Thursday, January 27, 2011

Contested Ground, Not Common Ground

by Michael D. Tanner

President Obama spoke eloquently during his State of the Union address last night about civility and the search for common ground. And certainly a bit more civility would be a welcome change. Yet, at the same time, the president's speech showed just how little common ground there is between two distinctly different views on the role of government.

The president clearly believes in using government broadly as a force for good in society. Despite the lip service paid to the need to put our fiscal house in order, the president's answer to the problems facing this country is for government to do more and spend more. The president may call these new initiatives "targeted investments," but what he means is "more expensive government programs."

In calling for more government action, the president's attitude reminds one of Samuel Johnson's description of second marriages: the triumph of hope over experience.

That is not a divide that can be bridged by civil rhetoric or rearranging congressional seating.

For example, the president wants to spend more on education. That sounds good — who could be against education? But the federal government has increased education spending by 188 percent in real terms since 1970 without seeing any substantial improvement in test scores.

The president's answer to unemployment is for the government to pick winners and losers in the marketplace, "investing" in infrastructure and "green technology." The president sees government as the engine of economic growth, as a force that "creates jobs." He says he wants that job growth to be in the private sector; it's just that he doesn't believe that the private sector can do much unless it acts in "partnership" with the government. Yet from Hoover and Roosevelt during the Great Depression to the anti-recession policies of Gerald Ford and George W. Bush, government efforts to fight unemployment by "creating jobs" have been unsuccessful. And we have the experience of hundreds of billions of dollars spent by President Obama in stimulus programs with little evidence of job creation.

Nor should we forget that the president's "investment" must be financed through either taxes or debt (meaning future taxes). Thus the president is simply moving money around, taking it from those people and businesses he deems less worthy and giving it to those he believes will "win the future." That's a recipe for redistribution, not competitiveness.

As the economist F. A. Hayek noted, government's ability to manage the economy is premised on a "fatal conceit" — politicians' inability to recognize their own limitations. For example, studies show that not only do government "green jobs" policies create few jobs, but the ones they do create often come at the expense of existing jobs. To cite just one finding: A study by Gabriel Calzada of the Juan Carlos University of Madrid found that every green job created by the Spanish government destroyed an average of 2.2 other jobs, and that only one in ten of the "green jobs" created was permanent. The fact is, if these industries were viable and profitable, the private sector would be rushing to invest in them. The very fact that they require government subsidies demonstrates that they are not the road to future economic growth.

But the president continues to insist that the right mix of government spending will work better than the invisible hand of the market to restore a growing economy.

Naturally, the president defended his health-care bill despite all the evidence that it has failed to control medical costs and is actually driving up the price of insurance, limiting consumer choice, and making it more difficult for businesses to hire new workers. The government health plans we have now, Medicare and Medicaid, are spiraling into insolvency even as the quality of care they provide deteriorates. In fact, most of the problems facing our health-care system can be traced to government policies designed to fix it. But the president insists that more government mandates, subsidies, and regulations are the answer.

On the other side of this grand political divide are those who believe that government is already too big, too intrusive, and too costly. Rather than "invest" in new programs, they want to cut back the programs we already have. Rather than seeing Washington as the font of all wisdom, they see the 50 states as, in Louis Brandeis's immortal phrase, "the laboratories of democracy," and seek to devolve more authority and responsibility to state governments. Rather than federal money and regulation, they see increased competition and parental choice as the answer to failing schools. Rather than a government industrial policy, they see the free market as the route to economic growth, and call for lower taxes and less regulation to unleash that market. And rather than increased government control of our health-care system, they seek a consumer-centered health reform.

That is not a divide that can be bridged by civil rhetoric or rearranging congressional seating.

U.S.-China Trade a Collaborative Effort

U.S.-China Trade a Collaborative Effort

by Daniel Griswold

The visit last week of China's President Hu Jintao was considered a diplomatic success, but it seems to have only hardened the determination of Sen. Charles E. Schumer, New York Democrat, and other critics to get tough on Chinas alleged unfair trading practices toward the United States.

Despite the trade-war rhetoric we heard last week, it's a mistake to see China as a monolithic economic rival to the United States. While certain U.S. companies do compete head to head with producers in China, the reality is that producers in both countries occupy different locations in an increasingly complex global supply chain. U.S. companies are more likely to be collaborators than competitors with producers in China.

This is true not just for U.S. companies but for firms throughout East Asia. The story of the past two decades is that companies in Japan, South Korea, Taiwan and elsewhere have been slicing up their own supply chains, basing their lower-end, labor-intensive operations in China while retaining production of higher-end components and services in their home markets.

Daniel Griswold is director of the Cato Institute's Center for Trade Policy Studies and author of the 2009 book, Mad About Trade: Why Main Street America Should Embrace Globalization.

More by Daniel Griswold

As a result, most of the products we import from China are not really "Made in China" in any real sense of the term. The consumer electronics and other more sophisticated products we import from China typically are designed and engineered outside China and built with more expensive components made outside China. The products are assembled in China, but even that lower-end work is usually performed in factories owned and managed by multinational corporations outside China.

On a macro level, this dividing up of the supply chain shows up in our trade numbers with the countries surrounding China. Yes, imports from China have grown exponentially since 1990, from $15 billion to more than $300 billion in 2010. This has provided fodder for the critics to claim were being swamped by a tidal wave of low-cost imports that have displaced U.S. production.

What the critics miss is the relative decline of imports to the United States from other major Asian economies. Most of the products we import from China are not the type of things Americans were making 10 or 20 years ago, but rather the kinds of products we used to import directly from other Asian countries.

China has become the final assembly operation in a global factory. Since 1990, imports from China have grown from 3 percent of total U.S. imports to 17 percent, a huge increase in market share by any measure, but that growth has come almost entirely at the expense of imports from China's Asian neighbors. During that same period, the share of U.S. imports from the more developed Asian economies — Japan, South Korea, Taiwan, Hong Kong and Malaysia — has plummeted from 31 percent to 13 percent of total U.S. imports. Overall, imports from those countries combined with China have remained a steady 30 percent of U.S. imports since China entered the World Trade Organization in 2001.

On a micro level, nothing better illustrates what is right with our trade relationship with China than the iPhone. Even though technically made in China, this is an American product in every meaningful sense of the word. It was created by Apple in California, and its success has been a boon to Apple employees and shareholders, application developers and the millions of consumers who enjoy the product every day.

According to an analysis last year by iSuppli, a market-research firm in El Segundo, Calif., just a few dollars of the value of an iPhone 4 is actually added in China during the final assembly. The major components come from suppliers in Japan, South Korea, Taiwan, the United States and even Germany and Switzerland. Of the $600 final price of an iPhone, less than a third goes into hardware and assembly. The highest value added for the iPhone, as with most manufactured products today, is realized at the beginning and the end of the supply chain — in research, design and engineering at the front end, and distribution, retail, service and profit mark up at the back end.

If the critics were to get their wish for higher tariffs on imports from China, the result would not be a repatriation of jobs to the United States, but a massive disruption of intricate global supply chains that are benefiting both American consumers and American companies and workers every day. The cost of producing an iPhone would go up sharply, driving up the final cost to consumers and reducing final demand. In fact, without the ability to assemble the final product efficiently and economically in a place such as China, products like the iPhone may never be developed in the first place.

The losers from an outbreak of anti-China protectionism would be those Chinese workers who assemble the final products, to be sure, but also American consumers, workers and investors. In our more globalized economy, we really are all in this together.

New Republicans

New Republicans, Same Old Militarism

by Benjamin H. Friedman

As the 112th Congress gets under way, a key question remains about where tea-party influence will push the Republican caucus on foreign policy — toward a more restrained stance on overseas commitments and Pentagon spending, or in the familiar trajectory of fiscally calamitous military adventures.

Since the tea party took off last year, pundits have predicted that its anti-spending zealots would eventually target the Pentagon. Neoconservatives are clearly nervous about that prospect. Sens. John McCain and Lindsey Graham have lamented the rise of an "isolationist" wing of their party, and a slew of Wall Street Journal and National Review op-eds have warned tea partyers away from defense spending. Meanwhile, antiwar pundits have heralded every dovish murmur from the right.

But the evidence that the new Republicans will challenge defense spending is slight.

The Cato Institute has scored the positions of House and Senate Republicans on the war in Afghanistan and defense spending, which are a good proxy for general foreign-policy views. We examined members' statements, websites, and votes.

[E]vidence that the new Republicans will challenge defense spending is slight.

On defense spending, we graded them as for cuts, against cuts, ambiguously for, ambiguously against, or just ambiguous. On Afghanistan, they were categorized as being for continuing the war, against it, skeptical about it, or having no position. ("Against" includes those who favor substantial reductions in forces and ambition; "skeptical" includes those who express fainter doubts.)

Our analysis reached three conclusions:

There is no "isolationist" wing of the GOP. Of the Republicans' 47 senators and 242 representatives, only 5 percent (15 members) expressed support for cutting defense spending. Adding those in the "ambiguously for" category makes it 13 percent. Forty-one percent are against cutting defense spending; with those ambiguously against, it's 60 percent.

Only 10 Republicans, or 4 percent, are against the war in Afghanistan, and none are senators. Including the skeptical members, 10 percent are somewhat antiwar. Eighty percent support the war.

The tea party is not mellowing Republican militarism. If it were, freshman Republicans, who mostly proclaim allegiance to the movement, should be more dovish than the rest. That's not the case. Five of the 101 Republican freshmen and 10 of the 184 who aren't newcomers support cutting defense spending. That's about 5 percent of each group.

No new Republican opposes the war in Afghanistan outright. Including skeptics, 9 percent of freshmen and 11 percent of the rest are against the war.

Fewer new Republicans have defined positions on these issues. Veteran Republicans are more likely to be in the clearly "against cuts" and "for the war" categories; freshmen are more likely to be ambiguous or have no position. This ambiguity is a silver lining for advocates of military restraint: Many tea-party Republicans were elected without saying much about foreign policy and may yet emerge as non-interventionists.

Benjamin H. Friedman is a research fellow in defense and homeland security studies at the Cato Institute.

More by Benjamin H. Friedman

Since we began collecting this data in November, the minority of Republicans who are willing to cut defense spending has grown slightly. Senate Minority Leader Mitch McConnell and House Majority Leader Eric Cantor both said recently that defense spending should not be excluded from deficit-reduction efforts. Still, they seem willing only to trim "waste," not to substantially reduce military commitments and cut the force structure and cost. Nation-building, however, again seems to have become a dirty word among conservatives — both because the nation-building president is a Democrat, and because recent polling shows two-thirds of conservative voters think we should scale back or end the war in Afghanistan.

The new Republicans would be more ideologically coherent if they came to oppose defense spending and the war. True fiscal conservatives understand that trying to run the world with the U.S. military is neither conservative nor cheap.

Those angered by Wall Street bailouts should look askance at military subsidies for our rich European and Asian allies. And those skeptical about government's ability to reliably deliver mail in Pittsburgh cannot expect it to deliver democracy in Afghanistan.

The Problem with the State of the Union

The Problem with the State of the Union Isn't the Seating

by Gene Healy

Bipartisan symbolism's all the rage on Capitol Hill right now, with members scrambling for a cross-aisle BFF to sit with at the State of the Union (SOTU). Tonight, the lion will lie down with the lamb — or at least Sens. Tom Coburn, R-Okla., and Chuck Schumer, D-N.Y., will sit elbow to elbow and try not to bite each other.

Maybe these gestures will lead to a nationwide surge of oxytocin — the togetherness hormone — healing partisan rancor across the fruited plain. But that's highly unlikely, given how polarizing the modern SOTU and the modern presidency have become.

A while back, Newsweek editor Evan Thomas went on MSNBC's Hardball with a tingle in his leg and a song of national unity in his heart. "In a way," Thomas burbled, "Obama is standing above the country, above the world. He's sort of God.... He's going to bring all different sides together."

The modern president has become a lightning rod for partisan sentiment.

But "the One" works in mysterious ways; if President Obama meant to "bring all different sides together" at last year's SOTU, he ("He"?) had a funny way of going about it.

With six Supreme Court justices sitting before him, Obama denounced the Court's decision to uphold the First Amendment in Citizens United, a case in which the administration admitted that its legal theory would allow the government to ban books.

When Obama proclaimed that the decision would let foreign corporations spend without limit in US elections, Justice Samuel Alito mouthed the words "not true," because the president's statement was, you know — not true. Bizarrely, liberal pundits accused Alito of breaching decorum.

As long as we're shuffling deck chairs for the sake of comity, how about starting a new tradition where the Supremes stay home? They're supposed to be a politically neutral bulwark of our liberties, and it's unseemly to seat them at a presidential pep rally — especially if they'll be harassed from the podium.

In fairness, Obama's hardly our first polarizing president. There was a time when the "approval gap" — the difference in presidential approval ratings from members of his own party and from those across the aisle — rarely got above 40 percent. Lately, it's passed 70 percent under both Presidents George W. Bush and Obama.

Today's presidents are, by their nature, "dividers, not uniters," argues University of Maryland political scientist Frances Lee. Her data shows that when presidents highlight a given issue in the State of the Union, they significantly increase the chances it will be decided by a party-line vote.

The modern president has become a lightning rod for partisan sentiment. In large part, that's because the modern presidency has become too prominent and far too powerful.

The original SOTU was a modest affair, in keeping with the constitutional requirement that the president give Congress "Information of the State of the Union and recommend to their Consideration such Measures as he shall judge necessary and expedient."

Gene Healy is a vice president at the Cato Institute and the author of The Cult of the Presidency.

More by Gene Healy

The idea was, with a full-time executive and a part-time legislature, the president would be well-placed to gather facts that would help Congress's deliberations. As President Zachary Taylor put it in 1849, "the Executive has the authority to recommend (not to dictate) measures to Congress."

But today's SOTU has become an imperious sermon befitting an Imperial President, short on "Information," long on pomp and circumstance, and larded with exorbitant demands on the public purse. Shaking up the seating chart won't help.

Some say that, given modern technology, there's no going back to the humble communique that the Framers envisioned, and that 19th-century presidents used to have copied and messengered up to the Hill.

But Obama's said to be inseparable from his Blackberry. Couldn't he do us all a favor and just text it over?

View from Davos: How Bad is a $1.5 Trillion Deficit?

View from Davos: How Bad is a $1.5 Trillion Deficit?

Joseph Stigliz is one of the many economists talking about debt at Davos (Vincent Kessler/REUTERS)

Now that we have the recovery, we will have to pay for it. The question is did we take the appropriate measures or did we overspend.

On Thursday, the CBO estimated that the federal deficit in 2011 will reach nearly $1.5 trillion. That's up from nearly $1.3 trillion last year. Three years after the financial crisis many had hoped what were supposed to be temporary budget deficits would be shrinking by now. That's especially true because early bailout measures like TARP ended up mostly paying for itself.

So why is the deficit still rising? It's because the recession has turned out to be weaker than many expected, and unemployment has stayed high. The tax cut passed late last year, which some called a second stimulus, will alone add $400 billion to the debt this year. Here in Davos, where business and political leaders are meeting for the World Economic Forum, there are two views on debt that are being expressed. And at least one of them seems to suggest the recent run up in US deficits aren't that bad. Here's why:

The first view on debt is the obvious one. Perhaps, in part, because the World Economic Forum is located, conversations here and panel discussions are dominated by the European fiscal crisis. And the situation in Europe seems bad. Greece, Ireland and others have borrowed so much that many are worried they won't be able to pay back their debts. The UK's austerity measures may be causing that country to slip back into recession. Some are saying the Euro will have to be abandoned.

On that backdrop, the US debt seems bad. At a dinner of economists on Wednesday night, economist Carmen Reinhart predicted that the US was headed toward a crisis where we would be forced to cut many of our social services. Raghuram Rajan, a former chief economist at the IMF, said that the measures that the UK were making to deal with their deficit right now were a good move. He said we too should deal with our fiscal problems now, rather than putting them off.

But not everyone thinks the US debt problem is so dire. While the total deficit is larger this year than last year, it is slightly smaller as a percentage of GDP than last year. What's more, the US many have more ability to borrow than other countries because of the dominant role of the dollar in the world economy. The fact that our dollars are so widely seen as a safe asset gives America the ability to borrow more than say Greece or Ireland before hitting the breaking point. Nobel prize winning economist Joseph Stiglitz, who is also at Davos, said that while he is worried about some of the US states debt problem, he thinks debt may not be as bad as some people think. In fact, Stiglitz would even be for increasing our debt even more. As long as it was spent on things like infrastructure and education, which can produce jobs, and boost incomes. So there is a debt cliff, but the US may not be there yet.

Better off bankrupt

Better off bankrupt

States should have the option of bankruptcy protection to deal with their budget crises.

By Jeb Bush and Newt Gingrich

During the 2008 financial crisis, the federal government reacted in a frantic, ad hoc fashion, tapping taxpayers for bailouts galore, running roughshod over the rights of bondholders and catching the American people unaware and unprepared. In contrast, we still have time to prepare for the looming crisis threatening to engulf California, Illinois, New York and other state governments.

The new Congress has the opportunity to prepare a fair, orderly, predictable and lawful approach to help struggling state governments address their financial challenges without resorting to wasteful bailouts. This approach begins with a new chapter in the federal Bankruptcy Code that provides for voluntary bankruptcy by states, a proven option already available to all cities and towns across America.

The figures for next year's budgets are staggering. California, which faces a $25.4-billion budget shortfall, will pay $100,000+ pensions to more than 12,000 state and municipal retirees this year. A Stanford study puts the state's unfunded pension obligations at more than half a trillion dollars. Illinois has a $15-billion budget deficit, prompting its governor and lame-duck Legislature to hike its personal income tax rate by 66%. New York, where 73% of the government workforce is unionized, is staring at a $10-billion deficit.

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There has been an organized federal bankruptcy process for municipalities since the 1930s, and a handful of cities, towns and counties — most notably California's Orange County in 1994 — have gone through municipal bankruptcy and gotten their fiscal houses back in working order. A bankruptcy option for the states would look very similar to Chapter 9 municipal bankruptcy, with some necessary modifications.

First, as with municipal bankruptcy, it would have to be completely voluntary. This means that neither the federal government nor state creditors could push an unwilling state into bankruptcy, no matter how catastrophic the state's finances may be, as this would violate the U.S. Constitution's protection for a state's sovereign immunity.

Second, as with municipal bankruptcy, a new bankruptcy law would allow states in default or in danger of default to reorganize their finances free from their union contractual obligations. In such a reorganization, a state could propose to terminate some, all or none of its government employee union contracts and establish new compensation rates, work rules, etc. The new law could also allow states an opportunity to reform their bloated, broken and underfunded pension systems for current and future workers. The lucrative pay and benefits packages that government employee unions have received from obliging politicians over the years are perhaps the most significant hurdles for many states trying to restore fiscal health.

Third, the new law should allow for the restructuring of a state's debt and other contractual obligations. In a voluntary bankruptcy scenario, states, like municipalities, will have every incentive to file a reorganization plan that protects state bondholder claims and their ultimate recovery. States will evaluate their future access to bond markets and their prospective borrowing rates as they formulate the optimal restructuring plan.

When California refused to bail out Orange County, the county entered bankruptcy and emerged within 18 months. Within three years, the county returned to an investment grade rating, and it repaid 100% of the principal of the vast majority of its investors by 2000 without raising taxes.

The lesson is that voluntary bankruptcy offers taxpayers the option to restructure state finances responsibly to achieve long-term fiscal health — which can only improve California's bond rating since it is the worst in the nation— instead of simply having to accept the Sacramento solution of another tax increase.

Fourth, the federal judge reviewing the state's reorganization plan would have the power only to accept the plan as permissible under the federal bankruptcy law, or reject it as inconsistent with that law. Just as with municipal bankruptcy, this new law for states must explicitly forbid any federal judge from mandating a tax hike or carrying out any other government function.

Fifth, the new law should provide for triggering mechanisms to initiate the bankruptcy process that respect the sovereignty of the people of a state. A state legislature acting by a majority vote, with the governor, would fit this test. The new federal bankruptcy law should also allow those states that provide for the right of initiative, like California, to put the question to voters whether they support a reorganization of their state government under the U.S. Bankruptcy Code.

If Californians were given the opportunity to do an end run around the politicians in Sacramento and vote to reform their state government under the U.S. Bankruptcy Code, it would almost certainly trigger a proposition fight. In such a circumstance, the proposition could provide that a yes vote would trigger the cancellation of all state government employee union contracts. Even if the proposition were defeated, the debate surrounding it would make abundantly clear to the people of California and the rest of the country just how much of a stranglehold government employee unions have on state and federal budgets.

An additional benefit of a new voluntary bankruptcy law for states is that its mere existence may deter any state from ever availing itself of its provisions. If government employee union bosses know that they could have all their contracts annulled under federal bankruptcy law, either through a plan of reorganization voluntarily entered into by state leaders or by the voters through proposition, they may be far more accommodating with state governments to restructure government employee union workforces, pensions and work rules.

Federal bailouts must come to an end. Federal taxpayers in states that balance their budgets should not have to bail out the irresponsible, pandering politicians who cannot balance their budgets. Congress must allow a safe, orderly way under federal bankruptcy law for states to reorganize their finances.

Jeb Bush is the former governor of Florida and president of the Foundation for Excellence in Education. Former House Speaker Newt Gingrich is the general chairman of American Solutions for Winning the Future.

States can handle school reform

States can handle school reform
By George F. Will

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“Since 1995 the average mathematics score for fourth-graders jumped 11 points. At this rate we catch up with Singapore in a little over 80 years ... assuming they don’t improve.”

— Norman R. Augustine, retired CEO, Lockheed Martin

WASHINGTON — What America needs, says one American parent, is more parents who resemble South Korean parents. Secretary of Education Arne Duncan, 46, a father of a third-grader and a first-grader, recalls the answer Barack Obama got when he asked South Korean President Lee Myung-bak, “What is the biggest education challenge you have?” Lee answered: “Parents are too demanding.” They want their children to start learning English in first rather than second grade. Only 25 percent of U.S. elementary schools offer any foreign-language instruction.

Too many U.S. parents, Duncan says, have “cognitive dissonance” concerning primary and secondary schools: They think their children’s schools are fine, and that schools that are not fine are irredeemable. This, Duncan says, is a re- cipe for “stasis” and “insidious paralysis.” He attempts to impart motion by puncturing complacency and picturing the payoff from excellence.

He notes that 75 percent of young Americans would be unable to enlist in the military for reasons physical (usually obesity), moral (criminal records) or academic (no high school diploma). A quarter of all ninth-graders will not graduate in four years. Another study suggests that a modest improvement (from a current average of around 500 to 525) over 20 years in an international student assessment of 15-year-olds in the OECD nations — improvement in reading, math and science literacy — would mean a $115 trillion increase in these nations’ aggregate GDP. Of that, $41 trillion would accrue to America. McKinsey calculated that if U.S. students matched those in Finland, America’s economy would have been 9 percent to 16 percent larger in 2008 — between $1.3 trillion and $2.3 trillion.

Familiar recipes for improvement are dubious. “Many high-performing education systems, especially in Asia,” Duncan says, “have substantially larger classes than the United States.”

In South Korea, secondary-school classes average about 36 students, in Japan 33, in America 25.

Duncan knows that Americans are uneasy about any national education standards that might emanate from a Washington they distrust, but he insists that it is irrational to have 50 different goal posts. Perhaps, but 50 different approaches might yield a few that are truly superior. The Education Department sits at the foot of Capitol Hill, where many new legislators consider “federal education policy” a constitutional oxymoron. They have a point.

They might, however, decide that the changes Duncan proposes — on balance, greater state flexibility in meeting national goals — make him the Obama administration’s redeeming feature.

The Waning of an Old Established Order

The Waning of an Old Established Order
By Victor Davis Hanson

American reality has been turned upside down in just 20 years.

Americans no longer count on their news to be filtered and shaped by the Associated Press or the New York Times. Nor do millions have it read to them in the evening by CBS, ABC or NBC anchorpersons -- not with the Internet, cable news and talk radio. Matt Drudge's website, "The Drudge Report," reaches far more Americans than does CBS anchor star Katie Couric.

The old notion that America's most successful citizens are turned out by prestigious four-year universities -- the more private and Ivy League, the better -- overseen by disinterested professors is also nearing an end. Private for-profit trade schools and online colleges are certifying millions in particular skills.

Meanwhile, the high jobless rate among recent college graduates, who are burdened by thousands of dollars in student loans, is starting to resemble the Freddie Mac- and Fannie Mae-spawned financial bubble of 2008, in which millions of indebted and unemployed borrowers could not pay back exorbitant federally insured home loans. The notion that parents are going to keep borrowing $200,000 to certify their children with high-prestige BA degrees that don't necessarily lead to good jobs seems about as wise as buying a sprawling house that one can't afford. James Cameron, Bill Gates, Sean Hannity, Tom Hanks, Steve Jobs, Rush Limbaugh, Tiger Woods and Mark Zuckerberg all made a good living without earning BAs.

A therapeutic college curricula and hyphenated "studies" courses have not made graduates better-read or more skilled in math and science. For many employers, the rigor of the new BA is scarcely equivalent to that of the old high school diploma. The global warming/climate change/climate chaos "crisis" has reminded Americans that careerist university Ph.Ds can be just as likely to fudge evidence and distort research as political lobbyists. The old blanket respect for academia and academics is eroding.

After the Greek financial fraud and collapse, the European Union identity crisis, and insolvency in California, there will be no more new defined-benefit retirement programs. A shrinking and debt-ridden youth cohort cannot and will not continue to subsidize an expanding and more affluent retired generation. Soon, 65 will be the new 50. We are going to see lots more seniors working well into their 70s.

Few believe that Detroit's problem is too few unionized autoworkers, or that the SEIU has resulted in far better public service and efficiency from government employees. A government conspiracy or an ignorant public does not explain why union membership has now fallen to 12 percent of the American workforce.

The welfare-entitlement state is likewise a relic. Only a few political dinosaurs are calling for more spending, more entitlements and more taxes. Fairly or not, most Europeans and Americans accept that the limits of redistribution have been reached. President Obama's talk of "spread the wealth" and "fat cat" bankers has not done much to lower $1.3 trillion deficits and 9.4 percent unemployment. So he has dropped the high-tax, more-benefits, class-warfare rhetoric in favor of writing editorials in the Wall Street Journal assuring business of less regulation and more government help.

Race relations are being redefined as never before. Interracial marriage, integration and immigration have made the old rubrics -- "white," "black," "brown" -- obsolete. Rigid, half-century-old affirmative action preference programs have not caught up with everyday reality. Their overseers are likewise ossified, now that millions in an interracial America do not fit into their precise racial slots, and being white -- to the degree that it can be easily defined -- is not synonymous with innate privilege. The notion that Tiger Woods' children need an admissions or employment edge over natives of Appalachia or immigrants from India is surreal.

Abroad, things are just as upside down. Russia is no longer the avatar of global communism but the world's largest cutthroat capitalist oil producer. China's cultural revolution is now about making tons of money and driving a luxury car. The European Union has been reduced to finger-pointing and standing in line to beg Germany for cash -- a far cry from its advertised 21st century utopian brotherhood. Our old neighbor Mexico is now a near-failed narco-state, bearing a greater resemblance to Afghanistan than to its brethren North American nations.

In response to this topsy-turvy world, the traditional media, tenured professors, well-paid public employees, rigid ethnic and racial lobbies, unions, organized retirees, open-borders advocates and entrenched politicians all are understandably claiming that we live in an uncivil age.

We well may, but we also are seeing the waning of an old established order. And the resulting furor suggests that the old beneficiaries are not going quietly into that good night.

The IRS Targets Income Tricks

The IRS Targets Income Tricks

There's a saying: Pigs get fed and hogs get slaughtered. The Internal Revenue Service surely hopes that includes tax hogs.

That is the message of a recent U.S. district court case won by the IRS against David Watson, a CPA in West Des Moines, Iowa. At issue: a common tax-cutting maneuver available to the owners of millions of closely held businesses.

[TAXREPORT] Mark Matcho

At issue: a tax-cutting maneuver available to the owners of millions of closely held businesses.

The case, David E. Watson P.C. v. U.S., revolved around Mr. Watson's low pay as the sole owner and shareholder of a so-called S Corporation. Such companies, often called "Sub-Ss" after the subchapter of the tax code governing them, is a popular choice of entity for private firms. Unlike C corporations, Sub-Ss have no more than 100 shareholders, and they pass profits to owners without an extra layer of tax. There are nearly 4 million Sub-Ss in the U.S. today.

Mr. Watson's Sub-S was, in turn, one of four principals in LWBJ, an accounting firm. According to the decision, the firm made profit distributions of $203,651 and $175,470 to Mr. Watson through his Sub-S for 2002 and 2003, respectively, the years in question.

Mr. Watson, who had a graduate degree in tax and 20 years' experience, received only $24,000 of salary for each of those years, far less than the $40,000 a year earned by recent graduates in accounting with no experience, according to one expert for the IRS.

The agency cried foul, saying his pay was far too low. Why object? Unlike profit distributions, all salary is subject to a 2.9% Medicare tax and some is subject to a 12.4% Social Security, or FICA, tax. (The FICA income cap, $84,900 in 2002, is now $106,800.) By reporting low pay Mr. Watson didn't save any income taxes, but he did save nearly $20,000 in payroll taxes for the two years, the IRS said, pegging Mr. Watson's true pay at $91,044 for each year.

Judge Robert W. Pratt agreed, ruling that the CPA owed the extra tax plus interest and penalties.

Mr. Watson plans to appeal the decision. "The IRS can disallow a tax deduction for unreasonably high compensation, but the law doesn't give it the authority to raise pay in order to collect extra payroll taxes," he says. Independent tax expert Robert Willens in New York says this will be a hard argument to win.

For Sub-S owners, this issue isn't going away. Last year it even turned up in legislation, when the House passed a provision that would have subjected all profits of shareholder/employees of personal-service firms—such as accounting, law and consulting firms—to payroll taxes. The measure died in the Senate, but the IRS would likely welcome its return. Cases like Mr. Watson's are expensive for the agency to litigate because each turns on individual circumstances.

Recent IRS statistics suggest why the agency might focus on Sub-S pay. Over the past decade and a half, when executive paychecks exploded, the salaries of Sub-S owners declined as a percentage of total income, from 52% in 1995 to 39% in 2007, according to the latest data available. (The remaining income is taxable to the owners as well, but doesn't incur payroll taxes.) During the same 12-year period, Sub-S income doubled, while salaries increased only 26%. The average pay for a Sub-S owner was recently was $38,400, according to Martin Sullivan, an expert with Tax Analysts, a nonprofit publisher near Washington.

Tom Ochsenschlager, former head of tax for the American Institute of CPAs, says pay and payroll tax issues are a frequent source of friction with clients: "Sometimes you have to take them to the woodshed and say, 'You need to report more income as pay for personal services."'

What is a fair ratio of profits to pay? There isn't one answer, experts say. A company with substantial capital or assets, such as a manufacturer, often is able to justify lower pay than one selling personal services like a law or accounting firm. Says Mr. Willens: "I would tell a client that for personal services, 70% would be the absolute floor and might not get the job done," he says.

In Mr. Watson's case, his revised compensation came to only about 40% of his total return from the company. The upshot: Pay can vary—but it can't be too low.

After You, Mr. Ryan

After You, Mr. Ryan

The President says the deficit is the GOP's problem now.

Amid his Reaganite sunshine and new admiration for the wonders of private enterprise, President Obama's political message in Tuesday's State of the Union address boils down to this: Republicans, it's your budget problem now.

The deficit is awful and must be cut, entitlements are unsustainable and must be addressed, the tax code hurts growth and must be reformed, and government should be smaller and more efficient, but don't look to Mr. Obama for ideas on how to fix any of this. Go ahead and cut spending and Medicare if you want, Republicans. The President will get back to you with his reply as time and politics allow.

After you, Congressman Ryan.

Editorial Page Editor Paul Gigot and Wonder Land Columnist Daniel Henninger critique the President's State of the Union address.

As political strategy, perhaps this will turn out to be shrewd. Republicans will advance their budget and spending cuts, Democrats will attack them, the voters will sour, and Mr. Obama will ride to re-election. It happened in 1996.

As leadership, however, this is an abdication that contradicts Mr. Obama's rhetorical flourishes about a new bipartisanship and the need "to merge, consolidate and reorganize the federal government." Beyond his welcome if vague support for reducing corporate tax rates in return for closing loopholes, Mr. Obama offered not a single new idea or spending cut. The bulk of his address was devoted to his familiar priorities that he said Republicans should spend more on. Green energy subsidies. High-speed rail!

At least the address had good timing, because less than 12 hours later the Congressional Budget Office released its annual budget review and exposed how deep the fiscal mess really is. Even CBO dared to call it "daunting," which for these budget gnomes is a primal scream.

Eighteen months after the recession formally ended, the federal deficit for fiscal 2011 (through September) is expected to increase once again, this time to $1.48 trillion, or 9.8% of GDP. That's a share of GDP topped since World War II only by the 10% reached in Mr. Obama's first year in office, when at least the recession was an excuse. The annual deficit in the 1980s never exceeded 6% of GDP.

As the nearby chart shows, the main culprit is spending. After falling slightly last year due in part to TARP repayments, federal outlays will climb again this year to 24.7% of GDP. Overall federal spending will have increased by $1 trillion in a mere four years. Without spending cuts, outlays will remain above 23% for the rest of the decade—starting to rise again once ObamaCare becomes fully phased in. (The outlay average from 1971 to 2010 was 20.8% of GDP.)


Compared to this spending boom, Mr. Obama's proposal to freeze domestic discretionary spending for five years is a mere gratuity. It would start from a baseline that pockets the spending increases of the last two years, which as the chart shows has taken outlays to a level not seen since World War II. And it would ignore entitlements, including his health reform. The President's proposal is a feint not a freeze.

The post-recession decline in revenues will also contribute to the deficit, thanks mainly to the slow recovery that the federal spending spree was supposed to boost. The GOP-Obama tax deal will also keep revenues as a share of GDP below 15% in 2011. But as the chart shows, revenues are expected to increase sharply in 2013 and beyond, well above the 40-year average of 18% of GDP. CBO is assuming, as it always does, that higher tax rates have little impact on economic growth.

The message in all of these numbers is that the deficit is mainly a problem of spending and slower economic growth. If the recovery continues and becomes a durable expansion, revenues will revive. But without spending cuts and entitlement reform the deficits will continue at unsustainable levels.

And as they do so will the national debt. We've never been federal debt worriers, but CBO estimates that on current trajectory the debt held by the public as a share of GDP will be 73.9% in 2012, up from only 39.7% in 2008. Those are heights where even we begin to tug at the collar.

So this is the ugly budget reality that House Republicans are inheriting. In his Tuesday night response to Mr. Obama, House Budget Chairman repeated a line he has often used that the U.S. may be at a budget "tipping point." Either Congress begins to control its political appetites, or the debt financing and inevitable tax increases that are coming will erode our economic well-being. The CBO numbers bear him out.

Judging by Tuesday night, Republicans will have to start this reformation without much help from the President. Perhaps if they lead, the public will put enough pressure on Mr. Obama that he has no choice but to follow.

The Next ObamaCare Vote

Another Earth in Outer Space?

Egypt Violence Shuts Markets

A Presidency to Nowhere

History of the Financial Crisis

Where I would be in a crisis

Where I would be in a crisis

by Simon Black
Santiago, Chile

On November 4, 1979, a battalion-sized group of militants who became known as the Muslim Student Followers of the Imam’s Line descended upon the American embassy in Tehran, Iran. They eventually suppressed the guards and seized control of the compound.

For 444 days, fifty-two diplomats, soldiers, and their family members were held captive by this Iranian group which demanded that the US government extradite their deposed Shah back to Iran for trial. The Shah had been overthrown earlier that year during Iran’s Islamic revolution, and he was seeking medical treatment in the US at the time.

The Carter administration did not bend to these demands, instead opting for what eventually became known as “Operation Eagle Claw,” a secret military rescue mission that resulted in an embarrassing failure.

When the Shah passed away in September 1980, the Iranians became more agreeable to negotiating an end to the situation, and they set forth financial demands including the transfer of some 50 metric tons of gold. The situation was finally resolved the day Ronald Reagan took office on January 20, 1981, an obvious snub to Jimmy Carter.

In another case from September 2004, a small force of separatist Ingush and Chechen militants took over a school in Beslan, North Ossetia, Russia… a small town of 35,000 in Russia’s Caucasus region near Georgia and Azerbaijan.

The militants held over 1,100 civilians captive, including 777 children; they demanded an end to Russia’s counter-insurgency operations in Chechnya, though negotiations quickly broke down in the three-day crisis.

Russian security forces ended the conflict by assaulting the school grounds with tanks, rocket launchers, and other heavy weapons, resulting in over 1,000 casualties and at least 156 children dead.

Both of these events are unfortunate, infamous examples of hostage situations… and I bring this up because of the numerous email questions we’ve received lately asking for more information about the ‘hostage situation in Chile.’

Thank you, Mainstream Media, for once again distorting reality. Fact: There is no hostage situation in Chile. There never was.

Over a week ago, the government of Chile announced a 17% hike in natural gas prices. Most of the country shrugged off the announcement, except for the folks in the deep south of Patagonia.

The region’s largest city of Punta Arenas is, after all, one of the closest port cities to Antarctica. It gets cold, and residents there depend heavily on cheap (read: subsidized) gas in the icy winter. Consequently, several locals took to the streets last week in a mass protest against the government’s decision to raise prices.

They blocked the city’s port facilities and most of the main highways. This hardly captivated the nation, even though a few folks unfortunately died in accidents. Most Chileans were far more concerned about pending education legislation and the 2011 Dakar rally, not a handful of misfits protesting a bump in the price of natural gas.

For any tourists who were down in the region, the demonstrations were definitely inconveniencing. With port facilities and major roads blocked, many tourists were stuck in the region, often even unable to drive.

To their credit, local Chileans were very apologetic to tourists, handing out bowls of soup and fruit, effectively saying, “Hey I’m sorry you got caught up in this, but I have to make a statement to my government…”

Western newspapers grabbed on to the story and ran headlines about tourists being ‘held hostage’ in Patagonia because they were unable to find immediate transportation out of the region. This is simply a gross mischaracterization.

In the end, the government reached a compromise with the Patagonian protestors to offset some of the increase to the most needy families this year. Even before the deal was finalized, protestors lifted their barricades as a gesture of good faith.

Look, no place is perfect… and Chile is far from it. But in a global crisis situation, there’s something I consider about countries called the ‘pitchfork factor.’ What’s the likelihood that angry locals will turn on foreigners and use them as gambling chips, live bait, or a herd of milk cows? In many countries it’s quite high.

Chile has had a few very public rough patches over the last few years, including its major earthquake in 2010 and last week’s “hostage situation”. Given the civility and lack of chaos that have ensued in both scenarios, and others as well, I find the pitchfork factor to be extremely low here, and that gives me a great sense of security.

A government agent on every corner, a wiretap on every phone

A government agent on every corner, a wiretap on every phone

by Simon Black ·
Santiago, Chile

US General George S. Patton is often credited with saying “No poor bastard ever won a war by dying for his country.” Perhaps Patton was correct. But a lot of poor bastards had a significant impact on security policies by blowing themselves up for their cause.

Yesterday’s suicide attack at Domodedovo airport in Moscow was another stark reminder that there are people in this world who have (a) extreme commitment to their cause; (b) the will to die for their beliefs; and (c) the twisted moral compass to justify the deaths of others as necessary and legitimate.

These three ingredients are a dangerous combination, and unfortunately they exist in mass quantities among fanatics who have lost sight of their humanity.

I don’t want to get into the chicken or egg argument right now about whether such fanaticism would exist without authoritarian, imperialistic arrogance on the part of major world governments… but suffice it to say that, with each attack on civilian targets, governments step up their military/police efforts in the ‘war on terror.’

It’s interesting how government defense planners always seem to be training their troops to fight the last war. For example, the WW2-style training in the US that lasted for decades which prepared troops to fight against Soviet forces proved largely irrelevant in the jungle warfare environment of Vietnam, or the desert in Kuwait.

Subsequent jungle warfare and traditional desert warfare training proved largely irrelevant in the 1990s peacekeeping operations in the Balkans, and training for peacekeeping operations proved largely irrelevant for Iraq’s counterinsurgency operations.

As the military now focuses its training on preparing troops for yesterday’s counterinsurgency operations, I suspect defense planners are largely ignoring tomorrow’s threats, like cyber- and economic warfare.

Similarly, every time there is an attack on civilian targets, governments come out in force against the threat. When someone tries to explode his shoe, everyone has to take his/her shoes off. When someone tries to explode his underwear, everyone has to go through a body scanner.

The Russian bombing yesterday proved that these reactive tactics are completely ineffective, akin to training to fight the last war.

Soft targets are everywhere, and if government agencies make it too difficult to blow up a plane, attackers will blow up the airport. If they can’t blow up an airport, they’ll blow up a bus station… sports stadium… grocery store… you name it.

Each reactive policy measure only serves to solidify the attackers’ convictions, erode the freedoms of the innocents, and divide the nation into to distinct sides– those who would rather have their freedom and take a chance on safety, and those who are willing to relinquish their freedom in exchange for the illusion of security.

Politicians will always side with the latter, expanding their domain and redefining ‘security’ so that it encompasses the widest possible range of human activities.

Going to a ball game? Security. A nightclub? Security. No more financial privacy? It’s for your security. Listening to your phone calls? Also for your security. Protesting against the politicians? You’re a security risk. 90-year old woman in a wheelchair? Frisk her, she’s a security risk. “Attention WalMart shoppers: rat out your neighbor.” – Homeland Security.

These measures are all readily accepted by society because voters will ask for, and allow, these types of politicians and policies.

After the 2004 Beslan hostage crisis in Russia in which hundreds of hostages and children were killed, the Russian government vastly expanded the powers of its law enforcement agencies, asserted its control over the media, and even unilaterally replaced certain elected federal positions with executive appointees.

Russian society digested these measures in stride, still shocked from the massacre in Beslan.

In response to Monday’s bombing, officials in Russia are already talking about enhancing their security procedures, which will certainly include new government powers. I also doubt that the effects will stop with Russia’s security posture.

The Chinese government already reacted by beefing up security at Beijing’s airport, deploying more police dogs throughout the terminals. I wouldn’t be surprised if governments in North America and Europe used this event as an excuse to initiate their own measures, going further down the slippery slope.

None of these steps really matter in the big picture; loosely organized suicide bombers cannot be subdued with conventional forces or security measures… and for the regular folks who just want to go on living their lives, it’s like being caught in the middle of a battlefield without a weapon.

I’m reminded of Herbert Hoover’s 1928 winning presidential campaign slogan, “A chicken in every pot, a car in every garage.” Perhaps the modern analogy is “a government agent on every corner, a wiretap on every phone.” It is, after all, for our security.

Freedom Is Not Compatible with Government’s Initiation of Force

Freedom Is Not Compatible with Government’s Initiation of Force Against Innocent People

by Robert Higgs

In yesterday’s New York Times appears an op-ed article by Edward L. Glaeser, a professor of economics at Harvard. Glaeser’s article is remarkable because arguments in favor of freedom, insisting that economic analysis implicitly rests on a moral presumption that individual freedom has fundamental value, do not appear every day – or every month – in “the newspaper of record.” So, I am glad to give two cheers to Glaeser, one for his theme and another for his courage in placing the argument in such a hostile outlet.

I cannot give Glaeser a third cheer, however, because toward the end of the article he inserts a concession that I find wholly inconsistent with the rest of the argument. He writes:

Economists’ fondness for freedom rarely implies any particular policy program. A fondness for freedom is perfectly compatible with favoring redistribution, which can be seen as increasing one person’s choices at the expense of the choices of another, or with Keynesianism and its emphasis on anticyclical public spending.

Many regulations can even be seen as force for freedom, like financial rules that help give all investors the freedom to invest in stocks by trying to level the playing field.

To be sure, many mainstream economists do think about policy just as Glaeser says they do. But in doing so, they are mistaken. I find it difficult to believe that a man of Glaeser’s intelligence has really given much thought to what he is saying in these passages.

In fact, a presumption in favor of freedom rules out virtually everything that modern governments do, certainly nearly everything they do in interfering in economic affairs. Redistribution of income, for example, requires that the government rob Peter in order to benefit Paul (and its own functionaries, who serve as middlemen in this transfer). This action is not freedom; it is a crime against Peter, a raw violation of his right to his own legitimate property. Keynesian countercyclical spending requires the government to spend borrowed money whose acquisition is premised on future taxation (that is, robbery) of taxpayers in order to service the debt and repay the principal. Again, innocent persons have their rights violated. How can anyone fail to see that robbery is incompatible with freedom? Finally, the financial rules that Glaeser finds compatible with freedom entail threats of violence against financial transactors who do not follow arbitrary government rules – often extremely foolish and even destructive rules – in making their transactions, notwithstanding the fact that the parties to the transaction may be perfectly willing to proceed without such regulatory compliance. Such regulation is the very opposite of freedom; it is instead the sheer imposition of outside force, intruding on willing transactors, and thereby discouraging them to some extent, if not entirely, with consequent loss of the wealth that such transactions would have created, in addition to the loss of liberty.

Perhaps it is unseemly for someone such as I to make a recommendation to a Harvard professor, yet I cannot resist the urge to suggest that Glaeser read, say, Murray Rothbard’s Power and Market. Expositions of that sort would help him to gain a clearer vision of the distinction between individual freedom and state domination in economic affairs. Glaeser quotes Milton Friedman to good effect in his article, but Friedman’s writings ought to be the beginning, rather than the end of wisdom in this area. In regard to freedom, Friedman’s arguments were good as far as they went, but they did not go nearly far enough. Like Glaser, Friedman was prepared to make many concessions to state power, and his focus on utilitarian arguments, as opposed to moral principles, diminished the intellectual force of his laudable efforts to enlarge the scope of liberty in economic affairs.

Reprinted from the Independent Institute.

When All Drugs Were Legal

When All Drugs Were Legal

by Jacob H. Huebert

Libertarians propose an immediate end to the drug war. This would be a dramatic course change for the United States but, as we’ll see, it’s really not so radical – it would just return us to the successful libertarian drug policy America had for most of its history.

For most of U.S. history, all drugs were legal. How legal? As libertarian writer Harry Browne put it, "Few people are aware that before World War I, a 9-year-old girl could walk into a drug store and buy heroin." In fact, before Bayer sold aspirin, it sold Heroin™ as a "sedative for coughs." (As a German company, Bayer was forced to give up the trademark after World War I under the Treaty of Versailles.) One heroin-laced cough syrup promised in its mail-order catalog: "It will suit the palate of the most exacting adult or the most capricious child." Cocaine, first manufactured by Merck, was popular, too. Parke-Davis (which is now a subsidiary of Pfizer) advertised a "cocaine kit" that it promised could "supply the place of food, make the coward brave, the silent eloquent and . . . render the sufferer insensitive to pain." Late-nineteenth century advertisements for "Cocaine Toothache Drops" promised users (including children such as those depicted in the ads) an "instantaneous cure." Another popular product, "Mrs. Winslow’s Soothing Syrup," contained one grain (65 mg) of morphine per ounce, and was marketed to mothers to quiet restless infants and children. McCormick (the spice company) and others sold "paregoric," a mixture of highly concentrated alcohol with opium, as a treatment for diarrhea, coughs, and pain, with instructions on the bottle for infants, children, and adults. Another medication called laudanum was similar, but with 25 times the opium. Heroin and opium were both marketed as asthma treatments, too. And, of course, cocaine was an ingredient in Coca-Cola from 1886 until 1900.

All these products were available "over the counter." A doctor, pharmacist, or anyone else could advertise them and sell them with no prescription or other special permission. Drugs were like any other good on the market.

Marketing heroin to children? Putting coke in Coke? Many people would take all this as evidence that of course the government needed to step in and do something. But the widespread availability of these products did not cause the disaster one might expect. In hindsight, it may not seem right that people casually took narcotics or routinely gave them to their children. On the other hand, in the years before acetaminophen, ibuprofen, or even aspirin (which was not introduced until 1898), people had few alternatives to treat pain. So as easy as it might be for us to criticize nineteenth-century Americans for using them, these drugs often really did help people and may have been their best alternative. And they were not just used by ignorant people taken in by snake-oil salesman; for example, Benjamin Franklin took laudanum to control pain from kidney stones late in his life.

Life under legalization wasn’t perfect, of course. There were addicts. But most opium addicts became addicted because someone in the medical profession got them started on it, just as doctors today inadvertently hook people on legal drugs. Some people became addicted through patent medicines they took on their own – but addicts were just a small portion of the market for these products. Many people became opium addicts essentially because of government. During the Civil War, the United States fed opium addiction as it issued some 10,000,000 opium pills and 2,841,000 ounces of opium powder to the army. As a result, drug addiction became known as the "soldier’s disease." Other factors that drove people to addiction were state and local alcohol prohibition and increasing social disapproval of alcohol, which prompted people to substitute opium for liquor. In states where alcohol was prohibited, opiate use rose by 150 percent. An 1872 study by the Massachusetts State Board of Health found that the temperance movement had caused an upswing in opiate use and noted that opium could be "procured and taken without endangering the reputation for sobriety," and was seen as "more genteel" than alcohol.

Opium addiction rose in the decades after the Civil War, but soon so did education and understanding about drugs and their addictive, dangerous nature among both physicians and the public. The rise of mass media helped; for example, the Ladies’ Home Journal published numerous exposes on narcotic-laced patent medications. Meanwhile, the market produced safer medicines, such as aspirin. As a result of these factors, addiction peaked near the end of the nineteenth century and then began a long decline without any need for a government "war."

And although America did have addicts in the nineteenth century (perhaps as much as 0.5 percent of the population), there are some things it notably did not have. Most important, there was virtually none of the violence, death, and crime we associate with the present-day drug problem. Most drug users were not street criminals; instead, the typical addict was, as author Mike Gray put it, "a middle-aged southern white woman strung out on laudanum." Many or most opium addicts led more or less normal lives and managed to keep their addiction hidden.

Things were not perfect, as they never will or can be. But there was no real crisis when all drugs were legal.

Read the rest of this chapter in Libertarianism Today.

Marc Faber on Bloomberg 01/25/11

New Heroes vs. Old

New Heroes vs. Old

by Thomas Sowell

When I mention that my family used kerosene lamps when I was a small child in the South during the 1930s, that is usually taken as a sign of our poverty, though I never thought of us as poor at the time.

What is ironic is that kerosene lamps were a luxury of the rich in the 19th century, before John D. Rockefeller came along. At the high price of kerosene at that time, an ordinary working man could not afford to stay up at night, burning this expensive fuel for hours at a time.

Rockefeller did not begin his life as rich, by any means. He made a fortune by revolutionizing the petroleum industry. Although we still measure petroleum in barrels, it is actually shipped in railroad tank cars, in ocean-going tankers and in tanker trucks.

That is a legacy of John D. Rockefeller, who saw that shipping oil in barrels was not as economical as shipping whole railroad tank cars full of oil, eliminating all the labor that had to go into shipping the same amount of oil in numerous individual barrels.

That was just one of his cost-cutting innovations. If there was a better way to extract, process and ship petroleum products – or more products that could be made from petroleum – Rockefeller was on top of it.

Before he came along, gasoline was considered a useless by-product that petroleum refineries often simply dumped into the nearest river. But Rockefeller decided to use it as a fuel in the refining process, which made it valuable, even before automobiles came along.

Today, we tend to think of John D. Rockefeller as just one of those famous rich people. But Rockefeller didn't just "happen to have money." How he got rich is the real story – and it is a story whose implications reach far beyond that one particular individual.

Before Rockefeller's innovations reduced the price of kerosene to a fraction of what it had once been, there wasn't a lot for poor people to do when nightfall came, other than go to bed. But the advent of cheap kerosene added hours of light and activity to each day for people with low or moderate incomes.

It was much the same story with the advent of the automobile, which gave millions of people more range in space, as kerosene (and, later, electricity) gave them more range in terms of hours of daily activity.

Here again, automobiles and electric lights were truly luxuries of the rich when they began. Only after ways were developed to cut their costs drastically were such things brought within the reach of ordinary Americans.

Henry Ford's mass production methods cut in half the cost of producing the famous Model T Ford in just five years. People who had once lived their entire lives within a narrow radius of a relatively few miles could now go see places they never knew about before. The automobile expanded their horizons.

People today who complain about the automobile's pollution have no idea how much more pollution there was before the automobile came along. In New York City, for example, the 40,000 horses that were the backbone of the city's transportation, before the automobile, produced 400 tons of manure per working day, along with 20,000 gallons of urine.

At one time, people like Rockefeller, Edison, Ford and the Wright brothers were regarded as heroes, for having opened vast new possibilities for other human beings. The fact that they got rich doing it was an incidental part of the story.

We still have people revolutionizing our lives. Just think of the computer and the pharmaceutical drugs that have not only lengthened our lives but made them more healthful, so that being 80 years old today is like being 60 years old in times past.

But today we seldom even know the names of those who have made these monumental contributions to human well-being. All we know is that some people have gotten "rich" and that this is to be regarded as some sort of grievance.

Many of the people we honor today are people who are skilled in the rhetoric of grievances and promises of new "rights" at someone else's expense. But is that what is going to make a better America?

The union's troubled state

The union's troubled state

A strikingly unaudacious speech from Barack Obama failed to address America’s problems

The state of the union

IN A show of civility prompted by the dreadful shootings in Tucson, Republicans and Democrats sat side by side to hear Barack Obama’s state-of-the-union message. But that truce could not hide the fact that the two sides have starkly different analyses of what has gone wrong in America. And in so far as either side has solutions to offer (which is sadly not very far), these are starkly different, too. Everyone pretends to be in favour of bipartisan dialogue, but it is a dialogue of the deaf.

America faces two huge, linked problems. Its unemployment rate is running at 9.4%; once you add in those who want full-time work but can find only part-time jobs, it is almost twice that. Job creation is not even keeping pace with the rise in population. And the budget deficit is running at almost 10% of GDP; on that measure this year and the previous two will have been the three worst since the second world war.

To the Republicans who now control the House of Representatives, the main problem is the deficit and the cumulative burden of debt it brings with it. The deficit will of course narrow as the economy recovers, but because of the insatiable demands for health care of America’s now-creaky and retiring baby-boomers, unless taxes are hiked it will not dip below 4% of GDP, and it will start to rise again after 2015. That is not sustainable. Not only will borrowing on this scale tend to crowd out more productive investment: the interest on it is already eating up 10% of government revenue, a figure that will rise as interest rates go up. Hence the Republican demand for swift and deep cuts. Get spending down, shift government off the backs of the people, and jobs will return, as the invisible hand works its magic.

Mr Obama sees things the opposite way round. His state-of-the-union speech was an attempt to place jobs—which, according to pollsters, most Americans say are their priority—at the forefront of the debate, and he put the deficit at the end of a long list of concerns. After two years in which he concentrated more than was wise on getting health reform passed, refocusing on jobs makes some sense. It is obviously true that America’s infrastructure, both human and physical, is sub-par (its children’s maths skills were recently placed 25th out of 34 in a ranking of OECD countries). And it is hard to reduce the deficit while the country has a large group of persistently un- or underemployed people.

But two large difficulties arise. First, neither Mr Obama nor the Republicans has a workable plan for dealing with even their own main concern; and second, neither side seems interested in dealing with the other’s priority. This is not a recipe for a productive partnership.

Explore our interactive guide to the state of the United States, and see our word cloud of the president's speech.


Mr Obama claimed that America needs to “out-innovate, out-educate and outbuild the rest of the word”. Yet his speech provided only the waffliest of ideas about how it might do that, and no indication of how they might be paid for. The parallel he likes to draw with the moment when Sputnik was launched and America realised Russia was winning the space race falls down there, for in 1957 America’s government had piles of cash to spend on catching up. Now it has none.

True, some of the measures Mr Obama talked about this week, such as rewarding schools for holding poor teachers more accountable, should not cost much. But others—such as bringing high-speed rail to 80% of Americans and broadband internet to 98% of them—will. And the federal government’s record suggests the money may not be well spent: a report by the World Economic Forum puts America at 68th in the world for the effectiveness of its public-sector spending.

The big cop-out

Mr Obama also said far too little about what most concerns Republicans and what led to his party’s defeat at the mid-terms: the deficit. Cutting hard this year is too risky; but laying out a concrete set of proposals on how to get the budget back into shape from 2012 onwards is essential.

A year ago Mr Obama set up a deficit-reduction commission, which duly produced a sensible report at the end of last year. He has failed previously, and failed again this week, to endorse the commission’s conclusions. He offered no specific proposals for cutting the cost of the biggest drains on the federal purse: health care, Social Security (pensions) and defence. And, although revenues will have to rise if the budget is to be brought into balance, he failed to explain to middle-class Americans that they will have to pay more tax. His only gestures in the direction of fiscal responsibility were to propose reforming corporate tax, increasing some taxes on the very rich and extending a freeze on some categories of discretionary spending, all of them tiny parts of the overall picture. If he is serious about the deficit, this was the time to show it. He should have taken courage from recent improvements in both his poll ratings and the economy. He copped out.

For their part, the Republicans have made it clear that they have no interest in Mr Obama’s plans to spend or invest more money. Given that they are supposed to be the party of fiscal rectitude, that is understandable. But they, too, are failing in their main brief, having neglected to come up with a plan for dealing with the long-term problem caused by entitlements. The only medicine they propose is cuts of 20% and more on parts of the “non-security discretionary” bits of the budget (ie, on only about 17% of it) which would succeed in causing a lot of pain while failing to solve the problem.

Both parties’ ideas are rotten, but the collision between them looks like being worse. On March 4th the federal government will run out of money unless Congress first passes a bill voting more; a few weeks after that, it will bump up against the federal debt ceiling, now set at an apparently insufficient $14.3 trillion, unless, again, Congress votes to increase it. Both measures must be passed by a House of Representatives now firmly in Republican hands, and also require the support of seven or more Republican senators. The Republicans have vowed to exact deep spending cuts in return for their assent. The president will not accept these. The stage is set for a savage spring.

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