Show Biz Economics Debate

Here is a debate over basic rax and economic policy between Bill OReilly, Jon Stewart, Richie Cunningham, and Bill Clinton.



Quite a roundtable (with O'Reilly moderating, of course).

Do the Rich and Poor a Favor. Back Off

Last week, when a rumor leaked out that the Fed is plotting new measures to stimulate the economy, perhaps a QE3, gold prices spiked. QE refers to quantitative easing, the purchase of American government bonds by our own Federal Reserve Bank, effectively injecting money into the economy, or what we call "printing money."

The Street reported,

Gold prices popped Tuesday after Chicago Federal Reserve President Charles Evans said further measures to stimulate the economy could be necessary. The rally continued in after-hours trading after the Fed's latest minutes from the Federal Open Market Committee meeting in August showed a growing number of presidents calling for more stimulus.

Every time the Fed plays this card, the economy actually slows. Alan Reynolds gave us a detailed account of this in his Wall Street Journal op-ed, "The Fed vs. the Recovery." He concludes, "In the end, quantitative easing turned out to be an anti-stimulus which stimulated nothing but the cost of living and the cost of production. Good riddance."


Whenever President Obama dives into the economy to make things right, rather than stimulating, he depresses the economy. Instead of inspiring hope and confidence, he creates uncertainly and stagnation.


In light of the aggressively interventionist liberal government that we have suffer in these three years of the Obama presidency, Gary Becker compares market imperfections with the government imperfects that go with government attempts to perfect the market ("The Great Recession and Government Failure"). He finds that "market failure" is like nothing compared to the more predictable "government failure." He writes, "This recession might well have been a deep one even with good government policies, but "government failure" added greatly to its length and severity, including its continuation to the present."


The Journal's editorial today ("In Government We Mistrust"), reflect on this same problem of liberal, "progressive," government intervention and the predictable damage it does. They cites a Gallup poll that has tracked public confidence in government since the Eisenhower presidency. "Every time Democrats attempt to govern the country from the ideological left, they damage government's reputation and status." It's a demonstrable historical pattern. They supply the charts.


For another look at the unflattering comparison between Obama and the Gipper (he has invited it), read Stephen Moore's "Obamanomics vs. Reaganomics," also in the WSJ.


But it is not just the economic well-being of the population as whole that liberals damage. They hurt the people whom they say they are most concerned to help: the poor. I write about this in my Worldmag column from a month ago, "Save the Poor from their 'Friends'."

The poor in America (whoever exactly that is) have many friends in Washington D.C. But that is part of their problem. When your friends are powerful and aggressively well-intentioned but unwise, you don’t need enemies.

They tried to help unwed mothers. They gave them AFDC, and swelled their ranks, and made the condition permanent. The Evangelical left is passionately wed to this tradition of "help." I describe Jim Wallis's opposition to welfare reform in 1996 and now his "Circle of Protection" for the poor against any rollback of the welfare state.


It brings to mind Ronald Reagan’s quip, “The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’”

The 2011 Second Plunge Recession

Arthur Laffer makes a convincing and terrifying argument that we’re heading for an economic cliff next year. It’s going to happen. Make your plans accordingly.

"Tax Hikes and the 2011 Economic Collapse," Wall Street Journal, June 6, 2010. The subtitle: "Today's corporate profits reflect an income shift into 2010. These profits will tumble next year, preceded most likely by the stock market." When the cash for clunkers program was paying people significant incentives to buy cars, sales spiked. Lo! Incentives work! But when the program ended, sales plummeted. Much of the sales spike was just people shifting their purchase plans forward.

The same thing happened with the $8,000 that the government offered as an incentive last year for people to get out and buy a house. When the incentive ended, sales...you guessed it...plummeted. Much of what the publicly funded incentive either subsidized people who were buying anyway or concentrated in a shorter period of time sales that would have happened over a longer period. Undoubtedly it brought some people into the market who otherwise would not have entered, but Laffer's point is that the numbers are far overstated, and that we can see this in the collapse that followed the spike.

Now, consider that the Bush tax cuts are set to expire on January 1, 2011. Given that this Democratic Congress that grasps at people's money, but succeeds only at getting deeper into debt, has no plans to make those cuts permanent, people are doing what you can expect them to do in response to incentives and disincentives. They are using every means to move 2011 income into 2010, giving the misleading impression that the economy is recovering. But it's just a sugar high. 2011 will see a tremendous crash as a result of the massive tax hikes that are scheduled to hit the people who have money. Laffer details those taxes.

But, really. Obama's technocrats have it all figured out. They don't hand out Nobel Prizes like candy at a parade, you know. What could possibly go wrong? Here, Nassim Taleb, author of The Black Swan, his book on unexpected events (oh, say, housing bubble bursts, devastating oil spills, that sort of thing), has dark things to say about our economic situation and the people trying to steer us through it. Bloomberg reports that he considers President Obama "clueless."



As if that were not enough, the housing crisis is not over. The government, via the Federal Housing Administration, is fueling its continuation. Stephen Meister, in "The Next Disaster: Federal Mortgage Insurance," explains how.

In 2006, the FHA insured just 3 percent of home mortgages; today, it insures one of every three. Together with Fannie and Freddie, the FHA is putting the risk for the entire, $11 trillion US home-mortgage market on the back of the American taxpayer.

FHA also insures one in five refinances. Whereas private lenders--who are in the business of managing risk--are asking10-20 percent down when they lend at all, FHA requires as little as 3.5 percent down. As before, people in risky situations who really shouldn't be in the housing market are being facilitated into homes for political reasons, not market based ones. Also as before, many of them will default. But unlike the last time, the bulk of the loss will fall on the public treasury. That's a huge chunk of $11 trillion.

Thanks to the FHA, subprime-mortgage lending is alive and well. And thanks to Obama's latest program, private-mortgage investors will be able to pick the riskiest of their not-yet-defaulted underwater loans, and get them off their books and onto the FHA's. Bottom line: The Federal Housing Administration is continuing the toxic policies that produced the housing bubble and the subprime crisis, and putting the taxpayers on the hook for it. Expect it to be the next big bailout. 

Feeling down? Now meet the third Spirit of Crisis Yet to Come. Kevin Hassett of the American Enterprise Institute examines the Greek debt crisis and sees, if not an inevitably collapse, then at least a terribly brittle and shaky sovereign debt situation stretching from the east end of Europe to this side of the Atlantic. ("Greece's Bailout Heroes Arrive in Leaking Boats," Bloomberg Businessweek, May 16, 2010.

During the financial crisis, faith was restored in large financial institutions because toxic assets were essentially exchanged for government bonds. If government bonds become toxic, there will be no effective treatment options remaining. The collapse will have no bottom. And that collapse could happen at any moment.

Oh my. And our President is speaking to us from the Oval Office about energy-efficient windows.

A 2003 working paper by the International Monetary Fund puts in chilling perspective the debts we have been running  for the last couple of years.

The paper...studied historical sovereign-debt crises, exactly the situations that Western nations are hoping to avoid. They found that external debt levels -- money owed to foreigners -- exceeding 50 percent was a key indicator that debt default may occur. Here is the chilling fact: the average external debt as a percent of GDP among countries in their sample the year before a sovereign debt crisis was 54.7 percent, and 71.4 percent in the crisis year. The U.S. external debt on Dec. 31, 2009, was $13.77 trillion, or almost 100 percent of GDP. For much of Europe, the story is worse.

The lesson in each of these cases is that economics, something like physics, is unforgiving. There's no free lunch. Debts come due. You can put them off, but not indefinitely (though politicians like to fool us into thinking we can). The bigger you let them get and the longer you put them off, the deeper they bury you when they come back at you.

A more polished version of this appears at Worldmag.com under the title, "We're Doomed."

Dems Just Not That Into Economics

This is an expanded version of my column at WORLDmag.com (chart and video transcript).

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Daniel Klein's article, "Are You Smarter Than a Fifth Grader?" (Wall Street Journal, June 8, 2010), is one you want to clip and save for handy reference. He documents how characteristically more ignorant liberals are of basic economics than conservatives are. Politicians in general are poorly versed in the dismal science, but the further left you are on the political spectrum, the more clueless you are likely to be on the subject. This is alarming because, while politics is not reducible to economics, most of what government does involves economics, directly or indirectly, and the further left the politician, the more likely he is to occupy himself with economic matters...sadly.

Here is an example of a question Klein posed to a range of respondents:

Consider one of the economic propositions in the December 2008 poll: "Restrictions on housing development make housing less affordable." People were asked if they: 1) strongly agree; 2) somewhat agree; 3) somewhat disagree; 4) strongly disagree; 5) are not sure. Basic economics acknowledges that whatever redeeming features a restriction may have, it increases the cost of production and exchange, making goods and services less affordable. There may be exceptions to the general case, but they would be atypical.

Therefore, we counted as incorrect responses of "somewhat disagree" and "strongly disagree." This treatment gives leeway for those who think the question is ambiguous or half right and half wrong. They would likely answer "not sure," which we do not count as incorrect.


In this case, percentage of conservatives answering incorrectly was 22.3%, very conservatives 17.6% and libertarians 15.7%. But the percentage of progressive/very liberals answering incorrectly was 67.6% and liberals 60.1%. The pattern was not an anomaly.

Liberals generally answer with what they want to be true, what they believe ought to be true, or perhaps with what they can force to be true with properly executed legislation, not with what actually happens in the world when it is left to itself. Klein observes that, "the left has trouble squaring economic thinking with their political psychology, morals and aesthetics." May I venture to say that they don't think; they feel?

Klein ends with this: "Governmental power joined with wrongheadedness is something terrible, but all too common. Realizing that many of our leaders and their constituents are economically unenlightened sheds light on the troubles that surround us."

David Ranson provides us with an all too real example of this economic ignorance and wishful thinking in "The Revenue Limits of Tax and Spend" (WSJ, May 17, 2010).

The feds assume a relationship between the economy and tax revenue that is divorced from reality. Six decades of history have established one far-reaching fact that needs to be built into fiscal calculations: Increases in federal tax rates, particularly if targeted at the higher brackets, produce no additional revenue. For politicians this is truly an inconvenient truth.

This little nugget of the way things work even has a scientific sounding name: "Hauser's Law." On the basis of 60 years of consistent data, W. Kurt Hauser of the Hoover Institution found that there is an impenetrable ceiling on what wealth squeezing government can ring out of the economy in the form of tax revenues. No matter how we try, federal tax receipts will not exceed about 19% of GDP under the best of circumstances. Under present conditions, which are far from the best, any attempt to raise taxes will reduce GDP and thus actually reduce revenues. This article is another one for my "keeper" file.

But liberals don't care. They're not actually interested in paying for anything as long as deficit spending allows them to charge it to generations who will not be voting until after they are out of office. They are also just not that interested in economics at all. What matters to them is "fairness," even if it means bankrupting the country to pay for it.

Consider this golden moment during the final stages of the 2008 Democratic primaries. Barack Obama, saying what he knows the American people believe and want to hear him say, but what is completely alien to his way of operating, says he believes in paying as you go. But in response to Charles Gibson's question, he shows his complete indifference to economic constraints when it comes to the egalitarian moral imperative of "fairness."

GIBSON: All right. You have, however, said you would favor an increase in the capital gains tax. As a matter of fact, you said on CNBC, and I quote, "I certainly would not go above what existed under Bill Clinton," which was 28 percent. It's now 15 percent. That's almost a doubling, if you went to 28 percent.

But actually, Bill Clinton, in 1997, signed legislation that dropped the capital gains tax to 20 percent.

OBAMA: Right.

GIBSON: And George Bush has taken it down to 15 percent.

OBAMA: Right.

GIBSON: And in each instance, when the rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down.

So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?

OBAMA: Well, Charlie, what I've said is that I would look at raising the capital gains tax for purposes of fairness.

We saw an article today which showed that the top 50 hedge fund managers made $29 billion last year -- $29 billion for 50 individuals. And part of what has happened is that those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries. That's not fair.

And what I want is not oppressive taxation. I want businesses to thrive, and I want people to be rewarded for their success. But what I also want to make sure is that our tax system is fair and that we are able to finance health care for Americans who currently don't have it and that we're able to invest in our infrastructure and invest in our schools.

And you can't do that for free.

OBAMA: And you can't take out a credit card from the Bank of China in the name of our children and our grandchildren, and then say that you're cutting taxes, which is essentially what John McCain has been talking about.

And that is irresponsible. I believe in the principle that you pay as you go. And, you know, you don't propose tax cuts, unless you are closing other tax breaks for individuals. And you don't increase spending, unless you're eliminating some spending or you're finding some new revenue. That's how we got an additional $4 trillion worth of debt under George Bush. That is helping to undermine our economy. And it's going to change when I'm president of the United States.

GIBSON: But history shows that when you drop the capital gains tax, the revenues go up.

OBAMA: Well, that might happen, or it might not. It depends on what's happening on Wall Street and how business is going. I think the biggest problem that we've got on Wall Street right now is the fact that we got have a housing crisis that this president has not been attentive to and that it took John McCain three tries before he got it right.

And if we can stabilize that market, and we can get credit flowing again, then I think we'll see stocks do well. And once again, I think we can generate the revenue that we need to run this government and hopefully to pay down some of this debt.

Senator Obama weaves back and forth between advocating fairness at the expense of revenue considerations, and sounding fiscally responsible for the right-of-center American voter. But the two come crashing together in an embarrassing display of either contradiction or hypocrisy--Gibson caught it--when he says, "But what I also want to make sure is that our tax system is fair and that we are able to finance health care for Americans who currently don't have it and that we're able to invest in our infrastructure and invest in our schools. And you can't do that for free." In other words, we want a tax system that seems fair to a progressive liberal, and yet one that can pay for the generous social programs which that same sense of fairness requires.

The Senator likely just didn't see the contradiction because he is what Klein calls progressive/very liberal, and so he thinks primarily in sentimentally moral terms,* not economic ones, and simply expects economic reality to support those judgments. That is also how Obama the President has been behaving. Wall Street ought to be punished, even though a crippled and fettered Wall Street cannot fuel a recovery. BP ought to be prosecuted and pillaged as soon as possible, even though a bankrupt BP can neither clean up the spill nor compensate anyone for damages.

That, at least, is the generous interpretation.

*One can also think rationally about morality, of course, but liberals will have nothing to do with it because it leads to moral absolutism, which they absolutely abhor.

Dow 10,000 a Bubble, Not a Boom

Whenever we see a bubble, we want to think it's a bag of gold. And when we enter the eye of a storm, we like to kid ourselves that times of peace has come at last.

Now that the Dow Jones Industrial Average has once again surpassed the 10,000 mark, we want to believe that the hard times are finally over and that ten to fifteen years of unbroken prosperity lies before us. Brace yourself.

The New York Times reminds us ("10,000: The and Now") that when the Dow first passed that point on March 29, 1999, the economy was roaring through it's eighth year of wild prosperity, and unemployment was about as low as it could be. This ten is not the same as that ten.

Yes, unemployment today stands at 9.8 percent. But is that just the economy lagging behind the first indicators of economic recovery? Sorry. No.

The spike in the Dow is the result of huge profits that the banks have posted from their recoveries. But they are still not lending, and without that there will be no recovery for the rest of us. But don't get angry. Get answers. Why are these shrewd people still not lending? Isn't it their business to lend? No, it is their business, as in any business, to make money. They must have reason to believe that if they lend, e.g. to small businesses or to prospective homeowners, they will lose money. So look around for what they are seeing.

Look here. David Malpass, the president of Encima Global LLC, points us to our collapsing dollar as a source of our vanishing prosperity ("The Weak-Dollar Threat to Prosperity"). The Bush administration was devaluing the dollar throughout the decade. That corresponded with runaway government spending. When faced with large debts, government must either cut spending (unthinkable), raise taxes (impolitic and counterproductive), or devalue the currency. How do they do this? By keeping interests rates low, they encourage public and private borrowing, such as government bonds and home mortgages. If anything becomes oversupplied, it's value decreases. As dollars lose their value, it takes more of them to buy things, both at home and abroad. Prices rise across the board.

How much value has the dollar lost? Is this a big deal? You can see how dramatic the fall has been by looking at the price of gold over the past decade. Gold has a stable value. The fluctuation in its price reflects the relative value of the currencies that are used to price it. So as the dollar loses value, it takes more of them to buy an ounce of gold. When President George W. Bush came into office, gold was selling at over $250 an ounce. When he left office eight years later, it was about $850 an ounce. The price climbed steadily over those eight years.

President Obama is making his predecessor look like the king of thrift, and he's not done. The present government has popped the roof off an already large public debt, spending trillions, and preparing to spend trillions more. As a consequence, the dollar is falling faster than ever. Since Barack Obama took office less than a year ago, gold has gone from about $850 an ounce to roughly $1,050. You should expect it to go higher. Much higher. Adjusted for inflation, gold's historic high is over $2,000 an ounce.

As Obama pumps trillions of dollars into the economy, and the economy does not respond proportionately with a vigorously growing GDP (still no sign of that), more dollars chasing the same number of goods will mean inflation. A ridiculous increase in the money supply on top of a stalled economy will give us a devouring plague of inflation further devastating people's lives.

You might be wondering, however, about the upside to a weak currency. Doesn't it make our exports cheaper, and thus boost domestic production and launch us into recovery? Malpass explains how historically this has always been a losing strategy.

As the pound slid in the 1950s and '60s and the British Empire crumbled, the corporations that prospered were the ones that borrowed pounds aggressively in order to expand abroad. Though British equities rose in pound terms, they generally underperformed gold and foreign equities. At the end of empire, the giant sucking sound was from British capital and jobs moving offshore as the pound sank....No countries have devalued their way into prosperity, while many—Hong Kong, China, Australia today—have used stable money to invite capital and jobs.

None of this indicates the American economy returning to boom times any time soon. In fact, this window onto the future reveals just the opposite.

The other place bankers are looking is the second wave of residential mortgage defaults and, on top of that, the coming collapse of the commercial real estate market. Charles Gasparino helps us there ("The Next Bank Crisis").

[The banks are] still holding trillions of dollars in ailing mortgage loans and commercial-real-estate debt that they have yet to fully write down. They're hoping they won't have to -- but continued joblessness is squeezing those portfolios. The banks will tell you that they've written down a good chunk of their consumer loans. But the problem, according to banking analysts like Mike Mayo, becomes acute if unemployment passes 10 percent and nears 11 percent. That's the point, according to many economic models, that American consumers start defaulting on loans in such a way that trillions of dollars in consumer-related loans and debt that haven't been written down start to implode.

And that doesn't account for the trillions in commercial-real-estate loans and bonds that have yet to take any significant hit at all -- but (most analysts predict) will be crashing in the months ahead even if unemployment stabilizes at 10 percent.

Bottom line: If unemployment goes higher than 10 percent, the banks' numbers get even worse. As losses begin to mount, the big banks may well find themselves back begging the government for more bailout money.

So beware of jumping on the bank profit driven bull market, thinking that you are going to ride it into the Obama Boom Years. There is much pain to come, and with it much tragic loss. It is tragic because wise leadership could steer us through it more safely by stabilizing the currency and tightening up on government spending. The administration is doing just the opposite. It's like physics. If you torch your house, it will burn down. We are already feeling the heat.

Like Lunch, There is No Free Health Care

The Democrats are puzzled as to why Americans aren’t flocking to grab a piece of the “free health care” that their generous and compassionate party is trying to arrange for us. Paul Krugman attributes this insanity to the “zombie” ideas of the Reagan years which, though dead, continue to live among us ("All the President's Zombies" NYT, Aug. 23, 2009).

But Guy Sorman explains in this short City Journal essay ("Paying for Le Treatment," Aug. 24, 2009) that, as it is with lunch, there is NO FREE HEALTH CARE. He uses the recently celebrated French system as an example.

In a New York Times Magazine essay ("Le Treatment"), Sara Paretsky, a novelist travelling in France with her husband (ah, the privileges of wealth) explained how impressed she was by the quality and speed of the care that her husband received when he went to the hospital with chest pains. This care would have been free if they had been French citizens. Instead, the system billed them, but for only $220. She recommends this paradise which can be ours if we would just follow the President into the happyland of hope and change that he promised us and is now trying to deliver.

Wealthy liberals believe this sort of fantasy because they are used to having things just handed to them. They turn on the tap of life, and out flows whatever abundance they desire. They put bad things at the foot of their driveway, and the next day it has magically disappeared. Surely the government--especially the Obama government--can institute a national health care system than mandates low prices from wicked price gougers and top quality care from health care professionals who, as government employees, will become public spirited instead of narrowly selfish in their service to patients.

What a wonderful world. But it exists only in the dreams and delusions of political liberals. The rest of us look at the post office and the IRS, and dread the thought of our health care in the hands of the similarly callous and inefficient.

Sorman ends his brief lesson in the economics of "free" government goodies with this warning:

"In the end, who paid for Paretsky’s husband’s nearly free ride in a French hospital? French workers and taxpayers; American patients; and the young, unqualified, and out-of-work French unable to find jobs because of the unemployment that national health insurance engenders. There is no such thing, anywhere, as a perfect health-insurance system. It’s always a trade-off among competing goods, and the choices to be made are ultimately political ones. Americans commenting on health-care reform should try to make the costs and consequences of these choices transparent, rather than resorting to misleading morality plays."

America Conforming to the 80/20 Rule

Listen to this conversation between a guy disputing his Verizon bill with a Verizon rep AND then the Verizon supervisor. The Verizon people simply cannot understand the difference between 0.002 cents and $0.002, thus they charged him 100x what they should have. In the end, the supervisor calls it a "difference of opinion"(!).



How can the republic--and our liberties along with it--survive with this sort of thing going on?

Remember Pareto's Principle, or the 80/20 rule. This rule is that a minority of input produces the majority of results. I suspect that 20% of the population is carrying the other 80%. Twenty per cent work hard. 20% are competent. 20% pay almost all of the taxes.

That is not what made America great.

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Harold adds:

I hope someone at Verizon has the good sense to be embarrased at this exchange, which simply has to be heard to be believed. Adam Smith famously said "there is a lot of ruin in a country", and here in this recording of mathematically challenged employees of one of the largest high-tech companies in the world, whose entire business of digital communications is based on the understanding and manipulation of numbers, is a very large example of such ruin. It is unknown how much ruin is too much--Smith did not speculate on that, but I'm pretty sure he would be horrified to look into the future and see the enlightened, educated, and scientifically advanced nation he watched being born turn out illiterates like these two Verizon employees unable to distinguish a dollar from a cent. Maybe their paychecks should be rendered in cents instead of dollars.....

The Boomers Behind the Bust

David Brooks reports some sobering statistics in his column today, "The Great Unwinding."

"The ratio of debt-to-personal-disposable income was 55 percent in 1960. Since then, it has more than doubled, reaching 133 percent in 2007."

He adds: "Consumption as a share of G.D.P. stood at around 62 percent in the mid-1960s, and rose to about 73 percent by 2008. The baby boomers enjoyed an incredible spending binge." The post-WWII baby boomers have brought us new blessings with each successive decade of their self-absorbed lives.

When credit froze up last year, the government "replaced private borrowing with public borrowing." The result has been a dramatic increase in public debt: "In 2007, the federal deficit was 1.2 percent of G.D.P. Two years later, it’s at 13 percent."

The effect of this and the various bailouts in general has been a historically unprecedented spike in the money supply. This has ominous implications for inflation.

Source: research.stlouisfed.org

To move the country from a mostly consumption based economy (easy credit and imports) to an investment and production dominated economy (which requires much higher rates of savings), "[t]he members of the political class face a set of monumental tasks. First, they have to persuade a country to postpone gratification for the sake of rebuilding the country. This country hasn’t accepted sacrifice in 50 years." Fifty years takes us back to 1959. Again, that's when the boomers started to dominate American society, even as children.

Brooks says the Obama administration is aware of the need for this shift and of what it requires, but he is skeptical that Congress is up to the task. "Congressional leaders have been fixated on short-term conventional priorities throughout this entire episode. There is no evidence that the power brokers understand the fundamental transition ahead. They are practicing the same self-indulgence that got us into this mess." Congressional leaders are...baby boomers.

The baby boom generation is not solely responsible for this and every other mess, but since they were toddlers, they have had the shaping influence on our culture and economy. Brooks subtley identifies the characteristic excesses of his own generation in this present crisis too.

After the Recovery, the Hyperinflation

Former hedge fund manager Andy Kessler does a fine job explaining the basics of money supply and inflation in relation to the recent trillions that have been flowing out of Washington DC. (And, yes, I expect you to be interested.)

Here is how he starts "Putting the Toothpaste Back Into the Tube" (The Weekly Standard, April 27, 2009).

So how is Fed chairman Ben Bernanke going to get all that toothpaste back into the tube? The Fed has been cranking money out like water over Niagara Falls. The monetary base has increased by a trillion dollars in just the last six months. And he's not done, furiously printing dollars (bank credits, really) and buying Treasuries in an attempt to flood the economy with dollars. When will it end? $3 trillion? $4 trillion? And then what? A functioning economy doesn't need all that cash sloshing around. Is runaway inflation our next crisis?

Let's go back to fundamentals for a second. Money is a placeholder of value--the price of a cold Heineken or the value of work already done, a hole dug, a piece of software written, whatever. When things work just right, prices seek the right level and we get a match between that cold beer and the sweat from working for it.

Money supply is how much money is floating around the economy to handle all the transactions. No one quite knows how much money is needed. The classic formula is the output of the economy equals the amount of money times the velocity of money, or how many times the same dollar is spent during the year. You buy the beer, the bartender buys beer nuts, the nut farmer buys a Ford pickup truck, the auto worker buys a cell phone, which you the programmer just finished writing the location-based service code for, so you are out celebrating buying a beer and on and on. Of course, no one really knows what the velocity of money is. If times are tough, you may hold off buying that Heineken for a few months, and when times are good you may party every night.

I like to think of the economy as a giant bucket filled with money (money supply) sloshing around the bucket (velocity). We all hope the bucket is filled to the rim. But, in normal times, the economy grows every year. Population increases, too, so the size of the bucket has to grow to handle the transactions of more people who like to eat and drink. So more money needs to be created to fill the bigger bucket. That's pretty straightforward.

But now the hard part. ...

Read on, then hold onto your seats. Given the way we have chosen to ride out this recession, we could be in for a bumpy landing.

Scientism and You

In his inaugural address, President Obama declared that his administration would "restore science to its rightful place." He then gave some very conventional practical applications of that intention, but, taken on its own, the statement raises the question of the relationship between science and government. How much of government decision-making can be relegated to men of science? If we were all simply scientific in our thinking, would we be more governable? Would our life together be harmonious?

Francis Bacon was not only the original exponent of modern science, he also gave careful thought to its political implications. He begins The New Organon, his explanation and defense of what we have come to call experimental science, with this little aphorism:

"Man, being the servant and interpreter of Nature, can do and understand so much and so much only as he has observed in fact or in thought of the course of Nature. Beyond this he neither knows anything nor can do anything."

His project was to re-establish all human knowledge, even moral and political knowledge, on the foundation of the new scientific method. In other words, he proposed, "The total reconstruction of sciences, arts, and all human knowledge, raised upon the proper foundations." When he says "all human knowledge," all means all.

This is what we may call not just science but "scientism," viz. the view that scientific reasoning is the only way of knowing.

According to these epistemological standards, judgments of moral right and wrong, the noble and the base, the beautiful and the ugly, become utterly subjective, i.e. mere expressions of personal sentiment. They do not correspond with any objective moral or aesthetic reality.

The moral world that this produces is insightfully summarized in Monty Python's "Merchant Banker Sketch."



Notice that he has no "inner life." Evidently, someone has accused him of this, perhaps his previous appointment, and so he is looking it up in a reference book, having no idea what it is. As a mere calculator of self-interest, and maximizer of material advantage, contemplating what is true and eternal has no role in his life. He doesn't even have a category for it in his thinking. Accordingly he has no idea of what a gift is, gratuitous giving out of love for another, out of recognition of another person's inherent worth, be it a friend or a stranger. "Tax dodge" is the closest he can come. He hasn't a friend in the world, and feels no need of one. Friendship as such has no rational basis in a scientisticly understood universe. If scientific reasoning is the only way of knowing and if what can be observed and measured by modern scientific methods is the only reality that we are justified in recognizing, then there is no human relationship that is not a form of economic exchange or domination of one person by another.

He is indifferent to whether or not he has a name. He forgets it, but what is important to him is that he is definitely a merchant banker. See what Harvey Mansfield says is the importance of having names in how we see our personal importance or inherent human worth ("How To Understand Politics"). In general, he questions the sufficiency of the natural and social sciences for understanding the human beings the purport to explain.

Political science ignores the question of importance because it has the ambition to be scientific in the manner of natural science, which is real science. Scientific truth is objective and is no respecter of persons; it regards the concern for importance as a source of bias, the enemy of truth. Individuals in science can claim prizes, nations can take pride in them, but this sort of recognition is outside science, which is in principle and fact a collective, anonymous enterprise. And so political science, which by studying politics ought to be sensitive to importance, to the importance of importance, aims to abstract from individual data with names in order to arrive at universal propositions.

Yet human beings and their associations always have names; this is how they maintain their individuality. Names mark off the differences between individuals and societies or other groups, and they do so because the differences are important to us. You can think your way to an abstract individual or society without a name, but you cannot be one or live in one. Science is indifferent to proper names and confines itself to common nouns, but all human life takes place in an atmosphere of proper nouns. “To make a name for yourself,” as we say, is to become important. “To lose your good name,” to suffer a stain on your reputation, is to live thinking less well of yourself, or among others who think less well of you.

Anyway, I used the Python sketch as an illustration in class today of how a life guided simply by calculations of self-interest might look, and I wanted to post it on the blog.

Wealth Creation and Public Policy

One of the defining questions for thoughtful and morally serious human beings pertains to material prosperity: "How is wealth created?" How does a people lift itself out of poverty into widely enjoyed abundance? This question of not-mere-academic debate between American liberals and conservatives. Thus, we are asking how best to respond to this recession that is bordering on a depression. President Obama talks about the wealth creative capacity of the private sector, but he throws trillions of borrowed, government dollars into spending on just whatever Congressmen pull off their wish lists, as well as a some sensibly targeted investments in infrastructure, and the like.

Yesterday at The King's College, David Blankenhorn of the Institute for American Values hosted Cornell economist and New York Times contributor Robert H. Frank and Time magazine columnist Justin Fox in a discussion of the paradox of thrift. Prof. Frank defended the President's stimulus spending, saying that if we are going to borrow money in order to spend more to create demand for production, it makes more sense for the government to borrow at 3% than for private citizens to borrow at 22% on their credit cards--as though those were the only two alternatives. He also contrasted government spending on projects like bridges and tunnels that facilitate commerce and prevent death by bridge collapse which passes all sorts of costs on to the rest of us over against private spending on silly consumables. (He did mention comparable investments that individuals could make, but of course at a much higher rate of interest.)

The problem that some in attendance pointed out is that when given the go ahead to spend, government directs the spending largely in ways that are politically advantageous to officeholders, not economically advantageous to the country as a whole. Furthermore, once given the green light for a prudent burst of public spending, government just keeps going and going. A businessman in the audience suggested somehow arranging a 4% interest rate for mortgages so people could refinance their homes, and spend the resulting income that it would free up on whatever they see fit. Business would boom. Government revenues would rise. Et cetera.

This is why economists are not the most trusted profession. They are not the scientists they boast of being. On this point, read Harvey Mansfield's recent article, "A Question for the Economists" (Apr. 13, 2009, The Weekly Standard).

Mary Anastasia O'Grady recently entertained this question of wealth creation and general prosperity in relation to Latin America with foreign aid in mind "Aid Keep Latin America Poor," Wall Street Journal, Apr. 9, 2009). Among other sources of wisdom on the subject, including Lord Peter Bauer, she cites Alvaro Vargas Llosa's Lessons From the Poor: The Triumph of the Entrepreneurial Spirit (Independent Institute, 2008):

"The decisive element" in bringing a society out of poverty is "the development of the entrepreneurial reserves that exist in its men and women," Mr. Vargas Llosa writes. "The institutions that grant more freedom to their citizens and more security to their citizens' possessions are those that best facilitate the accumulation of wealth."

In an earlier post on development in Africa, I cited John Locke whom I will cite again. In his great Second Treatise on Civil Government (section 42), Locke appeals to the shrewdness of every ruler, saying:

This shews how much numbers of men are to be preferred to largeness of dominions; and that the increase of lands, and the right employing of them, is the great art of government: and that prince, who shall be so wise and godlike, as by established laws of liberty to secure protection and encouragement to the honest industry of mankind, against the oppression of power and narrowness of party, will quickly be too hard for his neighbours.

The lessons concerning "established laws of liberty" and the encouragement of the "honest industry of mankind" is a lesson that is continually in need of review, whether you are President of these prosperous United States or a South American oligarch.

Capitalism and Its Fruits

There are times when I am at home when I am too tired to do all the stuff I should be doing, and so like many another American, I repair to the cheap passivity of slouching in the leather chair in front of the flat screen TV that lurks like some kind of pagan altar in my home. But even at my most mind-numbed, the tube still resembles the business end of a 103 channel sewer pipe, pumping cultural detritus into living rooms across the land. Yet one program that I came across while flipping through the channels is a program called "How It's Made" on the Science Channel, a part of the Discover Network, and it allows me to loaf without self-inflicting too much psychic damage. Short segments show the basic processes involved in thousands of the products and devices that our huge, flourishing, modern economy has, Adam Smith-like, made available to households and businesses all over the world.

I have always been fascinated and impressed by the genius and creativity of manufacturing engineers, and the coordination of inputs and outputs by the free market that make possible the cornflakes and tennis shoes of life. Adam Smith's paean to the lead pencil comes to mind, following Locke's similar analysis in chapter Five of his Second Treatise of Government. Which government commissar, looking down from the commanding heights, could coordinate the millions of decisions made every day by free entrepreneurs and managers across this economy?

Among the many items showcased by the program are Binoculars, Sparklers, Rubber Boots, Circular Saw Blades, Anatomical Models, Jukeboxes, Tortilla Chips, Spark Plugs, Pencils, Coffee, Javelins, Cuckoo Clocks, Hearts of Palm, Windshield Wipers, Technical Glass, Washing Machines, Playing Cards, Crossbows, Cine Cameras, Glass Christmas Ornaments, Giant Tires, Microphones, Hot Tubs, Artificial Turf, and Beer Steins.

What do all these products and the industrial processes that make them possible have in common? CAPITAL. When you watch this program you are struck with the scale of the undertaking, and the discrepancy between the size of the production machinery compared to the product being manufactured. Even the least consequential product--the pencil, say--requires a huge industrial array of production facilities and processes to deliver that product into your hands as a consumer. It is the freedom we enjoy under the rule of law, and a constitution that specifically favors commercial activity, that allows the capital formation that makes possible even the simplest items we depend on and take for granted. How much would a handmade pencil cost? $5? $10? Instead, pencils are so cheap you hardly bend over to pick one up that has fallen. The vast array of manufactured items that make your life possible at a price that you hardly even notice is brought to you by CAPITALISM. The private interest of free men, free to make a profit, brings to your door every item in your house, including your house, at a price point that you can afford. Can't afford a $120 trash can for the kitchen? You can buy one for $10.

Take a look at this program sometime, and consider how much of our industrial manufacturing would have been possible under a less free political economy--say, like the one we are steering into now, where grandstanding Congressmen compete with faceless bureaucrats to antagonize with regulation as many aspects of the economy as they can get to.

I grew up hearing about "American ingenuity", about the can-do spirit that made America not only the envy of the world, but its economic engine. We are witnessing the systematic destruction, by way of the tax code, of the system of capital formation that makes it a rational economic decision to build a huge factory full of machine tools and production lines for the manufacture of even the humblest of products that we rely on every day. Without the growth that freedom allows, we will from this day forward begin to live off the capital already in place in the form of plant and equipment, and whatever new enterprises that might seem possible under this new regime will groan under a much heavier burden of taxation and regulation, and now it seems, even open intervention by the Congress in things like executive pay and union affiliation. Obama keeps saying he is laying the groundwork for future economic growth by loading us up with the gargantuan spending he and Pelosi are planning, but they are making the mistake all collectivists make concerning the producers. They assume that regulation and taxation have no essential effect on the level of production. But the increased rate of taxation being contemplated will remove the economic rationale for a huge number of projects on the books right now. There are untold thousands of projects, plans, and dreams that are back on the shelf now under the aspect of the mere threat of increased taxation.

If the Democrats have their way--and it looks like they will--our flourishing economy will begin to decay into the sort of rusting hulks seen all over the collectivist world. It needn't be.

UPDATE:

After reflecting on the blessings conferred by free markets and free minds, consider the "Anti Industrial Coup" being pulled off under our noses by faceless and remorseless bureaucratic fanatics across the spectrum of executive branch agencies. Today, (Mar 26) Robert Tracinski warns that it may already be too late to save our industrial civilization from these radicals.

Killing the Economy With Good Intentions

The Constitution should require entrance exams for elected public office. Too many Congressmen, for example, do not understand the basics of economics, and yet they throw themselves into "fixing" the economy or using economic policy to remedy what they see as social ills.

One basic principle of economics and of public policy is the so-called law of unintended consequences. Rob Norton, former economics editor at Fortune magazine, explains it this way:

The law of unintended consequences, often cited but rarely defined, is that actions of people—and especially of government—always have effects that are unanticipated or unintended. Economists and other social scientists have heeded its power for centuries; for just as long, politicians and popular opinion have largely ignored it. …

Most often, however, the law of unintended consequences illuminates the perverse unanticipated effects of legislation and regulation. In 1692 the English philosopher John Locke, a forerunner of modern
economists, urged the defeat of a parliamentary bill designed to cut the maximum permissible rate of interest from 6 percent to 4 percent. Locke argued that instead of benefiting borrowers, as intended, it would hurt them. People would find ways to circumvent the law, with the costs of circumvention borne by borrowers. To the extent the law was obeyed, Locke concluded, the chief results would be less available credit and a redistribution of income away from “widows, orphans and all those who have their estates in money.” (Concise Encyclopedia of Economics)

We have seen this in the current housing/credit/economy crisis. Well meaning Democrats pressured Fannie Mae and Freddie Mac and banks in general to make housing loans to poor people who could not afford houses. Banks developed loan products that in turn attracted people of all sorts to purchase them. What we are now calling "toxic loans" flooded the system. Housing demand shot up, and then home prices followed, creating a price bubble. When the bubble burst, as inevitably it had to, the collapse was systemic and catastrophic. Here we are. Good intentions. Bad policy. Unintended consequences.

Iowahawk's adaptation of Margaret Bourke-White's 1937 original

It's the poor who pay the price for ill-advised government "help"

A "must read" on this subject is The Economist's View of the World by Steven Rhoads (Cambridge, 1985). This University of Virginia professor explains what basic economic concepts people people need to understand in order to be effective public servants in the modern world. He then brings political wisdom to economics, explaining how a fuller, political perspective needs to supplement the economist's understanding of human affairs.

The Trouble With Trillions

One of the best known and best loved episodes of Star Trek was one titled "The Trouble with Tribbles", where fuzzy little creatures with no apparent purpose threaten the good order of the entire Enterprise as well as a large Federation government project with their irrepressible reproduction. The unleashing of so many trillions of dollars into our economy, which like tribbles, have a soothing effect on human beings, will have a similar inflationary effect: at first, the crew views these tribbles with affection, but as they come to multiply and appear everywhere, interfering in a seemingly benign way, they begin to get sick of them, as too much of a good thing overwhelms their serious business.

Take a look at the episode here, either for the first time, or as a nostalgic return.

And consider the inflationary hangover awaiting us as the trouble with trillions makes itself known to us. You could be forgiven for thinking this is a Klingon plot to destroy us.

Social Security is Inheritance Security

I'm feeling all "United-States-of-Obama" at the moment, all sweetly in agreement with others who have moved beyond the old disputes. I just read Michael Kinsley who, in the previous age of darkness, we would have called a "liberal." But whether he has changed or I have changed, or maybe we've all changed (or been changed), he makes a lot of sense in his recent TIME essay, "Entitlement Myths" (Feb. 9, 2009).

His point is essentially that whereas Social Security was established to protect the aged against poverty and suffering in their years of disability or retirement, it has become a way of saving money to pass along to your children.

Meanwhile, though, families--middle-class families, not just rich ones--are passing hundreds of thousands of dollars on to the next generation in their wills. Fair enough, if they worked for the money and saved it. In fact, wonderful. But much of this generosity, it turns out, is made possible by Social Security and Medicare. How much? Hard to say. What is easier to say with certainty is that most people today and in the future will get more back from these entitlement programs in retirement than they put in during their working lives.

Medicare and Social Security are supposed to be insurance against the perils of old age: poverty and illness. They are not supposed to be gifts or subsidies to the children of retirees. Yet that is what, in large part, they have become. The reason for insurance is that you can't predict the future. If an elderly woman has diabetes and her husband needs heart surgery, then dies anyway, leaving her impoverished, Medicare and Social Security should be there for her. And if it all costs far more than she ever put into the system, that's O.K. too.

But if our elderly woman dies with $691,000 in the bank, it's evident that she didn't need the government money to pay for her health care or to avoid plunging into poverty. She wasn't lying or cheating--she might have been legitimately worried--but her worries turned out to be unnecessary. And society, having kept its promise to her, should get at least part of that money back. Oh, yes, designing a system to achieve this would be a nightmare--maybe impossible. The incentive for old folks to squander their savings would be enormous. Maybe it can't work.

Social Security is childrens' inheritance security at the expense of national economic security.

When George W. Bush won the 2004 election he began spending his political capital attempting to reform Social Security. He utterly failed and sent his capital down a political rat hole. Kinsley challenges President Obama to keep this question in mind as we enter what the President has called a "new age" of "hard choices."

A Merely Political Stimulus

Harvard economist Robert Barro, also at the Hoover Institution, gives a technical, though simple-so-that-I-can-understand-it, explanation of why the Democrats' "stimulus" spending package will fail to stimulate anything, apart from perhaps Chris Matthews' leg.

Read "Government Spending Is No Free Lunch" (Wall Street Journal, Jan. 22, 2009).

But, in terms of fiscal-stimulus proposals, it would be unfortunate if the best Team Obama can offer is an unvarnished version of Keynes's 1936 "General Theory of Employment, Interest and Money." The financial crisis and possible depression do not invalidate everything we have learned about macroeconomics since 1936.

Much more focus should be on incentives for people and businesses to invest, produce and work. On the tax side, we should avoid programs that throw money at people and emphasize instead reductions in marginal income-tax rates -- especially where these rates are already high and fall on capital income. Eliminating the federal corporate income tax would be brilliant.

I find it interesting that we are speaking of this stimulus package as something necessary for "jump starting the economy," as though the economy were a car, and as though it were at a stand still.

But this is rhetoric in the service of covering up a duplicitous government. The Democrats are not interested primarily in economic recovery. That will come eventually, one way or another, in the natural cycle of things. They see this crisis and the unprecedented breadth of power we have handed them as an opportunity to fund "just about every pent-up Democratic proposal of the last 40 years" ("A 40-Year Wish List," Wall Street Journal editorial, Jan. 28, 2009).

Also of interest is that 57% of Americans believe that tax cuts are generally good for the economy compared to 17% who believe they are bad, according to Rasmussen Reports.

Go Ask Alice

We have yet to discern any effect on the overall condition of the economy from the injection of all that credit into the banking system. Banks are still not lending, even though the markets world wide seem to have been calmed by the action. But it feels like the calm before the storm; even with the right policy mix--TAX CUTS--things would still be long in turning around. All this demand-side Keynesian pump-priming is not going to be any more effective than pushing on a rope, a lesson taught not only by the great depression, but also the lost decade of '90s Japan. The two trillion already gone down the rabbit hole hasn't visibly changed anything; will another trillion or two? The head-scratching thing about what we are witnessing, and you must pardon the mixed metaphor directly ahead, is that piling more debt onto the mountain we already have flies in the face of that well known bromide regarding holes and shovels: if you find yourself in a hole, the first thing is to stop digging. Obama and the New Geniuses instead are calling for backhoes and power shovels, with the idea that only if we dig in deeper than ever before can we get out of this hole that the evil, witless, and craven George Bush got us into. "This is the deepest hole we've ever been in, and that is exactly why we need to dig even deeper."

Sounds like something the Red Queen would say to Alice. Welcome to Obama's Wonderland.

Eat More Donuts

Fred Thompson explains how the stimulus package(s) coming our way actually work: its like telling a fat guy he can lose weight by eating more donuts. Call it the Homer Simpson Recovery Act.




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Innes adds: Fred is good at this. But while this video is entertaining, I doubt that the former Senator from Tennessee and recent candidate for the Republican presidential nomination is going to all this bother simply for our entertainment.

The "comment from Fred's den" that I have given you here was Thompson's response to Michael Moore after he challenged Thompson to a debate. When I saw it I thought I saw the next president. I saw strong principles, republican principles, and an ability to communicate such principles that we haven't seen in years.



But he delayed announcing his candidacy, he had severe organizational problems, and an appearance of sleepy indifference, something I have never seen before in any aspirant for the executive office.

So is Fred back on his feet? Are these videos to parallel Reagan's many radio addresses that he delivered on a myriad of political, economic and cultural issues in the 1970s? Is Fred positioning himself and building his base for a better organized run in 2012? I see that Chris Cillizza does not list him in the GOP Ten Mostly Likely list. So much for early lists.

Just Say No

This election, 2008, really is going to turn out to be a watershed event. Either we as a country will turn back the most serious run at overturning our presumptive reliance on free, open markets and self government; or we will take the fatal steps over the point of no return and walk into the narcoleptic dream world of a Euro-welfare state.

With our economy in crisis, there are so many temptations for the average citizen to go soft and turn to government for aid and solace. The age cohort that overwhelmingly supported the Obama-phenom, 18-29, has never seen a deep recession, and has the idea that robust growth with little inflation is the default position. The connection with lower taxes and less onerous regulation with the sterling economic performance we have had over the last two decades and more has been conceptually severed in the minds of most Americans. Thus, talk of the salutary effects of "tax cuts for the rich" and laying conclusive blame for the mortgage debacle on "lack of regulation" have become settled consensus views.

In light of the sudden and momentous--even world-historical--move by the Bush administration to socialize wide swaths of the banking and insurance industries, many voters are now ready to accept huge government intrusions and outright takeovers in the midst of this slow motion catastrophe. In the formulation of history as first tragedy and then farce, we will witness, in all likelihood, a farcical reenactment of the very sorts of government solutions FDR shoved into the American way of life, and which Amity Shlaes shows conclusively actually made the depression of the 1930's worse. Obama's solution for the looming unemployment right around the corner? Not aid to the private sector in the form of tax cuts and favorable monetary policy, but the ramping up of huge CCC and WPA style public works projects, financed with public debt, along with the takeover of the auto industry. "We owe it to ourselves" was an old Rooseveltian/Keynsian justification for government spending what it does not have.

I suspect that a lot of the free capital being shaken loose in the profit-taking sell-offs on these market run-ups will be fleeing to better climes. Hong Kong and Singapore, to mention just two, are set to reap an investment boom as tax friendly jurisdictions benefit from the follies sure to flow from a Democrat choke hold on all three branches of government. Our only hope is that this hard left turn runs us immediately into the ditch; if it takes too long for the reality to become apparent, we are doomed to a future where we're all Europeans. (See Randall Hoven's excellent "3 Scenarios for the Obama Years: The Good, The Bad and The Ugly")

But, as a very old saying has it, "who's going to pull the wagon when we all want to ride?" Without the enormous engine of economic growth that America uniquely provides, with our free economy and faith in capitalism, the socialist hammocks of Europe cannot be paid for, nor can the defense umbrella we provide the whole world. Witness the pathetic response to these Somali pirates in the Gulf; in the absence of American power and will, what's to stop them from franchising across the globe?

We are going to be a lot poorer and a lot more threatened than we ever imagined possible, unless enough people come to their senses quickly enough. The narcotics of leftism are being pushed at vulnerable people with little will to resist, and we are at risk of becoming a nation of addicts, willing to sell anything or anyone to maintain the sleepy cocoon our would-be overmasters have designed for us. Weak and soft, with no conception of self-reliance, looking to government for guidance and sustenance: imagine what the stout-hearted revolutionaries of 1776 who spilled their blood over the loss of their rights as Englishmen would say if they could see the decadent, slouching, addict-like mien of modern Americans.

We owe it to our forebears, and our posterity, to stop the sleepwalk into the narcotic oblivion the socialist drug dealers of the New New Deal have laid out for us. Just say no.

A Bulgarian Economic Model for America

Ideologues are in charge of Congress. Our fear is that Barack Obama may govern ideologically along with them and take us over the cliff into poverty, oppression, social breakdown and perhaps even attack from abroad. The definition of an ideologue is someone who holds to his theories despite all the evidence to the contrary from experience.

Well, when Congress comes to consider President Obama's 2009 tax bill, and when at the same time the voting public considers Congress, we would all do well to consider the recent experience in Bulgaria with a flat tax. Richard Rahn explains it in "Lessons From Abroad" (Washington Times, October 8, 2008).

Can you name a country that has a flat 10 percent income tax on both personal and corporate income, and that is also running a budget surplus of 8 percent of gross domestic product (the equivalent of the United States running a budget surplus of more than $1 trillion)? The surprising answer is Bulgaria, formerly one of Europe's most backward countries. Most of the former communist countries of Eastern and Central Europe have instituted flat-rate income tax systems. Estonia was the first, and Bulgaria is one of the most recent, having only moved to the 10 percent flat rate at the beginning of this year.

Rahn reports on the Bulgarian banking system as well as on how the Bulgarians are weening themselves off their highly inefficient government health care system. (Having said "government system, did I need to say "highly inefficient?")

"This year, the Bulgarian economy will grow about 4 times faster than the average of the European Union (of which Bulgaria is a member)."

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth. It was my colleagues in economics at the King's College, Alex Tokarev, a Bulagrian ex-pat, who brought this news to my attention.