Which American Governments are Bankrupt and Why

I was reading "Nine American Cities Going Broke," and noticed similarities between the cities in the most financial trouble. Many of them simply forgot their core functions and decided to go into projects like redevelopment and stadium building. These are "grand" projects that appeal to the egos of petty politicians, but for the most part, they do little good for, and much harm to, the taxpayers. Next, you have simple corruption and finally you have politicians buying the support of city workers by offering overly-generous pension schemes.

You may remember Vallejo, CA., actually filed bankruptcy as a result of the extreme pension costs for city workers, especially those given to unionized fire fighters. The city politicians, always wanting to be on the good side of the unions, caved in repeatedly. For years the taxpayers were able to cover the costs of buying political support from the unions, but long term it was unsustainable.

The nine cities listed are those "with the worst credit ratings assigned by Moody's." Here are the worst nine cities in from least bankrupt to most bankrupt.

#9 Camden, NJ. A very corrupt political system meant that three of the last five mayors ended up in prison for corruption. For some odd reason more than half the property in the city is tax exempt meaning taxes are imposed on the remainder. The city, not the school system, got over $1 billion in state aid in the last decade and is still going bankrupt. The state took over managing the finances and spending actually sky-rocketed while tax revenues plummeted. And in 2010 the state paid 80% of the costs of the city to stay afloat.

The city gave tax exemptions to a for-profit aquarium as well as to the a high-rent apartment complex. And greedy trade unions used their political clout to push through high pensions for police and fire fighters. Fringe benefits for those two departments doubled since 2001 after being adjusted for inflation. The city now pays out 28% of its budget in fringe benefits to these greedy city employees who use the clout of unions to their own selfish benefit.

Even while they are going bankrupt the unions increased their clout by getting more members hired. Full time city employees went from 1,131 in 2001 to 1,562. And the police department is 20% larger than the average for a city this size while there are 17% more firefighters than in other similar cities.

#8 Strafford County, NH. The main problem here is that the county went into the business of running a nursing home. And it is losing millions per year. About 40% of the entire country budget goes into this one nursing home. Most the patients are Medicaid patients and the country is finding that the reimbursements from Medicaid simply don't come close to paying the actual costs. This is a problem all health care providers face: government health care refuses to pay the actual costs of health care and this forces up prices for private patients. It is one way that government health care can pretend to cost less, while forcing up the cost of health care for everyone else, and then blaming the higher costs on private health care providers.

#7 Riverdale, IL. The main problem here just seems to be bad budgeting with the village consistently spending more than it takes in.

#6 Salem, NJ. The city decided to get into the office building field by guaranteeing bonds issued to construct the complex. Politicians said they could pay the bonds from revenue from leasing office space. But construction delays, a common thing in government run projects, meant they were paying out with no revenue coming in. Government officials tend to make bad investments like this all the time. They all dream of being the one credited with "revitalizing" the city, or having some grand project attributed to them. They are much more careful when they invest their own funds. But politicians are used to playing with other people's money.

#5 Detroit, MI. Trouble here is long term and tied to the heavily unionized auto industry which continued to push up costs for employers. General Motors and Chrysler both declared bankruptcy which substantially hurt the city. In addition the city was never well run to begin with. The net result is that debts are more than double the annual tax income for the city.

#4 Harrison, NJ. The city got involved heavily in redevelopment and spent $39 million to build a stadium. The income from the stadium, however, is well below what the politicians pretended it would be when they pushed it through. The stadium is one massive subsidy to the privately-owned New York Red Bulls, a soccer team. Bloomberg reports:

Town officials in December had to borrow $3.1 million -- 21 percent of its municipal tax collections -- to make the debt payment on the 2006 issue, and they anticipate doing so again this December, Moody’s said.

Meanwhile, the New York Red Bulls, whose owner is No. 208 on Forbes magazine’s list of the world’s billionaires, are challenging their taxable status. The team refuses to pay a $1.4 million property levy, according to Moody’s.

To close its $6 million budget gap, Harrison plans to dismiss 17 percent of its police and 29 percent of its firefighters on July 1, according to an e-mail from Town Clerk Paul Zarbetski. Mayor Raymond McDonough is also considering selling seven parking lots.

The city claimed that payments from developers would go from $2.3 million in 2008 to $11.5 million by 2011. But, in 2009 they only received $980,000 and $1.1 million in 2010 and 2011, just 10% of what they projected. The soccer team's managing director says the team shouldn't pay taxes since just being there "is a huge economic impact." Of course, it was an even huger economic cost.

#3 Jefferson County, AL. The county is in deep shit, literally and figuratively. It's 2o09 debt was $1,337,233,000 while revenue was only $308,440,000. The county decided to spend $3.2 billion on sewer overhauls. But numerous officials ended up in jail due to corruption connected to the project.

#2 Pontiac, MI. Here is another city hurt by the bankruptcy of union-riddled General Motors. But there was another stadium project involved as well: Silverdome Stadium. Built in 1975 it cost the city $55.7 million. The purpose was to "lure" the Detroit Lions to the stadium by given the wealthy owners a huge subsidy. They moved and stayed until they got a better handout leaving Pontiac holding a white elephant. The Jehovahs Witnesses rented it once a year for their annual get-together and a drive-in theater was opened up in the parking lot. The city decided to get rid of the stadium and asked for bids. In 2008 an offer of $18 million was made. The buyers were planning to turn the stadium into an entertainment complex. The city refused the offer and put it out to auction. Instead of getting $18 million the stadium was then sold for $550,000 in 2009. Brilliant!

#1 Central Falls, RI. Central Falls declared bankruptcy in August of this year. The reason was mostly due to the pension plans for city workers. The city owes $80 million in retirement benefits, which is equal to five years worth of the entire city budget. Once again it was the greedy unions redistributing wealth to fire fighters and police officers. The $80 million in retirement promises is for just 215 cops and firemen. The city has around 20,000 residents. The New York Times reports that Central Falls "is small and poor, but over the years it has promised police officers and firefighters retirement benefits like those offered in big, rich states like California and New York." (I don't know about New York, but big, rich California is in financial trouble as well and once again greedy unions have pushed through massive pension promises for union members.)

State regulations are also to blame here. State law favors unions and forces cities into binding arbitration. The law says that benefits are to be based on comparable benefits across the entire state and has to ignore the city's ability to pay. The result is that each time a city is forced into paying higher benefits the "comparable average" for the state increases forcing each other city to increase their benefits during the next union hold-up (I mean negotiation). Of course, as those benefits go up then the other cities are now lagging behind and have to catch up again. And so it goes in perpetuity. The Times report this means Rhode Island has "the nation's highest per capita spending for fire services and sixth-highest for policing." The law does not apply to other government employees but the teacher's unions are now pushing for a similar law to inflate the pay of teachers.

The Perverse Incentives of Obamacare

The Obama administration carefully crafted a piece of legislation that is meant to destroy private insurance and health care over the long-run. Consider how they have created a system of incentives that rewards you for canceling any health insurance you are currently paying for. Yes, that's right, the Obama "reform" makes you better off if you cancel your health insurance.

In normal insurance markets your incentive is to buy insurance before you are ill because pre-existing conditions are not covered. You pay $X per month for protection against conditions that may develop in the future. There is a very strong incentive to purchase insurance prior to such a condition developing.

Obama ends that incentive. Insurance companies will no longer be allowed to exclude pre-existing conditions. So why buy insurance?

Obamacare puts in penalties if you don't have insurance. But the penalties will be lower than the cost of the insurance itself. The money you will save on insurance will not be eaten by the penalties so you win. And, if you do get sick, no insurance company can turn you down for a policy and you're covered again.

Most of the time we aren't sick. Most of the time we pay for care we aren't using as an investment for when we will need it. But under Obamacare you can pay much less now, and still get the rewards later.

Companies that stop providing insurance will pay a penalty for doing so, but again under the cost of providing the care, especially as private rates increase. What alternative exists for Obamacare then? Obviously it will have to get more heavy-handed in punishing people. So the iron boots of government will have to be put on to deal with people who actually act according to the perverse incentives of Obamacare.

It should also be noted that some of the bad consequences of Obamacare have already materialized.

Publicly traded companies are supposed to announce any significant moves in their value. As the Wall Street Journal noted: "Black-letter financial accounting rules require that corporations immediately restate their earnings to reflect the present value of their long-term health liabilities, including a higher tax burden."

And that is what some companies have done. They announced the anticipated effect of Obamacare on their company. While Obama was claiming the measure would bring down health-care costs the companies that would be paying the bill said their costs would go up. According to the Journal: "AT&T announced that it will be forced to make a $1 billion writedown due solely to the health bill, in what has become a wave of such corporate losses." But AT&T wasn't alone:

On top of AT&T's $1 billion, the writedown wave so far includes Deere & Co., $150 million; Caterpillar, $100 million; AK Steel, $31 million; 3M, $90 million; and Valero Energy, up to $20 million. Verizon has also warned its employees about its new higher health-care costs, and there will be many more in the coming days and weeks.

The Democrats were hoping for some more time to pass before they were discovered to have lied to the public about costs. So they are hopping mad. Democrats "announced yesterday that they will haul these companies in for an April 21 hearing because their judgment 'appears to conflict with independent analyses, which show that the new law will expand coverage and bring down costs.'" Of course, we can all get more for less. Well, that was the promise.

The Journal asks: "Should these companies have played chicken with the Securities and Exchange Commission to avoid this politically inconvenient reality? Democrats don't like what their bill is going in the real world, so they now want to intimidate CEOs into keeping quiet."

The Journal notes precisely what the Democrats were trying to do:

Gradually introduce a health-care entitlement by hiding the true costs, hook the middle class on new subsidies until they become unrepealable, but try to delay the adverse consequences and major new tax hikes so voters don't make the connection between their policy and the economic wreckage. But their bill was such a shoddy, jerry-rigged piece of work that the damage is coming sooner than even some critics expected.

Nobel laureate Gary Becker called the Obama legislation "a bad bill" which actually doesn't address any of the real weaknesses of American health care but "adds taxation and regulation. It's going to increase health costs—not contain them." But Becker thinks it will become difficult to repeal this bad legislation because "interest groups group up around it."

Politicians, especially Democrats, are quite capable of setting up systems of perverse incentives. It has happened repeatedly. Of course, when things get screwed up the politicians claim it was caused by private business, not by their actions. They are blameless, always, because they are looking out for our interests. If you believe that,let me know, I have a bridge I want to sell real cheap.

Bailout promises, Mao's famine and bad incentives.

I suspect a lot of people are shocked by the blatant falsification of statistics by various government bureaucrats, at different levels, which gives a pretense to the Obama administration to claim their stimulus package created, or saved, jobs. I'm not sure why people are surprised at all.

One of the problems with the bureaucratic system of management is that such self-reporting is often the criteria used to measure "success." The problem is that the incentives for the bureaucrats are such that they pushed to fudge the numbers, in whichever direction necessary, to please their superiors. In the bureaucratic system pleasing the overlords, is necessary for advancement. So it's best to tell them what they want to hear.

Equally important is that government agencies, which report successes for their programs, often get showered with additional funding. Additional funding means more conferences for the top bureaucrats, often at resorts with very nice beaches. It also means more funding for pay increases and benefits.

There are numerous reasons why it is "helpful" to distort the facts in a way pleasing to those who have power over you. Often the distortions are small, just an attempt to show something "positive," but as the distortions move up the bureaucratic ladder they accumulate and the distortions grow.

A prime example of this, and the disastrous consequences that can follow, is found in Jasper Becker's book Hungry Ghosts. Becker's book is about the great famine in China from 1958 to 1962, where it is now estimated that 30 million people starved to death. And bureaucratic incentives to distort information had a lot to do with it.

Mao was a moron, plain and simple. He believed that various Marxist principles could be used to produce bumper crops. Since the Maoists said that solidarity of the people made the people stronger, then the same applied to grains. Thus growing grains tightly packed together would make them stronger, not destroy crops. This was just one area where the Maoists tried to apply "scientific Marxism" to the physical laws of agriculture—applications that failed over and over.

So these experiments were dismal failures. But such failures are not enough to lead to a famine. Other factors come into play. One such factor was the fear of the dictator. Mao's ideas failed but no one wanted to tell him. Tyrants could easily confuse the message with the messenger. So the incentive was to lie.

Local bureaucrats, instead of admitting that crops had been reduced, decided to write reports claiming that crops had increased. Those reports went to the superiors. The superiors, not aware of how much of the report was bluster, combined these exaggerated reports together. And they, thinking the reports were accurate, saw no harm in making them look even better by increasing the crop yields. And so it went. As the "data" accumulated it appeared that scientific Marxism was a success in agriculture. The top echelon of Mao's China got reports that made them very happy.

Desperate for hard currency the Chinese officials decided to take advantage of their bumper crops and sell them outside China. So they confiscated a large section of what crops did exist for export. This meant that food was scarcer at the local level as the farms were depleted of their stock to fill the quotas for export. A year goes by and the next set of reports have to be prepared. Again no one wanted to be the first to prick the Maoist bubble. Nor did anyone want to report they had failed, not when everyone else was apparently so successful, as the reports clearly indicated. So once again they took the figures from the year before and added a bit to them. And the process repeated itself.

At the top levels of the government Communist officials received more data, carefully collected from across the country, indicating an even larger crop than the year before. So the quotas for export were increased.

More food was confiscated. But a problem arose. You can't confiscate food that doesn't exist. Authorities scoured the countryside and couldn't find the crops that supposedly existed. The conclusion they drew was a simple one: the farmers were greedy, counter-revolutionaries who had obviously hidden the bumper crops. They were attempting to sabotage the revolution. So the officials, convinced the farmers had hidden food somewhere confiscated all the food they could find—which was actually all the food there was. The farmers had no hidden stocks, the data was wrong. The cumulative effect of lots of small distortions produced a massive error which resulted in the deaths of millions.

We saw a similar sort of bureaucratic distortion when the Bush administration looked at the "reports" on weapons of mass destruction in Iraq. Intelligence agents, dealing with lots of unknowns or information that could be interpreted in various ways, tended to interpret the data with the wants of their superiors in mind. This tended to bias everything in one direction with no one wanting to be the odd man out. This was especially true with Bush officials who tended to be disciplined if they contradicted what the President wanted. (A humorous example of this process can be found in the film The Tailor of Panama.)

Can't the same thing be found in private industry as well? Yes, but to a much more limited degree. For instance I know a publication which faked its circulation figures, claiming numbers double the actual figures. Advertisers paid on the assumption that the number of responses would be higher than they actually were. The advertisers who could accurately measure the results tended to drop their ads. But some businesses had no method of determining results from their ads and they tended to stick around as advertisers where the others didn't.

The difference is in how results are measured. The private sector has a "bottom-line" which tells the superiors everything they need to know. If something is working it shows up in increased profits. If it isn't working it shows up in reduced profits or losses. (For a good exposition on the differences between profit management and bureaucratic management see Bureaucracy by von Mises.) The more a business is able to use the "bottom-line" the harder it is to fudge the reports according to the benefits that accrue to those making the reports.

Government tends to shun profit management and has no bottom-line. Attempts to quantify the data are distorted by the incentives of the system. The net result is that even well-meaning superiors find it difficult to make rational decisions because the information they use has been distorted by the system.

While Mao could be a tyrant I don't think the evidence indicates the starvation was intentional—as opposed to Stalin's planned starving of the kulaks in the Ukraine. Eventually the situation got so bad that someone told Mao the truth and the situation changed. However, Mao's moronic Marxism was sufficient to create the crisis and the bureaucratic system made the situation worse by distorting the facts. And Mao was clearly a willful killer who ran a system that murdered millions intentionally as well as unintentionally.

The key point is that such distortions are systemic in nature. They are built into the structure of the bureaucratic model of management. They are not determined by the motives of the bureaucrats per se. Good people, facing bad incentives, are still likely to screw up. Bad people, facing good incentives, are likely to do good things. The progressive Left errs by thinking intentions are critically important while incentives are a minor issue. Many of the errors of the socialist Left are derived from this one fallacy.

By the way, this exposes the errors conservatives make about the Left as well. They assume the bad results, inherent in the system, are the result of immoral or evil motives by the Left. Typically that is not the case. A second, similar error of the conservatives, is that they buy into the Left-wing assumption that motives matter. So the Right will claim that putting "moral" people, "Christians" or "conservatives" into the system will change things. It won't. In the past, before they were taken over by theocrats, the Republicans claimed that putting "businessmen" into office would give us business-like management. That wasn't possible. The problem is not personnel but incentives built into the system.

Reality: It's a bitch.

Previously I mentioned that I was at the Atheist Alliance International meeting in Burbank recently. As expected a good number of people were dyed-in-the-wool Lefties of one statist variety or another. But a goodly number of people were libertarian—which is what I would expect.

In the course of the conference I meet and talked to dozens of people and have previously recounted some of the arguments I heard from the Left. But there was one argument I wanted to leave for a discussion by itself because it was so interesting. And, actually, it wasn’t really an argument, just a statement.

The discussion began with our Left-leaning friend saying that we need stringent government regulation of, well just about everything, in order to protect the Little Guy from rapacious Big Boys with lots of power. To do this we had to give the State lots and lots of power to counter-balance the Big Guys out to hurt the Little Guy. It’s a pretty standard argument from the Left.

My reply was what I would call Libertarianism 101. Simply put, I argued that history has shown that when the State is given such powers it is rarely used to protect Little Guy. Instead Mr. Politician conspires with Big Guy to use the new fangled powers in order to make life for Mr. Politician and Big Guy better at the expense of Little Guy.

As I’ve repeatedly said, the concentration of power does not help the powerless but those who already have power to grab the new power. Politicians need the support of powerful people, not little people. So they automatically turn to the Big Guys for financing. Senators don’t go out and have dinners at McDonald’s with the local gardener. They go to expensive restaurants with corporate executives and work out the “new” legislation that will protect the Little Guy. Since Big Guy and Mr. Politicians need each other, and the Little Guy only has to be fooled at the ballot box—which is a relatively easy thing to do—the end result is not favorable to Little Guy.

At this point my nemesis presented a very sad reply. And I don’t mean sad as in pathetic, I mean sad as in depressed or despondent. He actually looked sad as well. His voice got soft, as if he didn’t really want to say what he was about to say. He sort of shook his head slightly and lamented: “Yes, but it shouldn’t be that way.” And that was the end of his discussion. He bid me farewell and moved on. “Yes, but it shouldn’t be that way.”

What surprised was the lack of willingness to defend his fundamental argument that centralized power could be beneficial to the poor and the powerless. Instead, he just lamented that life is not the way he would like it to be and said, “It shouldn’t be that way.” He was acknowledging that it is that way; just saying it ought not be so. Which is like wishing to fly, despising gravity, and then stupidly flapping your arms in the hopes of getting airborne. He did not seem willing to abandon his premise that state power can be used in the way he thought would be good. He just lamented that reality is not the way it ought to be. If wishing were sufficient we’d all live in Candyland, walking streets of gold and be young, good looking, wealthy and smart. But reality loves to interfere with our wishes. Wishing isn’t enough.

Creating new powers and controls merely creates new ways in which the powerful can oppress the powerless. These new powers simply won’t be in the hands of the poor or the powerless. It doesn’t work that way. It doesn’t matter what I want, what you want, or what any of us want. Reality is what it is. Today’s New York Times illustrates this point perfectly with two stories.

The first article mentions the astronomical levels of debt that Obama has imposed on future generations of Americans. The new debt for the year is $1.4 trillion. That is equal to 10% of the entire economy. The Times says the debt is currently $12 trillion and that the Feds estimate it will rise by $9 trillion over the next decade. Anyone want to bet it will rise much, much faster than that? In essence, Obama is bankrupting America, just like Bush was doing, only more so.

The second story looks at one major cause of the new debt—the bailout packages. Politicians said they had to have billions in bailouts for Bankers to help the Little Guy --- it’s always to help the Little Guy, of course. But justification for policies and the results of policies rarely coincide. The Times notes that while people are struggling to pay debts and keep their homes “much of Wall Street is minting money—and looking forward again to hefty bonuses.”

The Times explains why: “It may come as a surprise that one of the most powerful forces driving the resurgence on Wall Street is not the banks but Washington.” Ah, excuse me, but YOU WEREN’T PAYING ATTENTION. This is NOT a surprise but precisely what I expected. This is the rule of power: expanding power always benefits those who have power already, not those who don’t. Maybe this is a surprise to the staff of the New York Times, as they seem relatively naïve on the role of incentives in politics and markets. But this sort of “surprise” is precisely what advocates of depoliticized, free markets predict will result from such policies. The Times says that the measures taken by the politicians “helped set the stage for this new era of Wall Street wealth.”

And the concentrated forms of wealth on Wall Street are only becoming more concentrated.

A year after the crisis struck, many of the industry’s behemoths — those institutions deemed too big to fail — are, in fact, getting bigger, not smaller. For many of them, it is business as usual. Over the last decade the financial sector was the fastest-growing part of the economy, with two-thirds of growth in gross domestic product attributable to incomes of workers in finance.
Now, the industry has new tools at its disposal, courtesy of the government.

I am sorry the New York Times is surprised that the policies they helped promote had results contrary to what they wanted. Ignore reality at your own peril. The Left does that in economics all the time. I guess the Times would say: “Yes, but it shouldn't be that way.” Yep, reality is a bitch, so maybe you ought to start paying attention to it.

The real class warfare: responsible vs irresponsible

The U.S. Congress is about to pass new legislation, the effect of which is to punish anyone who has credit cards and uses them responsibly. If you pay your bills on time you will be hurt. If you are irresponsible, or perhaps even intentionally dishonest, you will be rewarded.

Congress, in its infinite wisdom (read loads of sarcasm into that statement) wants to limit the penalties on irresponsible credit card users. The New York Times reports that one result of the legislation will be the “reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.”

One official of the American Bankers Association said: “Those that manage their credit well will in some degree subsidize those that have credit problems.”

Lest you think the Times has sympathy for responsible people, worry not. They have not given up their political bias in favor of irresponsibility and profligacy. In the sidebar they even have a section called “Room for Debate” which invites readers to debate the issue of “Should responsible card users be penalized for paying off their monthly balance?” That the Times even thinks there is “room for debate” on that issue speaks volumes.

The paper also quotes a “consultant” who claims that responsible cardholders were “making out like a bandit” because they didn’t pay annual fees and collect points for travel and other perks.

Remember that each time you use the card with a company that company pays a percentage to the bank for the privilege of having your credit backed by the bank. Individuals who don’t pay their debts on time actually take money from card companies. So, of course, banks charge them more.

But in the world of the perverted morality of politics responsibility has to be punished and irresponsibility has to be rewarded. If you think the Obama/Democratic government is waging war on the rich think again. They don’t give a damn if you are rich or poor. They merely care if you are responsible or irresponsible.

If you are irresponsible you will be favored no matter your level of income. Obama proved that by pouring trillions of dollars into the coffers of some of the wealthiest corporations in America but only if they had proven to be irresponsible. In fact, the more irresponsible they were, the more they were rewarded. Under Obama’s bailout schemes the only people punished were the responsible corporations.

Why is this sort of perverse politics so popular with the ruling elite? I suspect there are two reasons.

First, most of these clowns have never run businesses or, if they had, they ran them badly. George Bush was a lifelong failure in business; Obama has never been in business. He never paid out a salary to another person with his own money. This is sadly true from many politicians.

Second, politicians identify with irresponsible financial management. They understand it; they practice it on a daily basis when they draw up the budget. They understand spending more than you have, wasting money in irresponsible ways, lying to creditors, and cheating people out of the money they have earned. That’s how they run the country and they simply can’t conceive of any other way of managing things.

Drug wars, bad results and good intentions.

This ought to be news. Whether it will be remains to be seen.

The “this” to which I refer is an editorial penned by three former presidents from Latin America. The authors are Fernando Cardoso, the former president of Brazil, Cesar Gaviria, the former president of Colombia and Ernesto Zedillo the former president of Mexico.

With one voice the three former presidents announce: “The war on drugs has failed.” They are right. Here is some of what they write:

Prohibitionist policies based on eradication, interdiction and criminalization of consumption simply haven't worked. Violence and the organized crime associated with the narcotics trade remain critical problems in our countries. Latin America remains the world's largest exporter of cocaine and cannabis, and is fast becoming a major supplier of opium and heroin. Today, we are further than ever from the goal of eradicating drugs.

Over the last 30 years, Colombia implemented all conceivable measures to fight the drug trade in a massive effort where the benefits were not proportional to the resources invested. Despite the country's achievements in lowering levels of violence and crime, the areas of illegal cultivation are again expanding. In Mexico -- another epicenter of drug trafficking -- narcotics-related violence has claimed more than 5,000 lives in the past year alone.

The revision of U.S.-inspired drug policies is urgent in light of the rising levels of violence and corruption associated with narcotics. The alarming power of the drug cartels is leading to a criminalization of politics and a politicization of crime. And the corruption of the judicial and political system is undermining the foundations of democracy in several Latin American countries.

That the former leaders of three nations have publicly come forward to support the end of the drug war is big news.

Of course, I think these men are correct, not because illicit drugs are good but because drug wars are bad. If we investigate drugs there is no doubt in mind that we will find harm. If we investigate the war on drugs we find even more harm. In fact, the harm done by a bad solution to a real problem is worse than the harm done by the problem itself.

To call for legalizing drugs is to say one is pro-drugs. Just because I favor freedom of religion doesn’t mean I’m not really an atheist. One of the biggest fallacies in modern political thinking is that opposition to an alleged solution to a problem means one doesn’t believe there is a problem.

Lots of problems exist and there are lots of theoretical solutions to those problems. I oppose the drug war because it is a very bad solution that compounds the problem. I oppose the bail out and DC spending spree to the “crisis” because I believe those measures will make things worse, not better. My lack of support for socialized medicine is not because I’m pro-disease. Just because I want prostitution legalized doesn’t mean I want you to become a whore (if its already too late, please don’t tell me).

Another lesson from the drug war is that intentions don’t matter. Many of the people who constructed the war on drugs sincerely wanted to stop harm to our society and to individuals. They actually cared. Caring is not enough. In fact, caring doesn’t matter when it comes to solutions.

If you have the clap and an uncaring physician gives you penicillin it will work regardless of the physicians demeanor or concerns. If he shot you with sugar water, but really, really cared, it will also not matter. Good solutions work regardless of the compassion behind them. Bad solutions don’t work no matter how compassionate your motives.

I love cats. I’m very, very fond of them. Show me a kitten and my heart melts. If I’m driving down the road and a kitten runs in front of the car my compassion will shoot through the roof. But if I step on the gas, instead of the brakes, I’ll still be heartbroken over one flat cat. My love for cats won’t turn a bad solution (the gas pedal) into a good one (the brakes).

In fact, even bad intentions can have good consequences. The horrendously bad “bantu homeland” policies of the apartheid governments created little pockets of land that were “officially” not under South African jurisdiction. So those who enjoyed gambling just popped over this unmanned border and gambled. Erotica that was banned in South Africa was openly sold in the various homelands. Even television that was banned by the apartheid regime was legal over TV Bop (short for Bophuthatswana).

Since the government of Bophuthatswana was nominally independent it could allow television that was banned by the South African government. And since television signals are not stopped by the imaginary lines politicians draw in the sand those signals were available to South Africans. The result was that many people could watch news that was blacked out in South Africa, or television shows that were banned.

The homelands were a policy built entirely on bad intentions. Yet many of the unintended consequences were beneficial to freedom. Similarly many of the best intended policies that float about will have entirely negative unintended consequences.

And so begins the Obama betrayal.

You have to give Obama credit. He isn’t even waiting to take the oath of office before he begins betraying the very people who elected him. Of course the Obamatrons worship the water he walks upon and won’t admit they were taken for a ride by this con man.

Let us begin with Obama’s alleged antiwar views. One of Obama's first appointments is Rahm Emanuel who was asked to be his chief-of-staff. When it comes to war, especially war in the Middle East, Emanuel is right up there with Dick Cheney and the neocons. One difference is that Emanuel doesn’t have the restraint of Cheney -- he is aggressive, threatening and demanding. He was also one of the people who sat on the board of the Federal Home Loan Mortgage Corporation which is partially responsible for the housing bubble that has caused so much pain to the economy, but he resigned that appointment when he decided to run for Congress.

Emanuel, who served as a civilian volunteer with the Israeli Defense Force, certainly won’t be objective when it comes to foreign policy matters. The Nation says he is “seen as a strong Israel partisan.” Emanuel’s father, who was a member of the terrorist Irgun group says: “Obviously, [Rahm] will influence the President to be pro-Israel. Why shouldn’t he do it? What is he, an Arab? He’s not going to to clean the floor of the White House.” Emanuel was also a supporter of President Bush’s war policies and has said he wants the youth of America to be forced in compulsory government service. Neoconned again.

Now the scuttlebutt is that Obama has picked Eric Holder as attorney general. The Nation notes that Holder was a Department of Justice insider who, “at a point when the Bush administration was proposing to further erode barriers to governmental abuse, argued that dissenters should not be tolerated”. He also called “for the firing of any ‘petty bureaucrat’ who might suggest that proper procedures be followed and that the separation of powers be respected”. They also note: “Holder was part of the legal team that in 2005 developed strategies for securing re-authorization of the Patriot Act."

Nor can Barack Obama wait to begin imposing his Big Government solutions. No doubt it is entirely coincidental that the first new policy he announced amounts to a regressive tax on energy that will destroy jobs and reduce the wealth of all consumers. He wants to impose a tax on carbon emissions in the name of saving the planet from the global warming monster. Such taxes will be paid by consumers on the products they buy and the fuels they use. This is a particularly regressive form of taxation which hurts the poor the most. He told the poor he given them hope and what he is delivering is picking their pockets to help the fat cats.

These funds will go into Obama’s treasury so he can repay the massive amounts of contributions he received from Big Business. Say what you will, but Obama got more corporate funding than McCain, and Big Business doesn’t make investments without expecting a return on their money.

According to the San Francisco Chronicle, the not-yet crowned king of the United States has said he wants to give $15 billion a year of these funds to so-called alternative fuel companies. That is to major corporations who are producing fuels that consumers don’t want, some of which do more harm than the fuels they replace, and which require a subsidy to make them attractive.

Obama claims that these subsidies “will create jobs at a time of economic turmoil.” Okay, Obama is stupid or lying and I don’t think he’s stupid. These subsidies don’t create jobs anymore than the money he will be given the corporate elite is “new wealth”. He will take your wealth and give it to some rich guys. That isn’t new wealth at all. He is merely redistributing the wealth from the poor to the rich. And that is the same thing that will happen to the so-called “new jobs” which Obama is crowing about.

The higher taxes that he intends to impose on virtually every segment of the economy will destroy massive numbers of jobs. Those jobs disappear as consumers cut back in order to pay the new taxes which help Big Energy companies replace the profits lost to lower oil prices. Money is showered on the Big Energy companies and that will produce some jobs in those segments of the economy. But the process will destroy jobs everywhere else. It is highly likely Obama’s tax will destroy more jobs than it will redistribute, leading to a net loss of jobs. So not only will Mr. Obama impose a tax that hurts the poor mos,t he’ll also make sure there are more poor to be hurt by by destroying their jobs.

Obama says giving your income to wealthy energy companies will “help us transform our industries and steer our country out of this economic crisis by generating 5 million new green jobs that pay well and can’t be outsourced.” The man is a bald faced, blatant liar. Yes, this will transform industries by shutting down factories, closing stores, and destroying millions of jobs. And it will create some new jobs in the industries that he favors. And no doubt, the Big Energy companies will consider their investments in the Obama campaign well worth the investment.

As for the economic crisis it will just redistribute it. The likelihood that you will lose your job due to Obama’s tax increases is much higher than the likelihood that you will be hired to work in the so-called “alternative” fuel industry. And, I’d bet you that the “new” energy that they produce will cost more than the old energy it is meant to replace. The poor will get screwed twice over. First they will be taxed to pay the subsidies to Big Energy and then they’ll be screwed again when they buy the energy.

But the worshipful Obamatrons will all stare, wide-eyed and worshipful at their New Messiah and applaud his ability to “save the planet”. Jesus only promised to save your soul. By Obama standards he was a piker.

And to show you how the media distorts what is going on the San Francisco Chronicle reports that a business run “green” group is supporting the new measure “even though many of its members -- such as oil giants BP and ConocoPhillips - emit large amounts of greenhouse gases.” This make it sound like these guys will be hurt by the measures yet are selflessly applauding them. What they aren’t telling you is that these same companies will be among the major recipients of Obama’s corporate welfare.

Just take ConocoPhillips as an example. It is well known that the largest of the companies living off of stolen tax money is Archer Daniels Midland. ADM is an excellent example of “political capitalism” where rich investors get richer by having politicians redistribute wealth to them through subsidies and other government programs and measures. But did you know that ConocoPhillips and ADM are partners in efforts to “develop renewable transportation fuels from biomass”? So ConocoPhillips will benefit from the subsidies that Obama is handing out. The Chronicle never reported that fact.

BP is another company with lots of fingers in renewable energy pies. BP knew of Obama’s plans weeks ago and had already decided to move $5 billion in investments from Europe to the US to take advantage of the Obama welfare scheme for Big Oil companies feeling the pinch of lower oil prices. The Guardian reported: “BP has dropped all plans to build wind farms and other renewable schemes in Britain and is instead concentrating the bulk of its $8bn renewables spending programme on the US WHERE GOVERNMENT INCENTIVES FOR CLEAN ENERGY PROJECTS CAN PROVIDE A CONVENIENT TAX SHELTER FOR OIL AND GAS REVENUE.”

The Wall Street Journal noted “Oil companies like BP-- as well as U.S. majors-- could be well-positioned to take advantage of the subsidies, which take the form of tax breaks on U.S. income.” So while Obama is forcing new taxes on the working and non-working poor he will be giving tax breaks to Big Energy. If George Bush did this (and he would) the Left would be crying out in protest. When St. Barack does it there is nary a peep from them.

Did anyone really think these Big Energy companies are selflessly volunteering to pay higher taxes? Absolutely not. They expect that most the taxes they will pay on carbon emissions can be passed on to the suckers who voted Obama into office while they can take advantage of the subsidies created by the scheme to reduce taxes on their profits. You will pay more for energy and they will pay less taxes on their profits. This is how Obama helps the poor. Unless the poor include BP and ConocoPhillips the Obama campaign is already clearly a fraud.

This is a perfect example of the way that Big Business uses new regulations to increase their profits. The Green Left hates Big Oil so they push for subsidies on “alternative fuels” which amounts to tax breaks for Big Oil. Once again the Left has handed corporate America a new means of fleecing the poor to support the ultra-rich.

I suggest that Obama will craft a series of new measures, all of which will be sold to solve some crisis for the average worker, but which, in the end, will reward the corporations that poured hundreds of millions into his election coffers. It is so easy to dupe people that Obama isn’t really even trying to hide it.

The San Francisco Chronicle report is a perfect example of lazy reporting. The reporter, David Baker, claimed the oil companies backing Obama would be hurt by the measures -- thus given the measures credibility to readers. I would bet that the reporter himself supports the scheme. But what he didn’t bother to do was check to see if these selfsame companies would be net beneficiaries of the schemes they were endorsing. Mr. Baker played his role in helping keep this myth of wealth redistribution alive and well. The myth is that such measures hurt the rich and help the poor. The reality is that they tax the poor to subsidize the rich -- after all, who do you think paid for all those Obama television ads. It wasn’t old ladies on social security, single mothers on welfare, or minimum wage burger flippers.

What makes Big Business bad.

This blog has periodically discussed the threats to liberty and well-being posed by both Big Government and Big Business. Some well-meaning people on the left believe that Big Business is a threat and that Big Government is the cure to the problem. I disagree and will explain why here.

That a corporation is large poses, in and of itself, very little threat provided that is required to operated in a depolicitized environment. If, however, the marketplace is politicized through strings of regulations, controls, subsidies, taxes, etc., then the corporation has every incentive to use its size and wealth to buy political influence in order to skew the results in their favor. Considering that their competitors will be doing this as well any corporation would be stupid not to act in this manner.

But Big Business becomes a threat only to the degree that it can impose its will on people. And that can only be done through the use of Big Government. The real threat that corporations pose to liberty and well-being comes about precisely when well-meaning individuals increase the powers of government to turn competitive markets into politicized markets.

The ability of a corporation to impose its will on individuals is rather limited absent a large state apparatus capable of enforcing that will. Wal-Mart doesn’t have police agents able to prevent competition. But politicians can rig markets to prevent competition. Archer Daniels Midland can’t force you to buy their ethanol. But they can buy off politicians who pass laws forcing you to buy the ethanol, and, for good measure, pass laws handing some of you tax monies over to ADM in the form of subsidies for doing so.

In the real world Big Business is like Big Religion; in order to pose a real threat to the general public they need the cooperation of Big Government, otherwise they are relatively impotent.

Consider the largest Christian sect in the world: the Roman Catholic Church. It is officially antiabortion yet Catholics have abortions all the time. It is officially antigay but it can’t even stop priests from being gay. All the Catholic Church, or any religion, can do, absent government power, is threaten sinners with damnation. Most people ignore such threats because they have to real force in this world. Many deny the Church has any force in any world. What these sects need, in order to impose their theocratic desires upon others, is Big Government.

What Catholicism would love to do is use state power to ban abortion and thus impose its will on everyone. That is what the Catholic/Mormon alliance did with marriage equality for gay couples. They used state power to prevent gay couples from marrying.

Of course, there are times when a large corporation. or powerful local business. may actually violate the rights of people without access to government power. It might even have “enforcers” who impose the corporate will by force. But such incidents in history have been rare relative to the frequent and flagrant use of state power to kill, maim and destroy.

But when Business has acted this way the problem hasn’t been that government was too small. In many such cases government was simply corrupt and bought off. It failed to use legitimate state powers (that is powers that protect life, liberty and property) at the request of a criminal. If a rich man murders, and then pays off the cops to ignore, his crime, the problem isn’t that the police don’t have enough power but that they are corrupt. When government fails to protect real rights it is due, not to a lack of power, but to a lack of will.

Making government more powerful doesn’t solve this problem because the problem was never a lack of power. A government that can be bought off when it is small is one that can be corrupted when it is large. The difference is that the large government can inflict more harm on behalf of those who have purchased its powers. Making government more powerful thus doesn’t solve the problem but makes it worse. The ability to corrupt the political process doesn’t go away. If anything, the incentives to corrupt politics is now even greater.

It is more likely that a Big Government system would become corrupted. It is much easier to hide the corruption beneath a multiplicity of laws and regulations, agencies, departments and bureaucracies. When government refuses to prosecute a criminal that action is relatively transparent. A man kills another man, hands $1 million over the sheriff and isn’t prosecuted. People tend to know that the man bought off the government in order to escape justice. But the bureaucratic maze used by Big Business is so complex that it isn’t immediately, or easily, apparent when the process has been corrupted. Small nudges in one area or another can adequately skew the final result.

And often Big Business has used their sworn enemies as their most effective foot soldiers. Socialists hate Big Business. As such they are regularly used by Big Business to push through “reforms” which politicize the marketplace. Big Business lets the socialists push through the regulations and then the Corporations step in and use their political pull to write the regulations in such a way as to skew the market in their favor. Whatever they may say about their socialist enemies in public, in private they are thankful that they provided them another tool with which to rape the pocketbooks of the public.

Big Business is mainly a threat when coupled with Big Government. In the few cases where Big Business actually acts in a criminal way, absent Big Government, it only gets away with such crimes if the political process is corrupt. And giving a corrupt political system more power doesn’t end this problem but magnifies it.

On the other hand, Big Government is a threat in and of itself. It does not need Big Business in order to harm people. Big Business basically needs Big Government but Big Government doesn’t need Big Business as the Soviet Union proved. Governmental power is always coercive. And coercion is always a threat to life, liberty and property. It is coercion that turns sex into rape and a transfer of wealth into theft. Coercion can transform a moral act into an immoral one.

It is the existence of Big Government which acts as an incentive to attract special interest groups of which Big Business is only one. When government intervenes into various aspects of human life it politicizes those aspects and that creates conflict where previously it did not exist.

Consider a government with the power to determine shoe production. If the government decided it would regulate the size, make, and design of shoes there would be conflict over this matter. As it currently stands we walk into stores and pick among thousands of different kinds of shoes. Were government to regulate all these aspects we would have conflict. Some would want sneakers while others would want high heels. If one or the other is the choice then each group of consumers would have to fight the other groups to ensure that they get what they want. In the depoliticized market each is satisfied to a relatively large degree. But in politics it is often one size fits all regulations. There are winners and there are losers, markets expand the number of winners, politics reduces them..

This is clearly seen in government schooling. Instead of schools that reflect the diversity of parental desires the government education system is one-size-fits-all. If you don’t like abstinence education tough luck. If you don’t care for evolution, tough luck. The state sets the curriculum, hires the teachers, forces the children to attend, and then confiscates your wealth to pay for it. Across the board the education system lacks choice and thus it is a major area of conflict. We, who support sex education, have to fight the abstinence moralists. We, who support scientific evolution, have to fight creationist mythology. With market-oriented schools these conflicts tend to vanish. The market provides different schools for different families allowing both to pick what they prefer.

The political process creates conflict. It is inherent in the system. When government is limited to the defense of life, liberty and property this conflict is small, almost non-existent. Criminals would prefer the government give them free reign and their victims would prefer the government arrest the bastards. But that is pretty limited as only a few are one side with the bulk of the population on the other side. But as government powers expand these political conflicts spread into more and more areas.

The so-called “Culture War” in America is not a culture war but a political war. The conflict is almost exclusively limited to areas under state control. A totally private marriage system would end the war over gay marriage. (However, I don’t think that is currently possible given the plethora of laws that are directly linked to marriage--such as immigration, tax laws, judicial rights, etc.). If all those laws were repealed, and marriage privatized, no conflict would exist. We have private schools that teach abstinence and private schools with a realistic sex education program. Since neither is able to coerce students into attending the conflict is almost totally absent.

Just as government intervention into private morals, the arts and education has generated political conflicts that divide the nation, political intervention into markets does precisely the same thing. The ever-expanding conflict that rents our nation asunder is the direct result of the ever-expanding nature of state power.

Congress plays Santa Claus with bail-out boondoggles.

The destructive “bail-out” legislation was drafted on the fly, barely debated, passed without any one person reading it in it’s entirety and rushed into law by a President who rushes to judgement on lots of issue with almost a perfect record of being wrong.

All it will do is hand billions of dollars from poorer people to wealth corporations. But it does more than that. The politicians, who are inherently deceptive, used the legislation in order to push other agendas as well.

Congress tends to write legislation that is about a “big” subject and then the D.C. crowd hide other measures into the legislation. So a bill that is about one topic is used to hide laws about entirely different topics, totally unrelated. The secondary topics don’t get any debate at all. Everyone is focusing on the “big issue” so the little issues slip by unnoticed. Democrats do it. Republicans do it. Once against it is the bipartisan effort by the two big parties to screw over the American people.

Did you know the bail out bill, while picking you pocket for the benefit of Wall Street is picking your pocket for other special interests as well?

Republican Senator, Pete Domenici, pushed a rider into the bill to force companies to provide insurance to so-called “mental illnesses”. As the Wall Street Journal notes this clause in the bail out bill requires “insurance companies to cover mental illnesses just like other medical conditions.” The problem is that so-called mental illnesses are not just like other medical conditions.

Measles is an objective condition. It exists as an illness whether or not the medical profession says it exists. But a mental illness has no objective condition. It is entirely subjective. It was once said by the psychiatric profession that masturbation was a mental problem. Now it isn’t. The American Psychiatric Association voted to remove homosexuality as a mental illness. Now I happen to think it was never a mental illness to begin with. But illnesses do not rely upon votes. The medical profession doesn’t get together and vote physical diseases into, or out of, existence.

The reality is that mad doctoring is a lot of hocus-pocus. It depends on cultural interpretations of behvaiour. Most mental illnesses have no evidence for their existence beyond the behaviour of someone. There is no virus or antibody that can be detected. You can’t do a blood test to determine a mental illness. You just state an opinion about how someone is acting.

There are numerous tests that have been done of mad doctors which show how they are unable to determine whether someone is mentally ill or not. One famous study sent “patients” to mental hospitals with the patient originally lying about hearing voices. (You can’t measure whether someone hears voice. You simply have to take their word for it.) The person was normal in every way. The mad doctors continued to incarcerate these normal people until it was exposed they had nothing wrong with them. They couldn’t tell if they were “mentally ill” or not.

Then as a follow up the mad doctors were told that the experiment would be conducted again. This time they had fair warning. Admission rates to their “clinics” dropped dramatically as the doctors began rejecting numerous patients. In truth no actors were sent to them. Patients who previously would have been admitted were rejected merely because the doctors thought they might be exposed once again.

There is no objective standard by which the term “mentally ill” can be defined. As a psychology/journalism major at university I took numerous courses on “mental illness” and the definitions were circular. No objective definitions were given. I’ve tried to find objective definitions and there were none. I pulled up one psychiatric web site to read their definition. They noted that a mental illness is a “broad range” of conditions. They say it is not brain damage or learning disabilities. They say the term is used for anything condition that “significantly interfers with the performance of major life activities, such as learning, thinking, communication and sleeping.” But there is still no actual definition. You can have a “mental illness” “over many years” and the symptoms can “vary from person to person”. They can “come and go”.

But what is it? Are there any actual symptoms that can diagnosed objectively? The entire definition depends on our own values and how we feel about what another person says is happening inside their mind. It can’t be measured objectively only subjectively. We see a man walking down the street babbling to an imaginary friend we call it schizophrenia. We see the same man doing it in church and he’s religious. No real disease acts this way. Cancer exists in the body regardless of your location at the time.

The reason that homosexuality stopped being a mental illness was simple. Social attitudes which condemned people for being gay changed. With mental illnesses the diagnosis may tell you nothing about the patient but a lot about the values of the doctor.

Sen. Domenici has been trying to get this measure through for years and regularly failed. Of course the mad doctors wanted the legislation since it pumps billions of new funds into their profession. Domenici couldn’t get the measure passed previously. But by adding it to the bail out it wasn’t even debated. Domenici was able to help this one profession by forcing insurance companies to give money to them for a non-objective condition.

How does a psychologist know you are experiencing anxiety? You tell them and act anxious. Ditto for depression. They can’t do a blood test for such problems. They can’t make a culture of the “virus” that causes them. They can’t detect antibodies. They talk to you and you talk to them. They have to take your word for it. (Of course, they can diagnose you even if you assert you feel fine.) Two psychiatrists can come to totally opposite conclusions because objectivity is not required.

Now we know that there are people in the world who fake being sick. They call in to work and say they can’t come in because they “have a cold” when, in fact, they are headed for the beach. Companies may ask for a doctor’s statement confirming the problem. Certainly insurance companies won’t pay out for “treatment” or lost wages merely on the say-so of the employee.

The same person can now go to a mad doctor and say he feels depressed. He can recount sadness, listlessness, and a general attitude about life. And the doctor has to take his word for it. Such things can’t be measured. The physician can recommend rest and relaxation. He might suggest the man head to the beach for a nice day of enjoyment. By claiming to have a “mental” state that can’t be measured the same man can get the insurance company to pay for his “treatment” and cover his lost wages while he enjoys the beach. And, if the patient is proven to have faked problems, time after time, then his behaviour of faking illnesses is itself indicative of an illness.

While Sen. Domenici was handing billions to the mad doctors other politicians were doing the same thing. Over and over measures unrelated to the “bail out” were being smuggled into the legislation, where they would be passed with no debate whatsoever.

The environmentalists, who due to their consistent fearful statements must be “mentally ill”, got billions in tax credits for their favorite causes. It’s part of the “bail out”. So there is a $17 billion subsidy for so-called green technologies.

The politicians were having a field day with the massive piece of legislation. Throughout the bill they were hiding projects to reward special interests in areas which have no connection to the main matter of the bill. There is a 39 cent per item tax break for manufactures of wooden arrows for children. The bill extended $100 million in tax breaks for race car tracks and $478 million for Hollywood film producers.

You remember the bill that was rejected only a few days ago because of those “valiant” congressmen saying “no”. And then you remember how they caved days later. What changed? The Congress, in those few days, expanded the bill by hundreds and hundreds of pages. It was expanded to give out more money to more special interests. A good number of those Congressmen weren’t holding out for “better” legislation, they were holding out for their special interests. They were waiting to pad the bill with their preferred, unrelated projects. In other words, they were waiting for a political bribe -- a measure that would benefit them with the special interests they represent.

So you have tax breaks for wool producers, $192 million for rum producers, and a whopping $239 million to help rescue fishermen from the Valdez oil spill -- really! Ignore the fact that spill is about to have it’s 20th anniversary.

One of D.C.’s real low-lifes, Congressman Charles Rangel, was behind the rum rebate measure, which gives the rebates to the governments of Puerto Rico and the Virgin Islands. Rangel attacked the larger bill because it was filled with special interest legislation precisely like that which he introduced himself. Of course he was bitching about other special interests and not his own. And even though the bill contained $100 billion in spending unrelated to the bail-out he said that he had to vote for the measure because something had to be done. Rangel insisted his special interest wasn’t just a vote-getting measure like the arrow rebate.

This is the dishonest way that politicians do business. These politicians can tell the public they opposed the first reading of the bill but caved in because of the dire need for it -- a need they created in the first place and one that really isn’t addressed by the legislation anyway. Then they riddle the bill with goodies for their friends and supporters, change their vote, and act as if this was a principled stand on their part.

The bail-out was a bad idea. The revised bail-out is nothing but politics as usual. But it is a perfect example of how politicians whip up fear and hysteria about something in order to ram through legislation that benefits small interest groups. Congressmen are not your friend!

Dr. Frankenstein's Bubble: Made in Washington

Question: How bad is the economy going to get?

Answer: Much worse than it has to be.

Why: The nostrums being proposed by the Secretary of the Treasurer are destructive and noxious. Let’s face it, the Bush Administration is totally incompetent and can turn any cold into a fatal disease. I really wasn’t paying that much attention to what Secretary Paulson was saying so I didn’t realize precisely how stupid he was in regards to economics. The man is a blithering moron. Take this series of questions and answers with Paulson as an example:

Jon Healey: Many of the people we speak with don't like this because they see the results of the government's work being sustaining housing values that should have been allowed to come down.

Henry Paulson: Again, I've given my answer to that. I think what we're doing is avoiding a market failure that would have forced housing values down in a way that was not in the investors' interest, and in a way that the market wasn't intended to work.

Tim Cavanaugh: How can you force values down? Why aren't values finding their natural level?

Henry Paulson: The way values would go down is, as I've said, you'd have market failure...

Henry Paulson: ...What this will do will make a difference in that we won't have housing prices driven down in ways that distort the market because the industry wasn't able to come up with procedures to deal with an unprecedented situation.

Tim Cavanaugh: Is it distortion in the market when the market was already distorted up to a degree that maybe wasn't unprecedented, but was certainly unusual in American history?

Henry Paulson: So you'd like to see it distorted down too...
Peter Hong: Could you be a little clearer on what you mean by "market failure"?

Henry Paulson: As I've said, chaos...when I say market failure I say that we have an unprecedented situation, and the private sector has to find a way to deal with that. Otherwise you're going to see them drowning in people who can't make resets, whom they would ordinarily want to keep in a home.

Peter Hong: You used the phrase "distort down." Is it distortion or is it a correction?

Henry Paulson: What I want is markets to work. And I would define a market failure as the system not being able to cope with the wave, so that foreclosures took place that would not have taken place if there were smaller volume...

Peter Hong: But are house prices too high?

Henry Paulson: I'm not going to—foreclosures are bad for neighborhoods. You have needless foreclosures that are driving down prices, created by a situation that is unprecedented and that would under normal circumstances not have taken place.

Good God, didn’t this man take a basics Econ 101 course sometime in his life or is he intentionally ignoring market fundamentals for other reasons? First, lets get rid of the absurd idea that this crisis is one of “market failure”. Markets are doing precisely what they are supposed to do -- when a good is overpriced markets correct that price and bring it down.

So why is housing overpriced in America? Government policies pushed by short-sighted politicians (are there any other kind?) intentionally distorted markets to increase the demand for housing. The whole purpose of the government created monsters, Fannie Mae and Freddie Mac, was to make it easier for people who can’t afford a home to buy one. Easy-money policies from the Federal Reserve, cheap lending from government-backed institutions, increased the demand for housing faster than the supply thus pushing up prices. This gave the home owner the illusion of increasing wealth and they went on a spending spree increasing their debt believing the increased equity in their home would cover it. A good time was being had by all.

And there were lots of people willing to build homes in order to sell them to these people. In fact, there were lots more people building those homes then there should have been.

But why the distortion in building? Consider yourself an investor wanting to get a return on your money. If you purchase stocks, and the stocks went up, you paid capital gains tax on the increased value. If you invested in gold, silver, coins, or almost anything, and you received a profit on your investment you paid a capital gains tax on that profit --- with one major exception. You guessed it: housing!

Go back to 1997 and the so-called Taxpayer Relief Act of 1997 passed by the Congress. Here is a description of the law:

The relief act's primary provision for home sellers is the capital gains tax exclusion -- when you sell your home, if you qualify, you can keep, tax free, capital gains of up to $500,000 if you are married filing jointly or $250,000 for single taxpayers, or married taxpayers who file separately.
Your capital gain on the sale of your home is the selling price minus your cost basis. The cost basis is your purchase price, plus qualified purchase costs, improvements and selling costs, minus any accumulated depreciation, say for a home-based business. A professional can help you more specifically calculate your gain if you are not sure what qualifies and what doesn't.

Now a libertarian might say that tax relief is not a bad thing. But there is tax relief that can create problems. When you have a tax on all capital gains but one specific kind then tax relief linked to one investment alone it will distort investment patterns. The tax policy, in essence, lowers the return on all investment save the favored one. Thus more capital flows into the favored investment than into the others. The natural market is distorted. Some areas lack the investment they ought to have under natural returns and the favored area receives more investment than it would if on an equal playing field.

When one sector of the economy has too much investment the rate of return in that sector will eventually fall. Over investment drives down profits in that sector while pushing up profits in the underinvested sectors. Housing was over built and with each new house the pressure was increasing. The bubble had to burst. What Secretary Paulson is doing is trying to artificially pump up the bubble -- the very sort of policy which caused the problem in the first place. Somebody needs to point out that you don’t cure drunkenness with more alcohol and you don’t cure an economic bubble by re-inflating it.

Vernon Smith won the Nobel prize in economics and almost a year ago he wrote about the housing bubble and the cause.

Thank you President Bill Clinton for your 1997 action, applauded by the banks, the realtors and all citizens in search of half-millionaire status from an investment they could understand and self deceptively believe to be low risk; thank you for fueling the mother of all housing bubbles; thank you for enabling so many of us who bought second or third homes, and homes before construction began, which we then sold to someone else who dreamed of riches from owning homes long enough to sell to another fool.

Once again, try as we might and in spite of our political rhetoric, we have failed to help the poor in applauding government action intended to help ourselves.
The consumption binge is now over, and there is more than enough blame and souring loans to spread around. Congress, if its members can stop squabbling, wants desperately to sanctify it all with actions sure to launch at some future date the grandmother of all housing and mortgage-market bubbles. This august body has long forgotten that it set the stage for housing bubbles by creating those implicitly taxpayer-backed agencies, Fannie Mae and Freddie Mac, as housing lenders of last resort.

Smith notes that it would have been beneficial to allow “capital gains on all assets to go tax free, provided that the capital was reinvested....” But proposals to do that raise the shrill cries of the Statist Left who believe the benefits the rich. They preferred target “relief” and they picked housing to encourage more people to invest into this one sector of the economy. They told us this was helping the poor.

So where are the poor today? They bought houses that had inflated prices, prices inflated by the politicians and their “created in DC” bubble. They bought the houses that they couldn’t afford because the same politicians made it easier for them to do so through the lending distortions they put into effect. So they gave easy money to people to buy property that was overvalued. When the value of the property corrected itself, as was bound to happen, the same homeowners found that they were paying far more than the property was worth. Each month their were going shelling out money as if a property was worth X amount, when in reality it was worth far less. Basically the “caring” Left in Congress conned a lot of people into buying an investment that was bad for them.

Of course those people borrowed the money and most those loans ended up in the hands of the government-sponsored agencies Fannie Mae and Freddy Mac. Make no mistake these are entirely creatures put together by the Dr. Frankenstein’s in Washington. Now the conned home owners are defaulting, destroying their credit ratings, going bankrupt and being harmed in innumerable ways. So the morons who created this crisis, the politicians, are rushing to bail out the big moneyed institutions that leant the money. Damn the little guy tricked into making a bad investment by government policy, but bail out the corporate interests.

Once again we have another politically-created disaster where the most vulnerable people in society are being harmed. The harm was imposed on them by policies which the politicians, particularly the Democrats in DC, claimed were being implemented to “help” them. One basic principle to remember is that “help” from Washington almost always does more harm to the recipient being helped than it does good. Help from DC is like a rapist claiming he’s helping his victim learn new techniques for sexual pleasure. The victim ends up bloodied and beaten and it is only the rapists who gets his jollies.

After the poor home buyers were conned into buying overvalued property by the snake-oil salesmen from Washington they found themselves in a horrible position. When they start going under, and the institutions that hold their loans start hurting, the politicians rush in to rescue the institutions. And who is going to pay for that? The taxpayers. And that means higher taxes to cover the billions in bailouts. Washington tricked people into making bad investments. And when those people go broke and can’t pay off their loans Washington comes in and taxes the same people to save the asses of the corporate elite.

Once again it is clear that government intervention into the market does not help the poor. Quite the contrary. It is the poor who tend to pay the highest price for the intervention and receive the least benefits. Even under the best of the times the “benefits” are dubious and or a short-term nature with long-term consequences which make them worse off.

Keep an eye on Washington because this will be a perfect example of how alleged liberals in the Democratic Party will push through policies that help major donors to their parties while shafting the poor. It will also illustrate how government interference in the free market does not help the poor but harms them. And notice how this crisis has been evolving for sometime now but the political classes did nothing. As long as people were losing their homes the politicians were relatively silent. Once the defaults started hurting the billionaires that fund both parties the politicians jumped to life and demanded bail outs for the big boys. That is the nature of politics but I’ve written about that before.

Corporate plunder as the consequence of state power.

Many people speak of the “profit motive” and attach it to free markets. Of course, there is a profit motive but the idea that the profit motive vanishes in the absence of markets is absurd. The desire to profit exists regardless of the economic/political system under which one labors.

The bureaucrat under the system of state socialism is just as driven to improve his life as the so-called robber baron. No system eradicates this motivation.

The political/bureaucratic system abolishes “profits” in the sense of creating value in excess of costs. But it does not abolish profits for the individuals who labor in that system. Politicians don’t earn profits in the sense that business owners do, yet they profit by their political activity. They gain things which are important to them and that includes monetary gain, prestige, power, praise, etc.

The idea that profit is only monetary in nature is naive at best. Once, when I sponsored a dinner with Milton Friedman, his entire compensation, in terms of material goods, was dinner for himself and Rose and a reduced parking charge at the hotel garage. When I handed him his discount coupon for the parking I commented: “This has to be one of the lowest honorariums that you have ever received.”

Friedman, never one to miss a chance to make an important point smiled and said: “Any good economist will tell you that their is more to profit than mere monetary gain.”

The basic reality is that all humans are profit-maximizers especially when you realize this covers more than “profits” in the pure business sense. Politicians and bureaucrats profit. All people are “greedy” in the same sense. Everyone wants to improve their life.

Political control doesn’t eradicate such greed and neither does the free market. But the two systems do create different incentives as to how one uses their “greed” in relationship to others.

In a totally free market, one without subsidies or political control, the entrepreneur must produce a good which I am willing to buy. For me to be willing to buy his product I must conclude that the value of the product is worth more to me than the value of the money which I am paying for it. If I conclude that I am worse off, I simply don’t purchase the product. In order for the entrepreneur to be “better off” by having me part with my money he has to make me more satisfied than I would be without the trade. His profit is dependent on his ability to increase my well-being. That is because the market is voluntary, and in order to get me to “volunteer” to part with my money, he must increase my well-being.

This is most certainly not the case with politics. Where markets rely upon voluntary exchange the political process relies upon state coercion. Politicians and bureaucrats have the ability to force individuals to make less than optimal exchanges. In fact they have the ability to expropriate private wealth in exchange for nothing at all.

The German sociologist Franz Oppenheimer explained this difference in 1919 in his classic work The State. Oppenheimer contrasted the two systems of profiting this way:

There are two fundamentally opposed means whereby man, requiring sustenance, is impelled to obtain the necessary means for satisfying his desires. These are work and robbery, one’s own labor and the forcible appropriation of the labor of others. Robbery! Forcible appropriation! These words convey to us ideas of crime and the penitentiary, since we are the contemporaries of a developed civilization, specifically based on the inviolability of property. ...I propose ...to call one’s own labor and the equivalent exchange of one’s own labor for the labor of others, the “economic means” for the satisfaction of needs, while the unrequited appropriation of the labor of others will be called the “political means.”

Even though he was socialist Oppenheimer saw clearly that the “state is an organization of the political means.” As Oppenheimer puts it: “The ‘state’ is the fully developed political means, society the fully developed economic means.” This fits precisely with Felix Morley perspective in his classic The Power in the People. Morley, a well-known journalist and peace activist (he became the president of a Quaker college), noted that society “carries the flavor of voluntary companionship” but with the state “the association tends to be involuntary”.

“Society” is all interaction, economic or not, which is voluntary and cooperative in nature. It encompasses not just the economic market but social clubs, charitable organizations, private associations and individual activities. It should be noted that the bulk of social good that we experience comes out of this undirected, unorganized, spontaneous social order that free individuals naturally create. The state, on the other hand, is that entity which imposes involuntary actions on people within a certain geographic area. In society many competing and varied organizations seek to do the same good. Within the state there is no room for “a thousand flowers” blooming -- it is a monopolized entity claiming the exclusive right to initiate force.

As Morley sees is, the state is the same an Oppenheimer’s “political means” and society is the same as his “economic means”. You can dichotomize them as the voluntary versus the coercive as well. I tend to see the one as peaceful action verses violent action.

The political means of wealth acquisition relies upon the use of force or the threat to use force. The economic means requires cooperation and peace. It is said that markets are seductive while political controls are rape. In each case they could potentially achieve the same end, but the one requires seduction or persuasion while the other relies upon orders, threats or violence.

My tendency toward limited pacifism means that I prefer the latter sort of social structure. I say “limited pacifism” because I believe it is immoral to initiate force against others but not necessarily immoral to use force to defend one’s self against violence from others.

And this brings me to my main point -- that businessmen are not inherently inclined toward one system or the other. The profit motive, which we all acknowledge inspires them, exists in both systems.

A profit-seeking businessman could be an advocate of social, voluntary exchange based on the peaceful exchange of value for value, benefiting all parties to the exchange. He, or she, can just as easily prefer the political means of wealth acquisition which uses state power to impose involuntary exchanges upon unwilling individuals. What we call “the profit motive” exists in both situations. But, as I see it, the one is inherently immoral and other moral.

There is nothing about businessmen that makes them more inherently moral than the public at large. Just as some individuals prefer to live by theft from others there are some businessmen who prefer to use the political means, or state coercion, in order to acquire wealth for themselves.

We are witnessing this sort of lolly scramble with those corporate interests who are using state power to confiscate wealth from productive individuals in order to bail out themselves. The entire debacle we see on Wall Street is one where government interventions created distorted incentives and encouraged risky investments, so risky in fact, that they failed. The State then comes in and uses its coercive monopoly to confiscate the wealth of individuals and make them involuntary “partners” in the losses created by the mismanaged corporations.

I do acknowledge that the politicians created the incentives to mismanage things. But that doesn’t exonerate the corporate leaders who choose to use these incentives in an attempt to enrich themselves. Long-term the reliance upon state coercion to gain wealth is doomed to fail. It is inherently destructive. Dr. Martin Luther King noted: “The ultimate weakness of violence is that it is a descending spiral, begetting the very thing it seeks to destroy. Instead of diminishing evil, it multiplies it.” Because the state means of profiting uses force, because it is involuntary, because it is inherently violent, is multiplies the very evils it seeks to address. It tends to exacerbate problems not solve them.

The problem with the State socialist is that he doesn’t see how the use of evil means creates more evil. He is willing to use violence to address the needs of people. He wants to improve the lot of the poor and powerless and for this he creates state power. But power doesn’t fall into the hands of the powerless by definition. The centralized, violent system of statism always ends up in the hands of a powerful elite who use it against the interests of the very people it was meant to help.

Classical liberalism, or libertarianism, properly understood has always been a political philosophy of the Left. This was clearly indicated when the great liberal thinker, Frederic Bastiat, sat on the Left of the French Assembly. Bastiat shared the Left’s desire to improve the lot of the poor and powerless, but, unlike the state socialist, he understood the dangers of using state power to accomplish these goals.

I believe in a libertarianism that speaks out for the powerless and for those who are denied their full equal rights before the law. And I realize that to achieve such a system of justice requires the abolition of concentrated power--not its monopolization. When power is monopolized in the hands of the political classes the results will always be one where the rich and powerful use state coercion to pick the pockets of the poor and powerless.

The “bailouts” that we see today are the plundering of the working classes by corporate elites. It is a plundering that could NOT take place in a truly free market. It is only possible when the State has the power to transfer wealth involuntarily. And the statist Left needs to recognize that they are largely guilty for creating the system that makes such plunder possible.

If the Left wants to put an end to such corporatism they will have to re-evaluate their belief that the use of involuntary, state power can achieve a peaceful, prosperous social system. Violence does not beget peace, coercion does not create cooperation, plundering does not create wealth. Both the ends and the means must be consistent with one another. That means the eradication of concentrated power and the creation of truly free, voluntary markets.