Considering these motivating factors but also recognizing the political challenges, I devised a six-point proposal for revenue-neutral tax reform that addresses some of the most harmful elements of the current tax system but purposefully stops short of an outright overhaul. Here, I outline the key elements of this pro-growth, progressive, and practical proposal that, while not perfecting our current convoluted tax system, constitutes a significant leap forward.

When examining the case for tax reform, two characteristics of the current tax code stand out: 1) the corporate tax rate is too high to permit them to compete in the current competitive global economy, and 2) there exists an excess of tax preferences - government subsidies - that distort taxpayers' natural decisions and lead to a misallocation of resources. Fortuitously, these two faults are complementary from a budget perspective - revenue raised by curtailing or repealing distortionary tax subsidies can be used to fund the reduction of the most harmful tax rate in the current tax code. With this in mind, my plan consists of three business tax changes and three individual tax changes:

1. Phase down the corporate tax rate to 25%.

2. Make permanent the 50% bonus depreciation that encourages business investment in equipment and machines in the United States.

3. Limit the deductability of interest expenses for C corporations to 90%.

4. Replace the current mortgage interest deduction with a flat 12% tax credit available to itemizers and non-itemizers alike.

5. Phase out the state and local tax deduction.

6. Repeal the alternative minimum tax.

The net effect of this proposal would be to reduce the tax code's interference in our economy while still raising the same amount of tax dollars. Dramatically reducing the corporate tax rate by 10 points would bring the U.S. in line with the average corporate tax rate among other industrialized nations, thus removing an important impediment to U.S.-based firms' operating globally. The rate on new corporate investment would be cut 7 points overall, while the subsidy for debt-financed corporate investment would be reduced and the tax on equity-financed investment cut even more. Taken together, these changes would lead to more investment over time, a higher capital stock, and a more productive economy.

The subsidy that encourages higher state and local tax rates would be eliminated over time. The home mortgage interest deduction, a federal subsidy that leads to excessive investment in residential property, would be replaced with a flat 12 percent tax credit for all homeowners with a mortgage. In addition to these changes, the cumbersome and complex alternative minimum tax, which ensnares millions of taxpayers annually, would be repealed.

These tax changes would have the effect of increasing the progressivity of the tax code. Because the state and local tax deduction primarily accrues to higher-income taxpayers, its repeal would generally raise taxes only on those households. Similarly, converting the home mortgage interest deduction to a credit would limit the benefit for higher-income earners while increasing it both for those in the 10 percent tax bracket, and for non-itemizers who currently cannot claim a mortgage break. Democrats committed to furthering the progressivity of the tax system will hopefully find this aspect of the plan appealing, while Republicans can take solace that this shift occurs without any increase in statutory tax rates.

More important than the shift in the progressivity is the shift toward a pro-growth tax system. By reducing the most harmful tax rate and eliminating the most distortionary tax subsidies, this plan, without raising or lowering taxes overall, encourages more investment in productive activities and removes government-imposed distortions that hurt our economy.

These proposals are not the be all and end all for tax reform, but rather just a plausible first step. Other important tax reforms will be necessary, including eliminating the political tax favoritism with which the tax code is littered and modernizing the tax treatment of foreign-sourced income to come in line with our trading partners. However, the key objective of my tax reform plan is to remove some of the primary impediments to economic growth. Once we win that battle, we can tackle the next challenge.

Alex Brill is a research fellow at the American Enterprise Institute, served as an adviser on tax policy to the President's Fiscal Commission, and is a former senior adviser and chief economist to the House Ways and Means Committee.

Of course in the late ‘90s 5% returns were seen as all-too-boring given a stock market that kept testing new highs. Still, investors who wanted to be cautious with at least a portion of their wealth could count on reasonable compensation for the short-term use of their cash.

Notable for central bankers and economic commentators today who believe that an increased Fed funds rate would "hammer" the economy, back then the U.S. economy soared and the stock market roared alongside a Fed funds rate quite a bit higher than the zero rate that prevails at the moment. But rather than allow the market economy to work free of intervention, once stocks began to crater in 2001 the Fed got to work on "fixing" things.

Though downturns or market corrections and the tight credit they foster in the near-term are healthy inputs for a quick recovery, Fed officials, having learned all the wrong lessons from the ‘30s, increasingly operate as though any failing business concept must be inundated with credit so that bad ideas can be kept afloat. So in the early part of the new millennium the Fed slashed rates repeatedly to ease the alleged burden of a correction within the Internet space.

Here it should be said that falling rates on Treasuries necessitated some amount of Fed ease, but as is often the case, the Fed overdid it. The Fed's actions then can't be separated from the eventual problems that revealed themselves within money market funds in 2008.

Though cash management had once been more of an afterthought, low rates meant that conservative investors couldn't achieve the returns they once did on short-term savings. Presumably eager to please customers used to better returns, money market funds grew a bit more aggressive on the way to short-term holdings that were exposed as very much not like cash in 2008.

As is well known now, the Reserve Fund in particular ran into trouble due to holdings of the Lehman variety, and if the Feds hadn't stepped in, the "buck" would have been broken. Though money market funds had long been seen as among the safest of all investment vehicles, investors in them suddenly faced the prospect not of minuscule returns, but negative returns that would reduce the amount of dollars in their accounts.

About this, it bears asking why this was a calamity such that the federal government needed to step in. Particularly now in what remains a low interest rate environment, the buck is theoretically broken with great regularity. Indeed, at the moment those in cash get microscopic returns from their money funds, and considering how often we're all forced to use ATMs that cost anywhere from $2.50 to $4.00 per transaction, it seems we voluntarily break the buck on a daily basis.

After that, assuming a run on the Reserve Fund, the latter's holdings surely had some value such that investors wouldn't have been wiped out altogether. And then assuming they weren't made whole, this would have been a healthy market event reminding the conservative to be even more prudent through spreading their cash around prosaic money market funds much in the way they do so with shares of companies. A quality economic lesson would have been learned.

Back to reality, troubled money market firms were bailed out in 2008 amid a political/economic crackup that said failure, despite it having authored nearly every economic advance known to mankind, would not be allowed. Money market funds survived thanks to government largesse with the money of others, though as is always the case when governments bail any sector out, eventually they return for their payment. Sadly, payment always comes in the form of regulations that ensure less of a focus on profit.

All of which brings us to the SEC's proposed regulatory plan that would require companies in the money market space to set aside holdings so that they're ready and able to handle redemptions should another financial crisis occur. Translated, having bailed the money market sector out in 2008, the federal government now seeks to weaken it on the way to market irrelevance.

As it is, money market firms continue to suffer wildly distorted rates of interest on short-term credit that make the provision of any kind of yield for customers difficult to achieve. Basically the government that wrecked money market returns through its naïve policies of near zero rates now wants to make it even more difficult for them to achieve any kind of yield on the funds invested with them.

This won't happen, but better it would be if the Federal Reserve floated the short rate it now sets so that market realities would dictate the cost of short-term credit. If so, conservative investors, having grown used to negligible returns in money market funds, would suddenly find themselves once again being compensated for their highly liquid holdings. As for money market firms, they'd have less of an incentive to aggressively search for questionable yield given these new rate realities.

Barring that, and assuming passage of the SEC's proposal, the money market space will be hit in two cruel ways such that the sector's eventual strangulation becomes more likely. Low rates created by government distortion will make finding credible yield a tough concept, and then rules dictating reserves will make achieving even microscopic returns even more of a challenge.

Here's hoping cooler heads prevail such that the SEC's bad idea dies a quick death. Markets can fix this problem; that is, if we allow them to.

John Tamny is editor of RealClearMarkets and Forbes Opinions, a senior economic adviser to H.C. Wainwright Economics, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He can be reached at jtamny@realclearmarkets.com.

The U.S. Bureau of Labor Statistics (BLS) reports two monthly employment series: nonfarm payroll jobs collected from employers, and civilian employment collected from household interviews. Both are valuable in assessing the condition of labor markets and guiding policy decisions. But users would be better off, and gain better perspective, if they knew the limitations of the data, including the types of underlying errors. Some errors mainly affect the level of data and some mostly affect monthly or cyclical changes.

Let's start with the payroll employment numbers. They are incomplete as initially reported by employers because of an undercount in the net number of new businesses. The BLS, using a model of business births and deaths, temporarily fills the information gap by estimating and adding in the number of jobs missed. In subsequent months the data are revised as the business count of workers becomes more complete. And once a year there is a basic and often substantial benchmark revision, a comprehensive count based on unemployment insurance tax records.

As recently reported by the BLS, the benchmark correction amounted to an upward revision of over 200,000 jobs a month in the past half year and somewhat less going back to January.

The job count is also overstated when workers change jobs and appear on the payrolls of both their new and their old company in the same pay period.

Also, the person responding for a business can misunderstand instructions or definitions or err and provide the wrong job count. Besides collection and processing errors, seasonal adjustment factors are subject to error and later revision. The payroll data are also affected by sampling error, which is estimated and reported.

The household employment data also have their problems.

The sampling error for a monthly change in civilian employment is 430,000, more than four times that of payroll employment. Consequently, the last time a monthly change in civilian employment was statistically significant (not counting the beginning-of-year months when the data were distorted by the introduction of new population controls), was December 2009.

Each year the Census Bureau updates its population estimates, which the BLS uses as controls in its labor market measures. The population data include an estimate for net international migration, which is more a guesstimate subject to considerable error.

In its latest press release on the employment situation, the BLS reported the effect of the new population controls on December 2011 data. The population count was raised by 1.5 million, the labor force by 258,000, employment by 216,000 and unemployment by 42,000. The labor force participation rate and the employment-population rate were both reduced by 0.3.

Response error is a persistent problem in the household survey. For example, when the Census interviewer needs information about a householder who is not at home, a proxy respondent can answer for that person. The proxy respondent may not know that the absent person worked for pay sometime during the reference week - it could have been a temporary or a part-time job - in which case the information provided will be wrong and employment will be undercounted.

When the absent householder is unemployed but the proxy respondent did not know the absentee looked for a job during the past four weeks and answers wrongly, the official unemployment count becomes understated. Studies based on more probing periodic reinterview findings show that the weaker the labor market, the greater the understatement in unemployment. In recessions the unemployment rate is estimated to be understated by a half point or more.

Revisions to economic statistics improve their accuracy. Revisions are also a confession of error. Raw data are sometimes processed, adjusted, imputed, and modeled to the point of dominating the underlying signal.

Knowing about data shortcomings is critical to the interpretation of economic statistics. Unfortunately, some errors can't be measured (e.g., uncounted workers employed off-the-books). They have technical names seldom mentioned, yet cast a dark shadow. Worse, errors that are known are too often ignored.

Alfred Tella is a former Georgetown University research professor of economics. 

In addition, the U.S. federal government has no control over the budgets, taxing or spending of the various states, just as the European Union's government in Brussels has no control over the similar fiscal decisions of the various sovereign nations that are part of the EU. Why is it, then, that the Euro group may be coming apart, while the U.S. does not face a similar problem? The answer says a lot about the adverse effects of moral hazard.

The crucial difference may be found in the relationship  between the subordinate political units and the central bank in each grouping. The U.S. central bank- the Federal Reserve - carries out its monetary policies by buying and selling U.S. government securities. If the Fed wants more dollars in the economy, it buys U.S. government securities from banks and thus increases the number of dollars outstanding. The Fed does the opposite if it wants to reduce the amount of dollars outstanding, by selling U.S. government securities and thus pulling back cash.

On the other hand, the European Central Bank, known as the ECB, carries out its monetary responsibilities by purchasing and selling the bonds of Euro group member countries. If the ECB wants more Euros outstanding in the Euro group economy it buys the debt of EU member countries, primarily from banks, under an agreement in which the ECB's counterparties must repurchase the debt within a specified time period. By putting more Euros in circulation, that has the same effect as the Fed's purchase of U.S. government debt from U.S. banks. The repo can be renewed if the ECB wants to continue the money supply increase. The ECB does the opposite if it wants to reduce the number of Euros outstanding - selling the bonds of member countries, subject to a renewable agreement to reacquire the bonds at a subsequent time.

Thus, ECB deals in the debt of the various EU countries, but the Fed buys and sells only U.S. government debt; it does not accept the debt issued by U.S. states.

This difference turns out to have important consequences. For example, the bonds of U.S. states have much less value to U.S. banks than the bonds of the Euro member countries have for EU banks. They can exchange the debt of EU member countries they are holding to acquire Euros from the ECB, while U.S. banks, by and large, can only get cash from the Fed by selling U.S. government bonds. In addition, the ECB has not in the past been able to discriminate against the bonds of one country as opposed to another - these are, after all, sovereigns - even if the countries themselves have very different credit standings.

Finally, the Basel framework for bank capital allows the bonds of EU members to carry a zero risk weight when banks calculate their capital positions, again providing a preference for sovereign bonds that does not exist for U.S. states. Both these factors give the bonds of Euro member countries added value that enabled them to borrow more than their credit positions alone might otherwise suggest.

In contrast, U.S. states are subject to far greater market discipline than the members of the EU. Banks and other U.S. bond buyers have no reason to give the bonds of U.S. states special value beyond their inherent credit value. If there is doubt that a state is able to meet its obligations, it won't be able to raise funds for its daily operations, or those funds will become substantially more costly. As a result, U.S. states have to be careful to manage their expenses so that their ability to meet their financial obligations is credible.

It is questionable whether the Euro member countries can agree on changes in their current relationship with the ECB. As the central bank of a union of sovereign nations, it seems doubtful that the ECB will be permitted to discriminate among the bonds of the members based on its perception of each country's creditworthiness. Nor is it likely that the Basel framework - which is again a kind of treaty among the financial regulators of the participating nations - will agree to impose differing risk weights on the bonds of EU members.

Under these circumstances, it is difficult to see how - as a political matter - the moral hazard associated with sovereign debt can be overcome. And if moral hazard cannot be avoided, there is little likelihood that the EU's debt problems can be solved unless the member nations are willing to surrender a substantial portion of their standing as sovereign nations to a central government.

Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute.  He was general counsel of the Treasury and White House counsel in the Reagan administration and a member of the Financial Crisis Inquiry Commission. 

- L.P. Hartley, English novelist

It must now be obvious that, economically speaking, we're in another country. Things we once took for granted no longer apply; things we never imagined occur all the time. We've entered a zone of ignorance where familiar experience and ideas count for less. "Thirty years ago, if you'd said that the United States and Europe were going to be the centers of financial crises, people would have thought you were crazy," says economist Fred Bergsten. The unforeseen is now routine.

Profound changes to the global economy contributed to today's crisis and make it harder to resolve. Bergsten - director of the influential Peterson Institute for International Economics - cites three shifts.

First is the rise of "emerging market" countries, led by China, India and Brazil. In 1981, when the Peterson Institute was founded, these nations were laggards. "Now, they're more than half the world economy and are growing three times faster than high-income countries (the United States, Japan and European nations)," Bergsten said in an interview. "They drive the world economy."

Second, the United States has moved from the largest-creditor to the largest-debtor nation. Through the 1970s, the United States generally ran trade surpluses, and U.S. multinational investment abroad overshadowed foreign investment here. But since 1980, U.S. current account deficits exceed $8.5 trillion. (The current account is a broad measure of trade.) And foreigners have invested trillions in U.S. stocks, bonds, factories and real estate.

Finally, financial crises have mushroomed. After World War II, countries restricted the flow of money across borders. This changed in the 1970s and 1980s, when these controls were gradually dismantled. Unexpectedly, rapid inflows and outflows of foreign money caused booms and busts: first in Latin America in the 1980s; then in Asia and Russia in the late 1990s. And the American and European financial crises, though largely homegrown, have had global repercussions.

Globalization, it turns out, is a double-edged sword. It raises living standards by promoting trade and spreading modern technology around the world. But it also causes disruptions and deepens downturns. The future of the world economy hinges heavily on whether this instability is modest and tolerable or massive and intolerable. As Bergsten asks: "Are we on a path not only of crises but also of crises of increasing frequency and rising severity?"

We don't know. What we do know is that mutual dependencies have grown. For years, U.S. trade deficits promoted globalization by boosting other countries' exports. Ideally, emerging-market countries would now return the favor. Their fast economic growth would swell demand for U.S. and European exports, making it easier for these countries to pay their debts and reduce unemployment. The odds of this happening seem no better than 50-50.

What countries see as their narrow self-interest may subvert their collective interest in a stable world economy. Political power has fragmented along with economic power. The currency dispute with China is a case in point. For years, American presidents have failed to persuade China to stop undervaluing its currency and, thereby, subsidizing exports and penalizing imports. Indeed, some economists argue that China's trade surpluses - converted into dollars and invested in U.S. bonds - fueled America's financial crisis by driving down interest rates. Low rates then encouraged riskier mortgage loans.

By nature, Bergsten - who will retire as Peterson's director after a successor is found - is an optimist. Unlike the 1930s, he argues, we have institutions (the International Monetary Fund, the European Union and others) that allow enough cooperation to avoid disaster. Europe will muddle through its crisis, he argues, because its leaders recognize that the alternatives are grim. Joblessness would surge. Political and social cohesion would collapse. So the European Central Bank (Europe's Federal Reserve) will lend whatever is necessary, and Germany will pay whatever is necessary.

Maybe. Even Bergsten's optimism is tempered. "The next crisis could be a dollar crisis," he warns. Foreigners own roughly $23 trillion in U.S. stocks, bonds, real estate and factories; Americans own about $20 trillion in foreign assets. That's the reality of being the world's largest debtor. A loss of confidence could trigger a sell-off of American stocks and bonds that - given the dollar's role as global currency - would reverberate around the world.

Foreign faith in the United States ultimately rests on a belief in America's political stability and economic vitality. Could huge federal budget deficits shake that faith? "The European crisis has shielded us from our follies," Bergsten says. Worried investors have channeled funds from European securities into American bonds, reducing U.S. interest rates and making borrowing easier to cover $1 trillion annual deficits. There's no telling what comes next. We are, after all, in another country.

The BLS reported that the closely followed "headline" (U-3) unemployment rate fell to 8.3% in January. This represented a decline of 0.2 percentage points from the previous month's level and the lowest level since February 2009. So, why isn't this good news?

The problem isn't just that the employment report wasn't good news, it's that the employment report wasn't even news. Rather, it was simply the latest monthly installment of the long-running story contained within President Obama's so-called "economic recovery": falling labor force participation. For the past 31 months, discouraged workers have been dropping out of the labor force in unprecedented numbers.

At the end of the recession (June, 2009), the labor force participation rate was 65.7%. In January 2012, it was 63.7%. The difference between these two numbers represents 4.8 million people who have given up on looking for work.

If the labor force participation rate for January 2012 had remained the same as it was in December 2011, the unemployment rate would have risen by 0.2 percentage points to 8.7%, rather than falling by 0.2 percentage points to 8.3%.

However, this comparison does not even begin to show the damage being done by Obamunism.

If the labor force participation rate had remained where it was when Obama took office (65.7%), the unemployment rate for January 2012 would have been reported at 11.0% rather than 8.3%. In January 2009, unemployment stood at 7.8%.

The authors of Obama's $787 billion "stimulus" program predicted that it would reduce unemployment to about 6.4% by January 2012. Adjusted to the labor force participation rate assumed in the stimulus plan, the January 2012 unemployment rate was 11.2%. The difference represents a shortfall of 7.6 million jobs from what Obama promised when he took office.

From a GDP growth perspective, Obama's recovery has been the slowest economic recovery in U.S. history. From an employment perspective, there has been no recovery at all.

At the end of the recession in June 2009, America was 12.6 million jobs short of full employment (defined as the employment conditions that existed at the peak of the Clinton boom, in April 2000). In January 2012, after 31 months of "recovery", we are 15.2 million jobs away from full employment. In January 2012 alone, we lost ground with respect to full employment by 244,000 jobs.

If Obamunism could produce a real economic recovery, it would have done so by now. By proposing a combination of $447 billion in additional "stimulus" and huge tax increases on investors, the Progressives have admitted that they are fresh out of ideas. They have been reduced to crowing over economic reports that are, in fact, bad news.

It's time for the Progressives to leave Washington, but they will need some place to go. Given their model of economic reality, they should feel completely at home on Fantasy Island.

Louis Woodhill (louis@woodhill.com), an engineer and software entrepreneur, is on the Leadership Council of the Club for Growth.

Nowhere is this more apparent than in the way Washington concocts its complex tax and regulatory policies, and in the media's childish analysis. As dumb as they think we are, do politicians really believe that they are smart enough to fine tune the economy, counting on their media enablers to justify ham-handed interventions through sound-bite politics?

Consider the balance between capital and labor.

Every day, corporations evaluate investment alternatives that make tradeoffs between man and machine. Do we put more workers on a second shift or buy capacity-boosting equipment to increase the output of our existing workforce? Do we hire more people to bring a part of our supply chain in-house or invest in software to monitor suppliers' product quality and delivery performance? Do we risk entering a market dominated by legacy providers burdened with expensive union workforces, investing in a modern new factory in a right-to-work state, or instead play it safe and just hire more salesmen to increase market share in our existing business? Do we bet on an increase in demand by building up inventories, stockpile cash for a rainy day, pay the cash out in dividends to shareholders, or hire more lobbyists?

Unless Washington succeeds in leading us into Mussolini-style public-private fascism, corporations will always have choices that politicians cannot control. Policy makers can try to lure them in one direction or another, but most company managers are perfectly capable of holding multiple concepts in their minds to judge how best to pursue their interests over the long term.

For example, government policies that make employees more expensive artificially tip the balance away from hiring and toward investment in technology and capital equipment. This allows corporations to get more output from fewer of people. Yet in the name of helping the working man and with the applause of the media, Washington continually lards on mandated employee benefits, such as Obamacare, and other onerous employment regulations that do exactly that.

Low-tech service businesses that rely on unskilled labor offer inexperienced young workers, including those with little formal education, their first step into the world of employment. Raising the minimum wage prices the most vulnerable out of that job market, hurting the very people the sound-bites claim to be helping. Yet even Mitt Romney has fallen into that trap, proposing that the minimum wage be atomically adjusted for inflation. With this kind of "help" youth unemployment will soon approach that in Europe.

Recent reports indicate the same kinds of distortions emanating from tax policy. Although the U.S. has one of the highest statutory corporate tax rates in the developed world, currently at 35%, few corporations actually pay that rate. In fact, total corporate federal taxes in fiscal 2011 reportedly fell to 12.1% of U.S. earned profits. How can this be?

Look no further than the congressional sausage factory. With broad bipartisan support, a temporary "bonus depreciation" tax cut was enacted that allowed companies to write off investments in capital equipment in one year, rather than depreciating it over the life of the equipment. Unsurprisingly, this lured cash off of balance sheets, helped to barely inch GDP growth into the positive numbers, and was very popular with the business community.

But no one knows whether this burst of capital investment will produce the "best" outcome for the economy over the long run-whatever that means, and to whom. The politicians that passed the law certainly don't. We can be sure, though, that their complex machinations produced a different outcome than if they simply reduced the corporate tax rate to a more internationally competitive level, say 15%, while eliminating all loopholes and special deductions, allowing the market to guide decisions on how to allocate resources. Doing so would incidentally increase total corporate tax revenues, an outcome you think would appeal to a government constantly in arrears. But what politician has the courage to stand up to the sound-bite attacks that would surely follow a call to reduce tax rates on "greedy" corporations?

OK, so courage is in as short a supply as brains in Congress. Yet while howling about unemployment, how can politicians justify a higher overall tax rate, coupled with special "bonus depreciation" and other write-off goodies, over tax simplification, even though this tilts the playing field against labor? Of course, getting out of the way means vastly reducing the incentives that generate campaign contributions - a horrifying thought for most members of Congress.

Politicians may be right that voters don't have the attention span to figure this out, and the media analysts who are supposed to inform them are largely to blame. After all, look at the tempest kicked up last week when most analysts reporting on Mitt Romney's "I don't care about the really poor" gaffe couldn't even get to the end of a paragraph to make a judgment. Given the idiotic commentary this remark generated, how can we rely on media pundits to examine multiple tax and regulatory policies through the lens of their actual outcomes, rather than their emotional tenor? Is it any wonder voters are misinformed?

Bill Frezza is a fellow at the Competitive Enterprise Institute, and a Boston-based venture capitalist. He can be reached at bill@vereverus.com. If you would like to subscribe to his weekly column, drop a note to publisher@vereverus.com or follow him on Twitter @BillFrezza.

That great phrase was coined by the late Jack Kemp, who believed that growth and opportunity for all is the answer to poverty. In fact, Kemp believed it was the answer to all things economic. And he was right. The best anti-poverty program is the one that creates jobs. The answer to large budget deficits? Grow the economy, create jobs, watch incomes rise, and let the tax revenues come rolling in.

Partly from Jack Kemp's work, and partly from his own experience, Ronald Reagan believed the same thing. He knew that growth is the single best solution for our economic ailments. And neither Reagan nor Kemp saw the world in terms of specific income classes or categories. They looked at the whole economy and realized that everyone is tied together. Dragging down the top earners will not help the middle class. And providing an ever larger safety net will not solve poverty. Reagan believed in the safety net, and maintained it. But he knew it was a stop-gap, not a solution.

Does Mitt Romney understand this?

The worry stems from Romney's ill-advised statement this week. He said, "I'm not concerned about the very poor. We have a safety net there. If it needs repair, I'll fix it." That raises doubts as to whether he understands the Reagan-Kemp model. Perhaps he does. But he will have to tell us more.

Incidentally, the safety net has been expanding at an alarming pace. Transfer-program spending has been soaring. It's up $600 billion, or about 35 percent, in the last three years. Medicaid, food stamps, and unemployment insurance have seen benefit levels rise and eligibility expand. This is a huge drag on the economy. We are paying too much to not work, and rewarding too little to work.

Welfarism is not compassionate. Opportunity is.

But now it's up to Romney to propose moving the very poor out of the poverty trap by making it pay more after tax to work rather than not work. And he must persuade the electorate with a clear and detailed prescriptive agenda.

Part of the solution is tax reform, especially getting rid of the 10 percent bottom tax rate. Another part of the solution is education reform: Revive real choice and competition; spread merit pay and performance to judge the schools; and insist on high-school diplomas or associate degrees or streamlined training programs to bring the unemployed into the high tech age.

In his Florida victory speech, Romney said, "If this election is a bidding war for who can promise more benefits, then I'm not your president." Good. But he must build on that. He has to make it clear that when the unemployed return to work they will not face huge marginal tax rates. In other words, there must be an incentive to leave government dependency and move into the productive economy.

That's why a bold tax-reform plan is so important. The unemployed face a 10 percent bottom tax rate. But the middle class faces 25, 28, and 33 percent tax rates. That's way too much. Why not flatten the code to just two rates, say 15 and 25 percent, and then simplify by getting rid of the other brackets and wiping out the unnecessary deductions, credits, and carve-outs?

Such tax reform will not only provide growth incentives, it will provide anti-poverty incentives as well. Job creation for everyone.

People know Romney is a successful business man. And I suspect most folks think he understands the free-enterprise economy better than Obama. But they're not sure he has a specific plan that will translate his experience into real economic improvement for the whole country.

The same is true for the budget mess. Back in November, Romney put out an excellent statement on reforming entitlements, cutting $500 billion out of the budget by 2015, and getting spending down to 20 percent of GDP. It's time he hit the reset button and started selling that plan all over again.

Railing against the Obama economy will not be enough to win. The latest jobs report shows a quickening pace of recovery: 243,000 nonfarm payrolls, 847,000 new jobs in the small-business household survey, and an 8.3 percent unemployment rate. Combine that with other strong readings on the manufacturing and non-manufacturing sectors (the ISM reports), car sales, chain-store sales, and jobless claims, and you have a 3 percent economy with good momentum.

Of course, coming from a very deep recession, growth and jobs should be better. The Reagan recovery was far stronger. But there's no double-dip out there, and unemployment is not going back to 10 percent. So the trick for Mitt Romney is to show folks he has a detailed plan to make the economy and the budget better.

He needs to prove to people that he knows what to do and how to do it.

In his State of the Union Address, President Obama condemned this practice, saying, "It's time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America." More specifically, he wants to conduct industrial targeting, namely he will favor American companies, the manufacturing industry, and particularly high-tech manufacturing.

First, it makes no sense to favor American companies over foreign companies. These are the types of policies that will drive plants for Toyota, BMW, Hyundai, Volkswagen, and Honda out of the American South.

Second, punishing companies for locating segments of the production chain in other countries makes those industries less efficient. This point requires a brief invocation of trade theory.

In 1817, David Ricardo noted that England could produce cloth quite efficiently, and Portugal was an adept producer of wine. Ricardo argued that each country could consume more of each if it specialized in its respective strong suit and traded. The case for free trade was born.

Ricardo's ideas still apply to a world of global supply chains, but our policy-makers do not seem to understand. Consider an alternative history where England specializes in oranges instead of cloth, the Portuguese still all become vintners, and the two nations trade. Each nation ends up with more oranges and wine, which the tired workers promptly mix together and down as sangria.

Trade in parts, oranges and wine, allowed each country to consume more of the final product -- sangria. While this example has not made it into the textbooks yet, it is extremely relevant in today's world. It means that punishing industries for taking part in global supply chains will make them less competitive.

Third, targeting industries for special treatment, like high-tech manufacturing, relies on outdated arguments for industrial policy. Some prominent economists from the 20th century, including Alfred Marshall and Paul Krugman, built a case for government protection or subsidy of key industries. Although intellectually defensible at the time, it has been largely undermined by the growth of supply chains.

The argument for industrial subsidies was based on the reality that some industries tend to cluster geographically. These clusters occur when industries share workers or inputs, or because knowledge spillovers occur between firms. Hollywood shares actors, Manhattan banks share securities lawyers, and tech geeks from different firms gather in Palo Alto bars to discuss CPUs, SEO, jar, and Python over beers. When an industry clusters for these reasons, economies of scale are created, and twice as many products can be produced for less than twice the money.

Moreover, these clusters can be quite arbitrary and dependent on historical whim. In 1541, John Calvin banned jewelry in Switzerland. As a result, Swiss jewelers started making watches, and they are still at it nearly 500 years later.

Could another country have been a more efficient watch capital? In the past, even if it could have, the industry would most likely not have moved. Since the economies of scale only work when the industry grows large, a bank would have had to finance the move of an entire industry to a new location and wait to reap future financial rewards. There's not a bank big enough.

Those who would advocate for an industrial policy of government intervention -- through subsidies or import protection -- presume that banks would be incapable of financing the relocation of an industry. However, studies of industrial policy throughout history have found few successes. The main reason for failure seems to be that policy-makers just pick the wrong industries. They misapply the theory, pander to special interests, or lack the technical know-how to identify the industries that form cluster based on economies of scale. Krugman also has recognized these difficulties.

Globalized supply chains make the hard task of picking industries to support near impossible. Industrial clusters are becoming less prominent and less valuable. As business coordination costs fall due to improved communication technologies, the sub industries, like the manufacture of parts and components, are separating geographically from the headquarters, R&D, and distribution. A hollowed-out industry is not worth as large of a subsidy, and the proper industries to target will be harder to identify.

What's more, as industries break down into their sub-industries, it is more likely that a new firm will play a larger role in a sub-industry. Specialized workers and inputs will cluster around that firm, and knowledge spillovers will begin to occur across departments. While no bank is big enough to move an entire industry to a more efficient location, it might be able to move a sub-industry. Where capital markets work, governments should not meddle.

No one can predict the future. The next communication or transportation revolutions will likely change the world as much as the internet revolution has, and policy-makers should not waste money predicting which industries will be valuable, and which will still cluster.

The policies that President Obama outlined in his State of the Union Address undermine the strength of America's economy, and are the wrong way to react to the changing nature of trade. Action is necessary, but it should focus on preparing future generations to compete in a global marketplace through education reform and retraining current workers who lose their jobs due to trade. The best policy advice is always to put the band aid where the cut is.

Matthew Jensen is an economic researcher at the American Enterprise Institute (AEI) and the co-author of chapters on trade and public finance in the forthcoming book, Is Competitiveness Worth Defending?

The potential for negative nominal interest rates, in my opinion, takes the prize for most significant of all the news. The other events highlighted above are really just continuations of the ebb and flow of the banking crisis as it has persisted for nearly five years now. But any move toward negative nominal rates is potentially a sea change in thinking and policy.

Of all the many competing strategies that vie for supremacy in policy action, there is a desperate impulse to get money moving in the real economy. In mainstream economics this is known through the simplistic, mathematical equation of exchange. Monetary policy works on one side of that equation as either the quantity of money or velocity (in an oversimplified form). The quantity of money has been the consistent explicit focus of monetary policy to date. By increasing the supply of money, policymakers hope to see a rise on the other side of that equation, as either rising prices or increased output (or, in a perfect academic world, both).

Quantitative easing, as the name implies, increased the supply of money to banks through open market operations carried out by the New York Fed. These consisted of swapping newly created "cash", a balance sheet entry on the Federal Reserve System's collective statement, for mortgage bonds and government bonds on the books of primary dealers. These twenty or so banks were then supposed to use those excess "reserves" in the interbank wholesale markets, with these new dollars making their way into Fed funds or eurodollars, funding the dollar-denominated lending activities of banks all over the globe. Right away banks resisted new lending, however, primarily due to equity impairments leftover from the real estate bubble's collapse (both marked and un-marked). There was simply no spare balance sheet capacity to advance new credit (showing up as much tighter lending standards).

Without excess equity capital, banks, with all this new near-zero interest cash, had to put those reserves to work somewhere to generate some kind of return to begin to repair their collective equity. So the global system switched to sovereign debt, with its bureaucratic definition of safety expressed by a zero-risk weighting. The Fed's experiment with increasing the money supply had no impact on the real economy (outside of commodity prices reacting to intentional inflationary expectations through dollar devaluation, an implicit attempt to influence velocity), but it served as a channel to fund the disastrous transition from mortgage bonds into government debt, especially higher yielding PIIGS.

Beginning in late 2010, but especially in March and April 2011, it became clear that the unserious efforts of European authorities to calm markets were grossly inadequate, and further that the situations in each of the PIIGS were both very susceptible to contagion and far more dire than previously stated. That started a sustained shift out of PIIGS and into other "safe" sovereigns, especially German bunds and U.S. treasuries. However, since a lot of these PIIGS bonds were pledged as collateral in funding arrangements (repos), just as the mortgage bonds were before the 2007/08 crisis, the element of liquidity crisis returned with a vengeance.

Once again wholesale funding markets froze, meaning all those trillions in newly created dollars were essentially stuck no further from the Fed than its inner-ring primary dealers. For all its trouble (and ours), increasing the supply of money has not only failed, it has directly led to economic retrenchment through commodity prices (weak consumer spending and now falling corporate profit margins) while solving nothing in the realm of global banking.

These were the exact considerations that put the Fed on hold last fall when all of the western world was sure QE 3.0 was coming. Rather than a large expansion of its balance sheet (another attempt at increasing the quantity of money), the Fed opted for Operation Twist (where its balance sheet size would be held steady). Instead of QE 3.0 in January 2012, as many were expecting, the Fed simply extended the time horizon for ZIRP (zero interest rate policy).

There were and are operational considerations regarding any new QE that has kept the Fed away from quantity policies. Despite it being counterintuitive given the $15+ trillion in outstanding U.S. treasuries, 2011 saw a desperate shortage of U.S. t-bills for repo collateral. It was one of the prime features of last year's liquidity crisis - a tremendously shrinking pool of low-haircut, liquid collateral for funding arrangements (reversing the trend of rehypothecation has also played a role here). Since the Fed's QE programs took up so much of the available supply of "on-the-run" t-bills (these are the most liquid treasury securities that make up repo arrangements), the banking system was in danger of having too little low-haircut collateral. So another round of QE would have actually made the liquidity crisis of the summer even more intense, and the Fed knew this (conducting reverse repos over the summer in advance of an Operation Twist that sold t-bills back into the collateral market).

This shortage of collateral was expressed as negative t-bill yields. Banks were so desperate to avoid haircut expansions from the junk on their books, they were willing to buy U.S. t-bills and accept the small loss on principal that the negative yields implied just to gain access to repo funding at those low haircuts.

Narrowing the list of low-haircut collateral has completely thwarted the quantity of money solutions (as well as the lack of sufficient systemic bank equity). Without the ability to get new money flowing into bank credit production, especially with the Fed belatedly aware of these operational constraints and realities, it is increasingly likely that we will see more determined efforts to interfere in velocity. After all, with that simple equation of exchange, if one variable fails to generate results, there is another to control.

In the days of the Great Depression, this kind of behavior by individuals would have been damned and condemned as "hoarding" money. In fact, the great collapse in money stock of that period was entirely due to the almost infinite demand by the public to hold physical currency instead of bank deposit money. In the fractional money system, such hoarding inverted the credit pyramid, collapsing the wider money stock, simultaneous to the drop in spending velocity, creating the dreaded currency disease of deflation.

We have a similar pattern going on here, but entirely within the banking system itself. Banks are hoarding quality collateral, blunting any quantity of money attempts by the Federal Reserve to push lending into "riskier" sectors, or to increase the quantity of credit advanced. The typical academic response to this kind of activity is to penalize it (economics has a pre-occupation with incentives, especially negative incentives). If banks, so this line of thinking goes, refuse to invest in anything other than "safe", collateral shrinkage or not, then they will have to pay for it.

I should note here that there is a tremendous difference between the negative yields on t-bills that occur now during periods of hoarding and negative nominal interest rates. Negative yields are happenstance occurrences of free trading. Negative nominal rates are explicit attempts to control the appetites and desires of financial participants. Economists have fantasized about negative nominal rates for years as a way to go beyond the dreaded zero bound. In fact the whole idea of generating inflation expectations (the velocity element of quantitative easing) was to create negative real interest rates to penalize holders of money balances, making saving expensive and spending more appealing (in theory). Negative nominal rates would circumvent entirely the need to run through the marketplace, giving policymakers a direct outlet of financial control/repression.

Of course, given that human nature rarely conforms to these kinds of mathematical and mechanical suppositions, banks nor individuals will not suddenly embrace risk simply because safety now costs more (negative nominal rates on t-bills should spill over into other asset classes in one form or another). Negative nominal rates won't suddenly fix banking institutions with balance sheets that tilt heavily in favor of sovereign debt that realistically will experience some profound degree of losses. Nor will negative nominal t-bill rates suddenly change lending standards to much more 2005-like levels of irresponsibility. This kind of interest rate policy has absolutely no chance of increasing credit to the real economy. But if such a policy stirs up money velocity as its proponents hope, it will not matter.

However, the first impulse of a system captured and engrossed by risk-aversion to an increase in the cost of safety will be to find other means of expressing those primal desires for it. Rather than respond exactly like the clinical predictions, banks will instead look for a relative substitute (gold is an example of substitute that can both store value and be used as collateral). As demand for a substitute rises, so does the emotional desire to hoard it - the only shift will likely be in the instrument or asset class that gets hoarded. In human systems, actors are often willing to bear penalties when experiencing stark emotions, especially when fear of monetary loss is involved (especially coming so soon after a historic panic, one that never seems to have fully dissipated). So the first attempt at velocity control is about as likely to succeed as quantity of money policies.

Once the explicit negative incentive genie is out of the bottle, the question becomes where policymakers go after the inevitable failure. That is what makes this change so dramatic. We have gone from an era of largely positive economic and financial incentives, or at least where negative incentives were not so explicit, to the possibility of a new epoch where disapproved financial behavior is openly rejected and punished (bans on the short sales of banks and naked credit default swap investing have been instituted previously, but negative nominal rates, again, is taking everything to another level, especially considering that they could affect a much larger proportion of investors, in money market funds perhaps). To say it is a slippery slope would be stating the obvious in a world where the governments now feel they can openly force individuals to buy health insurance.

Given rigid adherence to the equation of exchange, it is probably too much to ask policymakers to at least revise it or their understanding of it. Instead of seeing flaws in their policies and their system (or their oversimplified idea of velocity), they continually act along the same predictable arc. Seeing failure in the quantity of money solution to the real economic and financial problems, there is no rethink of potential policies or basic beliefs. Authorities, entranced by mainstream economics, are trapped in the linear thinking of a science that is not really science. Failure is never a result of poor policy, it is always due to not going far enough. Doubling down is the only solution that appeals to this pattern bias.

So the switch toward explicit negative incentives may signal, in my opinion, a shift to more serious attempts to enforce economic goals through stiffer, more direct means. Again, since success is not a likely possibility given that these incentives do not address any of the underlying concerns that are driving these emotions of fear and uncertainty, the only question is how far policymakers might go. In 1933 the U.S. government went so far as to confiscate all private gold holdings under Executive Order 6102, rationalized at the time as an anti-hoarding salve. And if that was not enough of a kick in the face of individual liberty, the same government almost a year later seriously devalued the dollar - essentially aggregating a good portion of the Great Depression's losses and socializing them on the very people that were trying to opt out of the system.

For all the historical demonization, hoarders are really doing nothing more than exercising the free will to exit a system. Gold holders in the 1930's were simply looking to store purchasing power in some method that would not be subject to the failing system's fractional pyramid inversion. Credit booms always go too far, meaning there has to be losses to someone at some point. Hoarders are simply trying to make sure they're not the ones holding the bag for others' heavy mistakes.

That is what makes the idea of negative economic incentives so unappealing to anyone that is not captured by the mainstream economic template. It is yet one more way to socialize losses amongst the body of people that may not have had anything to do with creating said losses. The free market and true capitalism created so much wealth precisely because there was an element of justice and fairness to it (though it has not always been perfect), meaning it had broad, universal appeal. But perhaps more importantly, there was a tangible ingredient of stability to it all because of market discipline. This simple idea is nothing more than people with bad ideas or that make mistakes suffering the consequences for their mistakes. That is reassuring to the marketplace in a way that negative economic incentives can never even hope to be.

We have to look no further than ZIRP itself to see them in action. To date, ZIRP has been an implicit negative incentive regime, creating a hidden tax on savers in favor of the banking system. Generated returns of holding "safe" and short maturity financial assets are artificially held to near zero so the banking system's cost of funds can be as well, and thus banks' ability to make money rises dramatically. This transfer of money from savers that have acted responsibly during the crisis to the very actors that initiated it is the opposite of market discipline. Responsible economic actors and their actions are being punished because of the academic economic mainstream canon. Worse yet, banks are given this no-cost method of making money when so many of them should no longer exist simply on the grounds they cannot seem to perform even the basic function of intermediation (it is bad enough they gave us the housing bubble and mortgage bond collapse, they "rectified" it by jumping right into PIIGS).

Despite the now six-year commitment to ZIRP, there is no evidence it has had any positive impact on the real economy (or the banking system for that matter). Credit is still mired in its rightful slump, with the savings rate still higher than the pre-crisis period. Savers have largely refrained from indulging this mathematical attempt at managing "animal spirits" where they are expected to move out of savings to spend, spend, spend. Economists and policymakers may grouse about the supposed fallacy of composition that they seem to see everywhere, but individual actions of self-interest are what make up the economy, not the socialized diktat of the self-empowered.

At the most basic level, negative economic incentives are simply about getting people to do what they do not want to do because policymakers believe themselves more apt and able to make those kinds of decisions for everyone else. That is essentially what the fallacy of composition means, that policymakers know what is best for the economy as a whole, so individual actors be damned since they cannot see the socialized forest from the individual trees. Failure can never be due to policy, only those repellant self interests. So the natural response by economic authorities is to reduce (or eliminate) the ability of individual actors to realize their own interests (in 2009, for example, there was some serious thought, particularly in Europe, given to issuing cash currency with a maturity - meaning you had to spend your money or lose it - to fight supposed deflation).

The same impulse that gave us Executive Order 6102 runs through the impulse that gave us the health insurance mandate: those at the top know what is best for the rest of us, better than we know for ourselves. It is also the same as the inclination that strives to enforce negative economic incentives. That they are now becoming more explicit, rather than hidden, may portend a change in the angle of the slippery slope. Unfortunately for the rest of us, this will lock the system into perpetual crisis since coercion is not an effective way to manage markets (economists really should learn about finance at some point in their lives, see the noticeably rising volatility and correlation across nearly every market). Coercion will lead only to further retrenchment, leading to more intervention and so on. It will only end when authorities stop seeing the economy as a system to be governed and managed, and start seeing it as a way for free participants to freely associate to further their own unique, individual set of interests.

Jeffrey Snider is President and Chief Investment Officer of Atlantic Capital Management, a registered investment advisor. 

Clinton writes:

"While our global economic system has brought benefits to many it has also exacerbated inequalities, both within and among countries. Too much inequality not only hurts the poor and stifles the dreams of the middle-class, it also hinders productivity and growth."

With all due respect to the former President, he sounds awfully similar to the current crop of class warfare fomenting politicians. For starters, he fails to address how and why such inequality occurs. At best, his argument is a broad generalization that misses the mark; at worst, it is pure leftist propaganda.

Inequality happens. It is inevitable in a political system such as ours. The "division of labor" inherently reflects different desires and different outcomes in earnings. Free people are precisely that-and they are free to choose their profession. While some people seek greater leisure, and some work for love of what they do, with little regard for pay, others are in it for the money. And of course, each individual has their own particular education, training, and abilities.

Now in a communist country like Cuba, or North Korea, there is virtually perfect equality among the citizenry. Except of course for the ruling class, politburo or dictator who are the rich in their respective countries. Why? Because the government essentially chooses a citizen's work for them. As a result, they all get paid virtually the same amount.

Unfortunately, there has been much misguided rhetoric recently about "rich people" paying their "fair share." So, what exactly is a "fair share?" No answer has been clearly offered. Perhaps that is by design? Political dogma is always more effective when left vague and subjective. Voters frustrated by a moribund economy like ours can then vent their frustrations on paying their "fair share," while the faceless, evil "rich" refuse to pay theirs.

Clinton also seems to suggest that capitalism is capable of hurting the poor. Huh? How can some people being wealthier than others hurt them? This argument can only make sense if you assume a fixed economic output-a static "pie" that is divided up. No sane economist or rational person makes this case because no such thing exists.

Clinton also writes of "stifling the dreams of the middle class." This is so convoluted it is hard to decipher. The dreams of the middle class? These dreams are based on creating a better life for themselves and for their children. Capitalism promotes wealth for all groups. The fact that hardworking people with a good idea can get rich and advance in the classical tradition of the United States is why immigrants still flock to our shores.

As for Clinton's canard that "[capitalism] also hinders productivity and growth"-now that is a real whopper. Capitalism is what causes "growth and productivity!" Low tax rates result in more investments, because an investor gets a higher rate of (net) return and this increases the risk reward ratio in the investors favor. How can free markets hurt growth and productivity?

Capitalism is not to blame for holding wages steady at the median income level for years. The real culprit? Government. To be precise: government manipulation of bank credit, interest rates, and the money supply. Add to this onerous and ubiquitous regulations and shifting taxes corporations used to pay to individuals. Since 1971, (after the U.S. went off the international gold standard) inflation has officially compounded at 4.25% annually. Who is to blame? The Fed.

In addition, raising costs on small business via health care, threats of higher taxes, and huge layers of new regulations is what hurts lower income people the most. It limits new hiring and start-ups. The real answer to helping low income groups is to increase growth and productivity. This increases employment; nothing else.

Let's be clear: the left's incessant hand-wringing over "income inequality" is just another straw man used to further the illusion that government is the solution, rather than the problem. When the fog is lifted, hardworking Americans are truly concerned with what they earn, and how much of it they get to keep in their own pocket, instead of handing it over to faceless, spendthrift bureaucrats.

Unfortunately, class envy, scare tactics and vilification of "the rich" is an easy way to convince voters that they are victims of a great injustice. The aim of course is to make these voters believe that only a larger and more intrusive government can protect and save them. Apparently Mr. Clinton thinks that mixing in a bit of the truth (capitalism) will make this Grimm's Fairy Tale more believable. I hope people are smart enough to see the Emperor-again-has no clothes.

Victor Sperandeo serves as the President and CEO of Alpha Financial Technologies, LLC, is a founding partner of EAM Partners L.P., and serves the President and CEO of its general partner, EAM Corporation. Known as "Trader Vic", he is a professional trader, index developer, and financial market commentator based in Dallas, Texas, with over 40 years experience trading numerous markets. He has traded independently, and for many notable investors such as George Soros, Leon Cooperman and BT Alex Brown.

The bill, sponsored by Chairman John Mica of Florida and Rep. John Duncan of Tennessee, both Republicans, authorizes $260 billion in spending over the next five years.

It's about time that Congress considered a transportation bill. The last one expired in September, 2009. The new draft, subject to changes in committee, on the House floor, and then in conference with the Senate, looks like an improvement.

It streamlines the federal bureaucracy and eliminates or combines 70 different programs, enabling transportation projects to be approved faster. "Shovel-ready" projects might actually be shovel-ready if this bill were passed. Plus, it contains no earmarks (extraneous spending) and it frees states to spend their transportation budgets as they choose, for the first time in many years.

But, in other respects, the bill does not go far enough. With the deficit exceeding a trillion dollars for a fourth year in a row, the federal government should be looking for ways to pay for what it wants to spend.

Here are some suggestions for ways to improve the bill that members could consider during the markup.

What should be the federal role in financing roads? In all other areas, except perhaps national defense, consumers can purchase more of a product if they want to do so, provided they have enough money. They want cell phones-they can buy them. They want water service-they can buy it.

The same should be true of congested highways and roads. If road users want more road space, they should be able to pay for it.

Supposedly, motorists and trucks pay now with the federal excise tax on gasoline and diesel. But the revenue from these taxes is insufficient to cover the cost of roads that drivers want to use. And as cars become more fuel efficient, and President Obama achieves his goal of a million electric cars on the road, fuel tax revenue will continue to decline.

The new bill assumes that all new road construction comes from the federal purse. Since revenues in the Highway Trust Fund, which come from the gas tax, are deemed insufficient, companion bills raise additional funds from energy production.

More exactly, companion bills will divert to highways the revenue from the federal sale of oil and gas leases that now goes into the government's general revenues. It's a good idea to raise revenue by selling these leases, and it will help to reduce the deficit. But these revenues should not subsidize drivers.

Rather, customers should pay for their roads, not through federal fuel taxes but on the basis of use, just as they pay for their electricity and water bills. Heavily-travelled roads could cost more than lightly-used roads, and driving at peak hours could be more expensive than driving at 2:00 am.

The new bill allows states to toll non-interstate highways. Why not also permit the tolling by the states of interstate highways, if only just for maintenance? After all, over the life of a road, the amount spent on maintenance exceeds the cost of construction.

If the bill allowed states to toll interstate highways, states would have a source of revenue for what is often described as "the nation's crumbling infrastructure."

If representatives are concerned that some strategically-placed states will charge too much for tolls, they could insert a clause, similar to the bill's Section 1204 for non-interstate tolls, to limit tolling to levels consistent with road maintenance.

The new infrastructure bill no longer obligates states to spend highway funding on non-highway activities, such as museums or landscaping. But this does not appear to apply to mass transit. It should. States are now required to spend 20 percent of their Highway Trust Fund allocation on mass transit, yet only 2 percent of passenger miles are used by mass transit.

Just as users of roads should pay all of their costs, such as construction and maintenance, so should users of mass transit. If individual states want to subsidize mass transit, they should do it out of their own revenues. With Uncle Sam broke, the Federal government should not be subsidizing expensive mass transit systems.

In the Washington D.C. suburbs, for instance, Maryland wants help in replacing a 16-mile jogging and bike trail with an above-ground railroad that would join different points on the capital's subway system. Called the Purple Line, the cost would be $2 billion. Maryland has so far budgeted $69 million, less than 4 percent of the cost.

Guess who Maryland expects will pick up the tab? Uncle Sam! He'll pay for anything, even a useless railroad, that few will use and many do not want, particularly bicyclists and pedestrians. Of course, if Marylanders had to pay the entire cost, the Purple Line would not get built. Instead, Marylanders might put in a dedicated busway, at far lower cost.

Mass transit does not have to be expensive, nor subsidized. Atlantic City, New Jersey , has an inexpensive unsubsidized system of vans that runs along Pacific and Atlantic Avenues. New York City has a low-cost high-frequency "dollar vans" that the City is trying to shut down to remove competition with the subsidized and unionized city subways and buses.

Uncle Sam is broke. He stares at many of us in the mirror each morning. We taxpayers are tired of paying for services that ordinary Americans or local governments should pay for themselves. The new infrastructure bill is an improvement on the past, but it could be even better.

Diana Furchtgott-Roth is a contributing editor of RealClearMarkets, a senior fellow at the Manhattan Institute, and a columnist for the Examiner.

First, the Obama administration said it would oppose the anti-piracy legislation that would hurt the Internet and innovation. Ahead of the recent Internet blackout by top Web companies to protest the Senate's Protect IP Act (PIPA) and the House's Stop Online Piracy Act (SOPA), the White House took a strong stand. Through a blog posting, the Administration said it would not support the PIPA and SOPA legislation as written. On the substance alone, this was not surprising, as I imagine everyone from the State Department to the Commerce Department said the legislation was bad for the Internet, national security, innovation, and the First Amendment.

But politically, it was courageous because it could cost the president some reelection dollars. The copyright lobby has been a top donor to the President, and several Hollywood leaders, most notably Motion Picture Association of America head Chris Dodd, have said they would be withholding their financial support if the Administration maintains its anti-SOPA/PIPA stance. Rarely is crony capitalism so blatantly exposed. But what's particularly odious is the sight of a former U.S. Senator, whose private industry job stemmed only from his Senate seat, candidly disclosing that he expects the President's support based solely on campaign contributions. Of course, what Senator Dodd missed was that the public outcry over the legislation was in part due to the sense that for years Hollywood had bought politicians who readily agreed to pass bad anti-consumer legislation.

It just so happened that the Supreme Court chose the day of the Internet blackout to release a decision upholding another Hollywood-driven law that grants Congress near complete authority to extend the copyright term whenever it wants. The Court's ruling upheld a law which hurt school bands and orchestras by taking "public domain" works and extending their copyrights. Although the law hurt students, school districts and did nothing for new creativity, Congress passed it simply because the content lobbyists wanted it. But with SOPA and PIPA, finally Congress said this can't just be about campaign contributions. And that's why the MPAA response to President Obama's decision was so offensive - you're bought and you should stay bought!

So kudos to Obama for standing up against those anti-innovation forces in Hollywood, and elsewhere, and making it clear that efforts to buy politicians and hinder the progress of talented entrepreneurs would not get the support of this administration.

The second big kudos concerns international tourism. Since September 11, we have discouraged foreign visitors to the U.S. out of unfounded fears that those who wish to visit America only want to do us harm. Nothing could be more reactionary or wrong. While world travel increased by 60 million travelers from 2000-2010, travel to the U.S. remained relatively flat. The U.S. Travel Association (USTA) estimates we could have had another 467,000 jobs annually if we had kept pace. In other words, we've only been hurting ourselves with our backward tourism and visa policies.

As Roger Dow, President and CEO of USTA, told a congressional committee last year, "The travel industry's $134.4 billion in exports contributed more than any other industry to America's $1.8 trillion worth of total goods and services exports." Which means our backwards policies have simply left money on the table. It makes no sense.

So it was good to see the president travel to Orlando last week to unveil his tourism initiative. Specifically, Obama signed an executive order to boost non-immigrant visa processing from China and Brazil by 40 percent and expand America's visa waiver program. The president also created a Task Force on Travel and Competitiveness that will look at inventive ways of increasing travel to the United States.

It's simple, common-sense steps like these that would do wonders for our ailing economy. Matched with the president's public opposition to anti-business policies like SOPA and PIPA, I'd say that the economy had a good week. It's perhaps not enough to salvage the wreckage of the administration's three years of anti-business measures, but it's never too late to start.

Gary Shapiro is president and CEO of the Consumer Electronics Association (CEA), the U.S. trade association representing some 2,000 consumer electronics companies. 

A worker's economic fortunes, however, aren't solely a function of his training and intelligence, or of the opportunities around him. They are also the product of personal qualities, like industriousness, self-discipline, thrift and reliability. And these don't simply arise spontaneously in us; they are cultivated by our parents, our neighbors, our schools. Preserving those qualities when they start to fade in a society isn't as easy as retooling the factory across town or starting up a store-front worker retraining program in a depressed neighborhood. Perhaps that's why politicians run from discussing the subject of the virtues essential for individual success in America. Better to cut ribbons on new schools, kiss babies and blame global forces for our economic woes.

In The Cultural Contradictions of Capitalism, Daniel Bell described the great movement in America, beginning in the 1960s, to reject those traditional qualities around which modern society had been organized and democracy and capitalism flourished. Out went a reverence for the strive and succeed work ethic, and what arose instead was what Bell described as a cultural revolution embracing an "aesthetic justification for life" in which "nothing is forbidden, all is to be explored." What grew was a disdain for institutions like marriage, religion, and the traditional workplace. By the 1970s Tom Wolfe could describe an emerging ‘me' generation whose pursuit of self-fulfillment one could see reflected in everything from declining worker productivity to rising numbers of divorces and children born to unmarried parents.

Much of this revolution originated among America's prosperous citizens and their children. And it only took some 20 years for them to see and understand the impact of this new ethic on themselves and their children and to begin rejecting it. Marriage rates stabilized among the prosperous, divorce declined, the pursuit of advanced degrees in a world that increasingly rewarded education grew.

But the rest of society didn't find it so easy to simply put on the breaks of this great cultural revolution and re-adopt the essential virtues for success. In The Dream and the Nightmare: The Sixties Legacy to the Underclass, Myron Magnet wrote of how America's elites were in a far better position to recover from their dalliance with a life in pursuit of self-gratification. Divorce might have been painful for their children, but the well-educated also had the resources to continue living comfortably in separate households after their marriages split up. When their kids who had dropped out of school in the 1960s suddenly decided it was time to go back, they could rely on parents with the wherewithal to send them on to a college education, and the cost was perhaps only a few years squandered.

The toll was far higher on those at the bottom of the economic rung, however. They found it more difficult to recover from family break up, from experiments with drugs, from dropping out of school. What arose from their failure to pick themselves up was an increase in intergenerational poverty as single, uneducated parents without skills, training or a grounding in the strive and succeed ethic themselves failed to pass on to their children the right script for success in America.

Now along comes Charles Murray who, in his new book Coming Apart: The State of White America, 1960-2010, argues convincingly that the nightmare has spread far beyond the lowest economic rungs of America. There are two America's, Murray argues, and they diverge principally in their adherence to what he calls the Founding virtues. Whatever they may preach or however they may vote, members of our prosperous classes continue to embrace those virtues and transmit them to their children, while a growing portion of our working classes increasingly do not live by them. If you have not been following the data you might be surprised, even shocked, by what Murray tells us.

In a fictional town Murray creates called Belmont, the archetypal white upper middle class neighborhood, adherence to the qualities that Murray says helped create two centuries of American exceptionalism are not very different today than before the cultural revolution. Today, 83 percent of all adults are married and their children are growing up in intact households. Fewer than six percent of all births in Belmont are to unmarried parents. In Belmont, only 12 percent of workers work fewer than 40 hours a week on average. The rate of imprisonment for residents of Belmont averages just 27 per every 100,000 residents.

The numbers are quite different in a fictional white working class neighborhood, which Murray calls Fishtown. There, the percentages of adults who are married has slid from 84 in the 1960s to 48 today. Nonmarital births to women in Fishtown have increased from a mere 6 percent some 50 years ago to 44 percent today (and are increasing at such a rate that they may soon account for half of all white working class births). That increase matters enormously because we now have a vast and credible literature of research on the performance of children growing up in single-parent families, and they struggle mightily when compared to children within intact families on everything from staying in school to staying on a job.

In Fishtown, industriousness has declined, too. The percentage of males with a high-school education or less who describe themselves as not available for work has risen from 3 percent in the 1960s to 12 before the current recession got underway, when unemployment was still low. Similarly, the percentage of those working less than 40 hours a week has doubled over the decades to 20 percent of Fishtown adult workers.

Crime has soared in Fishtown. Even with the decline in American crime since the mid-1990s, the crime rate is still 4.7 times higher today in Fishtown than in 1960. The number of the neighborhood's adult residents in jail has increased from 215 per 100,000 in 1974 (the first year statistics are available) to 965 per 100,000 today.
For all the talk of how the evangelical religious revival is a lower-class phenomenon in America, Fishtown is actually far more secular than Belmont, too. Some 62 percent of Belmont's residents describe themselves as religious and attend church at least occasionally. By contrast, 59 percent of Fishtown's residents do not.

Murray has chosen to write specifically about white America as a way of getting beyond the complicating factors of racial or ethnic inequalities in the discussion of achievement in America. This is not, as Murray observes, a racial or ethnic issue when you see the way the behavior of a large chunk of the country's majority population has changed, too, in the last 50 years.

Murray quotes an early observer of America, Francis Grund, who observed in 1837 that the U.S Constitution was a simple document, yet it proved sufficient because of the unique qualities of those early Americans: ‘[The Constitution] can only suffice a people habitually correct in their actions," Grund wrote. "Change the domestic habits of the Americans," he added, and you would wind up with a different country in spite of our Constitution.

If Murray is right, we are getting to see now what that other country that Grund referred to will look like.

Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

Thirty-six pages into the Congressional Budget Office's "Budget and Economic Outlook: Fiscal Years 2012 to 2022," released Tuesday, is the news that "the unemployment rate in the fourth quarter of 2011 would have been about 1 1/4 percentage points higher than the actual rate of 8.7%" once the "unusually large decline over so short a time" in labor force participation is factored out.

This means that, contrary to the claims of a media rooting for Obama re-election, the real jobless rate is nearly 10% - belying the notion of an Obama-led "recovery."

Moreover, citing the soon-to-expire Bush tax cuts, CBO warns that "the dampening effects of the increase in tax rates in 2013," along with the impact of retiring baby boomers, will "more than offset" demand for labor as the economy recovers.

Worse, as CNS News' Terry Jeffrey notes, the CBO forecasts a 30% jump in tax revenues between 2012 and 2014. The U.S. economy will perform "below its potential" for the next six years, the CBO says, with the unemployment rate remaining above 7% for the next three.

In short, if current policies continue, "hope" and "change" - at least in the form of a prosperous economy - won't be coming any time soon.

If that weren't bad enough, the CBO forecast another $1 trillion deficit this year and $4.7 trillion over the next four years, as the government speeds toward a fiscal abyss on a trip financed by the taxpayers' credit card.

"Four straight years of trillion-dollar deficits, no credible plan to lift the crushing burden of debt," complained House Budget Committee Chairman Paul Ryan, R-Wis., in reaction to the report.

But as private-sector workers get stiffed, are their government counterparts feeling their pain? In a separate but not unrelated report, the CBO noted that federal employees' lavish pay and benefits put them far ahead of their private sector counterparts.

Noncollege educated federal workers averaged "36% higher total compensation than similar private-sector employees," the CBO said. Those with a bachelor's degree, meanwhile, averaged 15% higher. Overall, "the federal government paid 16% more in total compensation" than the private sector.

The dominant media may tell you a new day is dawning in Obama's America. In fact, our overfed government is partying, while those of us in the private sector pick up the tab for its excesses.

In case you're wondering why this all sounds familiar, it's because California is re-running the same delusional program that it ran in 1990 (Yes, 22 years ago) when "Specifically, the Air Resources Board (ARB) required that at least 2 percent, 5 percent and 10 percent of new car sales be zero-emitting by 1998, 2001 and 2003 respectively."

And how did the past exercise in planner's conceit work out? As one of the first studies I directed in the think-tank world pointed out (1995), "EVs [electric vehicles] will be expensive, yet short on what consumers prize most: range and power.... Massive subsidies and/or cost-shifts would be required that would have depressive effects on the California economy (including higher energy costs statewide). Taxpayers and/or utility ratepayers would also have to pay for new refueling infrastructure. In addition, it is not clear that EV maintenance costs will be below that of conventional autos. If consumers avoid EVs for any of these reasons, and keep their old cars longer, air quality gains will be lost."

Or, as I wrote in a Los Angeles Times op-ed in 1995, "Our state's pollution control authority has to stop thinking of itself as some kind of homespun Japanese MITI that can pick and promote winners in the automotive marketplace. It isn't, and it can't. Conspiracy theories aside, the simple fact is that if Detroit's big three could make a profitable electric vehicle that consumers wanted to buy, they'd be making it at the behest of their own stockholders."

At the time, battery-car rent-seekers were putting out the same propaganda that they are today: that electric cars will produce jobs, and that mandates can "force" technology to evolve exactly as planners want it to. Responding to my op-ed, Malcolm Currie, former CEO of Hughes Aircraft Company, which created the EV-1 technologies (and where, amusingly enough, I did my doctoral internship while he was CEO), argued "In addition to encouraging the development of new technologies, the mandate has also stimulated enormous entrepreneurial activity and private investment in California, which will have a significant impact on our economy and jobs in the years ahead...out of a total potential of some 400,000 new jobs in California that will be created in advanced transportation by the year 2010, Project California anticipates that as many as 70,000 of these can be in EV-related industrial clusters, as a result of building on the large anchor market in our state." We know how that worked out: currently, 98% of advanced battery production is in Asia.

Starting in 1996, the Zero-Emission Vehicle mandate was watered down, and General Motor's first attempt at electric car rent-seeking died when they discontinued the EV-1 in 2003 for lack of sales, recalled the whole lot and junked them. But before that happened, California taxpayers subsidized the well-off eco-conscious people who leased the EV-1 for both vehicles and charging stations. (And those people had to have incomes over $100K, and own a second, conventional vehicle to qualify for the lease. They were the 1%).

But, surely you would say, things must have changed in 22 years, right? Surely developments in technology have made these vehicles competitive in performance and pricing! Alas, no.

The GM Volt sells for a non-competitive $40,000, and is barely selling despite federal tax subsidies up to $7,500, and some state subsidies that further sweeten the pot. Plug-in hybrid technology is more expensive to manufacture, more expensive to repair, more expensive to insure, and, after 22 years, they still have overheating and fire problems.

As Robert Bryce points out in his book Power Hungry, electric cars are the "Next Big Thing. And they always will be." Bryce observes that EV-boosters have been flogging electric cars since 1911, when the New York Times declared that "the electric car "has long been recognized as the ideal solution" because it "is cleaner and quieter" and "much more economical."

And fuel-cell vehicles? In 2007, Ballard Power Systems, a leader in fuel cell research terminated its vehicle-fuel-cell research, and sold the program off to Daimler AG and Ford.

It is long past time (about 100 years past) that planners drop the fatal conceit that they can plan the automobile market, predict technologies, predict consumer preferences, and pick winning and losing technologies in the marketplace. Of course, then they'd have to find a real job.

Kenneth Green is a resident scholar at the American Enterprise Institute. 

When doctors are asked what novel best describes what it's like to work in a hospital, Samuel Shem's 1978 classic, The House of God, is frequently the answer offered up. Though television dramas of the medical variety have historically glamorized the profession, up close the picture is often a gruesome one as the novel reveals.

A regular theme in the book is one of doctors, bursting with knowledge learned at the best medical schools, killing their patients given their hubristic desire to "do something" when their patients are sick. The Fat Man in the story, who is quoted above, did no such thing.

As he explained to intern Roy Basch, "My outpatients. I do nothing medical for them, and they love me. You know how much booze, hot merchandize, and food there's gonna be in that crowd as Hannukah and Christmas presents for me? And all because I don't do a goddamn medical thing." The Fat Man understood what interns fresh out of medical school hadn't quite figured out, that the body itself is often the best healer, so better it is in many instances to do no harm by virtue of letting the illness run its course.

The members of the Federal Reserve Board led by a doctor of different stripes, Ben Bernanke, could learn more from House of God than all the economics books they devour on the way to grandiose visions of fixing what ails us economically. Overcome with similar hubris that causes arrogant medical professionals to kill patients, the Bernanke Fed is foisting myriad fixes on the economy learned in textbooks, and in the process is strangling it.

Lost in all the discussion of our limping economy, though frequently mentioned in this column, is that what we call the U.S. economy is nothing more than a collection of individuals. And as individuals, when we're struggling in a job, or the business we run is declining, that's the free market's healthy way of telling us we're doing something wrong such that market actors don't value our contributions. And when businesses fail, that's the market's way of cleansing from the economy businesses that are not fulfilling the needs of customers, thus ensuring that no more capital is destroyed by the failures.

Considering the above, downturns characterized by business and individual failure are like the proverbial sick patient whose body needs to be left alone to heal. Just as overtreatment can often magnify the illness, so do bailouts and subsidies perpetuate ill-natured economic activity that the markets are seeking to banish. Looked at in terms of the broad economy, government intervention props up the sick at the expense of the healthy; the overall health of the economy in question made worse off by the interventionist hubris of economic types with PhDs at the end of their names.

The cost of credit is no different in this regard. Sometimes the individuals who comprise our economy overinvest in certain areas; the Internet boom of the late ‘90s one example, and then the housing boom that characterized the earlier part of the new millennium another.

When these mistakes occur, it's only natural that the cost of credit goes up, particularly for economic activity in the sector that is ailing. With capital always limited, it's essential when credit becomes expensive for government officials to let the rising rates run their course. If so, bad ideas are starved of credit, good ones access it with greater circumspect, plus the high rates serve as a lure for those possessing credit to enter the markets with an eye on receiving a high rate of return for offering it up. In short, high rates of interest are a healthy, credit generating, economy-fixing market phenomenon.

All of which brings us to the Federal Reserve. Staffed with over 20,000 economists bursting with presumed knowledge about how economies work, high rates of interest are anathema to them given their belief that without credit, the economy will sour. In this case, seemingly no thought is given to how much worse the economy will be if credit remains cheap so that bad ideas are perpetuated on the way to even greater capital destruction.

Specifically, the Federal Reserve announced last week, just months after promising a near zero percent rate of interest until 2013, that weak economic aggregates ensure a zero rate until 2014. The two aren't unrelated. If we ignore the utter arrogance of any governmental body presuming to know the infinite decisions of lenders and borrowers such that it could divine the proper cost of credit, the simple truth is that the Fed's continued attempts to make credit artificially cheap are related to the ongoing economic weakness that causes those at our central bank to promise low rates as far as the eye can see.

Indeed, in wreaking havoc with the cost of credit, the Fed is repelling the very savers whose savings would author the economy's rebirth. In attempting to keep the cost of credit low, the Fed is paradoxically making credit tight. David Malpass alluded to this in the Wall Street Journal last week with his comment that despite low rates, available credit hasn't increased except for the bluest of blue chip companies that are seen as good credit risks even at low rates of interest.

Cheap credit on its own is fine, but when interventionists make it artificially cheap, it's the equivalent of the Italian government decreeing that the price ceiling for Ferrari's will be $10,000. In that case, there would be lots of willing Ferrari buyers, but no Ferrari's to buy. Credit is no different. The high rates that would bring in the savers (on the way to lower interest costs down the line) are not being allowed, thus explaining tight credit despite "low" rates of interest.

Roy Basch, the narrator of The House of God, notes early on in the story that "most of what I'd learned at the BMS (Best Medical School) about medicine was irrelevant or wrong." The same could easily be said about the economists at the Fed, though in their case they continue to apply their textbook understanding of economics to the U.S. economic patient. And in not allowing the patient to heal on its own, they're killing it.

John Tamny is editor of RealClearMarkets and Forbes Opinions, a senior economic adviser to H.C. Wainwright Economics, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He can be reached at jtamny@realclearmarkets.com.

By all means, Congress should pass the "Buffett Tax," named after billionaire Warren Buffett, who noted that his 2010 tax rate (17.4 percent) was about half his secretary's. The explanation is that Buffett's income comes mostly from dividends and capital gains - profits on sales of stocks and other assets - that enjoy a preferential rate of 15 percent. This is neither socially just nor economically necessary.

Obama's still-vague Buffett Tax would apparently impose a minimum 30 percent tax rate on incomes exceeding $1 million. Republicans should support it. Economic incentives for risk-taking wouldn't collapse. Under President Reagan, the top capital gains rate was 28 percent. The economy did fine. And passing a Buffett Tax might improve political truth-telling.

For starters, don't pretend, as Obama does, that taxing the ultra-rich would solve the deficit problem. Here's what he said in the State of the Union address:

"Do we want to keep these tax cuts for the wealthiest Americans? Or do we want to keep our investments in everything else, like education and medical research, a strong military and care for our veterans? Because if we're serious about paying down our debt, we can't do both."

We sure can't. In September, the Congressional Budget Office estimated the 10-year deficit at $8.5 trillion. The nonpartisan Tax Foundation estimates that a Buffett Tax might now raise $40 billion annually. Citizens for Tax Justice, a liberal group, estimates $50 billion. With economic growth, the 10-year total might optimistically be $600 billion to $700 billion. It would be a tiny help; that's all. "The purpose of the Buffett Rule is not to close the deficit gap," Buffett has said. Hard choices remain, in part because existing deficit estimates already assume steep defense cuts.

It's also a myth that all the ultra-rich enjoy low tax rates. In 2007, the richest 1 percent of taxpayers paid an average tax rate of 29.5 percent and provided 28.1 percent of federal revenues, reports the CBO. On their wages and salaries, many of the ultra-rich pay the top income tax rate of 35 percent plus a Medicare tax of 1.45 percent.

Who are these people? How did they get so rich?

In a study, economists Jon Bakija, Bradley Heim and Adam Cole break down the top 1 percent as follows: executives in nonfinancial companies, 30 percent; doctors, 14 percent; professionals in finance (banks, hedge funds, pension funds), 13 percent; lawyers, 8 percent; computer experts and engineers, 4 percent; sales workers, 4 percent; sports, entertainment and media stars, 2 percent. The rest include farmers, management consultants, real estate developers and scientists.

Most of these people probably got rich the old-fashioned way. They worked hard, started businesses (about one in eight is an entrepreneur or manager in a closely held company) or showed great talent. But traditional virtues can't explain the growing concentration of income. From 1950 to 1980, the top 1 percent represented about 10 percent of Americans' income; by 2000, this had increased to about 20 percent, where it's remained, estimate economists Emmanuel Saez and Thomas Piketty.

Explanations abound: "superstar" rewards for those at the top; globalization (by expanding markets for the talented); warped corporate compensation practices. But the biggest contributor was the long financial market boom that inflated executive stock options and Wall Street compensation. "So many people in this group (corporate managers, bankers, traders) have pay that's tied to the stock and financial markets," says economist Bakija.

Consider: From 1980 to 2000, stocks rose almost tenfold; from 2000 to 2007, the gain was about 40 percent. And the boom's largest cause was declining inflation, which reduced interest rates. As rates fell, stocks and other assets rose. The ultra-rich benefited partly from good luck. Ironically, because the boom is spent, the rise of inequality may cease or reverse (Wall Street bonuses are shrinking) just as political attacks on the rich intensify. From 2007 to 2009, the number of tax returns with incomes exceeding $1 million dropped 40 percent, says Scott Hodge of the Tax Foundation.

So, raise tax rates on Warren Buffett and others to upper-middle-class levels. But recognize that the anti-wealthy populist rhetoric is mostly political expediency. It distracts from the serious issues the country faces - creating jobs and closing long-term budget deficits. The anti-rich backlash is growing; a Pew poll finds 66 percent of Americans see "strong" conflicts between rich and poor, up from 47 percent in 2009. Pandering to this is easier than dealing with the future.

In his quest to convince us he is the best man to return our nation to fiscal sanity, Newt made the astute observation that space exploration is to Florida what ethanol is to Iowa. Recognizing a good deal when he sees one, the handsomely-paid Freddie Mac historian promised the rump space-industrial complex, moldering in its misty memories of federal largesse, a return to glory along with a permanent seat at the federal budget smorgasbord.

Given the suicidal inclinations of the Republican base, this kind of shameless pandering might just tip the balance.

I'd like to make a counter-offer that will better serve the American people, while incidentally protecting the Republican Party from self-immolation. It's an unusual proposition but I bet we could get Mitt Romney to sign off on the deal despite the need to compromise his principles, as if he had any. Let's agree to establish a moon colony provided Gingrich agrees to drop out of the Presidential race. In return, we can appoint Newt the first Emperor of the Moon, a job for which he is manifestly suited.

Psychohistorically satisfying but far too expensive, you say? Nonsense. We can get Hollywood to underwrite the entire expedition.

Manned exploration of space was initially sold to the American people as a way to prove that American Capitalism was superior to Soviet Communism. Why we needed to go to the moon rather than to any supermarket to make that point is one of the great mysteries of history. Yet even critics have to admit, it was good fun until NASA ran out of other people's money.

Given the rapidly vanishing solvency of the U.S. government, there is only one sustainable source of financing for future manned space missions, and it isn't Uncle Sam. Once Hollywood gets over its disappointment that their favorite unelectable caricature was not selected to lead Republicans into the wilderness, assuring us four more years of Barack Obama's stewardship, the smart media money will line up behind a plan to create the largest, most expensive, and potentially most successful reality TV program ever conceived.

Title it - Megalomaniac on the Moon.

Donald Trump might object to being passed over for the leading role, and can be expected to cause trouble by threatening to launch a rival show. So Newt would be wise to name The Donald to be his HR manager, putting him in charge of recruiting volunteers, as well as firing any that get out of line. To save money while permanently solving the festering Newt problem, all flights can be made one-way. After all, why would anyone want to return to the intractable mess we've created here on earth given the opportunity to live under the wise leadership of Emperor Gingrich the First, unencumbered by silly inconveniences like a legislature, a Supreme Court, or the Constitution?

Just think of the entertainment possibilities. Season One: The Fundraising, where Newt sells shares in the nascent production to the millionaires and billionaires that have already bought shares in his presidential campaign. Wouldn't it be fun to wire the great debater for sound and go behind the scenes to learn more about the kind of people that actually give him money?

Season Two: The Design, where Newt instructs the assembled engineers and scientists hired to build the spaceship cum orbital studio to his specifications. Watch them put the set of the Jersey Shore to shame.

Season Three: The Voyage, keeping viewers around the world glued to their TVs soaking up every detail from liftoff to landing - one small step for a man, one giant leap for the man who would be king.

Season Four: The Resupply, where a national online plebiscite is held to determine whether the colonists should be sent fresh provisions or be left to fend for themselves.

Last Season: When the Oxygen Runs Out, a fitting finale for the improbable Gingrich comeback.

There are, of course, many details to consider. The United Nations has already lodged a protest against Newt's intentions to make his new moon colony the 51st state, complaining that this violates international law. Perhaps these esteemed diplomats from the world's great kleptocracies can be mollified by offering their relatives lifetime free parking in New York City, along with the first condemnation of Israel from the moon. And, of course, Congressional Democrats that might object would have to be log-rolled, perhaps by agreeing to let NPR broadcast pledge marathons from the lunar surface. But have no fear, once the broad outline is settled, a price can surely be found to convince every holdout politician.

So stay tuned for the next episode of the lunar adventures of Newt, coming soon to a pay-per-view station near you. Who says America can't innovate?

Bill Frezza is a fellow at the Competitive Enterprise Institute, and a Boston-based venture capitalist. He can be reached at bill@vereverus.com. If you would like to subscribe to his weekly column, drop a note to publisher@vereverus.com or follow him on Twitter @BillFrezza.

But instead, Obama used his State of the Union speech to rail on about fairness, inequality, and redistribution. The Obama strategy is simple: Tax the rich because they don't pay enough.

The problem is, they do pay enough. According to the Tax Foundation, Americans making $1 million or more pay a 25 percent average tax rate. People in the $50,000 to $100,000 income category - call it the middle class - pay 7 to 8 percent.

But no, Obama's one big idea in his Tuesday-night speech was a 30 percent minimum tax on millionaires. This, by the way, is really a hike in the capital-gains tax. And this Obama penalty is aimed squarely at his likely election opponent, Mitt Romney. Talk about taxing success. Talk about taxing growth.

The capital-gains tax is the single most important economy-wide tax on wealth, risk-taking, and investment. It's a tax on seed corn. What a brilliant idea, Mr. President.

I remember the late Jack Kemp always saying you can't have successful capitalism without capital. But that wasn't in the president's State of the Union.

It's not as though the economy is prepared to a take another tax hit. The fourth-quarter GDP report adjusted for inflation came in at a mediocre 2.8 percent. Wall Street promptly sold off on the news.

And we're now ten quarters into the tepid Obama recovery, with its average quarterly growth rate of 2.4 percent annually.

Deep recessions are supposed to breed strong snap-back recoveries. But it's not happening - even after an $800 billion government-spending package, a $2 trillion Federal Reserve balance-sheet expansion, a zero Fed interest rate (for three years and counting), and a whole bunch of temporary targeted tax cuts.

It's the whole Keynesian bag of tricks, but it's still a very subpar recovery.

Way back when, Ronald Reagan used the supply-side model, and rejected big-government Keynesianism. He permanently lowered marginal tax rates, deregulated the economy, went to a strong King Dollar that collapsed oil and gold prices, and limited domestic spending (as a share of GDP). After ten quarters of recovery, the Reagan growth rate was 6 percent.

Compare that to Obama's 2.4 percent. Or compare Obama's 2.4 percent to the 4.6 percent post-WWII average recovery rate after ten quarters. The average is twice as good as Obama. But Obama is only roughly a third of Reagan. That tells you something.

On top of all this, under current-law Obama policy, the vitally important capital-gains tax is going up, even without the millionaire's minimum. Next year, the capital-gains tax will revert to 20 percent from today's 15 percent. Then Obamacare will raise investment tax rates by 4 percent, bringing us up to 24 percent. That equals an 11 percent rollback of wealth and growth incentives.

But that's not all, since the capital-gains tax is paid on top of the 35 percent corporate tax. So under Obama, a 24 percent cap-gains tax is really a 51 percent tax rate on capital.

As Mitt Romney found out, even today's 15 percent cap-gains tax is really a 45 percent double tax on top of the corporate levy. But there's a better way here: Slash the corporate tax rate, and leave the cap-gains rate alone until full-fledged tax reform can take place.

In other words, increase incentives to grow and invest. Make it pay more after tax to invest and take risks. That's a growth prescription, the exact opposite of Obama's redistributionism.

Why is it fair or equal to create a lower tide that pulls down all boats?

I interviewed Mitt Romney on CNBC this week, and it's clear that he gets this. And as he aggressively argued in the Jacksonville, Fla., debate, he is proud of his success and doesn't want to give it back to the tax man.

More important, Team Romney is cooking up a stronger tax-reform plan. Romney intends to broaden the base by getting rid of deductions, exemptions, and loopholes, and then bring down the rates. I asked him if the plan would be ready during the primary season. He said yes.

There is a growing consensus around the country for full-fledged reform of the personal and corporate tax codes. People yearn for simplicity, competitiveness, and new incentives. Obama's great mistake in the State of the Union was his low-ball vision of class warfare and redistribution when the country wants growth measures.

This November we'll see a great debate between a big-government entitlement society that emphasizes fairness and a smaller-government growth society based on free-market capitalism. Pro-growth tax reform is essential to this debate.

Germany, for the most part, wants restraint, a position not hard to understand given that it is still living with the legacy and remnants of its hyperinflationary episode of the early 1920's. The global establishment, on the other hand, is fixated on the decade after, the 1930's. We have dueling ghosts of past economic calamities.

Germany views unbridled money printing as the ultimate monetary mistake, no matter how challenging the economic environment or how rotten the banking system. The global establishment, including the IMF, sees deflation as the primary danger, the doomsday machine that will be unleashed absent sufficient "resources". With that in mind, Christine Lagarde, the head of the IMF, earlier this week warned the world, but aimed squarely at Germany, that:

"The global economy faces a depression-era collapse in demand if Europe doesn't quickly act to dramatically boost the size of its debt-crisis firewall, implement pro-growth policies and further integrate the euro zone. It is about avoiding a 1930s moment, in which inaction, insularity, and rigid ideology combine to cause a collapse in global demand."

If we analyze the chain of events leading to a 1930's-style collapse, what Ms. Lagarde is warning us as the likely path of "inaction" and adhering to "rigid ideology", I believe it goes like this: bank losses lead to firesales of assets in liquid markets leading to widespread price declines, depressed market prices then force losses into a wider subset of banks within the global system (especially a forced reprice of the entire "risk-free" sovereign class) leading to a further collapse in credit availability that intersects with the real economy by creating a shortage of usable currency, leading directly to the dreaded currency "disease" (Irving Fisher's word) of deflation.

That last step of real deflation and currency disease, however, is not complete without a widespread malaise where the demand for currency is near exponential, meaning that individuals value "liquidity" over real economic items. The scale of collapse in the early 1930's, transmitted as a monetary shock through the banking system, followed exactly this path.

Losses in a few banks led to firesales in bond markets that transmitted "contagion" to other banks, leading to further bank runs, collapsing the stock of money, creating a shortage of currency that forced a large proportion of the general population to sell personal possessions (real, not financial) to gain exposure to some manner of liquidity. In other words, the collapsing pyramid of fractional reserve lending made it all the way to the public-at-large. Firesales of real assets is the stain and strain of deflation, depressing the value of real production (including raising the cost of a rigid labor force that demands "sticky wages"), enforcing a feedback loop of financial and real economy destruction.

The question I have today, and one that I have been asking since 2008, is whether or not the final step in the deflationary collapse is even possible in a modern system. There is no doubt that there were deflationary "pressures" building up in 2008 and 2009, but there is no evidence those pressures were going to be exhausted into the general population's general usage of currency. There was, indeed, a desperate shortage of dollars, but that shortage only existed in the eurodollar and Fed funds wholesale marketplaces, the balance sheet world of interbank finance. In other words, the only place the currency disease existed was within the banking system itself. It was the world's first banking panic that consisted entirely of only banks panicking.

Money market funds were the only sector that came close to public panic. But the potential for "breaking the buck" in several money market funds does not/would not lead to a general shortage of currency. The wider population of consumers and households had been effectively insulated by perceptions of the FDIC's guarantee of deposits (especially once that guarantee became unlimited), meaning that money market investors had a viable banking-system alternative to park balances.

There was no shortage of real currency, physical cash or digital deposit balances, that would have forced consumers to begin selling their furniture, clothing or automobiles to raise cash for the very basic necessities of buying food and shelter. Even in Europe and Britain, where deposit insurance imposed some losses at lower levels, there were no runs on physical currency stock or deposit conversions (outside of a few exceptions like Northern Rock). Without a real and widespread currency shortage, true deflation is simply not possible.

The major intersection of the real-world economy with the banking system's shortage (which has been chronic) of dollars was credit to businesses. Yes, credit availability dropped amongst consumers and homeowners, but the scale of the economic decline in the fourth quarter of 2008 and first quarter of 2009 was paced by business "investment". Without working capital financing, inventory levels, and thus production, nearly ceased, especially in automobiles. Business equipment spending (capex), again without access to credit, also collapsed.

Of the nearly 9% annual rate of decline in Q4 2008 GDP, 47% was due to inventory contraction and lower business spending on equipment. Of the nearly 7% annual rate of decline in Q1 2009 GDP, inventory and business equipment was responsible for 76% of it.

Real currency was not in short supply in 2008 and 2009, credit money was. That is a vital distinction in the context of why and how the economy has failed to recover, and why the banking system exists in this chronic state of malady.

The funny thing is that the economy did recover (to some small degree) without ever reconciling this credit shortage. Within the three most robust (if they can be called such in the context of both the scale of contraction and historical recoveries in general) quarters of economic growth, according to GDP calculations, inventory and business equipment spending accounted for nearly all of the recovery. Of the 3.8% annualized rate of GDP growth in Q4 2009, 123% was due to those two segments (meaning inventories and equipment more than offset declines elsewhere). The next quarter, Q1 2010, saw 3.9% growth, 113% from our two segments. Finally, Q2 2010 registered 3.8% growth, this time 59% due to inventories and equipment spending.

Bank credit, to the contrary, continued to contract at the same time as this turnaround in the worst hit portions of the real economy. Commercial and industrial loans from commercial banks operating in the United States (including branches of foreign banks) contracted a further 10.6% during those three quarters, on top of the 9.2% decline during the crisis' worst days. The inventory and equipment revival was accomplished through other means: corporate bond debt.

In response to the credit money shortage, large businesses able to float bonds directly to investors, bypassing the intermediation system completely, issued any and all bonds they could. The real economy was able to at least begin to heal itself without having to solve the credit money problem at all. Of course this has been extremely uneven to say the least, forcing most small and mid-sized businesses into a lower tier recovery where self-financing has become more the norm, but the point here is that a credit money shortage is not at all the same as a currency shortage. Once large businesses figured out they could no longer count on banks for financing, they went elsewhere because there was still someplace else to go - there would not have been in a real currency shortage situation like that of the 1930's. Money found a way to close the loop of economic circulation because there was more than enough money available.

For all the commotion about deflation, it has largely been constrained to asset prices. Even here there is no mystery to it. The valuations of so many assets, especially credit assets, were set far too high in the confines of the last asset bubble. The ability to repay borrowed credit money was assumed to be far too vigorous given the level of artificial stimulation through real estate prices and extremely low credit standards (especially the costs of money and risk). Once the U.S. housing bubble collapsed, the global ability to repay has dropped with asset prices, meaning so many credit assets have had to be reduced in true value (while central banks try to prop up transactional prices). This was done to some extent in the mortgage bond arena, but government debt was largely unscathed.

It has been assumed that a robust recovery would solve this repayment impairment, meaning the realization that there is no robust recovery around the corner has given impetus to the attempt to revalue sovereign issues. Whatever deflationary pressures exist today are a direct function of the lack of recovery running through bare tax coffers. The level of credit money borrowed during the height of the artificial economic period cannot be repaid absent another artificial economic period.

This has produced the dual challenge of ensuring enough credit still flows to sovereigns weighed down by those bare tax coffers that will continue to get even more bare, while also managing the valuation hit to the banking system that ended up buying most of those bonds. Forcing banks to revalue these multiple trillion euros of bonds will necessarily lead to another round of credit contraction (in the U.S. as well as Europe, since European banks are a large source of U.S. credit through the eurodollar market, and U.S. banks hold more than trivial amounts of European sovereign debt - MF Global is not the only Wall Street bank that bet on exactly what Ms. Lagarde is pitching).

Will another credit contraction lead to devastating deflation, the currency disease of 1930's lore? Nothing is impossible, but I find it very unlikely. Again, bank losses would have to endanger the real currency stock of the general population, meaning deposit guarantees would have to be overridden, fail or be perceived as totally inadequate. Real currency would have to be destroyed right alongside financial asset values, despite the immense firewalls (to borrow a term) that have been erected as far back as the 1930's to ring fence (to borrow another) the general population from the banking system.

This is not to say another credit crunch would be a non-event. To the contrary, another credit crunch would likely lead to another recession and contraction, probably with inventory erosion leading the way. Any kind of interruption is always likely to produce a dislocation while the real economy sorts out the type and magnitude of a changed input. I think the IMF has it right in that regard, but none of this is the same as devastating deflation. Again, deflation is, and has been, contained today wholly within the realm of the financial economy. As the financial economy recedes, it produces imbalances that imperil the banks that made bad choices (which seems to be nearly all of the large ones), but not the general population's access to real currency.

The response of authorities to financial deflation has been very telling in this regard. Using narratives of a rerun of the 1930's, authorities have been allowed to pass along massive bank losses (diffusing these so-called deflationary pressures) to the wider population through taxpayer-funded bailouts and intentional inflation. In the toolkit of central banks, inflation is believed to be a lot like duct tape - it is useful in so many applications. For central banks, inflation not only counteracts and defends against deflation (including potential deflationary "pressures" that have yet to manifest anywhere in the real economy), it also reduces and socializes financial losses (if a bank made really bad lending choices to the tune of $50 billion, then a 50% increase in base money theoretically reduces that loss-load by a proportional amount).

The IMF clearly would like to try to increase base money by as much as possible to reduce and diffuse to you and me the banking system's very real losses. But if deflationary pressures only exist, as I contend, within the financial economy (having no direct, available channel to the real economy), then why would it not be better to focus their efforts on managing that imbalance where it already exists? In other words, rather than socializing everything in an attempt to disperse deflationary pressures among a broad base of real economy participants that are largely innocent and coincidental to all this, shouldn't policymakers focus on marshalling all their resources to manage the banking system's decline, with particular emphasis on insulating it completely from the real economy? To date, central banks have done the opposite.

Without making the case that the real economy does indeed have real deflationary pressures that go beyond financial asset prices, there is little argument for socializing losses and/or printing money. I suspect that the current policy regime knows that, thus the emotional appeal to the Great Depression in the hopes that the public fails to see the distinction between a credit money shortage and a real currency shortage. Preserving the current system in largely its current form is evidently the prime motive for every monetary action around the globe. The use of a deflation scare is just a rationalization; and in light of the rebound in inventories and equipment investment, it is not even a good one.

Because of the outsized role the financial economy has played in creating artificial levels of economic activity, a managed decline of that financial economy should actually be desirable. That necessarily means a system more in tune with the real economy, further meaning the financial system would be relegated to a support role in economic matters, not a prime one (where the IMF itself would be either an afterthought or did not exist at all). It would also mean that intermediation returns to more boring and traditional notions of actually intermediating credit, making the easy money, high flying returns of the current system the anachronism. Nothing marks this imbalance of the financial economy so much as how speculation has overwhelmed true productive investment.

However, none of that appeals to the IMF, ECB or Federal Reserve. A more traditional system of real economy over financial means less direct ability to control and manage. It would be an economy less likely to follow centrally manipulated inputs, impervious to the mathematical designs of 21st century central planning. Less financial economy means a dispersal not of losses, but of power and decision-making. It is a bottom-up system, not the top-down malfunctioning mess we currently exist with.

Ms. Lagarde, in her statement at the outset of this piece, referenced something far truer than she probably realizes. In terms of the current recovery, "rigid ideology" is probably the single largest reason for the inability of the economy to move beyond the 2008/09 dislocation. In every policy decision and program, the banking system has received the highest priority no matter what circumstances or conditions might otherwise dictate. The devotion of the financial policymakers and authorities has been unconditional, regardless of any sizable impositions upon the larger population. Not only have we withstood the intentional stoking of inflationary expectations through determined dollar debasement, savers have been taxed to nothingness through ZIRP (which will reach a very Japan-like six years if allowed to run all the way to its scheduled conclusion - though I have little doubt that next January the Fed will be renewing its commitment to ZIRP through 2015 or 2016).

We are supposed to believe that the banking system and the economy are one in the same. That if one fails, they both fail. Yet, in late 2009 and early 2010, the real economy decoupled (to use a word currently en vogue) to a large degree from the financial. That leaves the financial economy in a very precarious position where asset deflation is the rightful and proper course. It is attempting, through a measure of what I have called financial gravity, to revert back to something more balanced. But that means financial pain is still in the future, an unavoidable outcome of so many years (decades) of unrequited and unrelenting financial dominion.

While the real economy continues to suffer the very real effects of this artificial decay, it can function on its own as the corporate bond market amply demonstrated for anyone paying attention. If anything, peeling the real economy away from the financial economy's artificial façade is a positive sign of progress. The one constant about artificial, asset inflation-driven growth is that it is utterly unsustainable, unsuitable for long-term economic health. Yet until policymakers are forced to admit as much, they will continue to push for the artificial over productive, the financial over the real. The status quo is to be maintained no matter how much sense the opposite position makes. Rigid ideological adherence to ghosts of the 1930's is the order of the day, whether or not it is ever really appropriate.

Jeffrey Snider is President and Chief Investment Officer of Atlantic Capital Management, a registered investment advisor. 

This is part of the politics of class warfare that has become the defining feature of Mr. Obama's presidency.

American manufacturing has fled offshore due to some of the highest corporate tax rates and the most stringent regulations in the world. Millions of jobs have gone offshore.

Mr. Obama is desperate to get manufacturing to return, so he proposed a hodge-podge of temporary tax incentives, such as incentives for solar, wind and biomass, full expensing of investment in 2012, and a manufacturing community tax credit for areas with high unemployment.

To raise revenue, he wants to raise taxes on oil companies and banks, disallow deductions for moving offshore, and impose a minimum tax on multinationals. and give companies a credit for moving back to America.

Temporary tax cuts generally haven't worked, because businesses aren't stupid, and they know the provisions won't last. It would have been better to lower all corporate taxes and allow permanent expensing of all investment, without picking winner and losers, in order to bring America's corporate tax rate in line with global rates.

By calling for millionaires to pay a 30 percent effective tax rate, Mr. Obama is trying to do for American capital what happened to American manufacturing. Rapidly growing capital markets in Asia want our capital, just as they have taken our manufacturing.

A 30 percent effective tax rate requires an increase in long term capital gains tax rates from the current 15 percent rate. Some upper-income individuals, such as Warren Buffet, have lower average tax rates because of the high share of income they derive from the taxation of capital gains and stock dividends at the preferential 15 percent rate.

The president argued that it was "common sense" that billionaires pay taxes at least at the same rate as their salaried secretaries. He referred specifically to Warren Buffet's secretary, who was seated in the gallery with Michele Obama.

But a look at estimated average tax rates for 2011, as reported by the staff of Congress's Joint Committee on Taxation, shows that millionaires do pay higher tax rates than secretaries. The staff came up with average tax rates by dividing taxes owed by adjusted gross income.

Taxpayers with adjusted gross incomes between $50,000 and $75,000 pay a federal income tax rate of 4.5 percent, compared with 22 percent for those earning over $1 million. Including payroll and excise taxes, middle income Americans pay an average rate of 12.8 percent, compared to 24 percent for millionaires.

But even though millionaires pay tax at a higher rate than the middle class, facts often don't matter in tax policy discussions. The Alternative Minimum Tax, a parallel tax system set up to catch high-income earners, was implemented in 1970 after then-Treasury Secretary Joseph Barr reported to Congress that 200 wealthy taxpayers had paid no income tax. Over 40 years later, the AMT now affects millions of middle-class taxpayers.

Republican presidential candidate Mitt Romney's average 14 percent tax rate has added fuel to the tax-policy fire-although Massachusetts Senator John Kerry's 13 percent tax rate did not appear to arouse the same angst when he was the 2004 Democratic presidential candidate.

In order to raise the average tax rates of taxpayers like Warren Buffet and John Kerry, who have substantial amounts of capital gains and dividends, Congress has to raise capital gains taxes from their long term 15 percent rate. This is because much of these taxpayers' income is in capital gains or dividends.

That has negative effects on the economy by reducing U.S. investment or driving it overseas. If firms pay more in capital gains taxes, they would make fewer investments, especially in the businesses or projects that most need capital, and they would hire fewer workers.

Higher capital gains taxes would reduce economic activity, especially financing for private companies, innovators, and small firms getting off the ground. Taxes on U.S. investment would be higher compared to taxes abroad, so some investment capital is likely to move offshore.

There are good reasons for taxing capital gains and dividends at lower rates than earned income. First, capital gains have a lower tax rate to encourage the risk- taking involved in investment. Investors supply the financial capital essential for investments that spur innovation, improve productivity, and expand capacity.

Second, dividend income has been taxed before at the corporate level. The statutory corporate tax rate is 35 percent, although effective tax rates vary by firm, depending on the amount of plant and equipment purchased, among other factors. The tax is taken out of gains distributed to shareholders. A 20 percent effective corporate tax rate on top of a 15 percent individual tax rate means the capital is taxed at 32 percent.

Finally, a portion of the gain comes from inflation. Many people hold on to capital for years before selling it, and some of the price increases are due to inflation. Rather than calculating the inflationary gain from each stock holding, Congress decided to tax such gains at a lower rate.

In addition to raising taxes on capital gains, Representative Sander Levin, a Michigan Democrat and the ranking member on the House Ways and Means Committee, is reintroducing his bill from the 111th Congress to raise taxes on "carried interest" profits from private equity firms and investment partnerships. These profits have been taxed at long-term capital gains rates for decades.

Carried interest is a profit share, often in the range of 20 percent, received by general partners on the sale of a capital asset, whether it is a shopping center or a company. The remainder of net profit is distributed among limited partners, generally public and corporate pension funds, charitable foundations, endowments, individuals, and other equity funds.

Carried interest on real estate, private equity or venture capital investments is treated as a capital gain because it represents the profit earned from a capital asset whose acquisition and sale involves some risk. It is not guaranteed income.

Many politicians say that carried interest bears greater resemblance to wage and salary income than to capital gains, so should be taxed at ordinary rates. But they miss the point: capital gains treatment is afforded to owners to encourage investment. If you own the asset and make a profit from its sale, that qualifies your profit for capital gains treatment.

Raising taxes has a populist ring. But with capital mobile in a global economy, it is especially important to ensure that America's environment is hospitable to investment, so that jobs are created here rather than in London or Shanghai. Populist rhetoric might make President feel fiscally responsible, but tax hikes on capital and investment would harm America's economy and those who want to get back to work.

Diana Furchtgott-Roth is a contributing editor of RealClearMarkets, a senior fellow at the Manhattan Institute, and a columnist for the Examiner.

What's really needed is a "grand bargain" - near-term stimulus focused on investments in infrastructure, R&D, and human capital, accompanied by a credible long term plan to reduce the federal deficit to sustainable levels. But, in the current political environment, the prospects for a deal are next to nil. What does seem likely - a further temporary extension of the payroll tax cut - is at best a palliative. So, can anything be done to stimulate job growth?

Yes. Here are seven policy initiatives, most of which have bipartisan support, that could catalyze job growth without raising taxes or adding to the deficit:

Recruit Foreign Talent and Entrepreneurial Capital. The U.S. lags behind other nations in attracting top professionals, investors, and entrepreneurs. We shoot ourselves in the foot with low limits on H1B visas for highly-skilled workers, with impractical country-quotas, and with cumbersome rules for immigrant entrepreneurs.

America educates the world's brightest students at our universities, but then insists that they return home. We should be granting permanent residence for graduates from accredited science and technology programs, providing strong incentives for foreign entrepreneurs to invest in America, and making it easier for highly-skilled workers to obtain visas. While it doesn't go far enough, the bipartisan Startup Visa Act of 2011 (S. 565), sponsored by Senators Kerry, Lugar and Udall, would be a step in the right direction.

Expand Free Trade Agreements. In a rare display of bipartisanship, Congress approved the Korean, Colombian, and Panamanian free trade agreements last year. The International Trade Commission estimates that the Korean agreement alone will create at least 250,000 jobs. But, progress on parallel initiatives has stalled. Congress needs to renew the "fast tracking" that requires trade agreements to be subject only to an up or down vote, push to complete the Trans-Pacific Partnership, kick-start US-EU talks, and pursue other significant multilateral agreements, notably a Free Trade Agreement of the Americas, to widen access to U.S. exports.

Promote Tourism. The cumbersome visitor visa application process largely explains why our share of the global tourism market has shrunk from 17% to 12% over the last decade. The average Chinese visitor to the U.S. spends approximately $7,000, but many never come because, on average, it takes 120 days to process their visas. According to the U.S. Chamber of Commerce, restoring our share of the market to previous levels would generate $860 billion in spending over the next decade and create a million new jobs. Streamlining the visa process and expanding the list of 36 countries qualifying for the Visa Waiver Program could help get us there.

Modernize Export Controls. Notwithstanding some liberalization, U.S. regulations still limit the export of some high-technology products that are legally available from other countries (including NATO members). While there is a need to balance national security with commercial interests, our policies often drives allies closer to competitors. For example, because India was historically denied access to top U.S. military technology, it developed close ties with Russia to gain access to comparable equipment. Milken Institute research indicates that further liberalization of export controls would increase GDP by $64 billion and yield 340,000 new jobs by 2019.

Create National Enterprise Zones. While states offer a variety of incentives to induce companies to build new plants, we lack a national strategy to attract foreign businesses. Washington should create national (or broad regional) enterprise zones that would encourage non-financial companies to build new production facilities in the U.S. by providing investment tax credits and accelerated depreciation of new equipment. Done properly, this would not reduce tax revenues since the incentives would build new facilities that don't currently exist.

Increase Capital Access for Start-ups. The financial crisis exacerbated existing capital-access problems for just the sort of enterprises that create jobs. This financing "valley of death" is due in part to outdated securities regulations that inhibit new methods of raising capital and deter sophisticated angel investors from deploying capital. Innovative financing approaches - for example, the Entrepreneur Access to Capital Act (H.R. 2930), which passed the House by an overwhelming bipartisan majority - could help streamline the process for getting growth capital to entreprenuers.

Revitalize the Housing Sector. The overhang of unsold houses - a quarter million foreclosures and estimates of two million more in the pipeline -- continues to depress home prices, curtail new construction, and depress spending on many durable goods. The sooner excess inventory is cleared and home prices stabilize, the sooner builders will return to the market, and the sooner consumers will resume spending. The expected initiative by the Obama Administration to package and sell foreclosed properties owned by the government could be a step in the right direction. Another would be to grant visitor visas to qualified immigrants who buy high-priced houses here, along the lines of legislation sponsored by Senators Schumer and Lee.

The grand bargain may be a bridge too far now. But moving forward on initiatives that don't require new taxes or spending would not only improve the jobs picture, it might also restore some confidence in government.

Bradley Belt is Senior Managing Director of the Milken Institute, and head of its Washington, D.C. office. 

With its announcement today that it will keep interest rates near zero at least until late 2014, the Federal Reserve has put another large crack into the foundations underlying the U.S. dollar.

Not surprisingly, precious metals and foreign currencies rallied strongly on the news with gold up more than 2.6% and the dollar index down nearly half a percent in the wake of the announcement.

Tellingly, bond market investors reacted with less conviction. After rallying on the prospect of lower interest for years to come, longer-term Treasury bonds lost traction and gave back the lion's share of their intraday gains by the end of the session. Could it be that investors have finally realized that the Fed is the most dovish of all the world's central banks?

In coming to this momentous decision, which extends the Fed's prior low rate promises by another 18 months, Bernanke and his cohorts relied on a sanguine view of the economy that was at odds with the sunnier view presented last night by President Obama in his State of the Union address.

To hold rates so low for so long, the Fed is choosing to ignore all signs that CPI inflation is currently running north of 3%. Instead, they have conveniently chosen to look at the chain-weighted core PCE, which comes in just a shade below the Fed's arbitrary 2% target.

Although the U.S. economy has been badly distorted by negative real interest rates over the past three years, it is now a matter of policy that these rates will persist for the foreseeable future.

As a testament to its own faith in itself to forecast economic conditions, 6 of the 17 voting FOMC members indicated that they would have preferred to keep rates close to zero at least through 2015! This comes from the body that couldn't predict the 2008 financial crisis, even while it stared at them from point-blank range.

As long as interest rates remain far below the rate of inflation, the U.S. economy will fail to equitably restructure itself for a lasting recovery. As a secondary effect, U.S. savers will continue to suffer from a lack of yield and a weakening currency, while those wise enough to park savings in gold will likely see continued success.

Peter Schiff is the CEO of Euro Pacific Capital. 

The media elite are under the assumption that all government regulations are good. So when both Mitt Romney and Newt Gingrich took shots at Dodd-Frank, NBC News anchor Brian Williams was flabbergasted. He expressed skepticism that its new rules posed any problem.

Gingrich straightened him out, arguing the media and the public don't know how "bad" the Democrats' law is.

"If you could repeal Dodd-Frank tomorrow morning, you would see the economy start to improve overnight," Gingrich asserted. "It is crushing independent banks" by clamping down on lending for both housing and small businesses.

Indeed, the American Bankers Association predicts the law will shutter 1,000 banks by 2020.

"The Dodd-Frank Act and the related burdens are threatening not just our industry but our very banks," outgoing ABA chair Stephen Wilson last year wrote to FDIC chief Sheila Bair. "The most conservative estimates that we have seen predict that by the end of the decade there will be 1,000 fewer banks in the United States than there are today."

Williams wasn't buying it. "Do you really think the financial system is overregulated?" he pressed. "That's the second mention of Dodd-Frank tonight."

"Of course it's overregulated," Gingrich snapped.

Williams then turned to Romney for what he thought would be a more tempered response. But Romney said "the speaker is absolutely right."

"It has made it almost impossible for community banks," which are drowning in costly red tape, he said.

He said the head of a large New York bank told him he has hundreds of lawyers working to comply with Dodd-Frank. "Community banks don't have hundreds of lawyers," Romney explained. "It's just killing the residential home market, and it's got to be replaced."

Dodd-Frank is also a job killer. ABA says it threatens to cost the U.S. economy 2.9 million jobs over the next three years alone - and that's without all the rules yet in effect.

The regulatory onslaught is a boon only for lawyers and government workers. GAO says implementing Dodd-Frank will require 2,850 additional federal employees just through this fiscal year - at a cost to taxpayers of $1.3 billion.

Wall Street banks, meanwhile, are hiring small armies of outside advisers to navigate the hundreds of new rules. They are expected to spend nearly $4 billion on compliance technology alone. The law has spawned a cottage industry - dubbed Dodd-Frank Inc. - just to cope with all the new rules.

Of course, hiring consultants and compliance officers instead of loan officers won't help the economy over the long run. And producing mountains of government paperwork is merely business at the expense of business.

Treasury Secretary Tim Geithner recently scolded the industry for fighting what he called Dodd-Frank's "sensible rules." In fact, they are dumb rules that are hurting the recovery. And Republican White House hopefuls are wise to propose killing them.

They're essential to a smoothly functioning economy for the traders in their employ endlessly searching for market mispricings to fix through the commitment of capital. Price signals tell those with capital where investment is and is not needed, and as hedge funds correct what's not right in markets, their existence ensures that less capital is destroyed on a daily basis.

And while commentators who should know better have decried the billions that hedge fund trader John Paulson made in exposing the mortgage folly on the alleged backs of hapless homeowners, Paulson did the U.S. economy a great service in making his fortune. Indeed, in exposing major lending error early, the information wrought by his stupendous gains signaled to market actors that further investment in the housing sector was a fool's errand, thus saving a great deal more of capital from being destroyed.  Considering our limping economy at the moment, what a shame our servants in Washington didn't let the correction that Paulson profited from play itself out.   

Still, a new book out entitled The Hedge Fund Mirage perhaps unwittingly explains why the modern proliferation of hedge funds has been a negative for the economy, and by extension, the stock markets. Put simply, poor economic and stock market times have made hedge funds more necessary than before, which on its own is a bad signal.

Specifically, the book's author notes that since 1998, assets under management at hedge funds have risen from $143 billion to $1,694 billion. In short, the smart money, from rich individual investors to endowments to flush pensions, has more and more moved its money into hedge funds offering total return over simple long exposure to stocks and bonds.

Explaining why the above numbers signal limping markets and tough economic times is simple. This massive inflow reveals that the brightest allocators of capital don't expect major rallies of the ‘80s and ‘90s variety, and because they don't they're more willing to pay 2/20 fees over the much smaller costs that come with investment in mutual funds, index funds or ETFs.

To put it more plainly, if an investor intuits consistently rising markets for many years, why pay hedge fund fees when exposure to a low cost index fund will achieve similar returns with greatly reduced costs? What investors are saying today, as evidenced by the rush to hedge funds, is that since they don't foresee bull markets on the way, better it is to move their money into investment vehicles where "total returns" can potentially be gained irrespective of the health of the stock markets overall.

Looking into explanations for the big jump since 1998, that's similarly easy. Though hollow minds would presume that hedge funds have sprung up precisely because the fees accrue to the partners of same, lost on the simple minds who make this argument is the basic truth that no one's putting a gun to investors' heads and forcing them into hedge funds. Instead, it's voluntary and with good reason.

Specifically, during periods of extreme dollar weakness as we've witnessed over the last 10 years, stock markets necessarily sag. Though it's said regularly in this column, it's worth repeating that when investors go long stocks, they're effectively buying future dollar income streams. So when policy tends toward dollar weakness, there's tautologically less of an incentive for investors to commit capital to the stock markets.

Of course that doesn't mean investors head to the sidelines. Instead, they seek other ways to make money, and as hedge funds can thrive every bit as much in down markets as up ones, they're a good place to hide out during aimless market episodes. The weak dollar and its negative market implications don't explain the rush to hedge funds in total, but it's a certain factor. Investors aren't fools, and if they could gain similar returns in an ETF, they certainly would.

Sadly, the depressed scenario doesn't end there. As evidenced by what a difficult, competitive environment hedge funds operate in, the ones that last (and even some that don't) necessarily attract some of the greatest minds in the world. Though they certainly do grand work in providing the economy with more efficient prices, there's an unseen aspect that's perhaps not touched on enough.

Indeed, how many of tomorrow's Microsofts, Intel's and Google's will the global economy lose for hedge funds luring so many talented minds away from technology, transportation and medicine? Taking nothing away from the essential work that traders do, ultimately they're mere facilitators in their allocation of capital toward productive economic pursuits. That being the case, assuming a better market environment that history says would almost certainly be authored by a stronger, more stable dollar, it seems a not insignificant amount of financial talent would migrate out of hedge funds and into the metaphysical economy of the mind.

So while hedge funds remain essential and we'd be much worse off without them, that they've grown so substantially in modern times is not a bullish sign. Instead, it tells us the smart money that drives the direction of most any market presumes that we're not yet on the verge of the next bull market.

John Tamny is editor of RealClearMarkets and Forbes Opinions, a senior economic adviser to H.C. Wainwright Economics, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He can be reached at jtamny@realclearmarkets.com.

This outcome is all the more surprising when, added to fear over oversupply of government debt, are warnings that the support given to debt markets by central banks amounts to the printing of money, an undertaking that can lead to sharply higher inflation. The expectation of sharply higher inflation usually drives up interest rates, especially on longer-term debt, since investors expect to be paid back in currency whose purchasing power has been eroded by higher prices.

There are three factors behind the failure of interest rates to rise. Consider U.S. government 10-year bonds which serve as a benchmark for high grade bonds issued by borrowers like Germany and Japan. First among the reasons for low interest rates is the fact that actual inflation has been coming down. U.S. headline inflation is almost a full percentage point below where it was about four months ago and it is expected to fall further toward midyear. Inflation in Germany is coming down and Japan is actually experiencing deflation.

The second reason for lower interest rates is the outlook for moderating growth. Europe is heading into recession for 2012 while Japan's growth rate is probably going to be negative as well. Meanwhile U.S. growth is expected to be about 2% after a brief rise to 3% at the end of 2011.

Moderate to negative growth expectations in the world's largest advanced economies -- while growth and inflation are moderating in China, the world's second-largest economy -- are undercutting the inflation fears that many have claimed were justified based on the central banks printing money to purchase bonds. Lower-than-expected growth leaves investors who are seeking the safety of, say, a 2% return with moderating inflation risks more favorably disposed to bond purchases.

The third factor keeping interest rates low is a persistence of risk aversion among many investors. The negative shocks of 2011 including the Arab spring, Japan's tsunami-nuclear disaster, the ugly midyear battle over the U.S. debt ceiling and the 4th quarter intensification of Europe's sovereign debt crisis, all contributed to elevated risk aversion. As inflation risks abate, the safe haven represented by high-grade government bonds looks even safer.

For households and firms wishing to hold a high level of very liquid safe assets another alternative is U.S. treasury bills that are highly liquid and continue to be favored assets. The near zero and sometimes-negative interest rates on three-month treasury bills underscore the intensification and persistence of risk aversion evident in 2012.

Looking ahead, 2012 may see fewer risk events shocking investors than occurred in 2011. The recent rise in stock prices suggests that some investors are hoping for such an outcome. But the persistence of low interest rates on high-grade government bonds suggests residual caution among many investors who apparently are more worried about weaker growth and volatile credit risks among low-rated government bonds than they are about higher inflation.

In retrospect, the cautionary moves undertaken at the end of 2010 by the Federal Reserve and the Congress, may not have been such a bad idea as they helped cushion the U.S. economy from the shocks of 2011. Inflation has not run away and indeed has moderated while some growth has appeared at the end of 2011 that will help create a modest growth momentum going into 2012. The extension of the 2011 tax breaks into 2012 by the Congress will probably help to keep growth close to the 2% level.

But there are problems. Under current law, by the end of 2012 the total fiscal drag imposed on the U.S. economy will be close to 5 percentage points of GDP because of expiring tax cuts and stimulus measures. The new Congress and the new president elected in November will surely have their hands full moving forward.

Meanwhile, the shaky outlook for fiscal policy and the uncertainty about how it will be resolved perhaps helps to account for continued low inflation expectations and a persistence of risk aversion that, for now at least, is helping to keep interest rates low.

American Enterprise Institute resident scholar John Makin writes AEI's monthly Economic Outlook.

His myriad business successes include building Radica Games, the third most profitable toy maker in the world which was purchased by Mattel in 2006; launching Sea Smoke, his world-class vineyard located in Central California (featured in the Academy Award-winning movie "Sideways"); and his latest venture, "Villa Keliki", a luxurious 8,000 square meter resort located on the breathtaking island of Bali.

Davids has been successfully building businesses since 1956, when he was just a 12-year old boy living in Venice Beach, California. He attributes his consistent track record of entrepreneurial success to his non-conventional leadership style.

We caught up with him recently enjoying the sun in the Bahamas.

You have enjoyed a remarkable amount of success over the years as an entrepreneur. We're talking about a level of professional and financial success most people can only dream of. Now, if you had to pinpoint just three vital ingredients that were absolutely critical to your success-three things without which you wouldn't be the person you are today-what would they be?

The three ingredients would be discipline, tenacity and luck.

A successful entrepreneur also needs a drive "to be where they ain't". In other words, it's critical to find an area without a lot of competition.

When we first spoke, you mentioned that the scarcest resource in the world today isn't anything like oil, or food-it's leadership. That stuck with me. Why do you think that is the case?

Because it's true! Because the person has to have the gift without ego. It's very rare to find that combination. Ghandi was the best. I don't know how to say it more clearly than that.

What's your take on the "Occupy Wall Street" movement? Are you sympathetic to their frustrations?

No. I am not sympathetic to their frustrations. They are the believers that competition is bad. Someone said that if you want to stop this movement, 'put a jobs-fair in the middle.'

Do you think America's best days are ahead or behind?

America's best days are behind. And there are a lot of reasons for this.

One of the turning points occurred in the early 1960s-that's when the standard of living started to decline. This was a function of the electronic boom, Japan, and when jobs started leaking out of America. This all coincided with the death of craftsmanship, all of the hand-built stuff. And at the same time, Wal-Mart came. So there was a shift away from an era of quality and craftsmanship to price. This exacerbated the decline in standard of living.

You also have this recent trend towards big government, overspending and an attack on businesses. People are being told not to compete! You can't have government attack business in a capitalistic society.

So yes, it's clear that the best is behind us.

So what about China? Do the next hundred years belong to China? Should I be encouraging my kids to learn how to speak Mandarin?

Yes, yes. It was Europe first, then the United States, then Japan. Now it's China's turn.

I lived in China for thirteen years. There's no way to explain what is going on there. People have a very difficult time understanding China. The work ethic there is unsurpassed.

And as far as communism is concerned, there's more communism in Santa Monica, California than there is in Beijing.

The Chinese support system is the family. No one looks to the government for handouts like they do here-they don't look to the government for anything. Why? Because they won't get it.

On a much lighter note, please tell me a little bit about Sea Smoke-your world class vineyard in Santa Barbara's Santa Rita Hills AVA. What prompted your move to get into the wine business?

Pinot Noir is the most difficult crop. Period!

It was an impossible challenge-success was predicated on getting the perfect site and serving the grapes `breakfast in bed'. And guess what? We did both.

Speaking of beautiful places, your latest venture "Villa Keliki", the luxury resort on the island of Bali. How is that going?

It is going just fine because I do not put pressure on the project.

When I learned about the `Triple Constraint of Business', I had a breakthrough. I could only control Time, Quality & Money. To remove stress and be successful, I threw out Time & Money. I just focus on Quality-same as Sea Smoke and my Bahamas project-making it easy because of much lower stress.

I just have to focus on quality. I learned Quality at the Art Center College of Design. Bill Harrah had it right: 'there is always space at the Top of Every Market'. I live by this.

***Follow Bob on Twitter: @DavidsBob

Comments from members of the Federal Open Market Committee (FOMC) now seem misguided. The first 2006 meeting was the last for retiring Fed Chairman Alan Greenspan. Janet Yellen - then president of the Federal Reserve Bank of San Francisco and now Fed vice chair - said "the situation you're handing off to your successor is a lot like a tennis racket with a gigantic sweet spot." Treasury Secretary Timothy Geithner - then head of the Federal Reserve Bank of New York - called Greenspan "terrific" and suggested his already exalted reputation might grow even more. There was no sense of a gathering crisis.

All true, but it begs the central question: Why? The FOMC members weren't stupid, lazy or uninformed. They could draw on a massive staff of economists for analysis. And yet, they were clueless.

It wasn't that they didn't see the housing boom or recognize that it was ending. At 2006's first meeting, a senior Fed economist noted "that we are reaching an inflection point in the housing boom. The bigger question now is whether we will experience (a) gradual cooling . . . or a more pronounced downturn."

At that same meeting, Fed Governor Susan Bies warned that mortgage lending standards had become dangerously lax. She explained that monthly payments were skyrocketing on mortgages with adjustable interest rates. She worried that many borrowers couldn't make the higher payments. The flagging housing boom concerned many Fed officials.

But they - and most private economists - didn't draw the proper conclusions. Hardly anyone asked whether lax mortgage lending would trigger a broad financial crisis, because America had not experienced a broad financial crisis since the Great Depression. A true financial crisis differs from falling stock prices, which are common. A financial crisis involves the failure of banks or other institutions, panic in many markets and a pervasive loss of wealth and confidence.

Such a crisis was not within the personal experience of members of the FOMC - or anyone. Nor was it part of mainstream economic thinking. Because it hadn't happened in decades, it was assumed that it couldn't happen. There had been previous real estate busts. From 1964 to 1966, new housing starts fell 24 percent; from 1972 to 1975, 51 percent; from 1979 to 1982, 39 percent; from 1988 to 1991, 32 percent. Declining home construction had fed economic slowdowns or recessions. So the natural question seemed: Would this happen now? The answer seemed "no." The overall economy was strong. This is the most obvious reason for an oblivious FOMC.

But it is not the main reason, which remains widely unrecognized. Since the 1960s, the thrust of economic policy-making has been to smooth business cycles. Democracies crave prolonged prosperity, and economists have posed as technocrats with the tools to cure the boom-and-bust cycles of pre-World War II capitalism. It turns out that they exaggerated what they knew and could do.

There's a paradox to economic policy. The more it succeeds at prolonging short-term prosperity, the more it inspires long-run destabilizing behavior by businesses, banks, consumers, investors and government. If they think basic stability is assured, they will assume greater risks - loosen credit standards, borrow more, engage in more speculation, relax wage and price behavior - that ultimately make the economy less stable. Long booms threaten deep busts.

Since World War II, this has happened twice. In the 1960s, the so-called "new economics" promised that, by manipulating the budget and interest rates, it could stifle business cycles. The ensuing boom spanned the 1960s; the bust extended to the early 1980s and included inflation of 13 percent, four recessions and peak monthly unemployment of 10.8 percent. The latest episode was the so-called Great Moderation, largely paralleling Greenspan's Fed tenure (1987-2006), when there were only two mild recessions (1990-91 and 2001). We are now in the bust.

The Fed slept mainly because it overlooked the possibility of boom-bust. It didn't recognize that its success at sustaining prosperity - for which Greenspan was lionized - might sow the seeds of a larger failure. It bought into an overblown notion of economic "progress."

The Great Moderation begat the Great Recession. One implication is that an economy less stable in the short run becomes more stable in the long run by reminding everyone of risk and uncertainty. Sacrificing long booms may muffle subsequent busts. But this notion appeals to neither economists nor politicians. Ironically, the central lesson of the financial crisis is ignored.

It's often been said in various ways by economic thinkers of the classical school that booms and bull markets don't die of old age, rather they succumb to policy failure. Economies, and by extension stock markets, in this certain sense do best when policy barriers to productive economic activity are light.

But with policy from fallible politicians ever present irrespective of political party affiliation, mistakes are inevitable. And because they are, the stock markets thankfully exist so that investors can cast ballots on decisions emanating from Washington.

It's said that news about President Hoover's future intent to sign the Smoot-Hawley tariff over 80 years ago sent stocks cascading downward, and then in 1987 stocks were similarly spooked when a combination of tariff threats with Treasury Secretary James Baker's ill-fated comments about dollar gave investors yet another shock on the way to a 22% market plunge. Policy matters, and as investors are tautologically buying future dollar income streams, a comment by a Treasury official seeking a weaker greenback logically scared many investors to the sidelines.

The role of economic policy as it applies to the direction of stock markets bears renewed mention given the views of our current president, and our understanding of the state of the stock market. From them investors can hopefully divine a better sense of how the markets will perform owing to greater knowledge of the kind of policy that might emanate from Washington.

Up front, it's hard to be terribly optimistic about future vibrant markets of the Reagan 1980s and Clinton 1990s variety. As the quote leading this article makes very plain, President Obama sees the government as the main source of growth given his presumption that it alone at present has the resources to nurse our economy back to health.

Of course what's perhaps missed by a President whom former Fed Chairman Paul Volcker once described as "too self-confident" is that governments don't have resources. Their resources consist of their ability to tax or borrow always limited resources from the private sector in order to engage in forms of economic intervention.

The problem here is that to the extent that governments tax in order to spend, they're by definition raising the price placed on productive work. Taxes are a certain cost barrier foisted on economic activity, and then when governments borrow money in order to spend, they're necessarily extracting limited capital from the private sector that might otherwise fund future wealth creation over near-term capital consumption by the political class. Stock market indices render judgment on the quality of companies within, along with their future prospects, and if the price of work and capital is being increased through taxation and borrowing, this on the margin will weigh negatively on stock market health.

It's also been uttered over time that "personnel is policy", and the individuals Obama has surrounded himself with in order to advise on economic policy require prominent mention. Looking back to April of 2009, seeking ideas on how the government could lift economic spirits, the President didn't bring in a mix of economic viewpoints, rather he called to the White House Joseph Stiglitz, Paul Krugman, Jeffrey Sachs and Kenneth Rogoff.

So as opposed to a spirited debate among economic thinkers about how to best get the economy moving again, those in attendance encouraged even more government spending; Stiglitz calling for $2 trillion. Though the President would have been advantaged by contrarian views, it's apparent that early in his presidency he surrounded himself with thinkers eager to confirm what he'd already concluded.

Considering the economists working under President Obama within the White House, upon accepting the President's offer to head up his Council of Economic Advisers, it's been reported that Christina Romer had "Rooseveltian fantasies dancing in her head." Though it's accepted logic in some quarters that President Roosevelt somehow saved the United States from certain desperation with his New Deal, saner minds might point out that the first nine years of his Presidency amounted to a great deal of economic hardship followed by the horrors of war and the relative economic autarky that came with the last four years of Roosevelt's time in office. Far from an era of economic renewal, the Roosevelt years were characterized by a great deal of economic pain, thus raising the question of why Romer would want to promote policies that would give Americans a repeat of a not so grand period in our history.

In the same meeting, Obama casually observed to Romer that "It's clear monetary policy has shot its wad." Romer's scary response, which perhaps foretold the Administration's endorsement of the Fed's quantitative easing policies that have weighed heavily on the dollar was, "No, you're wrong. There's quite a bit we can still do monetarily, even with historically low interest rates." This is important to consider in light of what investors in the stock market are once again buying: future dollar income streams.

Returning to stimulus spending, once the initial $787 billion bill failed to reduce unemployment (quite the opposite as classical theory would suggest), rather than admit to what hadn't worked, the economists Obama surrounded himself acted as though the initial amount hadn't been enough. Orszag called for $700 billion in new spending while allowing for the political difficulties of achieving such a number, then Romer weighed in that even $100 billion, at $100,000 per job, would be the correct move. In her words, "A million people is a lot of people." You can't make this up!

President Obama, sensing the political difficultly of more government spending, instead offered up the opinion that "high unemployment was due to productivity gains in the economy." Seemingly lost on the President is that there are no jobs without investment, and investors as a rule are attracted to the kind of productivity the President decried.

Happily in a small sense, National Economic Council Chair Lawrence Summers disagreed with the President's analysis, as did Romer, though their analysis was equally deficient. Romer observed that "What was driving unemployment was clearly deficient aggregate demand." Not mentioned by Summers, Romer or anyone near Obama is that in order to stimulate demand one must stimulate the supply side of the economy; as in remove barriers to economic activity erected by Obama and his White House predecessor. The reality that production is what drives demand has had no voice in the Obama White House.

Classical economic theory tells us that there are four main barriers to economic activity; as in the production that drives the aggregate demand that Summers and Romer pined for. First up are taxes. Taxes as mentioned earlier are a price placed on work, so the lower the cost of productive work effort, the more work that reveals itself. Regulations by nature inhibit productive economic activity with little positive effect (figure banking remains one of the most heavily regulated sectors with no positive impact as evidenced by 2008), and then trade restrictions retard the natural expansion of the division of labor that stimulates production, plus the restrictions/tariffs themselves invariably subsidize weak industries at the expense of the strong ones necessarily hurt by trade barriers.

Looked at in light of the Obama administration's economic policies, if re-elected Obama will allow the abolishment of the 2003 Bush tax cuts (arguably the lone positive economic development of Bush's hopeless Presidency), regulations on finance, healthcare and energy have already gone skyward, and then by all measures, trade has become less free since 2009. With stock markets serving as a future-discounting barometer of our economic health, the Obama administration's unfortunate policy decisions in these three areas help explain a stock market that is flat over the past year, and would on their own would point to difficult economic/market times ahead.

Of course left out in the above is the fourth economic input; specifically stable money values. Stable money is easily the most important of the four to economic health, yet here the Obama Treasury is failing most impressively, as the Bush Treasury similarly did with its own support for a weak dollar, and its failures point to listless markets in the future no matter the direction of the other three.

To understand why, it's essential to reference a recent New York Post article which revealed that over the last 10 years the S&P 500 Index had risen 7 percent versus a 479 percent rise in the price of gold. This glaring disparity should horrify investors.

Figure that gold has highly limited industrial uses, yet over the last ten years an investor would have achieved exponentially better returns for having committed all available capital to gold over some of the most promising companies in the United States.

Looked at in this light, is it any surprise that job creation remains sluggish, not to mention the fact that Americans have for the most part experienced one of the more difficult decades on record in terms of economic growth?

A rise in the price of gold tautologically signals a decline in the value of the dollar. From an investment perspective, when those with capital commit it to new ideas their explicit hope is that some time in the future they'll achieve returns on funds invested greater than what they initially committed.

Of course the problem with currency devaluation of any kind is that assuming returns on monies invested, those gains will come back in cheapened dollars. Though many economists and commentators wax poetically about the wonders of competitive devaluations, simple logic tells us they dampen growth. The latter is largely driven by investment in productive concepts, yet devaluation removes the incentive for intrepid investors to offer up capital to those same concepts.

Importantly, investors don't simply disappear during periods of monetary mismanagement, rather they reorient their investing styles. Instead of providing capital to future-oriented concepts that would in some instances enhance our productivity, and boost stock market indices, there's a greater incentive to move their dollars into inflation hedges that will protect them from the devaluation.

Economic historian Brian Domitrovic described all of this very well in his 2009 book, Econoclasts. As he put it so clearly then about what occurred during the similarly devaluationist decade of the 1970s, "As for future stuff, it cannot be produced without investments in financial assets. The shift into tangibles thus prefigured a decline in production."

Perhaps put more simply, when the value of money is in decline, investment on the margin flows into hard assets - think gold, land, art, and rare stamps - that already exist, and it flows away from the stock and bond investments that will foster the creation of the wealth which doesn't yet exist. Devaluation is in this certain sense a blast to the past as investment in tomorrow's ideas is no longer as plentiful.

Though we only have four U.S. decades in which to test the above theory (up until 1971 the dollar had a definition of 1/35th of an ounce of gold), the stock market evidence from those decades surely supports the claim. Indeed, much as the S&P has effectively flat-lined over the last ten years amid gold's substantial rise, in the 1970s the price of the yellow metal rose 1,355 percent versus a 16 percent increase in the S&P 500.

And then happily for the purposes of this piece, we can compare stock market returns in the ‘70s and over the last ten years to the returns achieved in the ‘80s and ‘90s when gold weakened. The results are pretty striking.

In the 1980s the price of gold fell 52 percent, and the S&P rose 222%. Fast forward to the 1990s, gold's descent continued on the way to a 29% decline which occurred in concert with a 314% increase for the S&P. As mentioned earlier, Investors are buying future dollar income streams when they put capital to work, so rising stock markets logically coincide with periods when the dollar is similarly strong.

Considering the Obama stock market, the price of gold since 2009 has more than doubled, which means the value of the dollar has declined. At present there's no evidence that the Obama Treasury or the Administration have changed their tune on dollar policy, which tells us that continued dollar weakness will coincide with stock market returns that leave much to be desired. Putting it plainly, the Obama administration is violating the four basics (taxes, regulations, trade restrictions, dollar policy) that always coincide with economic and market health when they're moving in the right direction, and stock prices will continue to reflect these policy errors.

More broadly, it's very clear that far from believers in the fundamental ability of economic actors to create prosperity through rational, unfettered self interest, Obama et al believe that the federal government should have a very relevant role in boosting our economic spirits. Given the bad track record among governments when it comes to creating prosperity, it should then be said that assuming an Obama victory in 2012, stocks will only rally after to the extent that investors price in political barriers that will block the President's desires. In short, the outlook for stocks going forward isn't good, and they'll only rally to the extent that the President fails legislatively.

John Tamny is editor of RealClearMarkets and Forbes Opinions, a senior economic adviser to H.C. Wainwright Economics, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He can be reached at jtamny@realclearmarkets.com.

I'm not going to name names, because everybody knows who these Republicans are. Instead, I want to go positive, and commend Mitt Romney himself. Romney did his best in the second South Carolina debate to fight for free-market capitalism and Adam Smith, and against the spread of Obama-style crony capitalism and class envy.

During the Thursday night debate, Romney launched this:

"You've got to stop the spread of crony capitalism. [Obama] gives General Motors to the UAW. He takes $500 million and sticks it into Solyndra. He stacks the labor stooges on the NLRB so they can say no to Boeing and take care of their friends in the labor movement. . . . He has to bow to the most extreme members of the environmental movement. He turns down the Keystone pipeline, which would bring energy and jobs to America.

"My view is capitalism works. Free enterprise works. . . . There's nothing wrong with profit, by the way. That profit went to pension funds, to charities. It went to a wide array of institutions. . . . And by the way, as enterprises become more profitable, they can hire more people. I'm someone who believes in free enterprise. I think Adam Smith was right. And I'm gonna stand and defend capitalism across this country, throughout this campaign. I know we're going to get hit hard from President Obama, but we're gonna stuff it down his throat and point out that it is capitalism and freedom that makes America strong."

Whoa. Tough stuff. The right stuff.

I watched this on DVR late at night. So just to be sure, I read the transcript the next morning. Still there. And let me say, this is exactly what the Republicans must say.

The issue of crony capitalism should be front and center in this campaign. President Obama defends his cronies instead of the so called 99 percent. That's his contradiction. Big Labor, Big Business, and Big Green Energy are collections of cronies with big jobs, big salaries, and big privileges. Nothing to do with the 99 percent.

But Governor Romney can go even further to slam crony capitalism. This is where tax-reform and deep spending cuts come in. A flattening of tax rates should be accompanied by the elimination of cronied tax deductions, exemptions, and carve-outs. Even more, we should get rid of crony corporate welfare wherever it exists, including crony government subsidies to energy, exports, and agriculture. Wherever it exists.

Let's say you went to two tax brackets at 10 and 25 percent, as per Paul Ryan's plan, or even the next step of a single-rate flat tax. Here, all the crony tax advantages should be wiped out. They won't be necessary at lower rates and their removal would end crony favoritism.

Finally, Romney can punctuate his crony-capitalism attack by telling folks he will overturn and upend the prevailing Washington, D.C., establishment.

Sadly, with the exception of Rick Santorum making the case for lower tax rates, Thursday night's debate had virtually no discussion of tax reform. Newt Gingrich never even once mentioned his 15 percent flat-tax plan. Unfortunately, Newt still leaves most deductions and carve-outs in place, and that needs to be fixed.

That aside, Governor Romney capped his strong performance with a Reaganesque summation. As he has in the past, he criticized Obama for trying to "transform" America from a merit society -- an opportunity society where people are free to choose -- to a European-style entitlement society. Romney said, "We need to restore the values that made America the hope of the Earth. . . . [President Obama] has made it almost impossible for our private sector to reboot. . . . I will defeat Barack Obama and keep America as it's always been, the shining [city] on a hill."

Strong stuff. Good stuff.

Is anyone listening?

As it happens, South Carolina has an exceptionally rich history when it comes to an aversion to pure paper money ... like Federal Reserve Notes. South Carolina sent four delegates to the Constitutional Convention. History unequivocally shows that all four were anti-paper and pro gold - and that at least two of them led the fight to use the Constitution to shut the door against paper money.

In the Constitutional Convention Pierce Butler, a distinguished South Carolinian and delegate, seconded the motion to strip the federal government of the power to issue paper money. Madison recorded:

Mr. BUTLER. remarked that paper was a legal tender in no Country in Europe. He was urgent for disarming the Government of such a power.

Brigadier General Charles Coteworth "C.C." Pinckney, also a delegate to the Constitutional Convention from South Carolina, famously, while a prisoner of war, said: ""If I had a vein that did not beat with the love of my Country, I myself would open it. If I had a drop of blood that could flow dishonorable, I myself would let it out." He was an important member both of the Philadelpha convention and in South Carolina's ratifying convention.

Here, at the South Carolina ratification debate, is what Gen. Pinckney had to say about paper money:

"With regard to Mr. Lowndes's question 'What harm had paper money done?' General Pinckney answered, that he wondered that gentleman should ask such a question, as he had told the house that he had lost fifteen thousand guineas by depreciation; but he would tell the gentleman what further injuries it had done - it had corrupted the morals of the people; it had diverted them from the paths of honest industry to the ways of ruinous speculation; it had destroyed both public and private credit, and had brought total ruin on numberless widows and orphans."

Charles Pinckney, C.C.'s cousin, Senator and Member of the House of Representatives, 37th governor of South Carolina, progenitor of 7 South Carolina governors, had this to say in South Carolina ratifying convention http:

"If we consider the situation of the United States as they are at present, either individually or as the members of a general confederacy, we shall find it extremely improper they should ever be intrusted with the power of emitting money, or interfering in private contracts; or, by means of tender-laws, impairing the obligation of contracts.

I apprehend these general reasonings will be found true with respect to paper money: That experience has shown that, in every state where it has been practised since the revolution, it always carries the gold and silver out of the country, and impoverishes it--that, while it remains, all the foreign merchants, trading in America, must suffer and lose by it; therefore, that it must ever be a discouragement to commerce--that every medium of trade should have an intrinsic value, which paper money has not; gold and silver are therefore the fittest for this medium, as they are an equivalent, which paper can never be--that debtors in the assemblies will, whenever they can, make paper money with fraudulent views--that in those states where the credit of the paper money has been best supported, the bills have never kept to their nominal value in circulation, but have constantly depreciated to a certain degree."

John Rutledge, who served as the fourth South Carolina delegate to Philadelphia, spoke at a special session of the South Carolina legislature in September 1785 called by the governor to address a debt crisis:

"as not wishing to waste time ‘in fruitless and unavailing discussion of' paper money schemes that ‘could answer no good purposes, whatever.' He called an emission of paper currency ‘ludicrous, because it was not in their power to establish funds for its redemption.' Depreciation was inevitable. There ‘could not possibly be ... any public benefit from such a scheme.'"

South Carolina has a noble heritage when it comes to fighting paper money and standing for constitutional money with integrity: gold and silver. Are its citizens still made of the same stuff as Pierce Butler, John Rutledge, and Charles and CC Pinckney?

Ralph Benko is the senior advisor, economics, to American Principles In Action, based in Washington, D.C.

Now how can I be so sure? To the point of being cocky?

Look no further than Jimmy Carter-the worst U.S. president since Richard Nixon's character flaws triggered his resignation.

Jimmy Carter had a 54% approval rating when 1980 began. Today, (the same point in Obama's first-term) Obama has an approval rating of just 42%. Meanwhile, Carter came into 1980 with 9.7% inflation, 9% unemployment, a stock market appreciation of 5.4% (compounded from December 1976), not to mention a hostage crisis in Iran and gasoline lines as far as the eye could see.

The obvious disparity which revealed itself that November was Carter's approval rating was not at all indicative of his woeful election performance. Carter won only six states plus Washington D.C., for a grand total of 49 electoral votes. Ronald Reagan won a whopping 489 electoral votes (or 91%)! Simply put, it was an unmitigated election disaster for the Democrats.

The real source of the inaccuracy of Carter's approval rating was a poll that asks for an individual's approval, without measuring anything about whether they will actually bother to vote. Conversely, those who indicate disapproval reflect anger, suggesting a high probability of voting against the person targeted with the anger.

Other trends offer further proof of why Obama has little chance of doing better than Carter, and why a shellacking is destined to occur this November. A number of prominent, liberal Democrats are openly voicing their displeasure with President Obama, Big names like Mort Zuckerman, Lee Cooperman, Bernie Marcus and many other pinnacles of business are openly criticizing Obama (virtually none of which happened to Carter from his own party's followers and benefactors). Anger is trumping his benefactors' prior approval.

Recent election results also support my pasting prediction. Remember the 9th District in New York City? It had been in Democratic hands since 1920. 1920! The Democrats of course lost it. Or consider the 2010 House of Representatives victory for the Republicans and the Tea Party-it was the worst drubbing in over seventy years!

There are also reports that many Democrats are considering becoming independents, suggesting they don't want to be associated with a party now considered "Socialist" and "Marxist" by some. The party's attack on capitalism and our economic freedom has rightfully offended many likely voters who actually work for a living, as opposed to those who live off the welfare system and pay no taxes (or, as some say, "vote for a living.")

Remember, the presidency is won through the Electoral College, not the total popular vote. This leads us back to this issue of anger as a major force, and why a few more people voting per state can count a great deal towards a victory. Ronald Reagan won the popular vote over Carter 43.9 million to 35.5 million (55% to 45%), but as I mentioned Reagan took 91% of the Electoral College. That is the key piece of evidence foretelling the future that will befall Mr. Obama in 2012!

There is one caveat in my prediction: If Obama's approval rating drops into the 30% area early in 2012, like LBJ's did in March of 1968, it may very well lead to Obama dropping out of the race. In that case, circumstances would bring in Hillary Clinton and cause a real election.

Victor Sperandeo serves as the President and CEO of Alpha Financial Technologies, LLC, is a founding partner of EAM Partners L.P., and serves the President and CEO of its general partner, EAM Corporation. Known as "Trader Vic", he is a professional trader, index developer, and financial market commentator based in Dallas, Texas, with over 40 years experience trading numerous markets. He has traded independently, and for many notable investors such as George Soros, Leon Cooperman and BT Alex Brown.

One of the key aspects of the US economy in the early 1930's that turned a nasty contraction into full-blown collapse was something economists call "sticky wages". As price deflation took hold through a shock to the money supply (from constant bank runs and credit liquidation), the resulting pressure on businesses to cut costs to match declining revenue made labor increasingly expensive. In response to this deflationary pressure on wages, the pool of labor was slow and hesitant to reduce demands for wages or to accept wage cuts. So as businesses foundered with declining prices and revenues, this wage rigidity priced a lot of the labor force out of the market for employment.

The technical name for this is rising real wages. In economic terms, this relatively high cost of labor accelerates the upward trend in unemployment, eventually pushing it far above where it might end up in a more "normal" recession or contraction.

The lynchpin to this dynamic is the perspective of businesses. They are the marginal receivers of deflationary prices and make the vital comparison of the cost of labor, both directly affecting profitability and expectations of future profitability. If the labor pool is excessively rigid in terms of real costs, then businesses have fewer and more extreme options to deal with economic circumstances largely beyond their control.

As we move closer to the three-year mark for this recovery, nothing is so pronounced as the weak labor market. Though headline unemployment has fallen recently, as most people are now aware that "improvement" is nothing more than a function of people exiting the labor force. The employment/population ratio fell to 58.2% at the end of 2009 (down from a cycle peak of 63.4% in December 2006, also well below the all-time high of 64.7% registered in April 2000). Since 2009, this ratio has largely "scraped along the bottom", getting no higher than 58.7% (April & May 2010's census "boom"), sitting currently at 58.5%. This presents all manner of economic problems because earned income is simply the most direct and efficient way to create wealth and circulate money within any economy (far better than any "wealth effect" through asset bubbles).

According to orthodox economic theory, the way to alleviate the high real cost of labor is to create inflation by managing inflation expectations. If businesses believe that nominal prices will rise, then their perceptions of labor costs shift favorably. This is the opposite of rising real wages, a lesson learned by careful study of the Great Depression. Whether it extrapolates exactly into the 21st century is the object of this inquiry.

This entire theory hinges on the idea that inflation expectations lead to actual inflation, that is the general rise in all prices . If the most harmful aspect of deflation is falling prices leading to falling revenue, then it is logically assumed that rising prices lead to rising revenue, thus making incremental additions of labor seem relatively cheap. So the Federal Reserve in 2009 & 2010 engaged in economic engineering through quantitative easing, intentionally creating inflationary expectations (including authoring and publishing papers about how increases in oil prices are actually economically beneficial) signaled by negative real interest rates.

Obviously, given the apparent stickiness of unemployment, it has not been such a simple problem, proving much more difficult than expected (and monetary success was expected, QE 2.0 was even quantified as 3 million new jobs by 2012 in a January 8, 2011, speech by Federal Reserve Vice Chairman Janet Yellen). If we think about the mechanics of inflation, we can begin to piece together both where this policy fell short and why this might not be such a good idea in the first place.

Again, this theory rests upon the idea that the general rise in prices leads to increasing nominal revenue for businesses, and thus cheapens the nominal cost of the overall labor pool. From this change in price condition it is expected, directly and unambiguously, that rising employment should result. Monetary intrusion into the stock of money creates the predicate conditions for inflation and inflation expectations. The logic here is that if everyone has more money they will bid all manner of prices higher - more money chasing fewer goods. The key part of that previous sentence is "everyone has more money". In other words, it is not enough just to increase the stock of money, it has to circulate into a broad and broadening base to be effective. Without that circulation there is no power, or, literally, no money behind any managed inflationary expectations.

To create real inflation, according to the Fed's own definition, necessarily means expanding the money supply to the real economy . But quantitative easing only creates currency in the hands of the primary dealer network. The modern monetary system requires the Fed to trade newly created digital balance sheet figments known as dollars for government bonds within that special class of global banks. Those twenty or so large, and often foreign, institutions (the number changes, declining recently with MF Global's implosion into bankruptcy) are then supposed to lend out these brand new "excess" reserves in the wholesale money markets (either Fed funds or eurodollars). That supplies all the cash necessary for the banking system to do its work - to create loans to real economic participants, dispersing those centrally created dollars amongst a broad base of participants. The stock of central bank money therefore increases the stock of credit money, meaning a high proportion of households, consumers and businesses will all end up with the ability to spend more. Some minor inflation results, Bernanke is exalted, and the world is a much better place.

This relatively simple plan, therefore, is utterly dependent on the banking system to perform the circulation and dispersal of credit money. Instead of performing that "duty", the banking system is mired in its own dysfunction and disease. First, the wider banking system has little balance sheet capacity left after the real estate collapse for new loans. Since bank equity is the functional limitation of credit creation today, losses suffered (both marked and yet to be marked) have eroded equity capital across the entire intermediation landscape. That simply means that banks cannot create new loans without raising new equity capital - even the capital banks were lucky enough to acquire was used to bring their existing leverage ratios down and capital ratios up to merely "adequate" levels. In other words, all the hundreds of billions in new capital obtained in the crisis period has been used to "fund" the real estate bubble after the fact. No additional lending capacity has been created in the years since the panic in 2008.

The fact that the banking system has turned into the functional equivalent of government fundraisers is not an accident. Sovereign debt of OECD nations is afforded (inappropriately) by the Basel rules a risk-weighting of zero, meaning lending to the US or European governments can occur without a hit to bank capital. Without excess balance sheet capacity, nearly every dollar or euro in new lending activity is forced into this asset class. The current PIIGS/European crisis is nothing more than the eventuality of how desperately bank balance sheets remain constrained by a real shortage of spare equity capital.

Theoretically, governments flush with newly borrowed cash could perform the job of currency dispersal, but the typical means of accomplishing redistribution (think welfare, foodstamps and other types of transfer payments) are not efficient enough to accomplish the monetary task of more broadly spreading currency to create real inflation. In reality, however, most governments have used borrowed funds to merely prop up old budgetary levels. They are simply borrowing to fill the massive holes left by the declining tax collections during the recession and recovery. In other words, new money to sovereign governments is simply being used to maintain old levels of dispersal, not broaden that base. In the US, much borrowed money went to the "stimulus" bill and increased transfer payments, the rest was swallowed into the operations of the new level of government. This is not conducive to broad monetary distribution.

Beyond the bank capital shortage, the banking system has actively regressed in its ability to intermediate. Because the herd-like move of banks into the sovereign space was done without considerations of true risks, the banking system once again finds itself atop a mass of unrealized losses in securities that are still zero risk-weighted and supposedly risk-free. As a result, the primary dealer network has essentially refused to even engage in basic interbank lending in the wholesale money markets (either secured or collateralized). Instead, these largest global banks have hoarded all of those digital dollar creations, effectively freezing out the rest of the system in an abnormality all too similar to 2008.

This latest manifestation of substandard intermediation comes on top of a marked increase in credit standards, something that is both predictable and an anathema to exactly what the Fed is trying to accomplish. As the Fed seeks to broaden participation in its monetary inflation-fest, banks are actively repressing the pool of potential borrowers.

The Federal Reserve itself confirms this in the paper it very publicly sent to both branches of Congress on January 4, 2012. That paper served to give Congress some guidance and recommendations on how to get the housing market moving forward again (without recognizing any of the myriad failures up to this point, including the tax credit proposals). But it makes what I feel is a pertinent admission of, and thus an insight into, why these inflationary measures have largely failed:

"Obstacles limiting access to mortgage credit even among creditworthy borrowers contribute to weakness in housing and demand, and barriers to refinancing blunt the transmission of monetary policy to the household sector ."

The Fed can increase the quantity of money, but it is essentially powerless to disperse it. Not only is the banking system unable to lend to any obligor that requires a greater than zero capital charge (meaning anyone not a sovereign OECD government), lending standards have risen to the point that far too many households are no longer "eligible" to receive all this monetary endowment through debt accumulation. These are not trivial setbacks either, but as we have seen in these past two years they have been a monumental miscalculation.

Through determined efforts, the central bank's actions did indeed create the very expectations it was seeking, however. Commodity prices, primarily energy, food and precious metals, shot higher. But without the follow-on effects of new money being dispersed widely through credit, these inflation expectations acting solely through commodity prices were actually counterproductive (even the commodity price moves were indirect effects of the devalued dollar). Not only were consumer discretionary budgets further stressed (in some parts of the globe they were stressed to the point of revolution), cost expectations on the part of businesses have been re-adjusted negatively.

Business expectations, through commodity prices, have been altered to the point that profitability, the one bright spot in the whole of the past three years, has been jeopardized by commodity price fears. These fears have been realized by the noticeably declining profit margins at both large and small businesses (small businesses have not participated in the recovery to anywhere near the extent of their large, multi-national brethren), leading to the slower growth of corporate profits (to the point that some analysts are expecting profit contraction in 2012). During this margin adjustment, labor/employment became incrementally more expensive as businesses were expecting those rising input costs to absorb proportionally more of their expense budgets. In other words, these one-sided inflation expectations effectively created the exact same conditions the Fed was seeking to alleviate in the first place.

The Fed has been trying to reduce the marginal cost of employment through inflation, but instead it has succeeded in increasing the marginal cost of employment as commodity inputs were the only place inflation expectations intersected within the real economy. This half-baked inflation effect has decreased the attractiveness of rising employment from the perspective of business, effectively creating an effect very much like that of the 1930's. The relative cost of labor, which appears to still be "sticky", has remained too high to clear these imbalances. Now, thanks to the Federal Reserve, the inflation-induced effect of commodity prices requires an even greater adjustment for labor costs. The further commodity prices rise, the lower the ability of businesses to absorb new costs, the less attractive labor becomes.

There are, of course, additional factors affecting the cost of labor (healthcare legislation is a big one, as is fear of taxation), but I believe this is the prime reason that employment has been so weak and disappointing. This is more than just some ephemeral notion of "uncertainty"; it is a real world phenomenon of a poorly executed flawed monetary theory. The world does not operate like a mathematical model, and tinkering with economic variables does not follow the linear extrapolations of those math-based predictions. An inflation counter to potential deflation sounds great, especially if your models predict a high degree of control (like turning it off in fifteen minutes), but once it goes awry it spins into the very human realm of emotions.

Operationally, this inflation-stoking obsession by the Federal Reserve and its policies (now exported to the ECB to "combat" the PIIGS problems) cannot succeed, again, without the ability to broaden the effects of money creation. Unfortunately for this policy's designers, the trillions of dollars and euros created in the past three years have all gone to filling past holes. To get credit actually moving in a positive direction will require hundreds of billions (euros and dollars) of new equity capital, on top of trillions in wholesale currency. Judging by the equity sale that Unicredit in Italy just undertook (at a 43% discount to its stock price), equity capital will be extremely difficult to come by.

Given the negative effects we have already experienced from the previous episodes of trying to increase the stock of money, specifically inflation expectations pushing up vital food and energy prices, new monetary initiatives in this direction would be even more counterproductive. If QE 2.0 helped oil prices above $130 per barrel (Brent), what would a QE 3.0 (or European LTRO) that is an order of magnitude higher do? Again, given the desperate constraints on banking it would do little to disperse credit as it is intended, but it would certainly kick commodity prices ever higher, forcing even more adjustments within the business system that will make employment even more unattractive.

If labor is relatively expensive given current economic constraints, and nagging unemployment is certainly suggestive of that, making it functionally more expensive by depressing business margins further makes little sense. Since monetary policymakers are not likely to admit failure (remaining confused as to exactly where those 3 million jobs went), they will likely pursue the same policies of trying to fix the banking system so that it functions "normally", or at least is able to disperse money as desired. Outside of that, central banks will have to find a real world equivalent to Milton Friedman's helicopter.

The former requires something far greater than just money creation. The banking system is fundamentally flawed and nearly everyone knows it. This is not a mathematical question, it is a question of faith and trust. These are not easily papered over by managing the stock of money or interest rate regimes, but require real solutions that will involve real losses through brutal market discipline. Faith, once lost, is not easily regained.

The latter is about as dangerous a proposition as there is, perhaps even more dangerous than full-blown deflation. Printing money on such a scale and diffusing it broadly is nothing more than one-step below hyperinflation - the full-scale collapse of a currency system. As much as the economics profession fears and loathes prospects of deflation, a hyperinflationary collapse is far worse. Again, there is no mathematical calculation that defines the line between inflation and hyperinflation, or guides policymakers to divine just how much debasement is acceptable. Currency collapse comes at the point where the population loses faith in that currency. It is an emotional issue that cannot be predicted or modeled - it simply occurs after reaching some psychological, emotional inflection point. Because of this very human system, the entire range of inflationary designs is extremely perilous.

That begs the question of whether intentional inflation is at all or anywhere an appropriate policy. Realizing these dangers, the Fed and the ECB have, up until now, played it both ways - wanting to create some inflation, but emphatically proclaiming the idea that it can and should be minimized. The entire idea of Nominal GDP targeting is predicated on exactly this hope, that some controlled measure of inflation will cure all economic ills without any disastrous side effects. But at some point repeated failure and doubling down on the same policies will push the stressed system further toward the emotional breaking point. It is a monetary trap unlike anything in the Great Depression-inspired textbook. There are credit losses still to take, and that is deflationary, but creating inflation to offset it ends up in the same place anyway.

No matter which flavor of inflationary policy central banks pursue, I think it would serve them well to review their effectiveness (lack of) these past three years. Everything sounds easy and simple within the cozy confines of mathematical models (do X, Y results). Playing with fire (or inflation) is a dangerous game, no matter how much planning is involved or how much modern economics thinks it has learned the lessons of the 1930's.

Robert Burns may have said it best in his 1785 poem, "The best laid plans of mice and men; go often awry."

Jeffrey Snider is President and Chief Investment Officer of Atlantic Capital Management, a registered investment advisor. 

But the Fed hopes to make this signal decoding less difficult starting next week, when it will lift the shroud of secrecy and release the interest rate projections of the members of the Federal Open Market Committee (FOMC).

This move toward greater transparency has generated a flood of speculation about the potential effects on the economy and financial markets. Some observers have suggested that the new information could stimulate the economy by lowering interest rates. Others fear that the Fed's efforts might increase market volatility and harm its own reputation if the forecasts are revised too often or if they reveal too much internal disagreement.

Supporters and skeptics alike would agree this is an historic moment for the Fed, and anticipation is running high for the inaugural release of the forecasts of the federal funds rate, the interest rate the Fed controls directly. However, a look at the details of the Fed's intentions suggests that the roll-out next week could be a complete dud, and perhaps even a significant communications error.

In this case, a little transparency is a dangerous thing, because the Fed plans to take a full three weeks to release all the information. Like removing a band-aid in slow motion, this could cause markets to wince. The Fed can avoid this pitfall by making more of the forecast information available immediately.

The three-week period is a legacy of the procedure now in place for publishing its forecasts for economic growth, the unemployment rate, and inflation. On the day of the FOMC meeting, the Fed provides a highly aggregated synopsis of these forecasts. This summary reveals only the lowest and highest forecasts submitted by the 17 FOMC members and the "central tendency" range that strips out the three lowest and the three highest forecasts to capture the views of the core of the Committee. Chairman Ben Bernanke uses this summary for his press conference after the FOMC meeting. Three weeks later, the Fed publishes the full report on the forecasts.

In the past, the distinction between the initial release of summary information and the full report has not been a major issue. That's because the Committee's forecasts have tended to be similar enough that the summary pretty much told the whole story. However, that is not likely to be true for the interest rate forecasts.

The reason is that the Reserve Bank presidents, who all submit forecasts, have very different views about the appropriate path for monetary policy. Four of the twelve presidents (Charles Plosser of Philadelphia, Richard Fisher of Dallas, Narayana Kocherlakota of Minneapolis, and Jeffrey Lacker of Richmond) are policy hawks. All except President Lacker were voting members of the FOMC in 2011 and those three dissented from the August decision to keep the funds rate exceptionally low through at least mid-2013. The recent speeches of these four presidents suggest no change of heart regarding policy.

At the other end of the spectrum, four presidents have been outspoken in expressing dovish views (Eric Rosengren of Boston, William Dudley of New York, Charles Evans of Chicago, and John Williams of San Francisco); a fifth president (Sandra Pianalto of Cleveland), though less visible nationally, has also expressed deep concerns about the unemployment situation. The full range of forecasts for the target funds rate will be very wide. Even more problematic, the central tendency - which market participants generally focus on - will not clarify matters, because trimming the bottom three and top three forecasts will leave in one hawk and at least one dove.

Much of this uncertainty will probably be resolved three weeks later with the publication of the full report. Informed observers will be able to identify the true weight of opinion on the FOMC by studying the entire distribution of responses. But this will be small consolation for market participants who will have to puzzle over the Fed's initially unhelpful release of the interest rate forecasts. This drawn-out process will not be conducive to calming volatile markets, enhancing the Fed's reputation, or reducing interest rates.

These problems can be avoided by releasing more-complete information about the interest rate forecasts immediately after the January 24-25 FOMC meeting. That way, one would know, for example, how many Committee members expect the funds rate to remain at the current level of 0 to 1/4 percent at the end of each year, how many expect it to be between 1/4 and 1/2 percent, and so on. There is no reason to sit on this information for three weeks.

Perhaps the Fed is working behind the scenes to produce a more helpful forecast summary. If not, one hopes there is still time to change course and avoid a potentially serious self-inflicted wound next week.

Stephen Oliner is a resident scholar at the American Enterprise Institute and a visiting scholar at the UCLA Ziman Center for Real Estate. He was formerly an associate director in the Division of Research and Statistics at the Board of Governors of the Federal Reserve System. 

There lies one of the first truisms about Wall Street utterly lost on the protesters hanging around Occupy Wall Street encampments the world over. The firms they've made the objects of their scorn don't have historically long shelf lives. Operating in a business environment where one bad deal, trade or employee can imperil their very existence, each day financial firms and the talent within must prove their worth against brutal competition eager to put them out of business.

This of course helps explain why the pay, particularly for skillful employees, is so high. Engaging in very high-risk work, the financial reward is potentially great given the simple truth that the potential for extraordinary failure is even greater. Though the notion of a "job for life" in any sector of the global economy is increasingly something of the past, on Wall Street it never existed. Stating the obvious, the alleged nosebleed compensation in the financial sector is to some degree the result of how quickly it can disappear, not to mention it being a function of how valuable financial sector services are to the broader economy. More on that later.

About the street near the southern tip of Manhattan that is in fact Wall Street, it's a bit ironic that the most famous "occupation" occurred at Manhattan's Zuccotti Park, down near Wall Street. There lies a certain falsehood seemingly bought into by the Occupy Crowd, that "Wall Street" is on Wall Street.

The above may well have been true 100 or even 50 years ago, but today, with the exception of Goldman Sachs, the vast majority of financial firms have moved to midtown Manhattan, or out of New York altogether; Greenwich, Connecticut one of many popular locales for the financial world's greatest minds.

Though Wall Street in lower Manhattan was once the location of many great investment banks, today most in finance would agree that it's a very undesirable area. In short, more than ever what we know as Wall Street" is merely a symbolic, broad adjective for the myriad investment banking, trading and money management firms that dot the global landscape.

What do these firms do? They compete like crazy with each other for profitable financing, trading and investment opportunities, and for doing so, make our lives better; thus calling into question the absurd suggestion that Wall Street and Main Street are at odds with each other.

Figure one of the deals that put banking giant Goldman Sachs on the map was financing done for Sears; Sears at one time the personification of Main Street for its book size catalogues offering American consumers so much of what they wanted, but that was formerly out of reach. Goldman also famously did investment banking work for Ford Motor Company, the very company that made the once obscure automobile ubiquitous.

More modernly it was investment bankers at Morgan Stanley who attracted financing for Netscape; Netscape's IPO the precursor to an Internet boom that has profoundly changed all of our lives for the better. Investment bankers, far from objectionable individuals, find investors whose capital funds the companies we work for, pharmaceutical companies whose innovations make us healthier, clothiers whose designs make us look better, and retailers whose economies of scale make our dollars stretch further. Without Wall Street Main Street would be a depressed place, and vice versa.

Looking at the trading function of banks, the price signals wrought by this necessary activity ensure that good ideas receive more funding, and that bad ones are starved of capital so that they can't destroy any more of it. Of course the clients of Wall Street firms by definition have different viewpoints on everything under the sun, which means trading activities bring together the proverbial Google bear with the Google bull.

Regarding the "proprietary trading" activities that have so many up in arms for banks "betting against their clients", if Goldman Sachs can't bet against the trading views of its customers then as a rule those same customers can't bet against Goldman's market view. Though protesters may wish otherwise, there are two sides to every trade. And as Goldman's clients have differing views on the market direction of most everything, the firm, in its role as an investment bank, will at one time or another have trades on that will tautologically be "bets" against the market views of all its clients; those clients grateful for Goldman's trades bringing liquidity to the marketplace.

Considering the investment function of banks, well, customers large and small want to put money to work and investment banks help them to do so. There's no coercion here; rather investment banks succeed or fail, win or lose clients based on their ability to deploy the capital entrusted to them wisely.

All of which brings us to the mortgage securities that investment banks created, that took some banks down, and that have the Occupy crowd quite feverish about abolishing the banks altogether. There lies yet another example of how very much Wall Street and Main Street are joined at the hip.

Indeed, the mortgage securities at the center of today's controversy were Wall Street's way of bringing together individuals desirous of purchasing homes with individuals interested in fixed streams of income. It bears mentioning again that there are two sides to every trade, and Wall Street firms brought the two sides together much as it does investors with those interested in owning credit cards, securing a loan for a business, or selling shares in a business.

That many borrowers ultimately defaulted on the mortgages underlying the securities is hardly Wall Street's fault. Too often forgotten is that by virtue of the heavy demand for mortgages in concert with heavy demand to finance those mortgages, the counterparties in the recessionary rush to real estate (its cause a symptom of the weak dollar in this writer's mind) were willing participants. That the value of the securities declined due to mortgage defaults doesn't speak to Wall Street malfeasance as much as it speaks to a greater truth that businesses and the individuals they transact with make mistakes all the time.

Where it gets interesting is that when exposure to those mortgage securities rendered some firms insolvent, the federal government committed the grave error of bailing out with taxpayer money the banks that ran into trouble, and for doing so, their counterparties. Notable here is that if Occupy Wall Street were solely about protests against the bailouts, this writer would have joined up. It's also arguable that many Wall Street workers themselves would have joined up, and helped fund with their impressive salaries, Occupy Wall Street.

Indeed, what the banks that tragically took government money didn't understand then, but do understand now, is that money from the government never arrives without strings attached. Once any business or individual takes from the government that same government will have expectations about how they do things in the future. In that case it's no surprise that many banks and investment banks are currently in big trouble. Politicians and governments don't care about profit, and as they can now foist their blinkered views about profits on the banks they "saved", they're presently strangling them. If this is doubted, check out the share prices of banks that took TARP money in the fall of 2008 and compare them to today.

After that, a good number of Wall Street banks and investment banks had no need for TARP money over three years ago. Today they not only suffer increasingly suffocating regulations imposed on them due to the failure of some of their competitors, but they also had their futures stolen. Indeed, one of capitalism's greatest qualities (the bailouts a certain rush away from capitalism) is that when failures occur the bankrupt companies don't disappear as much as their assets are swallowed up by competitors - often at fire sale prices.

Had the political class done as it should have and let capitalism work, there firstly would have been no crisis owing to the historical truth that financial firms have been failing with great regularity for as long as they've existed; the crisis rooted in uncertainty as to government's intervention in their failure, and second, the healthy institutions not needful of bailout money would have grown stronger and more able to serve Main Street through the acquisition and better oversight of the institutions that went under. To put it simply, Wall Street was the biggest victim of the very bailouts meant to save it; failure always an author of future strength as opposed to weakness. Once again, if Occupy Wall Street were solely about protesting the ghastly bailouts of banks that should have been allowed to go bankrupt, it's fair once again to say that many on Wall Street would be loudly supporting OWS.

The simple truth is that it would be hard to find a more fruitful relationship than the one that exists between Wall Street and Main Street. Individuals and business on Main Street need financing, and the symbol that is Wall Street pairs those in need of finance with those eager to provide it. If Wall Street didn't exist Main Street would have to invent it, so for the Occupy crowd to bemoan its existence is for it to decry progress altogether. Individuals need credit, families need homes, and commercial visionaries need investment, so financial institutions of all stripes get it for them.

In short, Occupy is screaming its wrathful slogans at the wrong target. Wall Street isn't bad, but bailouts are. In that case Occupy Wall Street should pack up its guitars, pipes, tents and signs and train its sights on the world's political capitals from which the bailouts emanated.

John Tamny is editor of RealClearMarkets and Forbes Opinions, a senior economic adviser to H.C. Wainwright Economics, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He can be reached at jtamny@realclearmarkets.com.

Most people don't know that the economy destroys and creates millions of jobs every year. A monthly survey by the Bureau of Labor Statistics captures the details. Called the Job Openings and Labor Turnover Survey, it tracks the numbers of workers leaving and entering jobs.

In 2010, the latest full year available, employers made over 47 million hires, and there were over 46 million job separations. Of the latter, there were 21.3 million voluntary departures (quits), and 21.2 million separations.

This happened in a labor force of 154 million. As 2010 illustrated, about 30 percent of all jobs turn over in a year, and the labor market in the United States is in a constant state of flux. That's one of the strengths of the American economy, although those separated involuntarily might not see it that way.

Hires typically exceed separations, except during recessions. On January 10 the Labor Department published data for November 2011. The number of job openings was 3.2 million, little changed over the year. There were 4.1 million hires and 4 million separations, and the national unemployment rate edged down, to 8.7 percent.

Despite that high rate of unemployment, and with jobs hard to come by for many seekers, there were more quits than layoffs. About 2 million people quit in November, compared to 1.7 million who were terminated.

During recessions and often beyond, separations exceed hiring. Even though the most recent recession ended in June 2009, according to the National Bureau of Economic Research, separations exceeded hiring for a two-year period, February 2008 to February 2010.

In non-recession years, separations and hiring numbers have moved in parallel and have not been far apart since the Labor Department began compiling these numbers in 2000. Between 2000 and 2007, they ranged from 4.5 million to 5.5 million a month. During the recession, these metrics fell to 3.5 million a month. They have recently rebounded to 4 million, one of several signs that the employment situation has been gaining strength.

Industries with the highest rates of hires and separations rates in November 2011 were construction, which is still shrinking, and leisure and hospitality and professional and business services, which are growing. These industries experienced more workers coming and going than did most other industries.

Voluntary separations, or quits, were highest for leisure and hospitality and professional and business services. Quit rates indicate workers' confidence in finding a new job -- one that is similar to or better than the old one, or their desire for personal reasons to leave their job or the labor force entirely.

Quit rates were lowest in government and manufacturing, which is typical. People go into government often for job stability, and into manufacturing because it typically pays better.

Employment in manufacturing declined substantially from over 17 million in 2001 to under 12 million in 2011. Manufacturing, because it tends to be unionized, traditionally has had among the lowest rates of turnover. Workers are paid above-average wages, have excellent benefits, and lose vesting in pension plans if they leave.

Private equity firms such as Bain can, after a takeover, reposition an individual firm by infusing new financing so that it grows faster. As a result, some firms might lose or gain workers. Some even might fail.

But the vast majority of businesses prosper or fail without being taken over. They respond not only to market pressures and opportunities in the United States, but also to worldwide trade and trends.

In recent decades, all too many American firms failed as a result of excessive federal regulations. Some regulations have forced companies to go abroad. Over the past five years, multinationals have created more jobs outside the United States than inside.

Mitt Romney's Republican opponents have hammered him for Bain acquisitions that failed. How many failed is irrelevant to Mr. Romney's qualifications to become president. The right question is, does he understand how to create an environment for U.S. economic growth, where new hires will be greater than job separations?

Diana Furchtgott-Roth is a contributing editor of RealClearMarkets, a senior fellow at the Manhattan Institute, and a columnist for the Examiner.

As CNN put it in the first paragraph of its story, Romney's 15% tax rate means "the multimillionaire pays a smaller percentage of taxes on his income than many middle-income Americans."

This is a favorite canard of the left these days - that the super-rich often pay taxes at lower rates than do struggling middle-class families.

It was propelled by Warren Buffett, who claimed that his tax rate was lower than his secretary's, prompting President Obama to quickly propose a "Buffett rule" surtax on millionaires.

But like many "facts" about the tax code, this one evaporates upon closer inspection.

First, it's simply false that Romney's tax rate is lower than "many middle-income Americans." The middle 20% of income earners pay taxes at an average rate of just 2.3%. The next highest 20% pay at an average rate of only 6.1%.

Even when you include payroll taxes, the effective rate for families in the middle of the income spectrum is less than 13%, according to data from the Tax Policy Center.

IRS data, meanwhile, show that families with incomes of between $50,000 and $100,000 paid an average 8.9% in income taxes, while those earning between $100,000 and $200,000 paid an average 12.7%.

So where are all these overtaxed middle-class families the media keep talking about?

This fixation on tax rates also overlooks the fact that the wealthy pay the vast bulk of all federal income taxes. In fact, the top 10% of income earners pick up 70% of all federal income taxes paid, and the richest 1% account for more than a third.

At the other end of the spectrum, almost half of families don't owe any income tax at all - or get money back from the federal government.

Now, it's true that Romney's rate - as well as Buffett's-is lower than the average for the richest 1% (which according to the IRS was 24% in 2009). But even this figure is misleading because it doesn't factor in the hidden double taxation on his income.

Like Buffett, most of Romney's income is from investments, not wages, which are taxed at a fixed rate. But before they see any of this income, it's already been taxed at the corporate level, at a much higher 35% rate, which means companies have that much less to distribute to shareholders.

The same holds true with capital gains, with the added problem that the gains aren't indexed for inflation. So if an investor sells a share he's held for many years, he can pay taxes on a capital gain that is, in real terms, zero or even negative.

This double taxation of investment income poses a serious handicap to economic growth, which is why most advanced economies have tried to minimize it.

As President Obama's Economic Recovery Advisory Board noted in its 2010 report on tax reform, "a number of OECD countries" avoid double taxation by crediting individual investors "for all or part of the tax paid at the corporate level against their individual taxes."

And it's why the media's favorite Republican presidential candidate - John Huntsman - called for a 0% tax rate on dividends and capital gains.

"These taxes amount to a double-taxation on most individuals who choose to invest," he explained, which "serves to deter productive and much-needed investment in our economy."

But don't expect any Democrat or any reporter to explain any of this, since it's so much easier and more fun to play class-warfare games.

Call it the new Red Scare. Critics are afraid that giving a Chinese company access to vital information infrastructure could jeopardize U.S. security.

As Congress reconvenes this week, the House Intelligence Committee is expected to pursue an investigation, first announced in November 2011, into the potential security threats posed by Chinese telecommunications firms operating in the United States. Specifically, it would target Huawei, the world's second-largest telecom equipment manufacturer, and ZTE, its smaller sister Chinese company.

The investigation comes on the heels of a new White House task force that will look into the "opportunities, risks and implications" of relying on foreign companies for U.S. telecommunications and information infrastructure. Though the White House denied that the task force was targeting a single country or corporation, it did convey that Hauwei's drive to expand operations in the U.S. precipitated the initiative.

The Obama administration is clearly conflicted over the security challenges presented by Chinese foreign direct investment (FDI). Even while launching the task force, administration spokesmen are touting the benefits of FDI for U.S. growth and jobs. On a recent trip to China, Vice President Joe Biden enthused that Chinese investment "means jobs. American jobs. We are still the single [best] bet in the world in terms of where to invest."

The Chinese investment vs. security dilemmas will only grow more difficult in the future. It is time to clear the air with more precise guidelines - or even red lines - where security is truly jeopardized.

Much of the fear over Huawei, a $28 billion private company, stems from its beginning. It was founded in 1987 by an ex-officer of the Chinese military, and during its early years received substantial boosts from the Chinese government, including research organizations with ties to the military.

Over the past decade, it has burst upon the global telecommunications market, and now operates in 140 countries and services 45 of the world's largest telecommunications operators. The company is also a leader in information technology and is rapidly moving downstream to compete in the smartphones and services sectors.

Critics, including a number of members of Congress, argue that Huawei retains close ties with the Chinese military and that the company represents a major threat to U.S. security through the potential of subverting national telecoms infrastructure and providing a vehicle for both economic and military sabotage. Huawei's top executives in the U.S. have vehemently and doggedly denied such allegations. They assert that the company has no ties to the Chinese military, and that it provides normal and vital commercial telecommunications services and equipment in the global marketplace.

Despite its protestations, Huawei has been repeatedly rebuffed by U.S. government agencies in attempts to purchase U.S. telecom assets and to gain major supply contracts with top U.S. system operators such as Sprint and AT&T.

In the U.S., security-related investments are scrutinized by a federal inter-agency committee (the so-called CFIUS process), which is chaired by the Treasury Department and includes key defense and national intelligence officials. In two widely publicized actions, CFIUS officials intervened to stop Huawei from assuming control of two assets - the 3Com company and intellectual property owned by a small, bankrupt company, 3Leaf. Customarily, and in these particular cases, CFIUS officials give no specific reasons for their actions, merely invoking general national security considerations.

Under current law, the U.S. security review process is limited to screening investments in U.S. assets. It does not extend to contracts between U.S. companies and foreign companies. Yet in the past two years, U.S. government officials on several occasions have warned U.S. companies not to award contracts to Huawei or face the prospect of cutoff of future government contracts themselves.

In one case, this message was conveyed in a phone call by the Secretary of Commerce, and on a second occasion by a direct communication from the head of the National Security Agency. Such behind-the-scenes, ex parte interventions clearly undermine U.S. demands that Beijing adhere to the rule of law with attendant due process.

The decision by the Obama administration to create a task force to analyze potential security threats from foreign ownership and foreign contracts in the U.S. telecommunications sector, combined with a full-scale investigation of Huawei by the House Intelligence Committee, represent a consequential moment in U.S.-China ties.

When it comes to national security, there will always be instances when closed-door review sessions are appropriate - including in the case of Huawei. But neither the White House nor the Congress should be allowed to hide completely behind vague, "national security" concerns.

After serious, thorough examinations - through coordination with national intelligence agencies by the White House and through open hearings and security briefings by the congressional committee - both branches of the government should make public their conclusions.

It's what we would rightfully demand of Beijing. And it's what we should expect of Washington. If these are bad guys, say so; if nothing is uncovered, butt out.

Claude Barfield is a former consultant to the office of the U.S. Trade Representative and a resident scholar at the American Enterprise Institute. 

As is well known now, Federal Reserve transcripts released last week confirmed that Fed Chairman Bernanke was caught unaware by the brewing mortgage storm that rocked many of the banks his Fed is charged with overseeing. As Bernanke put it in 2006, "So far we are seeing, at worst, an orderly decline in the housing market." Bernanke went on to note that a cooling of the housing boom was a "healthy thing."

Fed critics from the left and right will doubtless seek to use Bernanke's utterances as weaponry meant to further discredit a Fed Chairman who is expert at always being wrong, but they'd be unwise to do so. Instead, they should use Bernanke's musings to explain in more confident terms why the Fed's presumed regulatory mission is a total contradiction.

First off, Bernanke was right in saying that a slowing mortgage market would be healthy. Far from negative, sector-specific downturns are extraordinarily stimulative because they ensure that no more capital will be destroyed in parts of the economy that no longer need investment. Market signals are precious in this regard in that through rising and falling prices, investors have a better idea of where and where not capital allocation will be rewarded.

What was then unhealthy, and which remains unhealthy, and this helps to explain why the U.S. economy continues to sag, is that the political class would not allow the market correction to run its course. Instead, bailouts of the banks and counterparties impacted by the correction softened the blow of the latter, plus delayed the stimulating migration of capital to business concepts desired by the infinite inputs that comprise what we know as the "market."

Where Bernanke was and continues to be scarily wrong is in his assertion that the Fed, for having failed to foresee just how bad the correction would be, should be given more oversight of the banks whose exposure to faulty mortgage securities imperiled their very existence not long ago. Here Bernanke can perhaps be excused. A Washington pro as evidenced by his ascendance to a job at which he's failed completely, he seemingly believes as all political animals do - with good reason - that to fail in Washington is to fail upward.

Instead, what Bernanke's presumptions about the health of the mortgage market prove yet again is that regulations are a tragic lie. They don't work, and the reason they don't is that no one - and this is even more true for the individuals so lacking in ambition as to want to become regulators - has any kind of consistent knowledge of the future. Regulations, if they are to work, are of course predicated on future knowledge, and as Bernanke once again revealed in the Fed transcripts, he hadn't a clue about what was ahead.

To understand why Bernanke was caught unaware, and why regulators nearly always are, it's necessary to consider how frequently even the best investors are wrong. This is notable too in the certain sense that regulators and government bureaucrats are frequently the individuals who could not get Wall Street jobs, or who lacked the ambition to compete with the brightest minds in finance.

As former expert trader Nick Kokonas notes in the quote that begins this piece, even the great traders are wrong nearly as often as they're right. Kokonas also pointed out in Life, On the Line, that the "saying on the Chicago floors was that only two out of every hundred guys break even their first year; and out of those only one out of a hundred becomes a millionaire."

Looking back at mortgage securities in 2006, as evidenced by the billions hedge fund trader John Paulson made betting against them, a good number of very sharp market minds felt as Bernanke did; that everything was fine. If this is doubted, we need only reference Paulson's now-famous Abacus deal. His counterparties in the trade set up by Goldman Sachs needed Paulson to bet against not because they wanted to, or because they'd even heard of him, but because so great was the demand for mortgage securities at the time that purchasing same wasn't very simple. Paulson's willingness to offer them synthetic exposure allowed them exposure that they couldn't otherwise achieve in the actual markets.

Considering regulations in this light, Fed hubris post-crisis has it seeking more oversight of banks, and then Dodd-Frank is predicated on giving regulators more broadly the power to take control of banks "before" balance-sheet difficulties cause "contagion" in the financial markets altogether. Of course as the years leading up to 2008 reveal in living color, no one, least of all regulators, was aware that something was amiss. Those that did made millions, and in Paulson's case made billions.

To state the obvious, regulators, and this includes the allegedly brilliant academic minds at the Fed, will always be late to problems, thus rendering regulation worthless at best, and tragic at worst for regulations creating a false sense of security that inevitably magnifies in harmful ways the similarly inevitable errors that occur in a marketplace comprised by fallible individuals. Better is it always to limit regulation to something that doesn't even require effort by lawmakers; as in if you fail, you will be allowed to go bankrupt.

What commentators should not do is use Bernanke's now-naïve utterances against him. He was wrong about looming problems in the mortgage markets, but so were many market participants - by definition. And then what commentators should do is use the information gleaned from the Fed transcripts to rail against any and all banking regulations which, by their hubristic presumption not to mention simple logic, are doomed to fail.

John Tamny is editor of RealClearMarkets and Forbes Opinions, a senior economic adviser to H.C. Wainwright Economics, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He can be reached at jtamny@realclearmarkets.com.

As the paper reported, Congress helped make American's pension hole even deeper than it should be by granting the airline and other carriers an exemption to new pension rules for private businesses, which allowed them to contribute less to their plans. Here's how it worked. Back in 2006 the airline industry's established carriers were under profit pressure from rising fuel costs and intense competition from new carriers with lower costs. One of the biggest burdens of older airlines like American were their traditional defined benefit pension plans, the kind where a company agrees to pay a worker a fixed pension for the rest of his life based on a formula calculated by factors such as years of service and final working salary.

But Congress, some of whose members seem to believe there was once a golden age of employee benefits when everyone could count on a predictable, regular income in retirement, wanted to encourage the airlines to preserve their plans, so Washington gave the industry exemptions from rules governing how to fund these pensions. In particular, Congress allowed the airlines to assume an aggressive future rate of investment return from the assets in their pension plans, somewhere above 8 percent, compared to a more conservative 4 percent to 5 percent return for private sector plans. By magically assuming that their investment managers would make a higher return in the market, the businesses were able to reduce their own annual required pension contributions.

But what Congress couldn't do, of course, is ensure that the stock market would cooperate. Today the market is lower than it was in 2007 and the pension plans achieved nothing close to those aggressive predictions of investment returns. The result is hundreds of millions more in additional underfunding for the plans, so that American is now considering dumping its pension while in bankruptcy, a move that saddles the PBGC with the bill.

What should be worrying to average Americans is that Congress' transparently bad pension math is exactly the same kind of math that states and cities have been applying in their pension systems, with the taxpayer as the backstop. Last week Sen. Orrin Hatch, the ranking Republican on the U.S. Senate's finance committee, issued a report noting the rising unfunded liabilities of state and local defined benefit pension plans, and which illustrates the potential impact of those liabilities on the taxpayer. Pointing out that local governments' unfunded retirement obligations may now approach $4 trillion, the Hatch report noted that the failure of a few big public sector pension plans could spark a credit "contagion" that would make it difficult for all governments in America to borrow money. Federal safety-net programs like Medicaid and food stamps might be strained if retirees in government pensions saw their benefits cut sharply, as they have been in a few municipal bankruptcy cases, like those of Pritchard, Al. and Central Falls, R.I.

There are many culprits in the state and local crisis, from politicians in search of electoral support who promised much to public employees without worrying about the costs, to a flawed system that allows government pension funds to engage in the same kind of unrealistic projections that Congress employed in the American case, to consistently relying on stock market returns that might have even made Bernie Madoff blush.

Hatch thinks that states and localities have been irresponsible enough with their pensions that federal legislation is needed to head off massive defaults. Although there are constitutional issues involved, the federal government does grant certain tax advantages to these pension funds which have encouraged the states to continue them. There are any number of ways for Washington to change the incentives to prompt the states to be more responsible, which could very well prompt some states to switch to more affordable defined contribution plans. But Hatch will have a tough time convincing a Congress where some members seem to believe that the defined benefit pension was once the gold standard of retirement income, and should be again.

The reality is actually quite different. Although defined benefit plans date back more than 100 years, when a few big employers like railroads began offering them, they were never widely used for very long. In the 1930s only about one-quarter of America workers enjoyed such plans. The post-World War II economic boom encouraged more businesses to start DB plans, so that by 1960, some 50 percent of the private workforce enjoyed them. But the burden of those plans quickly began to weigh on companies. So did 1970s federal legislation designed to protect employees in these plans, which created a whole menu of requirements that added to the cost of operating them, including the obligation that companies make insurance payments to fund the PBGC.

Over time, more and more firms switched to 401(k) style pensions, where an employer makes an annual contribution to a retirement account for a worker and the employer's liability ends there. Today, only about 20 percent of private workers are covered by defined benefit plans. In other words, the so-called golden age of pensions when a majority of workers had DB plans didn't even last through the working and retirement years of a single cohort of American workers.

Only in one area did traditional pensions continue expanding, in government, where the taxpayer is the backstop when these plans get in trouble. Today, some eight in ten public workers are covered by DB plans, though governments have done such a poor job of funding their promises to workers that one analysis predicts that without reform the pension systems of 11 states would exhaust their assets by the end of this decade.

Instead of encouraging private and public employers to assume obligations that wind up crushing them, Congress ought to be pointing the way toward a system where the costs are transparent, the liabilities are not open-ended, and where retirees can count on plans that will remain solvent so that the money will be there for their retirement. The kind of accounting that Congress relied on in the American Airlines case violates all of those principals.

Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

But now Romney is the certified front-runner, and oddly, it seems that it is only now--helped along by bitter and desperate attacks mounted by former front-runners like Newt Gingrich--that Romney is coming under the kind of intense scrutiny the other candidates suffered.

Most of that scrutiny is focused, not on his squeaky clean personal life, but on his time at the head of Bain Capital, a "private equity" firm that bought out failing companies in the hope of making them profitable. In fourteen years at Bain, before leaving to turn around the failing 2002 Olympics, Romney produced astonishing returns for his investors and made a fortune for himself.

But a political group associated with Gingrich has put together a documentary riddled with errors and distortions that portrays Romney as an unscrupulous "corporate raider" who ran companies into the ground. Rick Perry, picking up the same theme for the same reason, described Romney as a "vulture capitalist."

After coming under fire for attacking Romney in terms seemingly borrowed from the Occupy Wall Street movement, Gingrich has tried to make the distinction that he is not attacking capitalism itself, just this particular bad version of capitalism.

Which indicates that Gingrich has no understanding of capitalism, because the whole idea that politicians are going to go around deciding what are the "good" versions of capitalism they like versus the "bad" capitalism they dislike--isn't this the essence of statism and of the very cronyism the right has been denouncing?

A lot of these criticisms take the form of second-guessing Bain's record, which includes a small number of phenomenal successes and a large number of failures. But that is typical of firms that specialize in venture capital or turnarounds. They are making high-risk investments, and they hope that huge returns from a few successes will cover the risks from all of the failures. And before the cultural elites start feeling superior, I should mention that this is also typical of fields like publishing and filmmaking. A few bestsellers pay the freight for all of the obscure mid-list authors, and a few blockbusters make the profits to pay for the flops.

Criticism of this kind of entrepreneurial risk-taking is annoying when it comes from commentators in the press, who on average have never run any enterprise beyond the scale of a pushcart. It is galling when it comes from politicians like Gingrich, whose motive in criticizing Bain is obvious. He's trying to divert attention from the question of what he did to earn millions in consulting fees in exchange for rather vague services to Freddie Mac, the government-sponsored mortgage lender that helped drive the entire economy into the ground. Talk about "vultures" who "take all the profit and leaving people unemployed behind."

This is a long-notorious form of inside-the-beltway corruption. Fannie Mae was infamous as a place for politically connected Democrats to cash in with astonishingly lucrative jobs in between stints in government. The idea is that they would go back and talk to their friends in positions of power about what great organizations Fannie and Freddie were and what good work they were doing. Gingrich's work for Freddie Mac seems to have been an attempt to extend that influence-peddling racket to the Republican Party. After all, when you're in the business of deciding who the "good" capitalists are, you tend to pick your friends and supporters, don't you?

Economic populism is the last refuge of scoundrels, but in this case, it is a little too obvious. Gingrich gave the game away when he told a reporter, "I don't think I'm using the language of the left. I'm using the language of classic American populism. Main Street has always been suspicious of Wall Street. Small businesses have always worried about big businesses." A classic American populist does not talk about "using the language of classic American populism." Only a history professor masquerading as a populist would say that. And since when do leaders on the right appeal to muddle-headed false alternatives like "Main Street versus Wall Street"?

Fannie Mae and Freddie Mac are perfect examples of this "good capitalism versus bad capitalism" attitude. The government-sponsored mortgage lenders enjoyed decades of implicit government support and lenient regulation because they were portrayed as a benevolent version of capitalism which helped struggling folks climb up the first rung of the ladder into the prosperous middle class. In the long run, after so many people have been knocked right back off the lower rungs of that ladder, it turns out that a bit more of a stingy, greedy, vulture-ish attitude--the kind that says, "No, you can't afford this mortgage"--might have been in order.

The same goes for all of the Solyndras of the world, and there are more of them coming. They are the "good capitalists" who get lots of government subsidies because they're going to turn a profit while saving the planet, or some other supposedly worthwhile goal, until they go broke because nobody considered it polite to check whether their product makes any economic sense.

A free economy is a lot like freedom of speech and of religion. All of these institutions are based on the idea that only individuals, not government, can properly judge what is true and good. And in all of these realms, what we should expect from our political leaders is a fair bit of tolerance toward diverging views. In fact, even greater tolerance is called for in economics. Consider the choice between a Mac and a PC, which (despite how some people regard it) is not a moral issue. It's just a trade-off, with legitimate disagreements over which is the better side of the trade. A vibrant economy is full of disagreements like that.

I am not saying that you must automatically admire someone's business success. All kinds of people have found a way to get rich. Some of them have made money more by being glad-handing, self-promoting deal-makers than by being visionary geniuses. Think Donald Trump. More than a few think that because they've been hugely successful at business, they must be super-geniuses who can immediately solve all of our political problems. Think Michael Bloomberg. And some make money by seeking out government subsidies and gaming the regulatory system. Think of GE's Jeff Immelt, who has turned his company into a "green energy" gravy train.

Thus, the one criticism I've seen of Bain that actually sticks is from a former auctioneer of failing companies who complains that Bain was deceptive in the bidding process, telling people whatever they wanted to hear in order to get ahead. That sounds a lot like the political criticisms that have been leveled against Romney. On the other hand, he undermines his case when he concludes that "This win-at-any-cost approach makes me wonder how a President Romney would negotiate with Congress, or with China, or with anyone else." If Romney's guys were such sharks as negotiators, that's precisely the sort of person we want going up against the Iranians and the Chinese. After all, what exactly does President Obama have to show as the result of his negotiating skills? I don't think anyone would describe it by using the phrase "win at any cost."

My point is that it's amazingly hard to know what businesses will be the most productive over the long run. Guys who do this professionally in the financial markets only get it right part of the time. So it is presumptuous for politicians to tell us that they are going to stand in judgment over who is a "good capitalist" and who is a "bad capitalist." And after all, the free market always offers us one real answer. If you think there is a better way to turn around failing companies, if you think more profitable long-term results could be gained by taking a different approach than Romney or Bain or all of those supposedly short-sighted "vulture capitalists"--well, go ahead and prove it.

When your financial and managerial genius has earned you more money than Mitt Romney, then maybe you can run for president and do a better job of that, too.

Robert Tracinski writes daily commentary at TIADaily.com.

Yet simultaneously, Americans have a far more positive view of the concept of "creating value." The mainstream press lauds visionary businessmen who "create value," such as the late Steve Jobs of Apple. The business literature routinely emphasizes the importance of "creating value." So many organizations wish to be seen as "creating value" that it has become a business cliche, like "best practices" and "thinking outside the box."

But in a free society, "creating value" and "making a profit" are just two sides of the same coin. Under genuine laissez-faire capitalism, all trades are voluntary. If I buy a new laptop computer from you for $500 in a free market, it means I value the computer more than the $500 and you value the $500 more than the computer. Both of us thus benefit from this exchange.

I've purchased many Apple products over the years, and in each case Steve Jobs gave me something of greater value than the money I gave him in exchange. If one multiplies that by the millions of other happy Apple customers, it means he created far more value than the value of his personal wealth. His profits were thus a measure of the immense number of other people he made better off.

But it's not only manufacturers of physical goods who create value. Service providers also create value. For example, eBay has created a robust global marketplace that allows people to engage in mutually beneficial trades with partners they might not have found otherwise. The commissions eBay collects for this service reflects the value they have created.

Similarly, insurance companies enable individuals to voluntarily share the risks of unlikely but expensive adverse events, such as a serious accident or illness. Customers pay premiums in exchange for promised payments if a covered accident or illness befalls them. An insurer must carefully analyze the likelihoods and costs of possible adverse events, then set premiums at a level that is worthwhile to customers while allowing the insurer to remain economically viable in the long run. Offering this valuable service takes rational thought and hard work. The successful insurer's reward is his profit.

Mitt Romney's former company Bain Capital also created value by a combination of venture capital and private equity services. As the Wall Street Journal recently noted, Bain took underperforming or undervalued companies and tried to turn them around through improved management. Of course, "Sometimes this mean[t] closing parts of the company and laying off employees, but the overriding goal [was] to create value, not destroy it." The result was profit for Bain's investment partners.

In contrast to profits earned by companies engaging in voluntary trade, apparent "profits" made by cronyism and political favoritism are an entirely different matter. This includes government bailouts of failing businesses or subsidies to otherwise nonviable enterprises (such as the "green energy" Solyndra company). The money they receive isn't the result of voluntary trades, but government compulsion. Taxpayers must pay for goods or services they would not otherwise voluntarily purchase. We properly look askance at those who become rich not by offering value but through bailouts and political "pull."

But honest businessmen who have earned their profits through voluntary trade shouldn't apologize for this fact. Rather they should take pride in their accomplishment, just as they take justified pride in the value they have created.

As a concrete reminder of "creating value," attorney-blogger Doug Mataconis recently observed: "5 years ago I was using a cell phone that didn't have a touch screen, didn't have apps, and didn't access the internet. Thanks, Steve Jobs."

Profits make such innovation possible and profits are the just reward for successful innovators. If we wish to continue enjoying the benefits of capitalistic innovation, we should regard "making a profit" as praiseworthy as "creating value," and give those who earn honest profits the respect and gratitude they deserve.

Paul Hsieh, MD, is a physician and co-founder of Freedom and Individual Rights in Medicine (FIRM). He practices in the Denver area.

On Friday, Obama pushed Congress to give him the authority to reorganize several government agencies, merging six that deal with trade and business development. The idea, he claims, is to cut duplication and red tape to make it "easier to do business in America." As a bonus, Obama says this will trim spending by $3 billion over a decade.

Obama's sudden realization that the federal government is a bloated mess is welcome. There's no shortage of targets at which to aim. But his proposal should be seen for what it is: a crass political move designed to inoculate himself against charges that he's anti-business.

After all, if these reforms are so important to companies, why did Obama wait three years to propose them, or wait a full year after promising such changes in his last State of the Union address, knowing Congress would never get it done in an election year?

It's just as well, since once you scratch the surface, you realize Obama's reorg would almost certainly do more harm than good. Of particular concern is his plan to mash the lean and effective U.S. Trade Representative office together with the bloated and aimless Commerce Department.

In a joint memo Friday, Senate Finance Committee chairman Max Baucus, D-Mont., and Ways and Means chairman Dave Camp, R-Mich., warned that making the USTR "just another corner of a new bureaucratic behemoth would hurt American exports and hinder American job creation." And former USTR head Susan Schwab told the Washington Post that "I don't think it makes sense to put USTR in Commerce because you'd have to reinvent USTR."

The real problem with Obama's latest gambit is that it completely misses the point. Businesses aren't complaining that the federal government has too many agencies doing the same job. They're complaining that they have to deal with the federal government at all.

On that score, Obama has made their lives far worse by imposing a mass of expensive rules and regulations, to say nothing of the nightmare that businesses know is coming from ObamaCare.

Obama's so clueless about business needs that just last week he told a bunch of Environmental Protection Agency bureaucrats that "when we put in place new common-sense rules to reduce air pollution, we create new jobs."

If the president really cared about making it "easier to do business in America," he wouldn't move boxes on an organization chart for political points. He'd undo all the anti-business policies he's already imposed.

No, the pending match-up between Mitt Romney and Barack Obama is not a choice between a vulture capitalist and a radical socialist, but you wouldn't know from listening to partisans tirelessly trying to demonize the opposing candidate.

That doesn't mean that the nation isn't truly facing a choice that will dictate how our government deals with money, or the lack thereof. But no matter who wins in November, the pain will not be over. At stake is how long the pain is going to last, and for whom.

The economic meltdown kicked off by the subprime mortgage crisis is not a cause but a symptom of our deeper problems. Even if the housing bubble had ended with a soft landing and the derivatives casino built upon it was unwound without collapse, we would still have to figure out how to finance a government that has made many more promises than it can fulfill. The Great Recession added urgency to this problem-perhaps accelerating the day of reckoning by a decade-but it didn't create it.

The mismatch between the government's ability to extract money from its citizens and the promises made to shovel money to various voting constituencies has been in the making for seven decades. Both political parties are responsible. Together they built a warfare/welfare state that has gotten so large that it threatens to swallow the economy, and by doing so shrinking it considerably.

Now two opposing economic visions are being offered from which Americans must choose. The details are still sketchy, but the contours are clear.

President Obama is asking us to follow the example of the European social democracies. His vision requires further enlargement of the role of government, continuing the trajectory of the last few years. His philosophy is anchored in a communitarian view of society in which we are all our brothers' keepers, empowering government to ensure that all citizens enjoy a minimum standard of living. His goal is to compress the differences between rich and poor by aggressive redistribution designed to maximize economic equality.

Promoters of this vision would have us believe that the government can both finance its existing unfunded liabilities and promise even more benefits to the average voter by extracting ever increasing amounts of money from an ever diminishing sector of the citizenry-the maligned 1%, against whom Obama is fomenting class warfare. They believe that, despite disincentives, the rich will continue producing wealth, handing larger portions over to the government, because, well, that's what capitalists do.

Economic growth will come from the wise allocation of capital not by profit-seeking private investors, but by government bureaucrats picking winners upon whom to bestow grants, loans, and subsidies. Meanwhile, the government will saddle the "wrong" industries with taxes, regulations, and mandates- raising revenue while shrinking politically incorrect businesses to satisfy an array of social, political, and environmental agendas.

Soon-to-be Republican presidential candidate Mitt Romney is asking us to return to our roots. His vision requires either reducing the role of government, or perhaps merely reducing its rate of growth. It's hard to tell, as Romney appears to be a technocrat driven by pragmatic results rather than ideology. He imagines a future in which the government learns to live within its means primarily by reducing spending. His vision appears anchored in an individualist ethos in which the government's role is to ensure equality before the law, not of economic outcome. His goal is to maximize opportunity, even if this leads to economic inequality.

Government will increase revenues not by narrowing the tax base but by broadening it, reducing marginal tax rates for both corporations and individuals while eliminating distorting exemptions and deductions. Capital would be allocated by private investors risking their own money in hopes of earning profits, with the government standing aside. Regulations, mandates, and other encumbrances on business would be reduced or eliminated.

Promoters would have us believe that the ensuing changes in incentives, a reduction in regulatory uncertainty, and a more internationally competitive tax regime will stimulate investment and growth in the private economy. Under the rosy scenario, this growth will be fast enough to outstrip the demographic tsunami threatening to bankrupt the government as Baby Boomers retire and demand to collect on promises made to them. The more likely outcome is that entitlement spending will have to be means tested and cut.

Regardless of who wins the presidency, the House of Representatives will be dominated by restive conservatives working to ensure that the U.S. never goes the way of the European social democracies. They will do their best to roll back key portions of the entitlement state, starting with Obamacare. It is extremely unlikely that either party will win a filibuster-proof 60-seat majority in the Senate, so both parties will retain the power to grind legislation to a halt.

If Romney wins, he will find it a tremendous challenge to govern. With a little luck he may be able to enact some portions of his program. If he does, the pain will be sharp for some, particularly those whose economic well-being depends on an uninterrupted flow of checks from the government. If he succeeds in rekindling significant economic growth it may buy the country some time to get its books in order.

If Obama wins, he will find governing not just hard, but impossible. The ensuing four years will be marked by ceaseless political warfare while the government is left to grow on autopilot. Tax rates will automatically go up across the board as the Bush tax rate cuts expire. The phony across-the-board spending cuts due to kick in in 2013-which were embedded in the last 11th-hour compromise-will be revealed as a fraud. If it survives a court challenge, a crabbed version of Obamacare will roil the private sector as its public components get crippled by lack of funding. Continuing resolutions and debt ceiling theatrics will continue to replace rational budgeting. Maybe the economy will enjoy a brief and anemic recovery and maybe it won't. Either way, the day of reckoning will draw nearer.

There are, of course, other clear differences between the two presidential candidates and their parties, but the one thing most rational people agree upon is that culture war conflicts are a luxury we cannot afford this election cycle. What difference will it make whether gay marriage is banned or enshrined if the federal government follows Greece, Italy, Spain and the rest of Europe into insolvency?

Bill Frezza is a fellow at the Competitive Enterprise Institute, and a Boston-based venture capitalist. He can be reached at bill@vereverus.com. If you would like to subscribe to his weekly column, drop a note to publisher@vereverus.com or follow him on Twitter @BillFrezza.

The media argument goes like this: After years of struggling, the economy is finally churning out jobs. Last month alone there were 200,000 new ones, with unemployment falling to 8.5% - its lowest since Obama entered office.

This comes as a variety of U.S. economic sectors begin to show signs of life. And as they report this, the mainstream media can barely conceal their glee at the idea that Republican candidates might have to run against President Obama during an economic boom.

Boom? Well, the Fed doesn't see it that way.

Alarmed at the economy's slow pace, the ongoing slump in housing and the threat of European debt defaults, the central bank is preparing a third round of "quantitative easing" - the monetary equivalent of a defibrillator paddle placed on the economy's chest.

This is rather strange, given that the previous two attempts - QE1 and QE2- did little to help the economy. Indeed, those efforts may have so distorted markets and interest rates that they held back the recovery.

But say this for the Fed: It didn't sit on its hands. In those first two QE efforts, it bought $2 trillion of government-backed mortgage securities and federal bonds.

The Fed's idea behind this was to hold down interest rates and boost housing - a necessary prelude to reviving the entire economy. Only problem is, it didn't work.

Even with interest rates today below 4%, housing experts expect prices to continue to soften in 2012, and see mortgage lending falling to its lowest level since the '90s. Mortgage defaults are up, and housing's share of the economy has already dropped nearly 20% since 2005 to about 15% of GDP, according to industry data.

Worse, just-released minutes from 2006 Fed meetings show central bankers had no clue the U.S. was about to be hit by a housing tsunami of epic proportions. If they couldn't predict the future then, why should we have faith they can now?

Given its past failures, the Fed should resist the temptation to print more money. Stand pat. As the joke goes, "don't just do something, stand there."

As we've noted before, our slow growth is now a fiscal problem, not a monetary one. It's a function of too much government and surging debt, which have destroyed business and consumer confidence.

Just Thursday, Obama sought another $1.2 trillion in debt, pushing his total since 2009 to $6.2 trillion. Big government is out of control, and the people know it.

More Fed meddling and Obama stimulus won't help. Rather than another round of quantitative easing, the Fed and the White House should heed the physician's credo - First, do no harm. That's the best policy of all.

A quick look at the income statement of this troubled firm tells the story. Just in the past year (FY 2011) the firm spent $3.7 trillion, but took in only $2.2 trillion in sales revenues. Hence its deficit came to $1.5 trillion.

Just in the first three months of the new year (FY 2012), the firm's troubles continued. Outlays for all purposes came in at $874 billion, but income was only $554 billion. So the shortfall was $320 billion. No hope of a self-imposed turnaround here. Indeed, both the senior management and the board of directors show no signs of making major changes to their business strategy.

Hope for future profits? That's out of the question. The firms only chance of survival is a takeover.

Worldwide employment for U.S. Government, Inc. is estimated to be over two million, a completely unmanageable number for a venture like this. Total compensation for this company is roughly twice the level of its private-sector counterparts. And its retirement and health-insurance benefits are so large in relation to contributions paid that its benefit plans are careening toward insolvency.

In fact, the total debt of this firm now equals its total income -- an unsustainable position that suggests to many observers that future financing needs will not be met.

The product line of this troubled firm has been rejected over and over by growing segments of its customer base. And its product pricing (taxes) is not even remotely competitive. Even worse, heavily unionized work rules and regulations are so onerous that the prospects for even reasonable productivity and efficiency are long gone.

Its credit rating? That's been marked down, with more downgrades expected in the future.

The very troubled U.S. Government, Inc. had long been either number one or in the top three worldwide in terms of economic freedom. But as a result of all these deteriorating conditions, it has fallen four years in a row in this category, slipping all the way to tenth. In fact, over the past ten years, the firm has barely grown and its share price has been flat. Without the kind of radical change that comes from a takeover and turnaround, more economic slippage is baked in the cake.

Restructuring this company seems a hopeless proposition. But wait a minute. There's a highly regarded private-equity operation located in Boston that has a good (but not perfect) track record in turning around hopeless ventures. Though there have been failures for this firm, notable successes include Staples, The Sports Authority, Domino's Pizza, and Steel Dynamics.

Anyone operating in business knows full well that even the smartest reorganizing firms are prone to failure as well as success in our free-market capitalist system. But the customer base of the troubled U.S. Government, Inc. seems like it is desperate enough to go the takeover route.

Some are concerned that private-equity specialists are too hard hearted. But in these tough times, people are willing to take a risk. That even includes the current CEO of the failed U.S. Government, Inc., one Barack Obama. He just announced plans to merge the Department of Commerce, the Small Business Administration, and the Office of the U.S. Trade Representative. In other words, he's borrowing a private-equity tactic.

Alas, this move is way too small and way too late. Much more radical surgery will be necessary.

At a recent family election in New Hampshire, the former head of the Boston takeover firm, one Mitt Romney, emerged victorious with a sweep of all the key voter segments. Sounding like Ronald Reagan on the evening of his victory, the former turnaround CEO expressed confidence that the troubled U.S. Government, Inc. could be saved. He was even optimistic.

But he warned that if family members expected a bidding war for more unpaid-for benefits with excessive price tags, well, he wouldn't be the man for that job. Tough measures would be necessary instead.

So now the question is, will America, Inc. ask this former turnaround CEO to prevent the bankruptcy of U.S. Government, Inc.? Isn't a Bainful turnaround exactly what America needs?

More than any other country, the U.S. can lay claim to being the home of economic freedom. Our giant economy was, to an extent greater than any other, built on free markets and free people, an inspiration to the world. It's a major reason we're the wealthiest nation on Earth.

Sadly, in recent years our freedom has waned.

Each year, the Heritage Foundation and the Wall Street Journal rank the world's nations based on their level of economic freedom. Countries are ranked on 10 measures that include rule of law, openness of markets, regulatory burden and size of government.

The ranking goes from 0 to 100, with anything above 80 considered free. That used to be us. But this year, the U.S. ranked 10th, its lowest ever, from ninth in 2010. As recently as 2006 we ranked fifth.

On the overall index, we slipped from an all-time high of 81.2 in 2007 to 76.3 last year - four years of decline, paralleling a similar slide in quasi-socialist Europe.

Now we're considered only mostly free, ranking just behind the island nations of Mauritius and Ireland, but just ahead of Denmark and Bahrain. Canada is now the freest economy in the Northern Hemisphere.

How did we get here? According to the compilers of the data, the U.S. is a lot less free in a number of areas - including monetary policy, finance, property rights and especially corruption and government spending.

In short, under President Barack Obama, we're heading in the wrong direction. And if you think this doesn't matter, think again.

Economic freedom, as measured by the index, correlates strongly with economic performance. As our economic freedom declines, we'll have a slower growing economy, fewer jobs, lower incomes and, in general, a reduced standard of living. It's already happening.

Can something be done about this decline? Of course.

"Restoring the U.S. economy to the status of a free economy," the report says, "will require significant policy changes to reduce the size of government, overhaul the tax system and transform costly entitlement programs," among a number of other things.

Unfortunately, none of this is likely to come from the White House's current occupant. Such sweeping change is something only an election can bring about.

As much as there is a perception of disjointed confusion to all these "emergency" measures, including the ad hoc and disconnected timing to them, there is a definite element of commonality running through them, an unmistakable theme. Central monetary authorities are, in essence, running through a kind of pre-scripted economic playbook. As with most things monetary or economic it was developed from exhaustive analysis of the Great Depression.

Nearly fifty years ago, back in 1963, Milton Friedman and Anna Schwartz published, through the National Bureau of Economic Research, what amounts to the monetarist guide to handling a depression crisis, titled "A Monetary History of the United States, 1867-1960". It was a seminal work in many ways, not the least of which was that it offered an insightful, logical and, most importantly, a very plausible assertion of just how the Great Depression became so "great". Until its publication there was still, several decades afterward, quite a mystery as to how an estimated (their estimate) $2.5 billion in accumulated banking system losses, spread amongst deposit-holders and stock-holders of banks, could lead to an estimated $85 billion in losses to the value of all common and preferred stocks in the United States. As Friedman and Schwartz noted in their book, "A loss of $2.5 billion is certainly sizable, yet by itself it would not entitle bank failures to the amount of attention we and other students of the period have devoted to them."

The Great Depression, in their analysis, was wholly unwarranted because of monetary mistakes. The banking crisis permuted into a money crisis, the currency disease of deflation, simply because of two related and concurrent deficiencies or feedback loops.

The first was that currency was in short supply relative to the growing demand for it, as depositor faith in the banking system fell proportionally to the number and size of bank failures. Fractional reserve lending has always featured this kind of deficiency, namely that banks only have enough currency or reserves to repay or redeem a small fraction of their liabilities. Whenever the demand for that currency rises, there is the danger of a shortage, raising the cost of currency to inefficient and dangerous levels.

The Federal Reserve was created and empowered to alleviate just this kind of condition, known as money inelasticity. It was supposed to ensure that currency would never be in such short supply in the inevitable cycle of credit boom and bust. Yet, in the 1929-1933 collapse period "the banking system as a whole was in a position to meet the demands of depositors for currency only by a multiple contraction of deposits, hence assets." In other words, banks were forced into the desperate liquidations we now call firesales because, as Friedman and Schwartz believed, the Fed was behind the curve on systemic liquidity.

The second great monetary deficiency is where these liquidations became a systemic danger, where problem banks become a millstone around the neck of the entire system. The bank runs that fed the desperate process of firesale asset dispositions distorted market prices, leading to a systemic devaluation of bond prices since desperate banks are typically forced to raise cash in the most liquid markets. Without true currency elasticity, there are little options except to raise currency in markets where it is actually available, often meaning the markets for high-grade or first-rate securities.

"Banks had to dump their assets on the market, which inevitably forced a decline in the market value of those assets and hence of the remaining assets they held. The impairment in the market value of assets held by banks, particularly in their bond portfolios, was the most important source of impairment of capital leading to bank suspensions, rather than the default of specific loans or of specific bond issues. As W.R. Burgess, at the time a deputy governor of the New York Reserve Bank, told the Bank's board of directors in February 1931, the chief problem confronting many banks was the severe depreciation in their bond accounts; ‘given a better bond market and rising bond prices...the condition of banks now jeopardized by depreciation in their bond accounts would, in many cases, improve automatically beyond the point of immediate danger.'"

Indeed, Friedman and Schwartz cite several examples of how erstwhile "good banks" were ruined because of the market values of their bond investments:

"The depression of bond values, which started as far back as 1929 in the field of urban real estate bonds and reached foreign bonds and land bank bonds in the course of 1931, began to endanger the whole banking structure and notably the large city banks the moment first-grade bonds were affected in a most drastic way: From the middle of 1931 to the middle of 1932, railroad bonds lost nearly 36 per cent of their market value, public utility bonds 27 per cent, industrial bonds 22 per cent, foreign bonds 45 per cent, and even United States Government securities 10 per cent."

This led to an odd quirk of regulation, one that proved fatal in the cases of so many banks:

"Because there was an active market for bonds and continuous quotation of their prices, a bank's capital was more likely to be impaired, in the judgment of bank examiners, when it held bonds that were expected to be and were honored in full when due than when it held bonds for which there was no good market and few quotations. So long as the latter did not come due, they were likely to be carried on the books at face value; only actual defaults or postponements of payment would reduce the examiners' evaluation. Paradoxically, therefore, assets regarded by the banks as particularly liquid and as providing them with a secondary reserve turned out to offer the most serious threat to their solvency."

If a bank held bonds that traded regularly, chances were that those bond prices were irregularly devalued by the firesales of troubled banks, spreading further disease into systemic bond portfolios. Bank examiners, filling their bureaucratic role too well, read these prices as a measure of solvency, closing banks based on their perceptions of how said prices ultimately affected the overall condition of the bank (disregarding any thoughts of whether firesale prices are appropriate measures of solvency).

Because the most liquid securities were also thought to be the safest, and therefore were likely the most widely held, this distress was spread through the very securities that should have been the most insulated from crisis. So surprising bond price declines led to the suspensions of more than a few larger banks:

"The president of Federation Bank and Trust Company, closed by the New York State Superintendent of Banks on Oct. 30, 1931, explained that the bank had prospered for many years ‘and as a matter of fact right up to the past few months, when due to the nationwide rapid and unforeseen depreciation in bonds and other securities, the falling away in values of the bonds and securities owned by the company impaired the bank's capital structure'"

As these devalued bond prices transmitted distress across the whole system, the resulting bank suspensions fed into the already fearful population. The result was a self-sustaining feedback loop, where bank runs led to firesales, that then further suppressed bond prices, leading to more suspensions and then more fear and runs.

There is a healthy debate on just what kind of stance the Federal Reserve took in the early 1930's, but there is no debate about the results. The secondary effects of these two prime inadequacies were the shocking collapse of the money stock (estimated to be about an astounding 33%), ultimately leading to the collapse in national income and net national product (an unfathomable 53%). Thus the banking system's $2.5 billion in notional losses produced an oversized catastrophe that lingers in both the popular imagination and the professional instinct toward activism.

We see the implications of Friedman's and Schwartz's criticisms in nearly every central bank measure of the current crisis period. Money elasticity was enforced by quantitative easing and dollar swaps, ensuring (at least in theory) that there was enough supply of currency to meet rising demand (the Fed has misidentified which currency is in short supply, namely quality interbank collateral, but that is another topic). In addition, the bond market's fatal flaw, what is now called "contagion", is vigorously combatted by the (to this point ineffective) constant bond market interventions of both the Fed and ECB, where bond prices are supported by constant central bank bids, or even just the rumors of such. Further, as much as we might believe the suspension of mark-to-market in 2009 was a novel idea, it is directly implied here by the authors' work in 1963.

What is important to note is that none of these measures are proactive or precautionary. These are ex post facto measures designed for one single purpose, namely to keep the banking system from turning a cyclical downturn into a full-blown depression. Indeed, that is exactly what we have been told is the new conventional wisdom of 2009, that Bernanke saved the world from another Great Depression. Never mind that Bernanke downplayed the severity of the banking contagion, thought the economy would only experience slowing growth in 2008, and was desperately wrong on real estate prices, all that matters is that the Federal Reserve took Friedman and Schwartz to heart, heroically acting to keep the banking system off the same path to economic calamity that the 1930's economy tragically followed.

There has to be something a little more than troubling, then, that such valiant measures have had to be re-instituted repeatedly across the globe in the three-plus years since. If we do get to QE 3.0, it will be the fourth massive dose of money elasticity in as many years. To explain this chronic state of dysfunction, mainstream economics has coalesced around the idea that central banks have the right policies, and have correctly followed that 1963 playbook, just that the doses were too timid and were applied with far too much reluctance. In other words, central banks should have immediately embraced unbridled monetary measures including the outright printing of money (or at least its 21st century equivalent) and directly monetizing government debts. Even Milton Friedman's subsequent analogy of dropping money from a helicopter has been cited.

There is, however, an alternate explanation to the continued failure, even one that largely agrees with the framework set up in 1963. If we set aside any discussion about the predicate causation of the over-expansion of credit that preceded both the 1929 and 2008 collapses, there is still an obvious flaw to the central banking application of what came from Friedman and Schwartz (I believe they are wrong to downplay the expansion of credit in the 1920's as a proximate cause, just like it is wrong to overlook the rapid expansion of credit money in the 1990's and 2000's as anything other than another form of monetary mistakes and hubris manifesting as asset inflation). Without even getting into a discussion of just what causes these booms and busts, we can see the flaws of monetary suppositions on central banks' own terms.

If we identify the firesale prices of widely held, liquid bonds as the active transmission mechanism of wholesale malfunction, then actively encouraging, even herding banks to all purchase the same types and issues of bond instruments is both inherently dangerous and even suicidal. In other words, the true systemic danger to the banking system is not really the shortage of currency or money elasticity, it is homogenization. That was the reality of 2008 where the securitization and replication of structured finance meant that similar securities were in place at nearly every large financial institution on the planet. So when firesales started, the prices that saw initial declines forced losses on nearly everyone in the space (accounting for hundreds of billions of dollars).

In the years since, that systemic flaw has been intentionally replicated through the regulatory encouragement for banks to find "safe" collateral - which all happened to be the same basic type of bond. So the price of one largely affects the price of all, the very definition of contagion.

Even going back to the pre-crisis period, marginal credit expansion was accomplished through securities rather than traditional, idiosyncratically priced or unpriced loans. The over-expansion of the financial economy through the investment banking franchises of Wall Street led to dominant conditions where liquidity and trading were prized, necessarily precipitating the dangerous homogeneity that plagued the early 1930's.

Friedman and Schwartz note that by 1929, "investments" of commercial banks had risen from 29% of their assets in 1920 to 40% by 1929, a huge marginal expansion. Much of this rise had been due to merging retail banking operations with investment banking functions, "combining the function of investment distribution with that of credit extension". It is not hard to see why Glass-Steagall was instituted in 1933 (the second law that bears this name).

"These developments in banking were part of the general surge of financial activity so distinctive of the twenties. The main features of the financial activity, which culminated in the great stock market boom, were the public flotation on a large scale of foreign securities for the first time in U.S. history, and a widening shift by domestic concerns from bank loans to public issue of bonds and stocks as a means of raising funds."

That the financial economy of the 1990's followed right down the exact path of the 1920's seems to have been lost into the swirl of manipulated conventional wisdom of the 2000's. The Great Moderation was nothing more than a repeat of the "Roaring Twenties", complete with the inevitable collapse and despair. The absolutely vital lessons of the depression generation were ignored in the new age of mathematical predictions and complex bank evolutions.

Instead of putting lending back in lending, allowing traditional banks to set the marginal standards and pace of credit production, current policymakers do everything in their power to maintain the marginal importance of securities, trading and investment banking. Sure, there was some hand-wringing in 2009 and 2010 about the 1999 repeal of Glass-Steagall or ending "too big to fail", as well as some discussion about peripheral issues like the proprietary trading of these investment banks. But what is really outrageous is that not only has nothing been done about restricting the marginal importance of investment banking, and thus contagion danger, it has been allowed to progress to even higher levels.

In the end analysis, though, the reality is that the investment banks themselves are a politically favored class. Despite the mountain of evidence that their actions and even their current framework are inherently destabilizing and downright dangerous, there is no serious discussion about reining them in. The very handbook that forms the basis of current monetary crisis beliefs has been discarded on only this one point. For some reason, central banks desperately fight for monetary elasticity, but shy away from the real source of contagion as if there is no alternative.

What is really important and peculiar here is that central banks have utterly digested, incorporated and hold themselves to the 1963 script of crisis interventions; except for this one nontrivial aspect. Their failure to fully incorporate the ultimate systemic danger of homogenized banking renders all their efforts (no matter the magnitude) fully incapable of accomplishing the real task of economic healing. As long as the financial system continues on its path toward securities-based lending, and the constant emphasis on trading and imbalanced speculation, the systemic danger continues to multiply exponentially, not revert back to something more manageable and stable.

There are a number of answers as to why this is the case, why investment banking continues to garner such a preferential status. Some would surely argue that this investment banking model is a positive evolution or progression, so it makes little sense to revert back to the traditional fractional banking system that was also, or even equally, unstable (yet little thought is ever given to the whole idea of fractional lending itself). I have made the case that Wall Street is the realized ideal of monetary control, that the Federal Reserve has found its preferred tool for carrying out the transformation of a once free market economy to the soft repression of a new, lighter form of central economic planning. I have also made the case that the financial economy of the investment banking world has simply become too large, now a goal unto itself.

The full answer is probably a combination of all of these, as well as some other factors. The Federal Reserve, since its creation in 1913, has always been dedicated to one purpose, money elasticity. True elasticity, though, extends beyond just money printing or expanding its balance sheet. Real elasticity recognizes the destructive potential of systemic devaluation through homogeneity, regardless of whether it is undue or not, and how this kind of capital destruction is the exact same thing as destroying money.

With that in mind, the system finds itself in a bit of a paradox. To achieve true elasticity requires a sustained move away from homogenous credit creation, necessarily leading to a de-emphasis of investment banking. But any such move is vehemently resisted not just by the investment banks, but also central banks themselves, meaning the Fed or ECB can never hope to fulfill their true task of money elasticity. Perpetual crisis, volatility and instability are the fruits of this paradox.

Jeffrey Snider is President and Chief Investment Officer of Atlantic Capital Management, a registered investment advisor. 

For many conservatives, the people to blame were executives at the government-sponsored enterprises Fannie Mae and Freddie Mac, whom they believe recklessly purchased mortgage-backed securities (MBS) by the billions because the government would intervene if things went south. Many liberals theorized that outsized Wall Street bonuses led bankers to put short-term profits ahead of long-term security, while deregulation of the financial sector allowed them to get away with it.

Jeffrey Friedman and Wladimir Kraus, in their new work Engineering the Financial Crisis, seek to elevate empiricism in the debate. They ultimately don't buy either popular explanation, but they do claim to have found the true culprit. The financial crisis would not have happened, they argue, if developed countries had not adopted something that you've probably never heard of called the Basel Accords. Their assessment has the potential to shape the debate about the causes of the 2008 financial crash going forward.

Friedman and Kraus, respectively a political scientist and an economics doctoral student, are not whom you might first turn to as authorities on the economic downturn. Their approach is straightforward: they simply gathered all the preeminent explanations of the crash, and then assessed them one-by-one, looking for confirming or discrediting evidence. Friedman first brought together many credible accounts of the collapse in the 2010 book What Caused the Financial Crisis, which featured chapters by many prominent economists and finance experts, including the Nobel Prize winner Joseph Stiglitz from the left and Stanford economist John Taylor from the right.

In Engineering the Financial Crisis, Friedman and Kraus examine the most convincing arguments presented by our more prominent economists. They dispense with the case, presented by Stiglitz and others, that Wall Street compensation schemes led to excessive risk-taking by pointing out that there's almost no evidence whatsoever to support that view. They can find only one study that even purports to connect bank compensation schemes to overinvestment in risky securities.

Similarly, Friedman and Kraus brush off the Fannie/Freddie thesis. They acknowledge that the two GSEs played a significant role in inflating the housing bubble, pointing out that they "funded 45 percent percent of all mortgages outstanding as of the second quarter of 2008." Nevertheless, they show that the market never actually perceived the GSEs' problems as a crisis.

The price of Treasury debt never spiked above that of GSE debt in the way that it did for private banks, signaling that investors were never concerned that the government wouldn't step in and guarantee GSE debt. In other words, the market always knew that Fannie and Freddie's had government backing, and as a result never panicked about their safety. Based on yield spreads, "investors were about three times as concerned about the default risk of the banks as they were about the default risk of Fannie and Freddie."

The one explanation that Friedman and Kraus believe has supporting evidence is the theory that bad incentives created by the Basel I and II international financial regulations. These were rules first developed and signed on to by G-10 nations in Basel, Switzerland, in 1988, that established reserve requirements for banks.

The idea is simple: the rules included different minimum reserve requirements for different asset classes, and mandated too-low reserves for mortgage-backed securities (which both regulators and ratings agencies regarded as safe at the time). The more MBSs banks had on their books, the less cash they had to keep in the vault to meet regulatory requirements, leaving them with more capital with which to seek out profits.

The result was that commercial banks took on more MBSs than they would have without the regulations, only to find out once the bubble burst that their "safest" assets were in fact the most risky. This story not only describes a plausible mechanism by which banks wound up with far too many risky asset-backed securities in the fall of '08, but it also helps explain why the financial crisis struck so many developed countries simultaneously.

Friedman and Kraus provide a few key datapoints to back up their thesis. Although the U.S. never implemented Basel II, the second round of regulations for how private banks must weigh risks, it did adopt something very close to this rule, called the Recourse Rule. The Recourse Rule encouraged banks to hold highly-rated asset-backed securities and penalized them for holding other assets. Crucially, the Recourse Rule went into effect in 2001, and its introduction was immediately followed by an explosion of private-sector MBS growth. Non-commercial bank investors, not subject to the rule, purchased far fewer MBSs, suggesting the regulations were the driving force.

Why did the experts who agreed to the Basel Accords miss the dangers of MBSs? Friedman and Kraus argue that they did so out of ideology -- not political ideology, but a commitment to technocratic activism. Regulators believe they can solve the market's imperfections. These regulators were no exception.

The original imperfection was the frequency of runs on banks became during the Great Depression; market failure, at least according to some theorists. The solution was depositors' insurance, which in turn created a new problem, namely moral hazard.

If bankers knew the government would step in if they lost money, they might respond by taking on additional risk. The Basel Accords were designed to correct this problem by using reserve requirements to regulate and manipulate banks' risk-taking activities. The regulators failed to appreciate that in doing so, they took on the role of risk managers themselves. Their actions introduced the possibility that they, not the bankers, could cause banks to take on too much risk.

Joseph Lawler is an editor at RealClearPolitics.