In economic theory, a moral hazard is a situation where there is a tendency to take undue risks because the costs are not borne by the party taking the risk. A moral hazard may occur where the behavior of one party may change to the detriment of another after a transaction has taken place. For example, persons with insurance against automobile theft may be less cautious about locking their car, because the negative consequences of vehicle theft are now (partially) the responsibility of the insurance company. A party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.

Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions.

Economists explain moral hazard as a special case of information asymmetry, a situation in which one party in a transaction has more information than another. In particular, moral hazard may occur if a party that is insulated from risk has more information about its actions and intentions than the party paying for the negative consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information.

Moral hazard also arises in a principal–agent problem, where one party, called an agent, acts on behalf of another party, called the principal. The agent usually has more information about his or her actions or intentions than the principal does, because the principal usually cannot completely monitor the agent. The agent may have an incentive to act inappropriately (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned.

History of the term[link]

According to research by Dembe and Boden,^[1] the term dates back to the 17th century and was widely used by English insurance companies by the late 19th century. Early usage of the term carried negative connotations, implying fraud or immoral behavior (usually on the part of an insured party). Dembe and Boden point out, however, that prominent mathematicians studying decision making in the 18th century used "moral" to mean "subjective", which may cloud the true ethical significance in the term.^[2]

The concept of moral hazard was the subject of renewed study by economists in the 1960s and then did not imply immoral behavior or fraud; rather, economists use the term to describe inefficiencies that can occur when risks are displaced, not the ethics or morals of the involved parties.

Finance[link]

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Economist Paul Krugman described moral hazard as "any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly."^[3] Financial bailouts of lending institutions by governments, central banks or other institutions can encourage risky lending in the future if those that take the risks come to believe that they will not have to carry the full burden of potential losses. Lending institutions need to take risks by making loans, and usually the most risky loans have the potential for making the highest return.^[4] So-called "too big to fail" lending institutions can make risky loans that will pay handsomely if the investment turns out well but be bailed out by the taxpayer if the investment turns out badly.

Taxpayers, depositors, and other creditors often have to shoulder at least part of the burden of risky financial decisions made by lending institutions.^[5][6][7][8] According to the World Bank, of the nearly 100 banking crises that have occurred internationally during the last 20 years, all were resolved by bailouts at taxpayer expense.^[9]

Many have argued that certain types of mortgage securitization contribute to moral hazard.^[10] Mortgage securitization enables mortgage originators to pass on the risk that the mortgages they originate might default and not hold the mortgages on their balance sheets and assume the risk. In one kind of mortgage securitization, known as "agency securitizations", default risk is retained by the securitizing agency that buys the mortgages from originators. These agencies thus have an incentive to monitor originators and check loan quality. "Agency Securitizations" refer to securitizations by either Ginnie Mae, a government agency, or by Fannie Mae and Freddie Mac, for-profit government sponsored enterprises ("GSEs"). They are similar to the "covered bonds" that are commonly used in Western Europe in that the securitizing agency retains default risk. Under both models, investors take on only interest rate risk, not default risk.^[10]

In another type of securitization, known as "private label" securitization, default risk is generally not retained by the securitizing entity. Instead, the secrutizing entity passes on default risk to investors. The securitizing entity, therefore, has relatively little incentive to monitor originators and maintain loan quality.^[10] "Private label" securitization refers to securitizations structured by financial institutions such as investment banks, commercial banks, and non-bank mortgage lenders.

During the years leading up to the subprime mortgage financial crisis, private label securitizations grew as a share of overall mortgage securitization by purchasing and securitizing low quality, high risk mortgages. Agency Securitizations appear to have somewhat lowered their standards, but Agency mortgages remained considerably safer than mortgages in private label securitizations, and performed far better in terms of default rates.^[10]

Economist Mark Zandi of Moody's Analytics described moral hazard as a root cause of the subprime mortgage crisis. He wrote that "the risks inherent in mortgage lending became so widely dispersed that no one was forced to worry about the quality of any single loan. As shaky mortgages were combined, diluting any problems into a larger pool, the incentive for responsibility was undermined." He also wrote, "Finance companies weren't subject to the same regulatory oversight as banks. Taxpayers weren't on the hook if they went belly up [pre-crisis], only their shareholders and other creditors were. Finance companies thus had little to discourage them from growing as aggressively as possible, even if that meant lowering or winking at traditional lending standards."^[11]

Moral hazard can also occur with borrowers. Borrowers may not act prudently (in the view of the lender) when they invest or spend funds recklessly. For example, credit card companies often limit the amount borrowers can spend with their cards, because without such limits borrowers may spend borrowed funds recklessly, leading to default.

Securitization of mortgages in America started in 1983 at Salomon Brothers and was done in such a fashion that the people arranging the mortgage passed all the risk that the mortgage would fail to the next group down the line. With the mortgage securitization system in the United States, many different debts of many different borrowers are piled together into a large pool of debt, and then shares in the pool are sold to lots of creditors.

Thus, there is no one person responsible for verifying that any one particular loan is sound, that the assets securing that one particular loan are worth what they are supposed to be worth, that the borrower responsible for making payments on the loan can read and write the language that the papers that he/she signed were written in, or even that the paperwork exists and is in good order. It has been suggested that this may have caused subprime mortgage crisis.^[12]

Brokers, who were not lending their own money, pushed risk onto the lenders. Lenders, who sold mortgages soon after underwriting them, pushed risk onto investors. Investment banks bought mortgages and chopped up mortgage-backed securities into slices, some riskier than others. Investors bought securities and hedged against the risk of default and prepayment, pushing those risks further along. In a purely capitalist scenario, the last one holding the risk (like a game of musical chairs) is the one who faces the potential losses. In the subprime crisis, however, national credit authorities (the Federal Reserve in the US) assumed the ultimate risk on behalf of the citizenry at large.

Others believe that financial bailouts of lending institutions do not encourage risky lending behavior since there is no guarantee to lending institutions that a bailout will occur. Decreased valuation of a corporation before any bailout would prevent risky, speculative business decisions by executives who conduct due diligence in their business transactions. The risk and burdens of loss became apparent to Lehman Brothers (who did not benefit from a bailout) and other financial institutions and mortgage companies such as Citibank and Countrywide Financial Corporation, whose valuation plunged during the subprime mortgage crisis.^[13][14][15]

Insurance industry[link]

The name comes originally from the insurance industry. Insurance companies worried that protecting their clients from risks (like fire, or car accidents) might encourage those clients to behave in riskier ways (like smoking in bed or not wearing seat belts). This problem may inefficiently discourage those companies from protecting their clients as much as the clients would like to be protected.

Economists argue that this inefficiency results from information asymmetry. If insurance companies could perfectly observe the actions of their clients, they could deny coverage to clients choosing risky actions (like smoking in bed or not wearing seat belts), allowing them to provide thorough protection against risk (fire, accidents) without encouraging risky behavior. But since insurance companies cannot perfectly observe their clients' actions, they are discouraged from providing the amount of protection that would be provided in a world with perfect information.

Economists distinguish moral hazard from adverse selection, another problem that arises in the insurance industry, which is caused by hidden information rather than hidden actions.

The same underlying problem of unobservable actions also affects other contexts besides the insurance industry. It also arises in banking and finance: if a financial institution knows it is protected by a lender of last resort, it may make riskier investments than it would in the absence of this protection.

In insurance markets, moral hazard occurs when the behavior of the insured party changes in a way that raises costs for the insurer, since the insured party no longer bears the full costs of that behavior. Because individuals no longer bear the cost of medical services, they have an added incentive to ask for pricier and more elaborate medical service—which would otherwise not be necessary. In these instances, individuals have an incentive to over consume, simply because they no longer bear the full cost of medical services.

Two types of behavior can change. One type is the risky behavior itself, resulting in a before the event moral hazard. In this case, insured parties behave in a more risky manner, resulting in more negative consequences that the insurer must pay for. For example, after purchasing automobile insurance, some may tend to be less careful about locking the automobile or choose to drive more, thereby increasing the risk of theft or an accident for the insurer. After purchasing fire insurance, some may tend to be less careful about preventing fires (say, by smoking in bed or neglecting to replace the batteries in fire alarms).

A second type of behavior that may change is the reaction to the negative consequences of risk, once they have occurred and once insurance is provided to cover their costs. This may be called ex post (after the event) moral hazard. In this case, insured parties do not behave in a more risky manner that results in more negative consequences, but they do ask an insurer to pay for more of the negative consequences from risk as insurance coverage increases. For example, without medical insurance, some may forgo medical treatment due to its costs and simply deal with substandard health. But after medical insurance becomes available, some may ask an insurance provider to pay for the cost of medical treatment that would not have occurred otherwise.

Sometimes moral hazard is so severe it makes insurance policies impossible. Coinsurance, co-payments, and deductibles reduce the risk of moral hazard by increasing the out-of-pocket spending of consumers, which decreases their incentive to consume. Thus, the insured have a financial incentive to avoid making a claim.

Moral hazard has been studied by insurers^[16] and academics. See works by Kenneth Arrow,^[17][18][19] Tom Baker,^[20] and John Nyman.

John Nyman suggests that two types of moral hazard exist: efficient and inefficient moral hazard. Efficient moral hazard is the viewpoint that the over consumption of medical care brought forth by insurance does not always produce a welfare loss to society. Rather, individuals attain better health through the increased consumption of medical care, making them more productive and netting an overall benefit to societal welfare. Also, Nyman suggests that individuals purchase insurance to obtain an income transfer when they become ill, as opposed to the traditionalist stance that individuals diversify risk via insurance.

Insurance analysts sometimes distinguish moral hazard from a related concept they call morale hazard.

Economic theory[link]

In economic theory, moral hazard is a situation where the behavior of one party may change to the detriment of another after the transaction has taken place. For example, a person with insurance against automobile theft may be less cautious about locking their car, because the negative consequences of vehicle theft are now (partially) the responsibility of the insurance company. A party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently than how it would if it were fully exposed to the risk.

According to contract theory, moral hazard results from a situation in which a hidden action occurs.^[21] Bengt Holmström said this:

It has long been recognized that a problem of moral hazard may arise when individuals engage in risk sharing under conditions such that their privately taken actions affect the probability distribution of the outcome.^[22]

Moral hazard can be divided into two types when it involves asymmetric information (or lack of verifiability) of the outcome of a random event. An ex-ante moral hazard is a change in behavior prior to the outcome of the random event, whereas ex-post involves behavior after the outcome.^[23] For example, in the case of a health insurance company insuring an individual during a specific time-period, the final health of the individual can be thought of as the outcome. The individual taking greater risks during the period would be ex-ante moral hazard whereas lying about a fictitious health problem to defraud the insurance company would be ex-post moral hazard. In a second example, imagine the case of a bank making a loan to an entrepreneur for a risky business venture. The entrepreneur becoming overly risky would be ex-ante moral hazard, but willful default (wrongly claiming the ventured failed when it was profitable) is ex-post moral hazard.

Management[link]

Moral hazard problems also occur in employment relationships. When a firm is unable to observe all actions taken by its employees, it may be impossible to achieve efficient behavior in the workplace: for example, workers' effort may be inefficiently low. This is called the principal–agent problem, which is one possible explanation for the existence of involuntary unemployment.^[24] Similar problems may also occur at the managerial level because owners of firms (shareholders) may be unable to observe the actions of a firm's managers, opening the door to careless or self-serving decision-making.

Moral hazard can occur when upper management is shielded from the consequences of poor decision making. This situation can occur in a variety of situations, such as the following:

• When a manager has a secure position and cannot be readily removed.
• When a manager is protected by someone higher in the corporate structure, such as in cases of nepotism or pet projects.
• When funding and/or managerial status for a project is independent of the project's success.
• When the failure of the project is of minimal overall consequence to the firm, regardless of the local impact on the managed division.
• When a manager may readily lay blame on an innocent subordinate.
• When there is no clear means of determining who is accountable for a given project. The software development industry has specifically identified this kind of risky behavior as a management anti-pattern^[which?], but it can occur in any field.
• When senior management has its own remuneration as its primary motivation for decision making (hitting short-term quarterly earnings targets or creating high medium term earnings, without due regard for the medium term effects on, or risks for the business so that large bonuses can be justified in the current periods). The shielding occurs because any eventual hit to earnings can most likely be explained away, and in the worst case, if an executive is terminated, usually the executive keeps the high salary and bonuses from years past.
• When a numbered company is used for construction projects as a subsidiary of a larger enterprise. For example: a numbered company is incorporated to construct a condominium in Vancouver. It is built to meet the minimum building code requirements, but is not designed for Vancouver's typical weather patterns (mild temperatures, lots of moisture). A few years later, the exterior cladding of the building is disintegrating with mold and rot. The numbered company that built it has no assets, so the condominium owners must suffer a large expense to rebuild it. In this scenario, the senior officers of the numbered company, and its shareholders used the protection of a numbered limited liability company in order to take higher risks in the design and construction. Unless the law and the regulators have some effective means to hold those responsible to account, the Moral Hazard would be expected to continue to future building projects. In extreme cases, moral hazard can lead to or permit control fraud to occur, where actual illegal activities take place.

See also[link]

• Conflict of interest
• Externality
• Feedback
• Free rider problem
• Game theory
• Information economics
• Offset hypothesis
• Perverse incentive
• Samaritan's dilemma
• Systemic risk
• Unintended consequences

References[link]

• JSTOR.org, A working link to the Everett Crosby article "Fire Prevention"
• JSTOR.org, A working link to the Kenneth Arrow article "Uncertainty and the Welfare Economics of Medical Care"

External links[link]

• Saintjoe.edu, Discussion of moral hazard and insurance by Robert Schenk
• Gladwell.com, The Moral Hazard Myth (in Health Care)
• TheBigMoney.com, What is Moral Hazard
• Press.illinois.edu, What's so Moral about the Moral Hazard?
• Marketwatch.com, Uncle Sam as sugar daddy; Marketwatch Commentary: The moral hazard problem must not be ignored
• PBS.org, Inside the Meltdown, PBS's Frontline episode uses the idea as a central theme
• Mises.org, A comparison of the conventional views of moral hazard, with that by Austrian economists

Ron Paul
Member of the U.S. House of Representatives from Texas's 14th district
Incumbent
Assumed office January 3, 1997
Preceded by	Greg Laughlin
Member of the U.S. House of Representatives from Texas's 22nd district
In office January 3, 1979 – January 3, 1985
Preceded by	Robert Gammage
Succeeded by	Tom DeLay
In office April 3, 1976 – January 3, 1977
Preceded by	Robert Casey
Succeeded by	Robert Gammage
Personal details
Born	Ronald Ernest Paul (1935-08-20) August 20, 1935 (age 76) Pittsburgh, Pennsylvania, U.S.
Political party	Republican Party (1976–1988, 1988–present)
Other political affiliations	Libertarian Party (1988 election)
Spouse(s)	Carol Wells
Children	Ronnie Lori Rand Robert Joy
Alma mater	Gettysburg College (B.S.) Duke University (M.D.)
Religion	Southern Baptist
Signature
Website	Congressional website Campaign website
Military service
Service/branch	United States Air Force Texas Air National Guard
Years of service	1963–1965 1965–1968
Rank	Captain[1]
This article is part of a series about Ron Paul 2012 presidential campaign 2008 presidential campaign 1988 presidential campaign Political positions · Electoral history List of legislation sponsored by Ron Paul Ron Paul newsletters Ron Paul bibliography

Ronald Ernest "Ron" Paul (born August 20, 1935) is an American politician who has been the U.S. Representative for Texas's 14th congressional district, which includes Galveston, since 1997, and a three-time candidate for President of the United States, as a Libertarian in 1988 and as a Republican in 2008 and currently 2012. He is an outspoken critic of American foreign and monetary policies, including the Military–industrial complex and the Federal Reserve, and is known for his libertarian-leaning views, often differing from his own party on certain issues.

A native of Pittsburgh, Pennsylvania, Paul is a graduate of Gettysburg College and Duke University School of Medicine, where he earned his medical degree. He served as a medical officer in the United States Air Force from 1963 until 1968. He worked as an obstetrician-gynecologist from the 1960s to the 1980s, delivering more than 4,000 babies. He became the first Representative in history to serve concurrently with a child in the Senate when his son Rand Paul was elected to the United States Senate for Kentucky in 2010.^[2]

Ron Paul has been an active writer and publisher since the late 1970s, when he created the first of several newsletters bearing his name. He has published many books, beginning with The Case for Gold (1982) and including Liberty Defined: 50 Essential Issues That Affect Our Freedom (2011), End The Fed (2009), The Revolution: A Manifesto (2008), Pillars of Prosperity (2008), and A Foreign Policy of Freedom: Peace, Commerce, and Honest Friendship (2007). Paul has been characterized as the "intellectual godfather" of the Tea Party movement.^[3][4]

On July 12, 2011, Paul announced that he would forego seeking another term in Congress in order to focus on his presidential bid.^[5] On May 14, 2012, Paul announced that he would not be competing in any other Presidential primaries, though he is still competing for delegates in states where the primary election have already been held.^[6]

Early life, education, and medical career[link]

Ronald Ernest Paul was born on August 20, 1935, in Pittsburgh,^[7] the son of Howard Caspar Paul, who ran a small dairy company, and Margaret (née Dumont) Paul. His paternal great-grandparents emigrated from Germany, and his mother was of German and Irish ancestry.^[8][9]

As a junior at suburban Dormont High School, he was the 220-yard dash state champion.^[10] He graduated from Gettysburg College with a B.S. degree in Biology in 1957.^[10]

Paul earned a Doctor of Medicine degree from Duke University's School of Medicine in 1961, and completed his medical internship at the Henry Ford Hospital in Detroit and his residency in obstetrics and gynecology at Magee-Womens Hospital in Pittsburgh.^[11] Paul served as a flight surgeon in the United States Air Force from 1963 to 1965 and then in the United States Air National Guard from 1965 to 1968.^[12]

Paul and his wife then relocated to Texas, where he began a private practice in obstetrics and gynecology.^[13] He refused to accept Medicaid or Medicare payments, but routinely lowered fees for patients who could not afford to pay.^[14][15]

Early congressional career (1976–1985)[link]

While still a medical resident in the 1960s, Paul was influenced by Friedrich Hayek's The Road to Serfdom, which caused him to read many publications by Ludwig von Mises and Ayn Rand. He came to know economists Hans Sennholz and Murray Rothbard well, and credits to them his interest in the study of economics.^[16]

When President Richard Nixon "closed the gold window" by ending American participation in the Bretton Woods System, thus ending U.S. dollar's loose association with gold^[16] on August 15, 1971, Paul decided to enter politics^[17] and became a Republican candidate for the United States Congress.^[18]

Elections[link]

In 1974, incumbent Robert R. Casey defeated him for the 22nd district. President Gerald Ford later appointed Casey to direct the Federal Maritime Commission, and Paul won an April 1976 special election to the vacant office.^[19] Paul lost the next regular election to Democrat Robert Gammage by fewer than 300 votes (0.2%), but defeated Gammage in a 1978 rematch, and was reelected in 1980 and 1982.^[20] Gammage underestimated Paul's popularity among local mothers: "I had real difficulty down in Brazoria County, where he practiced, because he'd delivered half the babies in the county. There were only two obstetricians in the county, and the other one was his partner."^[21]

Tenure[link]

Paul has served in Congress three different periods: first from 1976 to 1977, after he won a special election, then from 1979 to 1985, and finally since 1997.

In his early years, Paul served on the House Banking Committee, where he blamed the Federal Reserve for inflation and spoke against the banking mismanagement that resulted in the savings and loan crisis.^[22][8] Paul argued for a return to the gold standard maintained by the US from 1873-1933, and with Senator Jesse Helms convinced the Congress to study the issue.^[16] He spoke against the reinstatement of registration for the military draft in 1980, in opposition to President Jimmy Carter and the majority of his fellow Republican members of Congress.^[23]

During his first term, Paul founded the Foundation for Rational Economics and Education (FREE), a non-profit "think tank" dedicated to promoting principles of limited government and free-market economics.^[24]

Paul proposed term-limit legislation multiple times, while himself serving four terms in the House of Representatives.^[23] In 1984, he decided to retire from the House in order to run for the U.S. Senate, complaining in his House farewell address that "Special interests have replaced the concern that the Founders had for general welfare.... It's difficult for one who loves true liberty and utterly detests the power of the state to come to Washington for a period of time and not leave a true cynic."^[25][26] (On Paul's departure from the House, his congressional seat was assumed by former state representative Tom DeLay, who would eventually become Speaker of the House.)^[27]

Committee assignments[link]

• House Banking Committee

1984 U.S. Senate election[link]

In 1984, Paul campaigned for the U.S. Senate, but lost the Republican primary to Phil Gramm, who had switched parties the previous year from Democrat to Republican.^[28] Another candidate of the senatorial primary was Henry Grover, a conservative former state legislator who had lost the 1972 gubernatorial general election to the Democrat Dolph Briscoe, Jr.

Inter-congressional years[link]

1985–1997[link]

Following the loss of the 1984 senate race, Paul returned to his obstetrics practice and took part in a number of other business ventures.^[8][29] Along with his former congressional chief of staff, Lew Rockwell, Paul founded a for-profit enterprise, Ron Paul & Associates, Inc. (RP&A) in 1984, with Paul serving as president, Rockwell as vice president, Paul's wife Carol as secretary, and daughter Lori Pyeatt as treasurer.^[30] The company published a variety of political and investment-oriented newsletters including Ron Paul Freedom Report and Ron Paul Survival Report, and by 1993 was generating revenues in excess of $900,000.^[31][32]

Paul also co-owned a mail-order coin dealership, Ron Paul Coins, for twelve years with Burt Blumert, who continued to operate the dealership after Paul resumed office in 1996.^[33][34] Paul spoke multiple times at the American Numismatic Association's 1988 convention.^[33] He worked with his Foundation for Rational Economics and Education on such projects as establishing the National Endowment for Liberty, producing the At Issue public policy series that was broadcast on the Discovery Channel and CNBC,^[24] and continuing publication of newsletters.

1988 presidential campaign[link]

Paul resigned from the Republican Party in 1987 and launched a bid for the presidency running on the Libertarian Party ticket. At the 1987 Libertarian National Convention, the party was split between a Conservative and Liberal wing. Paul represented the conservative wing, which was successful in fundraising, while the liberal wing claimed to have received ten times more (and more favorable) press coverage.^{[citation needed]} Paul argued, "Pro-life libertarians have a vital task to perform: to persuade the many abortion-supporting libertarians of the contradiction between abortion and individual liberty; and to sever the mistaken connection in many minds between individual freedom and the 'right' to extinguish individual life."^[35][36]

In the 1988 presidential election, Paul was on the ballot in 46 States,^[37] scoring third in the popular vote with 432,179 votes (0.5%).^[38] Paul was kept off the ballot in Missouri, and received votes there only when written in, due to what the St. Louis Post-Dispatch termed a "technicality".^[39]

According to Paul, his presidential campaign was about more than obtaining office; he sought to promote his libertarian ideas, often to school and university groups regardless of vote eligibility. He said, "We're just as interested in the future generation as this election. These kids will vote eventually, and maybe, just maybe, they'll go home and talk to their parents."^[37]

Paul considered campaigning for President during 1992,^[40] but instead chose to endorse Pat Buchanan that year, and served as an adviser to Buchanan's Republican presidential primary campaign against incumbent President George H. W. Bush.^[41]

Later congressional career (1997–present)[link]

An earlier congressional portrait of Paul

Elections[link]

1996 campaign

During 1996, Paul was re-elected to Congress after a difficult campaign. The Republican National Committee endorsed incumbent Greg Laughlin in the primary; Paul won with assistance from baseball pitcher, constituent, and friend Nolan Ryan, tax activist and publisher Steve Forbes^[8] and conservative commentator Pat Buchanan (both of whom had had presidential campaigns that year). Paul narrowly defeated Democratic attorney Charles "Lefty" Morris in the fall election, despite Morris' criticism over controversial statements in several newsletters that Ron Paul published.

1998–present

In 1998 and 2000, Paul defeated Loy Sneary, a Democratic Bay City, Texas, rice farmer and former Matagorda County judge.^[17] In the 2008 Republican primary,^[42] he defeated Friendswood city councilman Chris Peden,^[43] with over 70 percent of the vote^[44] and ran unopposed in the general election.^[45] In the 2010 Republican primary, Paul defeated three opponents with 80 percent of the vote.^[46]

On July 12, 2011, Paul announced that he would not seek re-election to the House in order to pursue the 2012 presidential election.^[47][48]

Tenure[link]

Legislation

Of the 620 bills that Paul had sponsored through December 2011, over a period of more than 22 years in Congress, only one had been signed into law – a lifetime success rate of less than 0.3%.^[49] The sole measure authored by Paul that was ultimately enacted allowed for a federal customhouse to be sold to a local historic preservation society (H.R. 2121 in 2009).^[49]

By amending other legislation, he has helped prohibit funding for national identification numbers, funding for federal teacher certification,^[17] International Criminal Court jurisdiction over the U.S. military, American participation with any U.N. global tax, and surveillance of peaceful First Amendment activities by citizens.^[50]

Affiliations

Paul was honorary chairman of, and is a member of the Republican Liberty Caucus, a political action committee that describes its goal as electing "liberty-minded, limited-government individuals".^[51] He is an initiating member of the Congressional Rural Caucus, which deals with agricultural and rural issues, and the 140-member Congressional Wildlife Refuge Caucus.^[52]

Committee assignments[link]

Rep. Paul serves on the following committee and subcommittees.^[53]

• Committee on Financial Services
  • Subcommittee on Domestic Monetary Policy and Technology (Chairman)
  • Subcommittee on International Monetary Policy and Trade
• Committee on Foreign Affairs
  • Subcommittee on Oversight and Investigations

With the election of the 112th Congress, and a resulting GOP majority in the House, Paul became the chairman of the Subcommittee on Domestic Monetary Policy and Technology starting in January 2011.^[54]

2008 presidential campaign[link]

Ron Paul being interviewed the day of the New Hampshire primary in Manchester

2008 Republican primary campaign[link]

Paul formally declared his candidacy for the 2008 Republican nomination on March 12, 2007, on C-SPAN.^[55] Few major politicians endorsed him, and his campaign was largely ignored by traditional media.^[56] However, he attracted an intensely loyal grassroots following, in large part energized by "iconoclastic white men"^[57] interacting through internet social media.^[58][59][60] In May 2007, shortly after the first televised primary debates, the blogs search engine site Technorati.com listed Paul's name as the term most frequently searched for;^[58] and Paul's campaign claimed that Paul had more YouTube channel subscribers than Barack Obama or any other candidate for president.^[61] For a candidate who had had relatively low national name recognition prior to entering the race, Paul did surprisingly well in fundraising, taking in more money than any other Republican candidate in the fourth quarter of 2007, as the primary season headed into the Iowa caucuses.^[62][63]

Despite benefiting from large numbers of campaign contributions from individual donors,^[64] and the efforts of tech-savvy supporters determined to keep his name a frequent topic of discussion on the internet,^[58] over the course of the campaign Paul was unable to translate the enthusiasm of his core supporters into large enough numbers of actual primary votes to unseat his rivals.

Paul came in 5th place in both the January 4 Iowa caucuses (10% of votes cast)^[65] and the January 8 New Hampshire primary (8%).^[66] With the exception of the Nevada caucuses January 19, where he came in 2nd (14%) behind Romney (51%), he did little better through the rest of January: Michigan 4th (6%), South Carolina 5th (4%), Florida 5th (3%). On SuperTuesday, February 5, he placed 4th in almost every state, generally taking in a mere 3–6% of the votes (although he did better in the mountain states of North Dakota (21%, 3rd place) and Montana (25%, 2nd place).^[67][68]

By March, front-runner John McCain had secured enough pledged delegates to guarantee that he would win the nomination, and Romney and Huckabee had both formally withdrawn from the race. Paul, who had won no state primaries, knew that it was now mathematically impossible for him to win the nomination, as he had captured only 20^[69] – 40 pledged delegates compared to more than 1,191 for McCain, yet he refused to concede the race and said that it was unlikely that he would ultimately endorse McCain.^[70][71][72] Over the next few weeks, Paul's supporters clashed with establishment Republicans at several county and state party conventions over state party rules, the party platforms, and selection of delegates for the national convention.^[73][74][75] In one of the more dramatic moments, Nevada's state party leaders, outmaneuvered by Paul supporters at the state nominating convention, resorted to the highly unusual measure of prematurely and abruptly shutting down the convention before selecting national delegates, with a plan to reconvene at a later date.^[76][77]

On June 12, 2008, Paul finally withdrew his bid for the Republican nomination. He later said that one of the reasons he did not run in the general election as a third-party candidate, after losing the primary election, was that, as a concession to gain ballot access in certain states, he had signed legally-binding agreements to not run a third-party campaign if he lost the primary.^[78] Some of the $4 million remaining campaign contributions was invested into the new political action and advocacy group called Ron Paul's Campaign for Liberty.^[79]

Refusal to endorse the Republican candidate[link]

At a September 10, 2008, press conference, Paul announced his general support of four third-party candidates: Cynthia McKinney (Green Party); Bob Barr (Libertarian Party); Chuck Baldwin (Constitution Party); and Ralph Nader (independent). He said that each of them had pledged to adhere to a policy of balancing budgets, bringing the troops home, defending privacy and personal liberties, and investigating the Federal Reserve. Paul also said that under no circumstances would he be endorsing either of the two dominant parties' candidates (McCain – Republican Party, or Obama – Democratic Party) because there were no real differences between them, and because neither of them, if elected, would seek to make the fundamental changes in governance that were necessary. He urged instead that, rather than contribute to the “charade” that the two-party election system had become, the voters support the third-party candidates as a protest vote, to force change in the election process.^[80][81] Later that same day, Paul gave a televised interview with Nader saying much the same again.^[82]

Two weeks later, "shocked and disappointed" that Bob Barr (the Libertarian candidate) had pulled out of attending the press conference at the last minute and had admonished Paul for remaining neutral and failing to say which specific candidate Paul would vote for in the general election, Paul released a statement saying that he had decided to endorse Chuck Baldwin, the Constitution Party candidate, for president.^[83]

In the November 2008 general election, Paul received 41,905 votes despite not actively campaigning.^[84][85]

2012 presidential campaign[link]

Ron Paul during his 2012 presidential election campaign in Las Vegas, Nevada.

Paul is a candidate for the Republican Party nomination for President of the United States in the 2012 election.

He won several early straw polls for the 2012 Republican presidential nomination ^[86] and in late April, 2011, he formed an official exploratory committee.^[87][88] He participated in the first Republican presidential debate on May 5, 2011.^[89] and on May 13, 2011, Paul formally announced his candidacy in an interview on ABC's Good Morning America.^[90] He placed second in the 2011 Ames Straw Poll, missing first by 0.9%.^[91]

In December 2011, with Ron Paul's increased support, the controversy over allegedly racist and homophobic statements in several Ron Paul newsletters in the 1980s and early 1990s once again gained media attention.^[92] During this time Paul supporters asserted that he was continually ignored by the media despite his significant support, citing examples of where television news shows would fail to mention Paul in discussions of the Republican presidential hopefuls even when he was polling second.^{[93][94][95][96]}

Paul came in third in the Iowa Republican Caucus held on January 3, 2012. Out of a turnout of 121,503 votes, Paul took 26,036 (21%) of the certified votes. Rick Santorum and Mitt Romney finished in a virtual tie for first place with 25% each.^[97] In the New Hampshire Primary held on January 10, 2012, Paul received 23% of the votes and came in second after Romney's 39%.^[98]

Ron Paul's results then declined, despite the withdrawal of candidates Michele Bachmann, Jon Huntsman and Rick Perry. He had fourth place finishes in the next two primaries, on January 21st in South Carolina (with 13% of the vote^[99]) and on January 31st in Florida (where he received 7% of the vote.^{[100][101][102]})

On February 4, Paul finished third in Nevada with 18.8% of the vote.^[103] Three non-binding primaries were held on February 7th; Paul took 3rd place in Colorado^[104] and Missouri^[105] with 13% and 12% of the vote respectively. He fared better in Minnesota^[106] with 27%, finishing second to Rick Santorum.

On May 14, Paul's campaign announced that due to lack of funds he would no longer actively campaign for votes in the 11 remaining primary states, including Texas and California, that had not yet voted.^[6][107] He would, however, continue to seek to win delegates for the national party convention in the states that had already voted.

Political party identification[link]

Throughout his entire tenure in Congress, Paul has represented his district as a member of the Republican Party. However, he has frequently taken positions in direct opposition to the other members and the leadership of the party, and he has sometimes publicly questioned whether he really belonged in the party.

He had been a lifelong supporter of the Republican Party by the time he entered politics in the mid 1970s.^[108] He was one of the first elected officials in the nation to support Ronald Reagan's presidential campaign,^[109] and he actively campaigned for Reagan in 1976 and 1980.^[110] After Reagan's election in 1980, Paul quickly became disillusioned with the Reagan administration's policies. He later recalled being the only Republican to vote against Reagan budget proposals in 1981,^[111][112] aghast that "in 1977, Jimmy Carter proposed a budget with a $38 billion deficit, and every Republican in the House voted against it. In 1981, Reagan proposed a budget with a $45 billion deficit – which turned out to be $113 billion – and Republicans were cheering his great victory. They were living in a storybook land."^[109] He expressed his disgust with the political culture of both major parties in a speech delivered in 1984 upon resigning from the House of Representatives to prepare for a (failed) run for the Senate, and he eventually apologized to his Libertarian friends for having supported Reagan.^[111]

Wikisource has original text related to this article: Ron Paul's 1987 Resignation Letter to the RNC

By 1987, Paul was ready to sever all ties to the Republican Party, as he explained in a blistering resignation letter: "Since [1981] Ronald Reagan and the Republican Party have given us skyrocketing deficits, and astoundingly a doubled national debt. How is it that the party of balanced budgets, with control of the White House and Senate, accumulated red ink greater than all previous administrations put together? ... There is no credibility left for the Republican Party as a force to reduce the size of government. That is the message of the Reagan years."^[110][108] A month later he announced he would seek the 1988 Libertarian Party nomination for president.

During the 1988 campaign, Paul called Reagan "a dramatic failure"^[110] and complained that "Reagan's record is disgraceful. He starts wars, breaks the law, supplies terrorists with guns made at taxpayers' expense and lies about it to the American people."^[113] Paul predicted that "the Republicans are on their way out as a major party,"^[111] and he said that, although registered as a Republican, he had always been a Libertarian at heart.^[112][111]

Paul returned to his private medical practice and managing several business ventures after losing the 1988 election; but by 1996, he was ready to return to politics, this time running on the Republican Party ticket again. He said that he had never read the entire Libertarian platform when he ran for president as a Libertarian in 1988, and that "I worked for the Libertarians on my terms, not theirs."^[114] He added that in terms of a political label he preferred to call himself "a constitutionalist. In Congress I took an oath to uphold the Constitution, not the (Republican) platform."^[114]

When he lost the Republican Party presidential primary election in 2008, Paul criticized the two major political parties, saying that there was no real difference between the parties and that neither of them truly intended to challenge the status quo. He refused to endorse the Republican Party's nominee for president, John McCain, and lent his support to third-party candidates instead.^[115][116]

In 2012 presidential campaign, during which he acknowledged it was unlikely that he would win the Republican Party nomination,^[117] Paul again asserted that he was participating in the Republican Party on his own terms, trying to persuade the rest of the party to move toward his positions rather than joining in with theirs.^[118] He expressed doubt that he would support any of his rivals should they win the nomination, warning that, “If the policies of the Republican Party are the same as the Democrat Party and they don't want to change anything on foreign policy, they don't want to cut anything, they don't want to audit the Fed and find out about monetary policy, they don't want to have actual change in government, that is a problem for me."^[119] On that same theme he said in another interview, "I would be reluctant to jump on board and tell all of the supporters that have given me trust and money that all of a sudden, I'd say, [all] we've done is for naught. So, let's support anybody at all ... even if they disagree with everything that we do."^[120]

Political positions[link]

Paul at the 2007 National Right to Life Committee Convention in Kansas City, Missouri, June 15, 2007.

Paul has been described as conservative and libertarian.^[8] According to University of Georgia political scientist Keith Poole, Paul had the most conservative voting record of any member of Congress from 1937 to 2002,^[121] and is the most conservative of the candidates seeking the 2012 Republican nomination for president,^[122] on a scale primarily measuring positions on the role of government in managing the economy – not positions on social issues or foreign policy matters.^[123] Other analyses, in which key votes on domestic social issues and foreign policy factor more heavily, have judged Paul much more moderate. The National Journal, for instance, rated Paul only the 145th most conservative member of the House of Representatives based on votes cast in 2010.^[124][125]

The foundation of Paul's political philosophy is the conviction that "the proper role for government in America is to provide national defense, a court system for civil disputes, a criminal justice system for acts of force and fraud, and little else."^[126] He has been nicknamed "Dr. No,"^[17] reflecting both his medical degree and his insistence that he will "never vote for legislation unless the proposed measure is expressly authorized by the Constitution."^[22]

Paul is a proponent of Austrian School economics; he has authored six books on the subject, and displays pictures of Austrian School economists Friedrich Hayek, Murray Rothbard, and Ludwig von Mises (as well as of Grover Cleveland)^[127] on his office wall. He regularly votes against almost all proposals for new government spending, initiatives, or taxes;^[128] he cast two thirds of all the lone negative votes in the House during a 1995–1997 period.^[17]

He has pledged never to raise taxes^[129] and states he has never voted to approve a budget deficit. Paul believes that the country could abolish the individual income tax by scaling back federal spending to its fiscal year 2000 levels;^[130][131] financing government operations would be primarily by excise taxes and non-protectionist tariffs. He endorses eliminating most federal government agencies, terming them unnecessary bureaucracies.

On April 15, 2011, Paul was one of four Republican members of Congress to vote against Rep. Paul Ryan's budget proposal, known as "The Path to Prosperity."^[132]

Paul has a consistent record as an inflation hawk, having warned of hyperinflation as far back as 1981.^[133] While Paul believes the longterm decrease of the U.S. dollar's purchasing power by inflation is attributable to its lack of any commodity backing, he does not endorse a "return" to a gold standard – as the U.S. government has established during the past – but instead prefers to eliminate legal tender laws and to remove the sales tax on gold and silver, so that the market may freely decide what type of monetary standard(s) there shall be.^[134] Since 1999, he has introduced bills into each Congress seeking to eliminate the Federal Reserve System in a single year.^{[135][136][137]}

Paul's foreign policy of nonintervention^[138] made him the only 2008 Republican presidential candidate to have voted against the Iraq War Resolution in 2002. He advocates withdrawal from the United Nations, and from the North Atlantic Treaty Organization, for reasons of maintaining strong national sovereignty.^[139]

He endorses free trade, rejecting membership in the North American Free Trade Agreement (NAFTA) and the World Trade Organization as "managed trade". He endorses increased border security and opposes welfare for illegal aliens, birthright citizenship and amnesty;^[140] he voted for the Secure Fence Act of 2006. He voted for the Authorization for Use of Military Force Against Terrorists in response to the September 11 attacks, but suggested war alternatives such as authorizing the president to grant Letters of Marque and Reprisal targeting specific terrorists. An opponent of the Iraq War and potential war with Iran, he has also criticized neoconservatism and U.S. foreign policy in the Middle East, arguing that both inadvertently cause terrorist reprisals against Americans. Paul has stated that "Israel is our close friend" and that it is not the place of the United States to "dictate how Israel runs her affairs".^[141]

Paul endorses constitutional rights, such as the right to keep and bear arms, and habeas corpus for political detainees. He opposes the Patriot Act, federal use of torture, presidential autonomy, a national identification card, warrantless domestic surveillance, and the draft. Paul also believes that the notion of the separation of church and state is currently misused by the court system: "In case after case, the Supreme Court has used the infamous 'separation of church and state' metaphor to uphold court decisions that allow the federal government to intrude upon and deprive citizens of their religious liberty."^[142]

Citing the Ninth and Tenth Amendments, Paul advocates states' rights to decide how to regulate social matters not cited directly by the Constitution. He opposes federal regulation of the death penalty^[143] (although he opposes capital punishment),^[144] of education,^[145] and of marriage, and endorsed revising the military's "don't ask, don't tell" policy to concern mainly disruptive sexual behavior (whether heterosexual or homosexual).^[146]

Paul says his years as an obstetrician led him to believe life begins at conception.^[147]

He terms himself "strongly pro-life",^[148] "an unshakable foe of abortion",^[149] and believes regulation or ban^[150] on medical decisions about maternal or fetal health is "best handled at the state level".^[143][151] His abortion-related legislation, like the Sanctity of Life Act, is intended to negate Roe v. Wade and to get "the federal government completely out of the business of regulating state matters."^[152]

Paul has stated that "The government shouldn't be in the medical business." He pushes to eliminate federal involvement with and management of health care, which he argues would allow prices to decrease due to the fundamental dynamics of a free market.^[153] Paul also opposes the federal War on Drugs,^[154] and believes the states should decide whether to regulate or deregulate drugs such as medical marijuana.^[155] He also opposes federal government influenza inoculation programs.^[156]

As a free-market environmentalist, he asserts private property rights in relation to environmental protection and pollution prevention.^{[citation needed]} He called global warming a hoax in a 2009 Fox Business interview, saying, "You know, the greatest hoax I think that has been around in many, many years if not hundreds of years has been this hoax on the environment and global warming."^[157] He acknowledges there is clear evidence of rising temperatures in some parts of the globe, but says that temperatures are cooling in other parts.^[158]

Paul was critical of the Civil Rights Act of 1964, arguing that it sanctioned federal interference in the labor market and did not improve race relations. He once remarked: "The Civil Rights Act of 1964 not only violated the Constitution and reduced individual liberty; it also failed to achieve its stated goals of promoting racial harmony and a color-blind society".^[159] Paul opposes affirmative action.^[160]

He is an outspoken proponent of increased ballot access for 3rd party candidates,^[161] but has sought to repeal the National Voter Registration Act of 1993, also known as the Motor Voter law.^[162]

Newsletters controversy[link]

Beginning in 1978, for more than two decades Paul and his associates published a number of political and investment-oriented newsletters bearing his name (Dr. Ron Paul's Freedom Report, The Ron Paul Survival Report, the Ron Paul Investment Letter, and the Ron Paul Political Report).^[163] By 1993, a business through which Paul was publishing the newsletters was earning in excess of $900,000 per year.^[163]

A number of the newsletters, particularly in the period between 1988 and 1994 when Paul was no longer in Congress, contained material that later proved highly controversial, dwelling on conspiracy theories, praising anti-government militia movements, and warning of coming race wars.^[163][164] During Paul's 1996 congressional election campaign, and his 2008 and 2012 presidential primary campaigns, critics charged that some of the passages reflected racist, anti-Semitic, and homophobic bigotry.^{[165][166][167][168][169][170][171]}

The newsletters included statements such as:

• "... I think we can safely assume that 95 percent of the black males in [Washington, DC] are semi-criminal or entirely criminal."^[166]
• "Boy, it sure burns me to have a national holiday for that pro-communist philanderer, Martin Luther King. I voted against this outrage time and time again as a Congressmen. What an infamy that Ronald Reagan approved it! We can thank him for our annual Hate Whitey Day!"^[163][172]
• "An ex-cop I know advises that if you have to use a gun on a youth [to defend yourself against armed robbery], you should leave the scene immediately, disposing of the wiped off gun as soon as possible.... I frankly don't know what to make of such advice, but even in my little town of Lake Jackson, Texas, I've urged everyone in my family to know how to use a gun in self defense. For the animals are coming."^[163][173]
• “I miss the closet. Homosexuals, not to speak of the rest of society, were far better off when social pressure forced them to hide their activities. They could also not be as promiscuous. Is it any coincidence that the AIDS epidemic developed after they came 'out of the closet,' and started hyper-promiscuous sodomy? I don't believe so, medically or morally.”^[174][175]
• “[Magic] Johnson may be a sports star, but he is dying [of AIDS] because he violated moral laws.”^[164][176]
• “[T]he criminal ‘Justice’ Department wants to force dentists to treat these Darth Vader types [people with AIDS] under the vicious Americans With Disabilities Act;" and “[W]e all have the right to discriminate, which is what freedom of association is all about, especially against killers [AIDS patients].”^[164][177]

Other passages referred to former Secretary of Health & Human Services Donna Shalala as a “short lesbian” and Martin Luther King, Jr. as a pedophile and “lying socialist satyr" – while offering praise for former Ku Klux Klan Imperial Wizard David Duke and other controversial figures.^{[163][164][174]}

When criticism of the newsletters was leveled against Paul during his 1996 congressional election, he did not deny writing the newsletters, but instead defended them and said that the material had been taken out of context.^{[165][167][166]} In later years, Paul said that the controversial material had been ghostwritten by members of a team that included 6 or 8 others and that, as publisher, not editor, he had not even been aware of the content of the controversial articles until years after they had been published.^[167][178] He eventually disavowed those passages, and stated that in 1996 his campaign advisers had thought denying authorship would be too confusing and that he had to live with the material published under his name.^[167][178] Some political commentators made note of the changing nature of the explanations he had provided over the years about his involvement with the newsletters.^{[179][180][181]}

An estranged former long-term aide of Paul, Eric Dondero, alleged that Paul was lying about his role in the production of the controversial newsletters.^[182][183] During the 2012 Republican presidential primary campaign, in January 2012, the Washington Post reported^[184] that several of Paul's former associates said that Paul had been very involved in the production of the newsletters and had allowed the controversial material to be included as part of a deliberate strategy to boost profits. Paul's former secretary said, "it was his newsletter, and it was under his name, so he always got to see the final product.... He would proof it."^[184] Paul continued to deny the accusations and to disavow the material.^[185]

Personal life[link]

Paul at a rally in Erlanger, Kentucky, on October 2, 2010, along with his son, senator Rand Paul of Kentucky, and his grandson, William Paul.

Paul has been married to Carol Wells since 1957.^[186] They met in 1952 when Wells asked Paul to be her escort to her 16th birthday party.^[187] They have five children, who were baptized Episcopalian:^[8] Ronald, Lori, Randal, Robert, and Joy. Paul's son Randal is the junior United States senator from the state of Kentucky. Raised a Lutheran, Paul later became a Baptist.^[188]

Bibliography[link]

Other contributions[link]

References[link]