy analyst at the Washington Policy Center, a free market think tank located in Seattle, Washington. This article is adapted from his longer paper “National Health Care Reform and the New Medicaid,” published January 2011, by the Washington Policy Center.

Saving the Republic Starts in the Classroom—One Lesson at a Time: An Insider Interview with Bob Chitester and Candy Mead

TEACHING YOUNG STUDENTS to think critically about public policy issues is no easy task. Teaching it to adults isn’t always easy either. Bob Chitester knows a little bit about both. Back in 1980 he produced the “Free to Choose” television series with Milton Friedman. That series was revolutionary because it brought basic economic concepts to a mass audience. It showed not only how free markets work, but also how to communicate those ideas in an engaging way. By creating izzit.org in 2006, Chitester has extended that educating mission to 4th- through 12thgrade classrooms all around the country. Under the guidance of Candy Mead, izzit.org’s director of curriculum development, izzit.org provides teachers with high-quality educational videos and accompanying lesson plans on range of topics. These include entrepreneurship, property rights, free trade, global warming, and personal responsibility. Ultimately, Chitester and Mead want to help teachers get their students to think for themselves about the role of government in their lives; they want the kids to always ask themselves: Who’s choosing?  

The Insider: Where did the idea for izzit.org come from?

Bob Chitester: It started out in 1999 when I approached John Stossel and proposed to him that I come up with a way to market his materials to classrooms, and ABC agreed to that. We then began as “Stossel in the Classroom.” In 2006, ABC decided they did not want us to continue doing that. We had developed quite a proprietary database of teacher e-mails and names, and rather than simply forfeit that we decided to move into this business of providing DVDs with teaching units, and ultimately into the daily current events service. We launched in the fall of 2006. We have since built up a library of 19 DVDs that come with teaching units.

TI: Where does the name izzit.org come from?

Candy Mead: It’s a derivative of a word—iz- z-a-t—that means respect.

BC: It’s Hindi.

CM: So our tag line is “Every teacher deserves respect,” or “You need respect in your classroom.”

TI: And what is it that teachers get from izzit.org that they can’t get anywhere else?

CM: Our products try to raise questions that might not otherwise be raised. That focus runs through everything we do, whether it’s our videos or our daily current events service. We try to get students thinking critically and to question the conventional wisdom about all of the issues and policies that are out there. We try to get them to look at issues from a fresh perspective. What we’re really getting them to think about is: Who chooses? Who benefits? And who pays? You can look at just about any policy or issue from that perspective. We try to raise questions about what is the proper role of government, and maybe for the first time students might be encouraged to think that there ought to be limits on government. We get them thinking about the power of incentives and how when you change incentives you often get unintended consequences. Another important theme is how important property rights are to freedom and to prosperity. These kinds of ideas are just not common in other resources that teachers have. There may be a few others out there, but we’re pretty unique.

The other thing we really strive for is making things easy for teachers. They just don’t have a lot of time. Each of our videos comes complete with a teacher’s guide with thought-provoking discussion questions, worksheets, and quizzes. It’s really a whole package. Same with our daily current events e-mail: The questions are already there for them. The prep work is done, and they can just grab it and use it and it doesn’t take them a lot of time.

BC: The approach we take is to offer materials that are very modular. We offer single-issue, supplemental material. We don’t intend to provide teachers with what one would describe as a comprehensive curriculum. We’re giving teachers little nuggets—video presentations and a daily current events e-mail. And we provide them with a broad enough variety of these that the chances are pretty good that a teacher will find something in the DVDs that we offer that fits somewhere in their curriculum. And as a result we feel we get a higher degree of participation than we would otherwise.

CM: And the creative teachers—even if they are math or science teachers—if they want to, they will find a way to fit one or more of our videos into their curriculum.

BC: There’s a philosophical perspective behind our strategy. It’s not just that—like a Moore’s Law in reverse—every year the attention span of citizens in our country decreases by 50 percent. The strategy certainly reflects that, but it also reflects the reality that the average person has no meaningful incentive or rational reason to take the time to fully understand these issues.

As long as they’re making a decent living, they’re happy and content; and as a result they have a tendency to not understand issues in a deep way. They’re being bombarded by 30-second messages that often lead them to act in the political arena in ways that are contrary to their best interest. And we are trying in the classroom to counter that with equally short and pithy—not 30-second, but 10- or 15-minute—videos in which we try to just weld into these students’ minds some very simple concepts that will help them sort their way through all this nonsense they are exposed to.

TI: How many teachers use your products?

BC: Our current events service has 56,000- plus teacher subscribers. Those 56,000 teachers get a daily e-mail from us that has a current events article indicated and discussion questions to go with it.

We have now shipped close to 300,000 DVD teaching units, and the number of teachers using our teaching units is in the range of 215,000. According to the audit that we do once a year, the average teacher shares our teaching units with between two and three other teachers. The average teacher shows the DVD to 100 students. So we are reaching millions of students with these teaching units.

I think we’re very close to being at a breakthrough in terms of extremely wide brand recognition within the schools. Teachers are recognizing that izzit.org stands for high-quality, stimulating supplemental material that gets students involved in the learning process. Last year, of the 1.7 million middle- and highschool teachers in America, 440,000 teachers visited our Web site. This year, the number of teachers—unique teachers—who have visited our Web site will be well in excess of a half- million. So it’s looking like about one out of every three teachers in middle or high school will have visited our Web site this year.

TI: What videos are your most popular?

CM: Pennies a Day is extremely popular.

BC: The most popular piece we have is a one-hour piece we did with David Robinson on character and personal responsibility. It fills a felt need in schools all over this country, which is that students really need to hear from people who are very strong character models. Teachers want to have an authority figure like, in this case a sports star, tell their students what it means to be a responsible adult. That DVD was one of the two we offered the very first year, so it’s been available the longest period of time. And I think we’ve shipped something like 40,000 units of that.

We have another one on global warming titled, Unstoppable Solar Cycles. We are coming very close to having shipped 40,000 of those. Another one, which Candy mentioned, Pennies a Day, is about micro-lending and Muhammad Yunus. And that’s a very well received one. We’ve done two different teaching units with Reason.tv and Drew Carey, and those have been reasonably popular. I think in the range of 15,000 teachers are making use of those.

TI: Do you have any advice for think tanks that want to develop content for the classroom or who have content they think is appropriate for the students and want to figure out how to get it to the classroom?

CM: I have a particular wish. Bob mentioned that we partnered with Reason—with the Drew Carey project. We partnered with the Acton Institute using their Call of the Entrepreneur. We used one segment of that about the Michigan dairy farmer—with his Dairy Doo. And that’s been really popular, especially among middle school students. The reason might be the title of the piece—From Poop to Profits. That got their attention. I would very much like to see us partner with Heritage and do one or more teaching units based on the Index of Economic Freedom. I think that would be really powerful.

So my advice is work with us. We have the pipeline into the classroom. Teachers already know about us.

BC: I have been in the media business now for a very long time—50 years or so. I have been a producer at all levels. I used to think that you can produce effective media pieces for pennies. I have done that. I have produced one-hour discussions with Nobel laureates for the cost of a cheap airline ticket and maybe $400.

But I have learned from experience that media cannot be approached on the cheap. I have said to the heads of freedom movement organizations—think tanks—that have spent, say, $20,000 to $25,000 to do a video that it was a complete waste of money.

Media has one primary characteristic: It is a tool for reaching a mass audience. And if you’re going to reach a mass audience—by which I mean millions of people—you cannot reach them on the cheap. They are acclimated to a very high standard in terms of the quality of media they are willing to watch. So even in the classroom where we have a captive audience, our approach is to work to raise the money and to spend significant amounts on producing videos that are not only strong in terms of the message they communicate but are highly entertaining and appealing to students. We want videos that a student at home would voluntarily take the time to watch.

In surveys we’ve done of teachers asking them to evaluate our product, 80 percent of the teachers surveyed rank our videos as superior to any other available to them. And furthermore, we get reports from teachers that students approach them and ask them: Would you please play the video again?

So the message we carry to the think tanks is: Let’s partner; we have a pipeline.

But for a 10-minute, 15-minute piece, you cannot do a decent job consistently without spending $200,000 to $250,000; and if you’re going to do an hour-long program, you’re looking at budgets in the range of $600,000 to $800,000 per hour of programming. Anything less than that we have found you so often fail to reach the mark.

TI: Are you concerned that some teachers will look at your materials and say:“Well, they’re just pushing an ideological view of American history and government?”

CM: We have a really broad appeal. We don’t try to tell students what to think, we just try to get them to think. And we have such a variety of topics. We appeal to teachers across the spectrum. They all—most of them—value getting their students to think critically.

BC: We’re very sensitive to designing the product in a way that raises questions, but does so in a way that’s reasonable. Because we create these little “nuggets” and they are not part of a comprehensive curriculum, we leave it open to the creative thinking of the teachers how the videos can be used in a variety of curriculums. So the range of courses in which our DVDs are used is very broad, despite the fact that you would generally categorize them as social studies—and even more narrowly as political science or economics.

One of our Teacher of the Year award winners was a fourth-, fifth-, and sixth-grade music teacher who selected a teaching unit we did about the Estonia Piano Company. The unit was initially intended to—and it does— illustrate why free trade is important to wealth development.

Yet this teacher got it, because she was out looking around for some videos that she could show her children about how musical instruments were made. So she asked for this teaching unit, and she got it and played it, and she was very happy because we have some great shots in there of how you make a grand piano. But the content of the piece is about Communism. It’s about the workers in the plant talking— one of them about how his father was shot by the Communists.

The video talks about free trade. It’s talking about the success of the Estonia Piano Company; but at the same time it is providing a history lesson—one that is often ignored in classrooms—of the Communist atrocities. At the very end, the father of the piano maker who bought the company makes this very passionate statement about how valuable freedom is. This teacher still shows this video every year, and they talk about those issues as well as how the piano is made in a music class.

CM: That’s my favorite video, Freedom’s Sound.

Sharing the Conservative Message Online

by Rory Cooper

A SOCIAL MEDIA STRATEGY is essential for any organization or business in America. As recently as 2009, having a professional Facebook or Twitter account was a luxury and most were simply designed to broadcast a message or advertisement. That is no longer the case. In today’s entrepreneurial and connected world, creating a conversation among your stakeholders rises to the top of any communications strategy.

Take Ford Motor Company, for example. When Ford unveiled its newly designed 2011 Ford Explorer, its marketing strategy relied heavily on Facebook. And what was the result? Ford generated a 200 percent greater return than a typical Super Bowl ad, and at a fraction of the cost.

Americans embrace social media every day, many without even knowing it. When you leave a review of a product on Amazon.com or “like” an article you read online, you are participating. You are using online tools to share with your family, friends, peers, and even strangers what you like and dislike, helping them make consumer decisions. While only 14 percent of Americans trust traditional advertising, 78 percent of consumers trust peer recommendations.

Whereas traditional media, such as television or newspapers, broadcast a message in one direction, social media is more of a public conversation. This trend of interconnected information sharing and socializing is only growing. In 2010, Kindle eBooks outsold paper books over the holidays, and only one of the top 25 newspapers saw an increase in circulation.

If you think this is a passing fad, think again. Facebook added over 200 million users in less than a year, and has over 500 million active users and growing. Over half of the world’s population is under 30 and 96 percent of the millennial generation are part of an online social network.

Facebook gets more weekly traffic than Google. And it’s not just the “kids” driving that traffic. The fastest growing demographic on Facebook is 55- to 65-year-old females. In fact, 57 percent of people on social networks are over the age of 35. Half of Facebook users log on every day, and the average user has 150 friends.

In other words, the challenge isn’t to embrace the now, but to recognize the future of media sharing. The Heritage Foundation has had success sharing its message and its research through social media; that success has come through doing a few things consistently. Here are five things that we focus on at The Heritage Foundation:

1. Deliver quality content. The Heritage Foundation is fortunate to have some of the brightest scholars doing high-quality research. Behind every 140-word tweet is a well-written, thoroughly documented research paper. That seriousness we bring to the medium gives our tweets, posts, and updates credibility. That in turn gives us the buy-in we need get our scholars interested in using social media, too.

2. Engage in a conversation. Currently, The Heritage Foundation has over 315,000 Facebook fans. That is more than the Republican National Committee, the Democratic National Committee, USA Today, the Washington Post, MSNBC, and nearly all peers and rivals in the public policy community. But numbers can be misleading. With a large enough budget, you can inflate your bandwidth through paid-advertising. Heritage has built that community organically, by delivering Facebook-friendly content and encouraging interaction. The more people interact with us, the better placement we get on their news feeds, and the more growth we experience.

Heritage has integrated sharing technology into its Web sites and utilized cutting-edge software to harness these platforms, use them better, and measure results. Heritage delivers unique experiences. For example, we offered Facebook users a live feed of House Majority Leader Eric Cantor speaking at Heritage, which allowed the Facebook audience to ask him questions directly.

3. Use all the platforms. In just the last six months of 2010, over 400,000 people clicked on a link on Facebook to read more on Heritage.org. On Twitter, 550,000 did the same. Some may dismiss Twitter as juvenile or even voyeuristic. “I don’t want to know what someone had for breakfast” is a typical complaint. But using Twitter is essential to participating in the modern media landscape. Twitter has over 175 million users and grows at a rate of 300,000 users per day. On Twitter, Heritage has over 120,000 followers who click-through, distribute, and interact with its content daily.

Heritage is able to track what stories reporters are covering, what Members of Congress are saying about legislation, and what narratives are building on particular issues. News breaks first on Twitter, so simply keeping an eye on it allows us to react in real time. Sometimes it gives us a head start so that we can proactively communicate our analyses.

A comprehensive digital strategy should also include blogs, video, and e-mail, as well as optimizing your search engine performance. In 2010, Heritage averaged over 8,000 views per video on YouTube, which is a 162 percent increase from the year before. We’re accomplishing this rapid growth by producing shorter and more dynamic videos that supplement our research material, by giving a quality introduction to our work, and by providing links and access to more information.

YouTube has also become a key resource in pushing for greater government accountability, as any Tea Party member will tell you. In 2009 and 2010, it finally became impossible for legislators to say one thing in D.C. and another at home. Camera phones and Flip cameras allowed embarrassing gaffs— like Rep. Pete Stark’s statement that “the federal government can do most anything it wants”—to be broadcast quickly across the nation.

YouTube is the second largest search engine in the world. Google is the largest. And Heritage spends time studying what search terms are trending, where its sites are ranked, and using Search Engine Optimization (SEO) techniques to improve those search engine rankings.

Heritage’s blog, The Foundry, is a top-five blog in News & Opinion on Kindle eReaders, and features rapid responses to the day’s news using the same quality Heritage research and analysis that is the organization’s foundation. Many think tanks employ separate bloggers, but The Foundry is largely made up of blogs written directly by experts in their field. The Foundry is also home to The Morning Bell, a daily e-mail newsletter that gives 170,000 subscribers Heritage’s latest research and analysis on the news of the day.

4. Know your audience. The Heritage Foundation’s primary mission is to put conservative ideas into the public marketplace and especially to make them available to Capitol Hill. But beyond that we aim to communicate with our 710,000-plus members and the broader public generally. Every audience has to be considered and its preferred method of engagement understood—whether it’s 18-year-old college students, 29-year-old congressional staffers, 50-year-old researchers, or 65-year-old retirees.

Juggling so many constituencies can be tough. If you try to be too informal and edgy, you may not reach the retiree. If you send out boring, policy-laden tweets, you will probably have a hard time reaching the college student. Just like with any form of public writing or speaking, you need to capture attention while maintaining the integrity of your brand. And the best way to maintain your integrity is to speak honestly and encourage a civil discourse.

5. Plan for the long run. If you follow sports, you know that teams build their programs looking out several years. Teams identify what pieces they need in order to make an immediate impact, but also think about building towards a long-term goal. This strategy is easily transferred to the online space.

You need to identify where you need an immediate impact, and fill that space. Then think how that growth will help you in the long-run. If you have the resources for only one team member focused on social media, then you have to ask yourself what strengths you need to lay the groundwork for future growth?

Heritage began with a few visionaries delivering a steady stream of online content. It grew by adding pieces, working with outside bloggers and influencers, using buy-in to diversify content, and building towards a long-term strategy. The more diversified content and diversified platforms we used, the stronger we got in every area. This strategy can also help you share the message of conservatism and enable others to do the same.

Mr. Cooper is Director of Communications for The Heritage Foundation.