First, a brief primer on interest rates and monetary policy: the 0.25% interest rate quoted by the Fed is known as the federal funds rate; this is the interest rate established by the Federal Open market Committee at which depository institutions, such as banks, lend balances to each other overnight. The fed funds rate is a key data point which drives monetary policy and the cost of credit in the United States and the world.

The Fed's primary means of implementing monetary policy and affecting the fed funds rate is through open market operations in which the Fed buys treasuries (to add money into capital markets thereby lowering interest rates) or sells treasuries (to drain capital markets of money thereby raising interest rates). The importance of treasuries in implementing monetary policy was highlighted in Alan Greenspan's book, The Age of Turbulence, when he discussed the possibility that the national debt could be paid down as a result of forecasted surpluses in January of 2001: "of course, shedding the debt burden would be a happy development for our country, but it would nevertheless pose a big dilemma for the Fed. Our primary lever of monetary policy was buying and selling treasury securities. But as the debt was paid down, those securities would grow scarce, leaving the Fed in need of a new set of assets to effect monetary policy. For nearly a year, senior Fed economists and traders had been exploring the issue of what other assets we might buy and sell."

Another important and oft quoted interest rate is the discount rate, which is the rate at which the Fed lends directly to depository institutions. The Fed could change this rate directly, however, and typically the discount rate closely tracks the fed funds rate and is of secondary importance. The third key tool by which the Fed could impact interest rates is by changing reserve requirements, which is the amount of funds that a depository institution such as a bank must hold in reserve against specified deposit liabilities. However, the Fed is loathe to change reserve requirements due to the potential liquidity problems it could create for some banks and the difficulty in forecasting how a change would impact the multiplier effect on the money supply. In that sense, the buying and selling of Treasuries serves as the Fed's method of choice for conducting open market operations, and as such, the amount of Treasuries held on the Fed's balance sheet relative to bank reserves and money supply are important in determining the Fed's ability to enact monetary policy.

Each week, the Federal Reserve publishes its balance sheet, typically on Thursday afternoon at 4:30 pm. As of November 11, 2009, The Fed's total assets stood at $2.1 trillion composed of an assortment of securities. Approximately $777 billion is U.S. Treasuries of various maturities which, if the Fed decided it wanted to raise rates, would be the primary ammunition with which to impact monetary policy. Given that the M2 money supply stood at $8.3 trillion as of September 2009 and excess bank reserves held on deposit by banks at the Fed surpassed $1 trillion on November 4, 2009, even if the Fed sold every treasury in its vaults (a highly unlikely scenario), it would only represent 9% of the money supply and still leave banks with approximately $672 billion of excess reserves.

To give you a point of reference, excess bank reserves were as low $267 billion in October 2008 (thus they've increased by a factor of four in the span of a year) and the M2 money supply was about $1 trillion lower in January 2008 ($7.4 trillion to be precise). All this liquidity came from the Fed of course, but the key problem is that the Fed may not be able to take back what it has so generously given. The reason is that the liquidity was used to buy over $1 trillion of ‘assets' which the Fed holds on its balance sheet as a result of bailouts, which includes but is not limited to: $150 billion of agency debt (Freddie Mac, Fannie Mae, etc), $776 billion of mortgage backed securities, $200 billion of term credit and loans extended to banks, and roughly $65 billion of assets held in Maiden Lane LLC's which were the vehicles formed to facilitate the Bearn Stearns bankruptcy and AIG bailout.

The liquidity of the aforementioned securities is likely very low and their value as listed on the Fed's balance sheet is likely a far cry from what an arm's length sale would yield in today's markets. Furthermore, if the Fed were to dump its MBS or agency debt into the market, it would likely cause real estate values to plummet again. These two features of these ‘assets' eliminate them as securities which the Fed could use to conduct open market operations and impact interest rates. As such, the Fed really only has the capacity to sop up $777 billion of liquidity through the sale of its securities, which still leaves substantial excess reserves in bank coffers and only decreases the level of M2 money supply to levels last seen in October 2008.

In conclusion, it is very possible that the Fed does not have the securities to impact interest rates in a meaningful way and as such, is presently forced to maintain its stance that it will not increase rates (because it really cannot) despite the specter of looming inflation and asset bubbles. Although the Fed may point to readings of misleading gauges such as the CPI and core inflation as proof that monetary expansion has not caused inflationary pressures, the market seems to believe otherwise as all time-highs reached in gold prices, the debasement of the dollar relative to other currencies, and strong crude oil pricing despite weak crude oil fundamentals all point to the dramatic oversupply of dollars.

Sammy Abdullah is an analyst with Prudential Capital Group in Dallas, TX.  Feel free to email him with comments at sammyabdullah@gmail.com. 

Congress seeks to use this crisis to do what Democrats have wanted to do for years-to write into federal law, for the first time, a requirement that employers give workers paid sick leave.

On Tuesday Connecticut Democrats Senator Chris Dodd and Representative Rosa DeLauro released the Pandemic Protection for Workers, Families, and Businesses Act, which would require that all employers with more than 15 workers offer full-time workers seven days of paid sick leave, and part-time employees a share commensurate with hours worked.

"This isn't just a workers' rights issue - it's a public health emergency," said Mr. Dodd. "Families shouldn't have to choose between staying healthy and making ends meet."

But with an unemployment rate of 10.2% and forecast to rise even further, the additional cost of paid sick leave would discourage hiring, lower some workers' wages, and cause others with low-skills to lose jobs.

Under the bill paid sick time would not just be available when workers were sick. An employee would also be able to use leave to look after sick children-to stay home with them when they were sick, to take them to the doctor for routine as well as sick visits, or to stay home with them when schools were closed due to the sickness of other children.

Use of sick leave in the bill is restricted to contagious diseases, but it's a fair bet that as soon as Congress hears from breast cancer patients, HIV/AIDS sufferers, and car accident victims that the law would be extended to cover all sickness.

The Dodd-DeLauro bill is similar to the Healthy Families Act, originally sponsored by the late Senator Edward Kennedy, and the Emergency Influenza Containment Act, sponsored by Chairman George Miller of the House Education and Labor Committee.

Bills to require sick leave have never passed Congress for a simple reason: they don't make sense. More than three-fourths of workers already have sick leave and would derive no benefit from a new federal law; workers without sick leave are often in entry-level jobs and might lose their jobs altogether.

The bills are open to abuse. The Dodd-DeLauro bill states that "paid sick time shall be provided upon the oral or written request of a covered employee" without medical certification needed, and employers are not allowed to consider potential abuse of sick leave into account when considering promotions or raises. Sick workers mean others have to pick up the slack.

Economists such as Harvard's Alberto Alesina and MIT's Olivier Blanchard, now International Monetary Fund chief economist, have reached the same conclusion: European labor market regulations, including those that award sick pay, have resulted in higher unemployment because employers substituted labor-saving machines as the cost of low-skill workers went up. With the U.S. unemployment rate at a 26-year high, this is not the time to price American workers out of jobs.

The Labor Department estimates that 77% of full-time private sector workers and 89% of state and local government employees have some paid sick leave, and still others have access to nonspecific, personal time off-days that they can use for vacation, illness, or other purposes. Many employers without formal policies give leave on a case-by-case basis, to prevent contagion.

It is admittedly hard for workers without paid leave to stay home when they are ill and for single parents, often mothers in low-wage jobs, to look after sick children. But it would be even harder for these workers to lose their jobs altogether and be unemployed. In October 36% of the unemployed had been out of work for over six months, and finding work is a challenge.

The International Franchise Association estimates that the Healthy Families Act would cost an average franchise business-typically a fast-food restaurant or a motel--$800 to $1,000 a year for each employee, plus additional costs for "temporary staff, additional record-keeping, burdening co-workers with increased workloads, or the loss of business due to decreased productivity caused by absent staff."

Local restaurants, clothing stores, and computer repair shops are exactly the sort of businesses that might not give sick leave today, and would offer fewer jobs tomorrow if sick leave were required. Teenage unemployment stands at 27%. If Congress passes a sick leave bill, teenagers and others looking for entry-level jobs will have even more difficulty finding a job.

The real crisis that grips most Americans of working age is not swine flu but the economy, and the fear that jobs will vanish tomorrow. When members of Congress go home for Thanksgiving recess, constituents will tell them not to make the economy worse. That common sense prescription means Congress should abandon required sick leave, and instead focus on how to put America back to work.

The federal government released a report on October 30 announcing that the $787 billion stimulus package had "created or saved" 640,000 jobs to date. The report has admirable specificity, reporting job creations and savings down to the employer and zip code. Trouble is, a lot of the data are wrong. Since the release, reporters at papers all over the country have busily written takedowns, picking out nonsensical factoids among the data.

The Chicago Tribune found that several Illinois school districts reported saving jobs for more teachers than they actually employ. The Financial Times learned that UCLA was counting tenured faculty among employees whose jobs were "saved" with stimulus dollars. Boston Globe reporters found a Head Start program in Greenfield, Mass., that claimed to save 90 jobs for $245,000 - an impressive $2,700 per employee. They also noted that the City of Revere created 64 jobs with a $485,500 project to install solar panels on a school's roof (presumably, that's 64 Green Jobs).

Moving to bigger fish, The Sacramento Bee noticed that the Cal State University system reported retaining 26,156 employees due to the stimulus - roughly half its workforce. Asked about this figure, which would seem to indicate a calamity averted, a CSU spokeswoman confirmed it was inflated and said, "This is not really a real number of people... it's like a budget number." (Only in California is "budget number" a synonym for "fake number.") It turned out stimulus funds were enough to pay half the system's employees for two months, not a whole year.

Some of these errors reflect confusion on the part of stimulus grantees when asked how many jobs they created, as is the case with a Kentucky shoe store owner who reported creating nine jobs with a contract for $889.60 - because he sold nine pairs of boots to the Army Corps of Engineers. But other errors come from the top. For example, the Department of Health and Human Services told grantees to reflect pay increases as fractional jobs created - as though a 5% pay increase is the same thing as creating 1/20 of a job.

And the errors add up. Reporters at the Washington Examiner reviewed the above reports and others from regional newspapers, concluding that at least 75,000 of the 640,000 "created or saved" jobs are bogus.

These vast data integrity problems are worthy of attention (and mockery). But by focusing on reporting issues, we risk giving the "jobs created or saved" statistic even more credit than it deserves. Even if all the reporting were fair and accurate, the stat would still be meaningless, because most of the jobs would have been saved anyway. Here's why. "Jobs created or saved" is a claim about the employment situation compared to a counterfactual world in which the stimulus was not enacted. Since this world doesn't exist, the government has to guess about what it would have been like. This is necessarily a subjective process with unverifiable results.

Unfortunately, the government has chosen a nonsensical counterfactual for the no-stimulus case. They've chosen to guess that every worker paid with stimulus dollars would have otherwise been laid off, as states worked to cut costs and close budget deficits. (Stimulus dollars are generally funneled through state and local budgets, and often used to pay for existing programs threatened by falling tax revenues.) Therefore, every job funded by the stimulus is a job created or saved.

This assumption doesn't accurately reflect the behavior of state and local governments. Layoffs and hiring freezes are only among the many measures governments use to close budget gaps. Alternatively, they can furlough workers. They can freeze or cut public employee salaries. They can raise taxes and fees. They can borrow money. They can sell assets. They can cut non-payroll expenses. In practice, states choose a combination of these and other methods to close budget gaps; they don't act solely by cutting jobs.

Numbers from the Bureau of Labor Statistics show that job cuts are not state and local governments' primary gap-closing measure. From July 2008 to July 2009, state and local government employment fell by 155,000 jobs. Assuming an average employment cost of $75,000 per worker, state governments saved about $12 billion through job cuts. But over that period, states closed budget gaps totaling $110 billion, meaning most of the gap closures came through other kinds of savings.

Indeed, this summer, Stateline.org reported that 21 states had furloughed or planned to furlough 728,500 employees. The Center on Budget and Policy Priorities writes that 30 states have raised taxes since the start of the recession. Actions like these aren't necessarily good policy, but they are seeing wide use as a way to avoid public sector job cuts.

Without stimulus funds, states and localities would have faced even bigger budget gaps, and they would have closed them in part by laying off more workers. But it's also safe to assume they would have found ways to retain most of the workers now funded by stimulus, just as they retained most of those who were threatened by budget gaps. The true stimulus job savings would only be a fraction of what's reported - even if the report accurately reflected the jobs funded by stimulus dollars.

This still leaves aside an even larger problem with "jobs created or saved" figures. They reflect "seen" effects - specific jobs funded by the stimulus - but not "unseen" ones. The figures cannot account for jobs lost because greater government expenditure leads to higher taxes or more government borrowing, discouraging private investment. On the other hand, they also don't account for jobs that might be spurred indirectly by stimulus-funded activity.

Ed DeSeve, a senior adviser to the President on the stimulus plan, defended the figures in to Wall Street Journal, noting that the program's purpose is "to create jobs, not count them." True. But the government releases count to show that the program is creating jobs. If the White House is hanging its hat on a fundamentally made-up number, why should we believe the stimulus is achieving its job creation purpose?

Newspapers like the Globe and the Bee have shown that the "jobs created or staved" emperor has no clothes. It's time for the White House to abandon this meaningless statistic and defend its fiscal policies on their merits.

Josh Barro is a Senior Fellow at the Manhattan Institute.

Not only have 640,000 new jobs not been created from the stimulus - an absurd claim, given the economy's loss of nearly 4 million payroll positions this year - but it now seems that even the jobs themselves are fictional.

Thanks to the digging of a number of data sleuths, it turns out that many of the jobs reported by states come from made-up congressional districts.

This would be funny if it weren't a criminal waste of public funds. And yet, G. Edward DeSeve, who runs the government's economic recovery program, says the errors are "relatively few" and "don't change the fundamental conclusions one can draw from the data."

Excuse us? The "relatively few" errors are in fact thousands in number. But that's the pernicious place we find ourselves today - a public official defending shoddy accounting that looks an awful lot like fraud to the tune of billions of dollars.

One example: the 15th Congressional District of Arizona, where 30 jobs were salvaged with $761,420 in spending, according to Recovery.gov, the official government Web site. As ABC News reports: "There is no 15th Congressional District in Arizona; the state has only eight districts."

States as diverse as Kansas, New Mexico, New Hampshire, Ohio, Minnesota and West Virginia also reported phony jobs.

Stimulus jobs were also reported in 35 congressional districts in Washington, D.C., and four U.S. territories. The problem: None of those jurisdictions even has congressional districts.

All told, according to the useful Web site Watchdog.org, some $6.4 billion was spent to "create or save" 30,000 jobs in phantom districts. That comes out to about $225,000 per nonexistent job. And that's only what's been found so far.

The Washington Examiner's bogus-job count is even higher - at 75,343, a figure likely to climb as more are discovered.

Some cases were egregious. California's state university system took in $268.5 million in stimulus funds, claiming it "saved" 26,000 jobs. It has since admitted that few, if any, jobs were really at risk.

The government's response to all this? "Human beings make mistakes," shrugged Recovery Board spokesman Ed Pound on Monday. But by Tuesday, as the furor grew, the board's DeSeve was vowing to go through reports with a "fine-tooth comb."

But this should have been done all along. The official Web site vows that stimulus spending will "be subject to unprecedented transparency and accountability," and that inspectors general of 28 federal agencies will "continually review" their spending.

To our knowledge, however, none of the errors was found by an inspector general. All were discovered by private individuals curious about what their tax dollars were being spent on.

Imagine for a moment a CEO standing before the public and claiming similar bookkeeping errors. He'd be arrested for fraud, frog-marched from his office, tried, convicted and left to rot in jail.

We said from the start that the stimulus and TARP programs would be an invitation to fraud, waste and abuse. Sadly, this has proved true. Yet no one is likely to suffer so much as a reprimand.

As the White House talks about another stimulus, Americans need to know that the promises of transparency and openness in the first program haven't been kept. And that billions of their tax dollars are being wasted.

Huh? This is the same limits-to-growth, central-planning wisdom we hear so often these days at home. It's also tone deaf, to say the least. Despite a sinking greenback that is wreaking havoc among the Asian economies, and in the face of repeated currency warnings by Asian officials, Obama brought no King Dollar stabilization message to the conference.

Before getting into the currency question, let me say this: I think more saving (and investment) by U.S. citizens is a great idea. But this need not come at the expense of consumption. In a prosperous free economy, people should be able to save, invest, work, and spend as much as they like. More is better than less in each case. Grow the pie larger.

Of course, if the president and his team want more saving and investment, they should end the multiple taxation of saving and investment. Unfortunately, our system taxes saving as income, capital gains, dividends, and inheritance.

Team Obama also intends to tax wealth more by raising the top personal tax rate from 35 to 40 percent. And they apparently don't object to Nancy Pelosi's plan to slap another 5.4 percent tax on the incomes and capital-gains of successful earners in order to finance a government takeover of health care.

Wealth is a crucial form of saving. And the investment that comes from extra saving is used to finance the entrepreneurial start-ups that create the jobs and incomes that allow families to spend. However, by creating a zero-sum game between saving and spending, the Obama planners are falling into an austerity trap -- one that would hand the American economy a second-place finish in the global race for capital and growth.

At the same time, Obama has no plan to stabilize King Dollar, and the Asian economies don't like it. China's top banking regulator said the Federal Reserve's money-creating binge was the main cause of "massive speculation." Similar sentiments came from top officials in Hong Kong, Singapore, and Japan.

And while Ben Bernanke tried to calm dollar worries during his recent speech at the New York Economics Club, it was clear that the greenback's value ranks low on his priority list. Nothing but dollar lip service from the Fed head.

Because of the slumping dollar, U.S. import prices have jumped 10 percent at an annual rate over the past three months, and nearly 6 percent excluding energy. This is a tax hike on consumers and businesses, and it could depress holiday sales. It's reminiscent of the gigantic energy shock of 2008 that was caused by the dollar's collapse.

And what's the current U.S solution to the dollar problem? Blame China, and call for a revaluation of the yuan. But beggar-thy-neighbor protectionism never works, and it causes bad blood between the countries involved.

The powerful Asian economies actually have a better idea. They want to move toward a free-trade currency-cooperation zone -- much like the euro zone, fathered by Nobel economist Robert Mundell. This makes more sense in terms of world price stability and free capital flows. But the U.S. refuses to play.

So Japan, Singapore, South Korea, Taiwan, and others are forced to desperately buy sinking dollars in order to protect their export industries. But this only creates inflationary money expansion. The beleaguered U.S. dollar is in effect exporting U.S. inflation overseas.

President Obama did talk about entering free-trade discussions. But his Commerce secretary, Gary Locke, threw cold water on the idea in a Singapore speech. He said trade agreements have to wait because of a crowded U.S. legislative agenda. (Hat tip: James Pethokoukis.) He may have a point: The South Korean free-trade bill has been languishing for several years in the Democratic Congress.

Then there's the massive U.S. health-care takeover plan, which is now estimated at $3 trillion. This additional dollar depressant will tax the patience of China, Japan, and other would-be buyers of our massive debt creation.

We cannot spend, tax, or devalue our way into prosperity. Nor can we command the respect of other nations by telling them our economy cannot grow as rapidly in the future as it has in the past.

Ironically, these same Asian countries -- with their accelerated growth rates -- have borrowed a page from American free-market capitalism. Yet Obama makes no defense of our free-market system, and provides no leadership on the leading economic questions.

In terms of global leadership, Ronald Reagan would say, "If not us, who? If not now, when?" It's a pity that President Obama doesn't share the Gipper's commitment to American leadership.

Yet much of her speech wasn't about immigration and the economy at all. Much of it was about enforcement, which made the speech by default mostly a speech about illegal immigration. Napolitano talked extensively about the administration's policing efforts because, I assume, she was trying to establish her street cred as a tough-on-wrongdoers sheriff before she introduces the administration's amnesty plan for illegals.

And yet one thing that Napolitano didn't acknowledge in her speech is that our immigration tribulations go far beyond the contentious debate about what to do with illegals. In fact, our legal system is a mess because it grants most visas based on family status and does little to welcome people here with the skills and job qualifications sought by employers. When he was a U.S. Senator, President Obama largely dismissed suggestions that America reform the system by tilting it away from family visas and toward more skills-based immigration. His past pronouncements suggest his administration is likely to leave the current misnamed ‘family unification' system of awarding visas as the cornerstone of our immigration policy and spend virtually all of his political capital on finding ways to negotiate an acceptable compromise about the fate of illegal immigrants. That will be a giant missed opportunity.

Our current immigration regime might best be described as an accidental system. When Congress fashioned it in the mid-1960s, its supporters assured the country that the new legislation, which eliminated strict quotas for immigrants by nation in favor of new, regionwide quotas, wouldn't boost immigration very much. But since the new system gave visa preferences to family members of U.S. citizens and legal residents-including not only spouses and minor children of U.S. residents but also parents, adult children and adult brothers and sisters of those already here-the math was simple. The more people who came and established residence here, the longer the so-called ‘family re-unification' list of visa applicants grew as newcomers placed their own relatives on it. That put pressure on Congress to continually expand the family-visa category until it came to dominate our immigration system. It also sparked more illegal immigration because Congress could never enlarge the number of immigration slots fast enough to reduce wait lists for family members, which meant many people just came without permanent visas to join relatives and then hoped for the best.

Meanwhile, many other developed countries were moving in another direction. Countries like Australia, Ireland and Canada recognized that most immigrants in the modern world hadn't been forcibly separated from their relatives but had migrated by choice, and so a visa policy based on the idea that countries should be allowing families to ‘reunite' was misleading.

Instead, these countries tilted their policies toward focusing on those with skills and talents most likely to succeed in and contribute to a late 20th century developed economy. Some, like Australia, went so far as to create extensive lists of the jobs their economies needed filled and placed a premium on granting visas to people who could do those jobs. Others, like Canada, enacted broader criteria that rewarded visa applicants with points based on their education levels or their ability to speak and read the native language.

In less than 15 years Australia completely flipped the ratio of its immigrant visas: whereas in 1993, 70 percent of those arriving were granted family visas, by 2006, 70 of Australia's immigrants had been admitted based on skills criteria. The newly arriving immigrants performed far better. A 2006 study concluded that the average immigrant to Australia gained income parity with native-born Australians just five years after arriving. By contrast similar studies in the United States suggest that many immigrants today start out far behind average native-born workers in pay and make little progress over their lifetime because they lack the education levels or skills to advance.

Several far-reaching examinations of American policy concluded that we should head in the same direction as other countries. The Jordan Commission, chaired by former Congresswoman Barbara Jordan in the early 1990s, employed some of the country's leading economists to study U.S. immigration and produced a series of striking reports that can still be obtained through the National Academies. The Jordan Commission observed that the family preferences policy had inadvertently tipped much of U.S. immigration toward visas for unskilled migrants and that we should shift to a skills-based system. Politicians in both parties initially accepted the recommendations of the commission, then headed for the hills when a backlash against the report erupted among those who saw it as ‘anti-family."

Only recently a similarly bi-partisan group, the Brookings-Duke Immigration Policy Roundtable, sought a path to compromise on immigration policy by enlisting experts and advocates from across the ideological spectrum. That group, too, concluded the family unification policy should be "narrowed to include the nuclear family" and that more legal visas should move toward "educated workers with the knowledge and skills to innovate."

Our President, however, doesn't seem to believe this. Back in 2007, while he was a new candidate for the Democratic presidential nomination, he dismissed efforts by Senators Kennedy and McCain to introduce an immigration bill that shifted away from family preferences, saying that he had problems with any legislation that emphasized job-skills over reunification. Other Democrats attacked the idea of emphasizing skills as violating basic American ‘family values.'

In a perfect world people would be free to move across borders and live where they wanted to; human capital would flow as freely as other sorts of capital. This is far from such a world, however, and there is no industrialized country without some kind of system for legal immigration. Ours happens to put the emphasis in the wrong places, and I haven't heard anything from candidate or President Obama which suggests we're likely to change that.

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

Few dispute that the federal government is currently failing by a wide margin to heed Mr. Micawber's admonition. Explanations vary for this radical departure from financial prudence. One view is that politicians are acknowledging the simple, if cynical, truth that people already of age will cast more votes in 2010 than the children who will be obliged to pay for it all. Some pundits actually defend the profligacy on grounds that these are not ordinary times, so the President and Congress must spend now and worry about revenues later.

Most likely, the intellectual basis for the mega-deficit contains several strands. Don Rismiller of Strategas Research Partners notes one that has not been highlighted previously. He argues that the Washington behemoth does not fully understand the price tag for its extravagance because prevailing interest rates are artificially low. The true cost of borrowing to support the massive outlays will become apparent only when the Consumer Price Index, currently restrained by a high level of idle manufacturing capacity, resumes its rise. That will likely boost the inflation premium embedded in interest rates. Another temporary factor underlying today's improbably low rates is quantitative easing, i.e., the purchase of vast quantities of bonds by the Federal Reserve.

The notion that our leaders are influenced by a borrowing cost illusion has a startling implication: The United States government is repeating the mistake of homebuyers who were sucked into bigger mortgages than they could afford by teaser rates. When those below-market rates expired, the mortgages became unsupportable, intensifying the downward pressure on housing prices, which triggered the financial crisis that begat the recession. There is an important difference, however, in the ways that that homebuyers and the government succumbed to the siren of teaser rates.

The family that used a teaser rate to buy more house than it could afford did not expect its income to rise sufficiently to cover the future step-up in monthly mortgage payments. Rather, the family's plan was to get bailed out by an increase in the value of its home. That would make it possible to refinance, using the ostensible increase in equity to reduce the size of the loan, rendering the monthly nut affordable even with a higher, non-teaser rate.

The government, by contrast, does expect a rise in its income to cover at least a portion of the gap between income and outlay. The Obama administration's budget, presented earlier this year, was far more optimistic than private economic forecasters in its assumptions about growth in Gross Domestic Product and, by extension, the taxes to be generated by economic activity. (It is normal for the President's GDP forecast to be above consensus, but this time around the disparity was unusually large.)

The economy may not grow at 4% or more in 2011-2012, as President Obama hopes, but it is a good bet that the Treasury's borrowing costs will rise too. To put the matter in perspective, the Merrill Lynch index of interest rates on Treasury obligations of all maturities currently stands at 2.15%. That compares with an average of 5.73% since the index's 1986 inception.

In statisticians' talk, present rates are two standard deviations below their historical mean. In plain English, we should expect the government's borrowing costs to be higher than they currently are in 39 out of the next 40 years.

Could the actual outcome differ? Certainly it could. My analysis might prove too optimistic, considering that I have calculated the probabilities on a period that excludes the years of astronomical interest rates prior to inflation being brought to heel under Fed chairman Paul Volcker. In 1981, for example, the Treasury issued a 20-year bond with a 15-3/4% coupon. If I had the data necessary to include those earlier years, current government bond rates would be even further below their historical-and probable future-average.

The Treasury could lessen the impact of tomorrow's higher interest rates by locking in today's exceptionally low rates through issuance of very long-dated bonds. Unfortunately, the Treasury is currently doing the opposite. By raising an unusually large percentage of its debt in the short-dated sector, it is maximizing taxpayers' vulnerability to a rise in rates in the next few years.

To be fair, the Obama administration is trying to extend its debt maturities, but faces obstacles. Rismiller points out that the Chinese, on whom the U.S. is heavily dependent for funding, are wary of lending for long periods and getting repaid in greatly depreciated dollars. Why are they worried about the greenback losing value? They see that with the United States government spending so much more than it is taking in, there may be no other way out than currency devaluation on a massive scale.

In perhaps the cruelest irony of all, the same government that is being suckered by a teaser rate of its own design presumes to instruct consumers on responsible use of credit. The U.S. Financial Literacy and Education Commission's website (www.mymoney.gov) urges aspiring homebuyers who contemplate entering into adjustable-rate mortgages to ask themselves the following question:

"Is my income enough-or likely to rise enough-to cover higher mortgage payments if interest rates go up?"

If this is supposed to be a serious question, then teaching by example is clearly not the government's preferred pedagogical method.

As I was write this article, Bloomberg's Quote of the Day is by the actor who portrayed Mr. Micawber in the 1935 film of David Copperfield. W.C. Fields reportedly said, "Start every day off with a smile and get it over with." Anyone in the electorate who is mollified by the present spend-and-borrow policy had better get the smiling done now, for this will surely end in tears.

Martin Fridson is the author of Unwarranted Intrusions: The Case Against Government Intervention in the Marketplace (John Wiley & Sons). 

By John Tamny

President Obama's arrival in China has predictably generated all manner of commentary about the economic relationship between it and the United States. Not surprisingly, the majority of the commentary has been economically untrue, misguided, or both.

First up is the notion that China artificially keeps the value of the yuan lower than it would naturally be. What this commentary misses is that currencies aren't commodities, rather they are concepts. Nothing else.

In that sense, China is one of many countries that pegs its currency to the dollar in order achieve for it a measure of credibility due to the dollar being the world's currency. Much as trade among the fifty states in the U.S. is made more frequent thanks to there being a common currency, the yuan's stable relationship with the dollar is what has fostered a great deal of trade between individuals in the U.S. and China. Trade is the reason we produce, and currency stability facilitates trade.

Many commentators seek an absence of policy whereby the yuan and dollar would float against each other as "fundamentals" warrent, but as Von Mises so clearly saw, floating currencies "complicate the technique of exchange" given the basic truth that uncertain currency values make it more difficult for producers to confidently use money in order to transact. Money is merely a medium of exchange, and the less uncertainty we have, the better off all parties to trade are.

Looking at the yuan, it's "settled logic" among the commentariat that currencies must reflect an economy's fundamentals, but not only is this untrue, it perverts the reason for currencies altogether. Indeed, when individuals trade, they're not trading money, instead they're using money in order to measure the value of goods so that goods can be exchanged. That is why currencies are meant to be stable value concepts, rather than floating paper values lacking any definition.

As to the absurd suggestion that currencies are supposed to reflect economic fundamentals, this might surprise those who watched Japan's yen triple in value versus gold during its near two decade recession. This might also surprise Americans who witnessed a much more vibrant U.S. economy vis-à-vis England's in the aftermath of World War II; all this occurring despite the pound being stronger than the dollar. It would be more realistic to say that excessive currency strength or weakness is an economic retardant, as opposed to the result of economic strength or weakness.

Currencies once again aren't supposed to move in value, because when they do the changes in value distort the money prices of all investments and transactions. The whole point of the Bretton Woods gold standard wasn't for currencies to float, but for them to be tied to the dollar so that peaceful trade could reliably occur among individuals around the world. Stable currencies not only enhance wealth-enhancing trade, but they free up those engaged in mere economic facilitation (think currency traders, hedge funds) to actually produce economic goods thanks to floating money values no longer being an economic variable.

Lastly, implicit in the jawboning of China for its yuan policy is the assumption that somehow its citizens don't suffer from the same currency weakness that now weighs down the U.S. economy. More realistically, inflation is death by a thousand cuts anywhere it exists, which means the unseen is how much China's economy would be growing if U.S. monetary policy weren't transferring an to inflation it. China is not aided by our inflationary policies as evidenced by its need to import all sorts of goods to create finished products, so it's naïve for anyone to assume that China is enjoying the decline of its currency thanks to our irresponsible Treasury.

Next up is the myth offered up by the Daily Telegraph's Ambrose Evans-Pritchard (among others) which suggests that with its artificially cheap currency, China is exporting deflation. Comments like this merely prove that many who write on economics don't have a clue what deflation is.

Indeed, by virtue of the yuan being in freefall thanks to its dollar definition, the cost of imports necessary to manufacture goods in China must be rising. This means inflation is stealing any alleged benefits that might result from a cheap currency.

Secondly, the import of cheap Chinese goods is in no way deflationary. That is so because if cheap Chinese shoes allow individuals to spend $50 on loafers when they used to spend $100, that merely gives them $50 of new demand for a wider range of goods, thus driving up the costs of other goods previously demanded less. The broad price level by definition cannot be changed by imports; instead it can only move up or down based on changes in the value of money. In that case, all signs point to inflation worldwide, the U.S. Treasury the main miscreant in this regard.

The third impoverishing myth possessing many adherents is the one that says China is pursuing an "export strategy." If we ignore the certain truth that countries don't trade, to suggest a country is pursuing an export strategy is as idiotic as the suggestion that a country could pursue an "import strategy."  Good luck importing unless you're exporting. 

What's forgotten is that exports and imports are but two sides of the same coin, and unless the supposed "experts" in our midst believe that Chinese producers are exporting in order to remain impoverished, there's no such thing as an export strategy. In truth, the dollars taken in by Chinese producers are either used to buy U.S. products, equities, land and debt, or they're traded to others with designs on what we have in the United States. Individuals export so that they can import, which means that to the extent U.S. citizens are complimented by a great deal of imports, that means they're also exporting something of value in order to have the means to buy imports.

Von Mises once observed that "Economic history is the story of the gradual extension of the economic community beyond its original limits of the single household to embrace the nation and then the world." That's exactly what's happening right now, and stable currency relationships are bringing the producers of the world closer and closer on a daily basis.

So rather than nonsensical commentary that perverts the purpose of currencies, we should embrace any measures taken that enable more, not less in the way of cross-border trade. In that sense, we should hope that more countries follow China's responsible lead in pegging the yuan to the dollar, all the while hoping that monetary authorities in the U.S. wake up to the economy retarding inflation they're foisting on the world, which threatens the wonderful process whereby individuals the world over are becoming more, rather than less economically interconnected.

John Tamny is editor of RealClearMarkets, 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.

Our economy currently undergoes the consequences of shifting scarce resources away from residential real estate and into other sectors. The painful transition is known in common parlance as a recession. The market corrects its resource allocation from that which previously satisfied customer's needs profitably, but no longer does so, and into those sectors ready to prosper our future.

Economics studies how man overcomes scarcity to best satisfy our unlimited desires. We all make decisions affording us the best opportunities for success. People change jobs or start new businesses daily. The market guides this resource reallocation via price signals. Firms that fail to efficiently satisfy customers succumb to new firms with new ideas. Schumpeter termed it Creative Destruction.

To the extent individuals behave rationally these changes enrich society through innovations, enhanced efficiency or better productivity. The much-maligned profit motive redirects economic actors to satisfy the market's new needs. Only when price signals get distorted, or some unforeseen shift occurs, do these adjustments aggregate into macro-economic pain.

Large scale resource reallocations (recessions) ensue when the whole economy suffers a shock such as when oil spikes due to currency devaluations; when credit or monetary inflation devolves into mal-investment such as the subprime mess; or in the aftermath of war. We transition from swords to ploughshares and spears into pruning hooks.

Cap and Trade forebodes the largest government intrusion in American history. This legislation would disrupt the existing economic paradigm for virtually everyone using energy. Currently, carbon emitting fuel sources generate 86% of US power. Only 1.1% derives from less dependable sources such as solar or wind, which are intermittent depending on the vagaries of weather.

Government bureaucrats would assume unfathomable control over our lives via energy restrictions. They will then redistribute taxes confiscated from energy usage via a carbon exchange. The rationing will not be determined by who best satisfies society's needs; instead, the decidedly uneconomic criterion of the congressional district of your factory or whose lobbyists pay the most cunning bribes will drive resource allocation. As atmospheric physicist Fred Singer jokes, this bill should be named the "Lobbyists Full Employment Act." It has already attracted thousands of registered lobbyists to Washington.

The Heritage Foundation predicts this would have the same detrimental effect as an energy crisis, which has been a recurring instigator of economic trouble. The price of gas would increase 74% in real terms, natural gas would increase 55% and your electric bill would soar 90%. Past energy crises have been primarily driven by a weak dollar. This one would likely be exacerbated by a dollar crisis to boot. Nominal prices would soar.

Currently profitable business models would crash. Whole industries would collapse. Unemployment would explode. Our government apparently wants to test the hypothesis that America remains an unsinkable ship. The economy is resilient, but that doesn't justify deliberately steering into policy ice-bergs.

Recessions entail economic transformations. The market is a natural symphony. Why would our government deliberately orchestrate economic cacophony by mandating its citizenry play warped instruments and sing off key? If green energy were economically viable, the incentive of profits would reveal its potential. Instead a conductor imbibing on green fantasies purposes dissonance for purely political ends.

To even consider this bizarre legislation, global warming zealots must answer four questions:

Does global warming even exist? The same crowd now clamoring for urgent action previously warned of an impending Ice Age thirty years ago. The coming apocalyptic freeze was blamed on the same industrial pollution that now supposedly warms us. Research shows that the Earth has cooled since reaching peak temperatures in 1998. The recurring headlines of record cold temperatures would be humorous if the stakes weren't so devastating.

Is global warming manmade? This presumption bespeaks arrogance of galactic proportions. Burning coal now has more influence than the sun? Even if CO2 is the catalyst, man accounts for only 3% of CO2 including our exhalation. Most stems directly from natural phenomena environmentalists supposedly cherish. After all, plants "breathe" carbon-dioxide making the world greener. The climate ended a roller-coaster ride throughout the 20th Century up 0.6 degrees Fahrenheit. CO2 increased 20% following a steady trajectory. Do the math.

Is global warming a problem? It might be bad for coastal areas, but huge amounts of wonderful soil in frozen climates would become available for agriculture. As Earth's population swells, gaining new farmland would be providential. Melting ice caps may not increase sea levels for the same reason that ice melting in your cup doesn't cause a spill. But what of ice on land melting into the sea? Would this be offset by increased oceanic evaporation into warmer atmospheres that retain more moisture than heavier cold air? Pure conjecture programmed into computer models suggests Florida could lose significant swaths of coastal property. However, ocean levels have fluctuated over millennia. It was no fun for Atlantis, but geography adjusts.

Can America help? Our ecology is far cleaner than the rising new industrial powers, none of whom feel compelled to stymie their own growth with this emotionally-driven nonsense. The BRIC nations have publicly stated they will not comply. Totalitarian states have never cared for their environment like private stewards tend their own land. Crippling our economy with drastically higher energy costs will not benefit the global environment. It will merely transfer economic leadership to states that treat nature far worse.

There is certainly no consensus and a rational analysis points to "no" on each. Despite mounting evidence Global Warming is an enormous fraud; it has become a substitute religion surreptitiously worshipping the created over the Creator. Although recent headlines suggest Al Gore worships Mammon, not Gaia, anyway.

Before proceeding, we had better understand the economic consequences. The entire global warming hysteria has more to do with global governance and undermining capitalism than the environment. It was a purposeful tribute that Earth Day gets celebrated on Vladimir Lenin's birthday. Considering the environmental devastation inflicted in Soviet Russia, this tribute doesn't reflect Lenin's ecological record.

Let's not copy his economic record either.

Bill Flax works in the banking industry. This column reflects his views and not those of his employer. Please contact him at billflax2@yahoo.com.

So what do they do? Just the opposite. Their far-reaching overhaul of the health-care system -- which Congress is halfway toward enacting -- would almost certainly make matters worse. It would create new, open-ended medical entitlements that threaten higher deficits and would do little to suppress surging health costs. The disconnect between what President Obama says and what he's doing is so glaring that most people could not abide it. The president, his advisers and allies have no trouble. But reconciling blatantly contradictory objectives requires them to engage in willful self-deception, public dishonesty, or both.

The campaign to pass Obama's health-care plan has assumed a false, though understandable, cloak of moral superiority. It's understandable because almost everyone thinks that people in need of essential medical care should get it; ideally, everyone would have health insurance. The pursuit of these worthy goals can easily be projected as a high-minded exercise for the public good.

It's false for two reasons. First, the country has other goals -- including preventing financial crises and minimizing the crushing effects of high deficits or taxes on the economy and younger Americans -- that "health-care reform" would jeopardize. And second, the benefits of "reform" are exaggerated. Sure, many Americans would feel less fearful about losing insurance; but there are cheaper ways to limit insecurity. Meanwhile, improvements in health for today's uninsured would be modest. They already receive substantial medical care. Insurance would help some individuals enormously, but studies find that, on average, gains are moderate. Despite using more health services, people don't automatically become healthier.

The pretense of moral superiority further erodes before all the expedient deceptions used to sell Obama's health-care agenda. The president says that he won't sign legislation that adds to the deficit. One way to accomplish this is to put costs outside the legislation. So: Doctors have long complained that their Medicare reimbursements are too low; the fix for replacing the present formula would cost $210 billion over a decade, estimates the Congressional Budget Office. That cost was originally in the "health reform" legislation. Now, it's been moved to another bill but, because there's no means to pay for it (higher taxes or spending cuts), deficits would increase.

Another way to disguise the costs is to count savings that, though they exist on paper, will probably never be realized in practice. So: The House bill is credited with reductions in Medicare reimbursements for hospitals and other providers of $228 billion over a decade. But Congress has often prescribed reimbursement cuts that, under pressure from squeezed providers, it has later rescinded. Claims of "fiscal responsibility" for the health-care proposals reflect "assumptions that are totally unrealistic based on past history," says David Walker, former U.S. comptroller general and now head of the Peter G. Peterson Foundation.

Equally misleading, Obama's top economic advisers assert that the present proposals would slow the growth of overall national health spending. Outside studies disagree. Three studies (two by the consulting firm the Lewin Group for the Peterson Foundation and one by the Centers for Medicare & Medicaid Services, a federal agency) conclude that various congressional plans would increase national health spending compared with the effect of no legislation. The studies variously estimate that the extra spending, over the next decade, would be $750 billion, $525 billion and $114 billion. The reasoning: Greater use of the health-care system by the newly insured would overwhelm cost-saving measures (bundled payments, comparative effectiveness research, tort reform), which are either weak or experimental.

Though these estimates could prove wrong, they are more plausible than the administration's self-serving claims. Its health-care plan is not "comprehensive," as Obama and the New York Times (in its news columns) assert, because it slights cost control. Obama chose to emphasize the politically appealing path of expanding benefits rather than first attending to the harder and more urgent task of controlling spending. If new spending commitments worsen some future budget or financial crisis, Obama's proposal certainly won't qualify as "reform," as the president and The Post (also in its news columns) call it. It's more like malpractice: a self-inflicted wound.

Such is the truth behind the President's accidental war on America's exporters.

I say "accidental war" because the administration's public statements, and basic economics, belie overt bellicosity. This summer, the White House announced a new effort to help U.S. exporters by expanding foreign markets, and the President routinely speaks of exports' critical role in the long-term stability of the US economy. This, of course, is smart policy: with 95 percent of the world's consumers living outside America's borders, foreign markets are vital for U.S. farmers, manufacturers and service providers, and developing economies provide fertile ground for the seeds of US business. That American exporters typically pay higher wages than their domestically-focused counterparts is icing on the economic cake.

Yet despite the cheery posturing and its sound reasoning, the White House and congressional Democrats have routinely made choices that end up closing markets, rather than opening them. Such choices result from a basic political decision to secure domestic priorities no matter the cost, but too often American exporters are left footing the bill.

Exhibit A is the President's mid-September decision to impose, at the request of the United Steelworkers union, prohibitive tariffs on Chinese tires under "Section 421" of US trade law. Contrary to Obama's excuses, the law gave him absolute discretion to impose the tariffs - discretion he used as a bargaining chip to solidify USW support for his fall health care push. But while the President's protectionism ensured union adulation, it also resulted in China's initiation of anti-dumping and anti-subsidy investigations of US chicken and automobile exports. The chicken retaliation - hinted by China weeks before Obama's decision was announced - now threatens a growing market that purchased $722 million in American poultry last year alone. And while the autos case is small, an affirmative decision could foreclose the Chinese market to US car exports for years.

China also has used the tires decision as an excuse to abandon World Trade Organization negotiations to eliminate tariffs on chemicals and other products - so-called "sectoral agreements" that are part of the Doha Round negotiations on industrial market access. Because these side agreements contain "critical mass" exceptions that prevent them from taking effect unless almost all major exporters participate, China's rejection essentially ruins the tariff elimination party for everyone else - including many large U.S. exporters like Dow and Dupont that view the sectorals as key to their long-term global competitiveness.

The tires case is not an isolated incident. The Democrats' refusal to ratify pending bilateral Free Trade Agreements has cost American exporters billions and is rooted in a cowardly decision to avoid "controversy" until health care and cap-and-trade legislation are secured. For example, Commerce Secretary Locke recently confirmed that the administration would not seek congressional passage of the U.S.-Colombia FTA in 2009 because of these domestic priorities. Yet according to Locke's own Commerce Department, American companies pay about $1.9 million per day in Colombian tariffs they wouldn't owe if the FTA were in force. Given that the agreement was signed in November 2006, this political stalling has resulted in a pointless tax on American exporters of around $2 billion and counting. Trade agreements with South Korea and Panama have been similarly shelved, and considering the US-Korea FTA is the largest since NAFTA, the price of its delay likely dwarfs Colombia's billions.

Exporters are also under attack because the White House has refused to re-open US roads to Mexican trucks (a direct NAFTA violation) in order to curry favor with the Teamsters. Part of the 2009 Omnibus Appropriations Act, the trucking ban provoked $2.4 billion in additional Mexican tariffs on 89 American products. After signing the legislation with full knowledge of its NAFTA-illegality, President Obama promised the businesses injured by Mexico's retaliation that his administration would quickly resolve the dispute. Six months later, the Transportation Department has crafted a solution but says the White House is sitting on the fix because it needs Teamster support for ObamaCare. So exporters will keep paying.

From these examples, the result of the White House's political strategy is clear: American farmers and manufacturers are being forced to pay billions of dollars to foreign governments - and to lose new markets and customers - so President Obama can achieve his domestic policy goals. The President is literally buying off American labor unions with US exporters' money, and in the process is waging an immoral war on an integral part of the American economy and thousands of innocent workers.

Accidental or not, this war's damage is very real, and it's time the President demanded a ceasefire.

Scott Lincicome is an international trade attorney with White & Case, LLP and the coauthor of the Cato Institute study, "Audaciously Hopeful: How President Obama Can Help Restore the Pro-Trade Consensus."  The views expressed are his own.

Abortion is a difficult subject, especially if your goal is to get people with opposing viewpoints to stop shouting long enough to hear each other. By way of full disclosure, I am one of those who believe that abortion is a tragedy, not a crime. I see no clause in the U.S. Constitution that empowers Congress to either ban the lamentable practice or force others to pay for it. This is, in fact, the status quo under the law.

But the status quo is never enough for culture warriors, especially if they believe they have a once-in-a-lifetime opportunity to advance their cause. With the calendar ticking down toward a voter backlash sure to end one-party rule, the left wing of the Democratic Party would be well advised to seek alternate means for achieving their long-sought goal of free abortion on demand. They might, for example, try engaging in a little empathy complemented by the uncharacteristic act of practicing what they preach.

Here's the empathy part, a thought exercise designed to give strident abortion rights activists a brief experience of the visceral horror that right-to-lifers must live with every day. Imagine waking up one morning to learn that the Supreme Court ruled that parents could legally practice infanticide up until a child's first birthday. Imagine clinics springing up across the country at which parents could drop off infants with Spina Bifida, Down's Syndrome, or maybe just kids they couldn't afford. At these clinics doctors would give unwanted children painless lethal injections, no questions asked. Parents might have to brave a gauntlet of picketing protesters, including some willing to adopt their unwanted babies on the spot, but imagine that the law protected a parent's right to dispose of their burden as they see fit.

Of course infanticide is not the same as abortion. Unless you believe that humans are invested with immortal souls from the moment of conception and that the Creator of Heaven and Earth has instructed that thou shalt not kill.

Hard as this may be to accept, many of our fellow citizens fervently hold these beliefs. Like it or not, we have to share this country with them. Living in peace with respect for those who hold different views is generally considered more desirable than engaging in never-ending gang warfare.

Isn't it enough that the law has come down on the side of those who wish to make abortion safe and legal? What purpose does it serve to force those who equate abortion with murder to pay for it? What's so horrible about leaving well enough alone? How would you feel if the government forced you to pay for euthanizing unwanted handicapped infants?

You say that your lofty goal is to guarantee "access" to abortion for those who can't afford it. OK, let's do the math. The average abortion costs about $400. Something like 1.2 million abortions are performed in the US every year. Suppose a third of these unwanted pregnancies are to women so destitute that $400 would swing their decision. Paying for every one of them to have abortions would bring the bill to maybe $160 million a year. This sound like a lot, but if a majority of Americans really believe that the poor should receive free abortions, the bill comes to about $1 per year per advocate.

So here's the practice-what-you-preach part. If you truly believe you are your sister's keeper, how about reaching into your own pocket to dispose of their babies? What's stopping you from raising the money voluntarily? Surely, there's room in your busy life for one more walkathon. Consider the hundreds of millions of dollars you spend on advocacy, political campaigns, and lobbying. How about diverting a little of that cash to pay for those abortions you believe are a basic human right?

Paying for what you believe in rather than paying to influence politicians to force others to pay for what you believe in may sound like a radical idea, but would it really be the death of liberalism? What better example could preachers of tolerance and diversity set than by declaring a truce over this divisive issue? What would happen to the tone of civil discourse if advocates of choice showed a little respect for their fellow citizens by choosing to put their own money where their mouths are?

Continued infighting stands a good chance of killing this budget-busting healthcare bill. In the end, such a death would be an act of poetic justice. What better testament could there be to the wisdom of our founder's in devising multiple checks and balances to protect us from a government run amok?

Of course, the Consumer Price Index (CPI) already tracks price changes across a wide array of goods and services (consumed by urban households). However, the CPI records the past. Inflationary pressures are ultimately controlled by expectations of future price increases. These expectations take shape based on the day-to-day inflationary pressures observed by consumers and producers. We believe that we can more accurately gauge the likely future direction of inflation by tracking these stories in real-time - even if the news is lumpy and disaggregated.

A sampling of items covered at Inflation Watch in recent weeks: a 15 percent increase in small business' health insurance premiums in the coming year; a 6.5 percent increase in college tuition fees this fall; higher prices for used and new cars; higher municipal fees for water and sewer services; a 50 percent increase in car rental prices during the past year; a 12 percent increase in the average price for basic funeral home services in New Jersey during the past year; an expected 15 to 25 percent increase in long-term care insurance premiums for California state retirees; and employers that cut their employees' pay, such as American Express, General Motors, and Advanced Micro Devices, that are now restoring pay to pre-recession levels.

Apparently, we at Inflation Watch are not alone. Even as the Federal Reserve (and most major central banks) insist that inflation remains "below target" and inflation expectations are well-contained, the prices for the inflation protection provided by assets such as gold and Treasury-Inflation Protected Securities (TIPS) continue a slow and steady march upward. Those of us who choose preparation have taken note and remain alert.

Dr. Duru blogs for Inflation Watch (http://inflationwatch.wordpress.com/)

Passage of the House bill Saturday night came a day after the Labor Department reported that the national unemployment rate rose to 10.2%, a 26-year high, with another 190,000 payroll jobs lost. Including discouraged workers, those working part-time for economic reasons, and those marginally attached to the labor force, the Labor Department measured the unemployment rate at 17.5%.

Even though American workers need jobs, the House bill would discourage hiring and result in lower take-home wages. Small business tax increases would take effect on January 1, 2011, and regulations on health insurance and the employer penalties and mandates would become fully effective on January 1, 2013.

The job-killing provisions of the House bill include:

Employers would be required to offer health care for workers. This requirement would cover employers with at least $500,000 in annual payroll costs, and it would add to employment costs for workplaces that don't now have the prescribed set of health benefits. All covered employers would have to pay 72% of premiums for single workers or 65% for families. Workers who were not laid off would receive lower wages to compensate for the higher benefits.

The House bill also prescribes what constitutes a qualified benefit plan. Such coverage would be expensive. The House prohibits copayments for routine visits, such as annual check-ups and mammograms, and requires coverage for mental health and substance abuse, and dental care for children.

Employers who don't offer health insurance would pay a fine. An employer with $750,000 or more in payroll who did not provide the right kind of health insurance would pay 8% of payroll. (Between $500,000 and $750,000 in payroll, employers would pay fines of 2% to 6%.) That would raise labor costs, discourage hiring, and lower wages in an economy in which employment recovery even now is predicted to be slower for years.

Someone who earned $1,000 per week, approximately median income, would cost his employer an additional $80 per week, or $4,160 per year. Multiplied by 20 workers this adds up to $83,200, not exactly an incentive to take on more workers. Some employers would cut pay, and others would hire fewer workers.

Income taxes on the most productive small businesses would increase, making them less willing to hire. The top tax rate on business owners who pay taxes as individuals, not corporations, now is 35%. It's already scheduled to go up to 39.6% on January 1, 2011, and under the House bill it would rise even higher, to 45% on taxable income of $500,000 for singles, $1 million for couples. With state taxes, some combined rates could exceed 55%. That has to discourage hiring and encourage retrenchment and use of contractors.

Expansion of Medicaid would burden state budgets. At a time when most states can least afford it, the bill expands Medicaid eligibility to 150% of the federal poverty line from 133% now. This would saddle states with an additional $34 billion in obligations, resulting in higher taxes or layoffs of state employees and contractors.

The Senate might begin debating its version of health care "reform" next week. It must merge bills from two committees, Labor and Finance. Once passed by the Senate, that bill would have to be reconciled with the House bill in conference.

The Finance Committee bill funds health reform not through income tax hikes, but through taxes on expensive health insurance plans and cuts in Medicare spending, cuts that may be unrealistic. Penalties on employers who do not insure their workers are milder than in the House plan, "only" $400 per worker.

The more expensive and generous health care plans would face an excise tax of 40% on premiums above $8,000 for singles and $21,000 for families. Health insurance premiums now average $4,824 for singles and $13,375 for families but would rise substantially in the future by 10% or 15%, according to the Congressional Budget Office.

One reason to expect increases is the prohibition on insurers turning away sick people. While this prohibition is well-meant, to protect the unlucky, it will have economic consequences-higher premiums for all.

As Harvard University economist Martin Feldstein has shown, the penalties for not signing up for health insurance--$750 per person-are so mild that it will pay people to wait until they are sick to get insurance. This will mean higher costs for underwriters and further premium increases. As premiums rise, more people will drop out, choosing instead to pay the fine.

The proposed taxes on expensive policies are meant to discourage employers from providing a large tax-free benefit to workers. While that is a worthy purpose, the law prevents individuals from switching to lower-cost plans by forbidding high-deductible low cost plans. Since the mandated qualified plans are overly generous, middle-class Americans would just be sitting ducks for the tax collector, just as they are now paying an increasing share of the alternative minimum tax.

Although the Finance Committee bill does not contain the tax increases on small business found in the House bill, the increases in premiums would gradually raise the amount everyone would have to pay for health insurance, leaving less disposable income to buy other goods and services. Rather than bending down the health cost curve, the economy would be stifled by rising health insurance premiums.

The primary crisis facing Americans today is joblessness, with its associated costs of bankruptcy and foreclosure on homes. An undue emphasis on health "reform" to the detriment of jobs could cause some members of Congress to join the ranks of the unemployed after next year's election.

History tells us that with no change of course by the U.S. or China, financial crises, protectionism, and political conflict are inevitable. Inflation during World War I led to the rise of monetary nationalism in the 1920s and the collapse of the gold standard, which paved the way for the stock market bubble, the crash, and the Great Depression. The huge imbalances in global gold reserves and export capacity that developed during World War II forced a return to bilateralism in trade and liquidation of the British Empire. The transformation of the global dollar shortage into a dollar glut in the 1960s led to the collapse of the Bretton Woods gold-exchange standard system, and paved the way for the stagflation of the 1970s. The serial currency crises of the 1980s and ‘90s led affected countries to pursue an active strategy of dollar accumulation, and fueled the runaway U.S. deficits of the current decade.

The present economic crisis has only affirmed those countries' belief in the importance of exchange rate management. Meanwhile, the U.S. abjures the use of tighter monetary policy to control the effects of recycled dollars on U.S. credit growth, seeing itself as a helpless victim of a "global savings glut".

This leads us to the current standoff, with the Chinese government, owner of over $2 trillion in reserves, calling for the U.S. to tighten its monetary and fiscal policy, and the U.S. government, borrower of $1.8 trillion over the past 12 months, calling for China to loosen its exchange rate policy. In Pittsburgh, they could agree only that the International Monetary Fund should review their policies, each knowing that the Fund can in the end do no more than urge flexibility on one side and prudence on the other.

The irony of the U.S. position is that the IMF was constituted according to a blueprint laid down by Harry Dexter White and President Roosevelt's Treasury team during World War II, with the explicit mission of maintaining a global fixed exchange rate system. The U.S. position was that the economic chaos of the 1930s was the result of countries failing to sustain their solemn obligations to maintain agreed exchange values for their currencies. Even John Maynard Keynes, the intellectual father of national economic sovereignty, categorically rejected floating exchange rates as a basis for the post-war system.

China began its policy of fixing the yuan to the dollar in 1994, as part of its strategy of integrating into the global economy. Roosevelt's Treasury would have heartily approved. During the Asia crisis of 1997-98, China sustained its policy in spite of high market and political expectations that it would follow its neighbours and devalue. "China, by maintaining its exchange rate policy, has been an important island of stability in a turbulent region," pronounced Robert Rubin, President Clinton's Treasury secretary, in May 1998.

How times have changed. Just a few years later, with pressure on the yuan now upwards against the dollar instead of downwards, the U.S. discovered the hidden eternal virtues of floating exchange rates. Writing in the Wall Street Journal in September 2006, Senators Charles Schumer and Lindsey Graham turned the intellectual history of economics on its head by declaring flatly that "One of the fundamental tenets of free trade is that currencies should float." (Explain that one to Keynes.) And in January of this year, then-nominee for Treasury secretary Timothy Geithner told the Senate Finance Committee that China, in pursuance of the same policy that exacted such praise from Robert Rubin in 1998, was now "manipulating" its currency, and that the Administration would act "aggressively" to put an end to it.

"When the facts change," Keynes once famously remarked, "I change my mind. What do you do, sir?" And the facts have clearly changed for the United States. They are no longer the creditor nation they were during World War II, controlling most of the world's gold reserves. They are now a massive debtor. So they have changed their minds. Fixed exchange rates were good when their trading partners were devaluing against them. Floating exchange rates are good now that they wish to devalue against their trading partners. There is perfect consistency in narrow self-interest.

As for China, expect it to continue to see the same virtues in exchange rate stability that the U.S. saw over its first two centuries of nationhood. But this does not mean passivity on the question of dollar reserve accumulation. China's initiative with Brazil and Russia to conduct two-way trade sans dollars is its most important one. And it is also the most worrisome, in terms of the survival of the multilateral trading system. As China clearly has no intention of stockpiling Brazilian reais or Russian rubles, the only way for China and others to conduct trade without an internationally accepted currency, like the dollar, is to balance it bilaterally with their partners. This means trade discrimination, of the sort the U.S. fought relentlessly to eliminate at Bretton Woods.

The U.S. must accept that it will not be possible to devalue its way out of its savings problem, as it will undermine global confidence in the dollar as a reliable store of value and the bedrock of the multilateral trading system. As Chinese central bank governor Zhou Xiaochuan observed in March, "Issuing countries of reserve currencies . . . cannot simply focus on domestic goals without carrying out their international responsibilities." The U.S. has yet to demonstrate the will to shoulder such responsibilities.

Benn Steil is a Senior Fellow and Director of International Economics at the Council on Foreign Relations.  

With birthrates falling in wealthy nations, there's a growing perception that those countries face a somewhat darker economic future for their perceived child deficits. The thinking is that with less people working and producing, countries with falling populations will see economic output drop due to a lack of young, able-bodied workers.

Birthrates have been falling in the industrialized world for more than a century now and worldwide since the 1970s. And with rich-country birthrates declining, New America Foundation senior fellow Phillip Longman has written The Empty Cradle, a book that suggests our prosperity is threatened by lower population growth.

To reverse the aforementioned decline, Longman has suggested providing parents whose offspring complete high school higher social security or pension benefits, while policymakers in Japan have looked into giving families monthly cash payments of $270 per child in order to reverse the trend. The birthrate issue is not as pressing in the United States, but as it stands now, parents can reduce their federal tax bill the more children they conceive.

The problem with all this handwringing over birthrates is that it does not acknowledge the broader truth that in a globalized world, the boundaries of the nation-state are no longer a huge factor in economic performance. Worries over birthrates seem dated, and only would have been relevant in an era when a lack of technology made it difficult for goods of all types to cross national borders.

Why birthrates used to matter. Adam Smith wrote in The Wealth of Nations that "The most decisive mark of prosperity of any country is the increase of the number of its inhabitants." Two centuries after, the late Julian Simon proclaimed in The Ultimate Resource that "The standard of living has risen along with the size of the world's population since the beginning of recorded time."

The arguments made by Smith and Simon are hard to argue with. From Smith's pin factory in the Wealth of Nations and the assembly-line innovations of Henry Ford to the manufacture of Boeing's 787 Dreamliner, plentiful workers have allowed for the very specialization of labor that leads to rising economic growth. Workers are in the end capital, so if populations decline there would seemingly be less economic activity in the aggregate.

It is well known that birthrates in Germany, Italy and Spain are below "replacement level," which means their populations are set to decline in the future. In Japan the birthrate is 1.2 children per woman, far below the 2.1 level necessary to ensure future population growth. In the United States the rate of birth is falling, but is still above replacement level due to greater procreation among immigrants and religious doctrines that encourage larger families.

If these trends continue among industrialized nations, the economic results have the potential to be profoundly negative. And with many of the industrialized nations facing increasing deficits in order to support a rising number of retirees, the tax implications are scary.

More "hands" mean more work specialization, more economic output, and more taxpayers of working age to pay looming bills generated by politicians. This seems to suggest that increased childbearing should be promoted through government incentives to ensure continuing population growth.

Why birthrates don't matter anymore. The problem with the alleged birthrate threat at first glance is that it fails to account for how capital is deployed. It can't be stressed enough that workers are part of the capital stock. Looking at birthrates from this perspective, an entirely different-and more optimistic-picture emerges.

Indeed, as the late Walter Wriston once wrote, "To manufacture a product in the United States in 1988 required, on average, only two-fifths of the blue-collar labor needed just eleven years earlier." Wriston's broad point was that the kind of physical output which used to require a lot of bodies to produce is increasingly being produced without so much human labor.

In contrast with U.S. automakers who are still hampered by labor contracts that make them non-viable without taxpayer support, the "economy of the mind" in the United States has thrived. Whereas the production of an automobile still requires a fair amount of human labor, the production of the microchip (which powers all manner of communication and computer technologies) is achieved with minimal amounts of physical exertion.

Wal-Mart is another example. Though not a manufacturing company, it is in the business of constantly providing a better experience for its customers with as few workers as possible. Thanks to innovations, it's increasingly able to do just that. To shop at Wal-Mart today is to make purchases without ever interacting with store employees given one's ability to scan and bag purchases ahead of a credit-card swipe; all of this done in self-service lines.

Secretaries and clerical workers formerly essential to labor-force productivity have been replaced by voicemail and the personal computer. Though we used to conduct our banking and investing activities through bank tellers and stockbrokers, the ATM and online investing allow us to do both without talking to anyone.

From 1900 to 1920 agriculture and manufacturing interests employed 30 to 40 percent of all Americans. That number has been falling since thanks to technological advances in both sectors that have freed up Americans to do other kinds of work. Technology has made a shrinking division of labor in the agricultural and manufacturing spaces less pressing amid much higher output in both.

The above examples speak to what is often forgotten among those who worry about birthrates. Specifically, they have very little to do with the all-important factor when it comes to economic growth: productivity per worker. As evidenced by incomes and standards of living, workers in the US, Japan and Europe are far more productive than their counterparts around the world.

Along those lines, the classical model of economic growth makes plain that demand is an afterthought. With human wants unlimited, there will always be demand for goods. The important factors are resources and the opportunities to put them to good use. Supply is demand. People ultimately trade products for products, so if labor productivity is rising, population growth (or decline) isn't much of a factor when it comes to prosperity.

Notably, birthrates in Lebanon, Lesotho and Liberia are far higher than they are in the U.S., Ireland and France, but no one is suggesting that the former countries are primed for major growth in the future. Citizens of all three doubtless have a lot that they "want," but lacking the worker productivity of wealthier nations they don't have the supply to fulfill their desires. Countries that demand goods are first supplying them, which underscores once again the importance of productivity per worker above population.

Wriston found that from 1967 to 1988, "the physical weight of U.S. product exports, per constant dollar value, fell 43 percent." Somewhat similarly, former Fed Chairman Alan Greenspan has frequently pointed out that while the aggregate output of the United States is five times greater in real terms than it was in 1950, the output weighs the same.

Importantly, neither Wriston nor Greenspan's examples can account for the knowledge and services that U.S. firms impart domestically and to the world, and which account for an increasing share of our economic activity. In short, our productivity has far outpaced population growth.

The globalization of production. Also forgotten in the population discussion is what's happening away from the well-established, industrialized countries. Their growth points to greater labor specialization, more production, and bigger markets for producers in countries whose populations aren't growing as fast as some might like.

And with the weight of our output having shrunk - sometimes to zero given how much of our output consists purely of intellectual capital - our ability to transport the goods we produce worldwide has increased. Birthrates matter in a world where goods don't flow freely, but when goods do flow freely, a talented individual can live in a retirement community but still transact with and be enriched by demand from workers across state lines, and around the world.

Former Secretary of State George Shultz once remarked in a speech that he saw "a snapshot of a shipping label for some integrated circuits produced by an American firm. It said, ‘Made in one or more of the following countries: Korea, Hong Kong, Malaysia, Singapore, Taiwan, Mauritius, Thailand, Indonesia, Mexico, Philippines. The exact country of origin is unknown.'"

More recently, Bob Weese, a spokesman for GE Canada, told the Wall Street Journal that due to integrated supply chains between the U.S. and Canada, "Some components cross the border four or five times" before the actual saleable product is finished. As evidenced by the imported inputs that go into the manufacture of a U.S. made automobile, much of what we produce today could not be made as cheaply and efficiently if U.S. producers were solely reliant on firms with a U.S. address.

What this tells us about birthrates is that they're increasingly irrelevant in a world economy that becomes more and more enmeshed every single day. So long as markets are open and free, growth will be there for the taking for talented individuals irrespective of where they live.

According to a Wikipedia entry on world population growth, Europe's population is expected to decline 29 percent over the next forty years, while in North America it's only expected to grow 18 percent. These numbers scare those who fear low birthrates, but apparently ignored are projections that point to population growth of 37 and 58 percent in Asia and Latin America, along with 45 percent growth worldwide.

Nobel Laureate Robert Mundell has famously said that "the only closed economy is the world economy," and judging by projected birthrates worldwide, the only limits to growth among citizens of countries with declining populations concerns their ability to profitably produce for the rest of the world. Not only will workers in less developed countries serve as extra hands for production of goods conceived in areas where birthrates are slowing, but their productivity will enrich the industrialized world through increased demand in return for their production.

Unfunded liabilities. The fact remains that many industrialized countries have enormous future liabilities in terms of retiree pensions. If birthrates in those countries are declining, won't their governments' ability to make good on their promises be compromised? At first glance, the answer is yes, due to the mismatch between the number of workers and retirees, but given a second pass, the outlook becomes more promising.

Government revenues rise and fall based on the number of individuals producing, but logic tells us that revenues are driven more critically by the level of taxable wealth creation. When output increases alongside a reduction in costs, wealth is boosted.

Looking at the future, assuming no major trade wars, there exists the opportunity for individuals in countries with low population growth to access the less developed world's cheaper labor force to create goods for a global population that is expected to grow. In that case, no matter the birthrates in one region or country, the potential for taxable wealth creation is enormous, and with that, the revenues necessary to fund a one-time wave of governmental liabilities.

No doubt the numbers are scary in the U.S. and Japan alone, but it's also true that yields on long-term government debt serve many purposes including as a signal of investor opinion of those governments' ability to make good on their liabilities. With yields on American and Japanese debt still low, it's possible that markets sense what those who fear declining birthrates don't: that future wealth creation will make a nominally insurmountable problem highly manageable.

Conclusion. Workers are by definition capital, and the more workers we have, the more innovation there is to serve their needs, along with greater labor specialization. Still, as evidenced by low productivity in many countries with high rates of birth, birthrates aren't the major story that some commentators suggest. The bigger story is output per worker.

Considered in light of individual worker productivity, the outlook is much better due to the growing ability of great minds to innovate, and through innovation, to create more wealth with much less of the human inputs that were previously necessary. If the present problems of the industrialized world are solved by allowing more economic freedom, the low birthrates in those same countries won't mean much. And they'll mean even less if individuals in Third World countries are also allowed more economic freedom themselves to produce.

Birthrates likely were a major economic factor in the time of Adam Smith. But with the world shrinking by the day when it comes to the ability of individuals to trade freely across borders, it seems this is yet another supposed problem that will never amount to anything. So rather than further empowering our governments to tax and spend in order to stimulate childbirth, the best solution is merely to maximize individual freedom to innovate and produce.

John Tamny is editor of RealClearMarkets, 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 will never quit. I persevere and thrive on adversity. My Nation expects me to be physically harder and mentally stronger than my enemies. If knocked down, I will get back up, every time. I will draw on every remaining ounce of strength to protect my teammates and accomplish our mission. I am never out of the fight."
-US Navy SEALs

That quote was cited by Marcus Luttrell - Team Leader, SDV Team 1, Alfa Platoon - as the central paragraph of the philosophy of the US Navy SEALs. I am Canadian. My son is American. That's the kind of American Leadership we can believe in.

In 2007, Luttrell wrote an eye witness account of his SEAL Team's deadly fight in Afghanistan. It was titled Lone Survivor. The true story remains the most impactful military book I have read this year. It's All American in a way that the US Financial System used to be - powered by pride and accountability.

Today is Veteran's Day. On behalf of everyone on my team, I would like to thank the bravest men and women of America for providing us the opportunity to wake-up and do what we do every day.

Yesterday marked another day of lower-highs for the US stock market. Closing flat on the day at 1093, the SP500 is only -0.4% off of the closing-high established on October 19th, and a full +61.7% higher than where a lot of market strategists called this entire system "out of the fight."

America always finds a way to fight back. This time, we took a page out of FDR's playbook and we fanned the fires of deflation by devaluing our currency. To a point, Breaking the Buck (we called for Obama to do that on February 24th) was something everyone on the American team could tolerate, to protect their teammates.

Then, predictably, some Washington and Wall Street individuals got greedy. Instead of Breaking it, they started Burning it. The Bankers, Debtors, and Politicians got paid. The American Savers and Consumers got the bill.

What does your Nation expect of you? What do you expect of your Nation?

My greatest fear in American finance today is that memories on Wall Street are as short as their last text message. There was a lot of economic sacrifice in this country, by a lot of people. The 119,000 employees of JP Morgan, Morgan Stanley, and Goldman didn't get us out of this financial mess. The American team did. Sadly, only a select few deem themselves worthy of the reward.

If you show me 30 Billion reasons why The Big 3 Bankers in this country deserve $30B in bonuses in 2009, I'll show you the cowardice that only a Taliban terrorist dressed as a goat herder can rival in Afghanistan. There is no pride in watching you people behave like this. It's un-American.

The only way out is for American financiers to start behaving like patriots again. It's time to "draw on every remaining ounce of strength to protect" our teammates , "and accomplish our mission." It's time to look this American Credibility Crisis in the eye, raise interest rates and strengthen our currency. Capitalizing the balance sheets of a select few and kicking a socialized can of losses down the road to our neighbor's children is gutless resolve.

On the heels of America's Squirrel Hunter (Geithner) saying the following in Tokyo today, the Buck is Burning down to another YTD low at $74.85:

"I believe deeply that it's very important to the United States, to the economic health of the United States, that we maintain a strong dollar"

Enough of what you believe "deeply" already. No one believes you, dude. Your voice is being laughed at by the Chinese. The world is using your conflicted compromise to engage in carry trading with our hard earned American currency. Your voice is a metaphor for the Lone Survivor in American Leadership lost.

It's time to find that American voice again. It's time to power the US Financial System with pride and accountability again. Let's get on with it.

"I'm a sniper, and I'm the platoon medic. But most of all, I'm an American."
-Marcus Luttrell

My immediate term TRADE lines for the SP500 are now 1070 (support) and 1101 (resistance).

Best of luck out there today,
KM

Keith McCullough is the founder and chief exexcutive officer at Research Edge, LLC, a real-time research firm focused exclusively on generating and delivering actionable investment ideas.

The "household survey data" showed that 589,000 jobs vanished during October. This is bad enough, but the three-month moving average of changes in total employment (current month and prior two months) shows that job losses are actually accelerating.

The three-month moving average (TMMA) of changes in total employment began a serious decline in February 2007. It went into negative territory two months later. This indicator has now been negative for the past 21 months. During this time, total employment has declined by more than 8 million jobs.

As the financial crisis gathered momentum in late 2008, the TMMA fell continuously, reaching a bottom of 853,000 jobs lost per month in January 2009. Then this indicator began improving. By June 2009, when stories about "green shoots" were common in the financial press, the TMMA was "only" 230,000. However, it then began falling again. The October BLS numbers pushed the TMMA down to 589,000 jobs lost per month.

Economic growth is supposed to create jobs. However, the U.S. economy shed twice as many jobs (1,332,000) in the third quarter of 2009, when GDP grew at a robust 3.5% annual rate, than it did in the second quarter (691,000), when the economy contracted at a 0.7% rate.

How can this be? To paraphrase the 1992 Clinton campaign, "It's the bonds, stupid!"

The massive sales of U.S. Treasury bonds to finance "stimulus", bailouts, and other government spending is sucking capital out of the private sector and destroying jobs. Once again, the October 6th BLS report tells the tale.

The BLS "household survey" showed job losses of 589,000, while their "establishment survey" showed a reduction of payrolls of only 190,000. This shows that most of the damage is being done in small business, "under the radar screen" of the BLS.

Small businesses-especially new small businesses-account for essentially all net job growth. However, business creation and expansion requires capital, and more and more of the nation's capital is being commandeered by the U.S. Treasury in the name of "stimulus".

The FY2009 Federal deficit was $1.4 trillion. This was almost a trillion dollars higher than FY2008. The capital to buy this additional debt had to come from somewhere, and much of it was squeezed out of business. Here are some indicators, both statistical and anecdotal:

• During FY2009, "Gross Domestic Private Investment" fell by 25% (almost $500 billion/year). It would have needed to grow by 5% to keep the unemployment rate from rising from an already-too-high 6.2%.

• Many venture capital firms are informing entrepreneurs that there is no money available for new startups. The firms say that they must husband their capital to meet the needs of their existing portfolio companies.

• The 500 largest U.S. non-financial companies now hold more than $1 trillion in Treasury bills, amounting to more than 10% of their total assets. Corporate cash flows are rising, but the money is being invested in government bonds, rather than growth.

• Banks have cut credit card credit lines by 25%, or $1.25 trillion. Because small businesses are often financed with personal credit cards, this has a direct impact on small business survival and growth.

If you divide the total real capital employed in the U.S. ("produced assets") by total employment, you get about $313,000. That is, for $313,000 in capital, the private economy can create one real, permanent, self-supporting job. In contrast, there are estimates that each of the jobs that the administration claims that "stimulus" has "created or saved" is costing about $1.2 million.

If so, this means that selling the bonds required to fund one temporary "stimulus" job will take enough capital out of the private sector to destroy four "real" jobs. This explains why, as the "stimulus" spending has ramped up, job losses have accelerated.

Unfortunately, the Administration, the mainstream media, and much of the economics profession are responding to the worsening unemployment with calls for even more "stimulus". This would compound the tragedy. Each $313,000 of bonds sold to fund the additional spending could be expected to extinguish one private sector job. In addition, we can expect that the next increment of stimulus would be even more wasteful than the first $787 billion. The "best" projects would have been included in the first stimulus bill.

The "headline" (U-3) unemployment rate of 10.2% vastly understates the magnitude of the jobs crisis in America. John Williams' "Shadow Government Statistics" unemployment number for October is 22.1%. Williams estimates that we would have to create 22.6 million new jobs in order to get to "true" full employment. At $313,000 each, the private sector would have to invest an incremental $7.1 trillion to accomplish this.

Every year for the past 58 years, real GDP has been very close to 30% of total capital employed (real "produced assets"). Accordingly, an additional $7.1 trillion in private business investment could be expected in increase GDP by about $2.1 trillion/year. Most of this income would go to the 22.6 million new job holders and their families, but about a quarter of it would be captured by governments at all levels.

Canceling the job-destroying "stimulus" program would be a good first step toward providing the private sector with the additional capital required to achieve full employment. However, this would provide only about 10% of the money required. The rest would have to be mobilized by increasing incentives for real savings and investment.

The two most effective measures toward this end would be to stabilize the dollar and to repeal the corporate income tax. The corporate income tax brought in only $138billion in FY2009. This amounts to less than 1% of GDP, and less than a fifth of the cost of the "stimulus" bill. Repealing it now would produce higher employment and higher Federal revenues within months.

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

In her piece Halderman recounted stories of patients who were enrolled in Medi-Cal, the state subsidized health plan for the poor in California, but paid upwards of $1,000 in cash out of their own pockets for laser hair removal procedures, and patients who sat in her waiting room entertaining themselves with expensive IPods and mini- DVD players yet balked at $5 insurance co-pays. She described patients who "considered health care a lower budget priority than decorated skin and expensive toys." Other doctors who commented on her piece online told similar stories.

It has now been some 70 years since the federal government shifted the landscape in health care by bestowing on employers tax subsidies for providing workers with health insurance. And it has been 45 years since the federal government got directly into the act by creating two vast public health plans, Medicare and Medicaid. Both moves have helped to transfer health care bills from the individual to third-party payers, so that many of us are now used to not paying individual bills from doctors or hospitals.

Over time, healthcare has come to seem less like a service we purchase than like an entitlement or worse, a right bestowed on us by government or by our workplace. After all, the government designed Medicare, the public health plan for seniors, to cover hospital care for seniors but eventually under pressure expanded it to pay for virtually all non-elective doctor and hospital visits as well as drugs for every senior.

And private enterprises like the Detroit auto companies negotiated their health benefits for employees with unions because it was cheap to do so using government tax subsidies. The companies rarely asked whether the additional services and coverage they were providing were essential to their employees' health. These services were perks that were affordable in the post-World War II era, and employees came to expect them until the auto companies could no longer afford them.

Now, nearly two-thirds of Americans surveyed by a Quinnipiac poll say it is government's responsibility to ensure that everyone has "adequate health-care." But does providing $90 mammograms to an uninsured person who would rather spend $400 on Botox treatments amount to a responsibility of government?

The question is ever more important as the health reform debate rages. The New York Times reports that a battle has broken out in the White House between those who want reform legislation to have more cost-saving initiatives and those like Chief of Staff Rahm Emanuel, a master of realpolitik, who think it's not politically possible to pass a bill that Americans will see as limiting their health care choices.

What both sides in this White House debate don't understand is that they are at loggerheads because the legislation being considered in Washington will attempt to reform the system from the top down, by fiat from the government. As a result, any cost savings will be those dictated from Washington after decades when individual Americans and health providers have grown resistant to such mandates. To take just one recent example out of dozens: some White House advisers want more savings in the legislation from hospitals, but the administration has already promised hospitals that it won't demand more of them in exchange for their support of health reform. This is the way our health system is being revamped, one political favor at a time.

This is why the only truly effective way to reform our health system, including slowing the growth of costs, is not from the top down, as mandated by Washington, but from the bottom up, by putting health care dollars and choices back into the hands of individuals. We can do that by eliminating the business deduction for health insurance and transferring tax credits to individuals who can use them to purchase their own insurance. We can establish health savings accounts where people can accumulate the money they save on health insurance to pay big bills. If we feel we need a safety net, we can establish government pools that protect people against the most catastrophic costs.

In these ways we would slow the growth of health costs not by gigantic, unpopular mandates from Washington but through millions of individual decisions by people acting with their own money and in their own best interests. Under such a system there should be no need for the White House to cut Machiavellian deals with hospitals or doctors or AARP for their support in exchange for political favors that undermine the greater goal of reform.

Or we can continue down the path we are on, which is what the current legislation would do. What will that get us? More incidents like this one in Boston, where a doctor, writing in the Boston Globe, recently described going to a CVS pharmacy where he found people lined up waiting for a flu shot. Some patients, when they discovered that their health insurance did not cover the shots, declined to get them and simply left, though CVS charges just $30 for a shot. As one letter writer, commenting on the doctor's observations, put it: "People unwilling to cover the costs of a shot that may prevent them from getting sick shows that the only health care reform that some people want is one in which someone else pays for it."

We need less of this sort of system, not more.

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

Domitrovic, an assistant history professor at Sam Houston University with degrees from Harvard and Columbia, argues supply-side economics, far from being an unserious program dreamed up by ideologues, had both deep roots in classical theory and serious intellectual backing from one of our era's true economic heavyweights, Robert Mundell. Professor Mundell, the father of not only supply-side economics but the euro (and one day, possibly an Asian bloc currency), is so respected in the world that in addition to his Nobel Prize and numerous European accolades, he is the first Westerner ever granted full residence rights in Beijing. China has profited so handsomely from Mundell's advice that it named a university for him. Clearly, Mundell's ideas deserve serious consideration.

Yet, Domitrovic says, despite such recognition, plus a two-decade bull market and global boom, historians have pointedly ignored the supply-side revolution, at least as an academic matter. Domitrovic explains that while numerous historians have written negative tertiary analyses of "Reaganomics" as monographs or textbook entries, none have bothered to research the primary sources on the topic, preferring opinion to scholarship. "It is high time for history to be true to its responsibilities and to consider in a methodologically serious way the momentous phenomenon that was supply-side economics," he says.

***

Domitrovic recounts that early in his career, Mundell realized that major periods of U.S. growth and prosperity such as the Gilded Age and Roaring Twenties coincided with the "policy mix" of sound money and tax cuts. Moreover, Mundell understood this was historically true, noting the rise of great nations, even empires, corresponded with these policies.

Mundell argued monetary policy was an arrow only able to hit one target, and it was best aimed solely at currency stability. Fiscal policy, specifically tax rates, should target employment.

Mundell's analysis ran counter to the economic establishment's consensus in the 1960s and '70s. Keynesians Paul Samuelson and James Tobin argued employment should be targeted with loose money, while taxes should be raised to check inflation. On the right, monetarists led by Milton Friedman argued steady money supply growth would stimulate demand.

The Mundellian policy mix was different from its Keynesian and monetarist competitors because it put the producer, supply, rather than the consumer, demand, at the framework's center. Supply-siders believed if investors, entrepreneurs, and business owners were incentivized to work, save, and invest at the margin - i.e. to take new risks - expansion would result. In this view, production led to consumption and was therefore paramount.

Domitrovic argues a central supply-side insight came from Mundell-protégé Arthur Laffer, but it wasn't his famous curve. Rather, Domitrovic places Laffer's Wedge Model at the heart of supply-side economics. The wedge is "that additional product which government compels persons to make if they want to make some other product in the first place." In other words, if two workers want to trade 16 hours each of their labor with one another, and the government requires four additional hours from each, the pair may conclude that working 40 hours to transact 32 is not worth it. The eight hours "tax" is the wedge between them. Reduce the wedge, and more transactions will occur.

Like the classical economists of the 18th and 19th centuries, Mundell argued sound money was essential because inflation punished creditors, forcing them to increase interest rates. Currency weakness undermined long-term economic planning, diminished wages, and destabilized trading relationships. Devaluations destroyed savings and incentivized investors to prefer safe havens over entrepreneurial ventures.

Mundell also drew a causal line from poor economic policy to global tragedies. He saw that American failures in the 1920s - in monetary policy (deflation) and fiscal policy (the Smoot-Hawley Tariff Act, tax increases) - collapsed the world economy, leading directly to the Depression, the Nazi Revolution, and World War II.

***

Ironically, as Mundell's ideas faced opposition from the 1960s academic establishment, the Kennedy Administration effectively enacted them, cutting taxes and recommitting to a dollar as good as gold. The result was, from 1961-68 the economy boomed at more than 5 percent annually.

The expansion faltered in the late ‘60s when the Lyndon Johnson Administration moved in favor of the Samuelson/Tobin policy mix, expanding the money supply while raising taxes. President Nixon followed Johnson's lead, raising taxes and further inflating the currency.

As U.S. monetary authorities oversupplied dollars, the gold standard - first established by Alexander Hamilton in 1791 - became untenable. In successive steps, President Johnson closed the London gold pool in 1968; President Nixon closed Treasury's gold window in 1971; and in 1973, Nixon permanently floated the dollar. The post-war Bretton-Woods currency system, which provided the U.S. would maintain the dollar value of gold at $35 while foreign governments would maintain the dollar value of their currencies, was dead.

Witnessing these events, Mundell said, "The forces of history are determined to engage in one of their periodic experiments with a managed currency." He predicted a major currency devaluation and inflation. As the gold price shot up, quadrupling from 1971-73 and then quadrupling again by 1980, Mundell warned oil prices would follow, and was proven right.

***

The slow-growth/weak currency years of 1968-1982 were an economic catastrophe second only to the Great Depression. As the dollar fell, the progressive tax system pounded workers when inflation pushed them into higher tax brackets, even while the cost of living outpaced wages. Investors couldn't make a buck, so they fled stocks and bonds for hard assets such as commodities, real estate, and collectibles. The prime rate reached 21 percent. In real terms, the Dow fell 70 percent during this period. By the time the dust had settled in the mid-80s, the dollar had fallen 90 percent against gold, meaning the general price level had to adjust accordingly over the ensuing decades. No wonder Americans wondered if their best days were behind them.

By the late 1970s, the economics establishment was stymied. Academic economists, left and right, saw their ideas tried and discarded as the debacle unfolded. A succession of presidents over the decade tried and failed to improve the economy, leading to a series of failed presidencies and a rising sense of political impotence and dysfunction.

Soaring commodity prices convinced many the Earth could no longer support humanity and was on the verge of environmental collapse. Currency devaluation punished long-term planning, driving out the bourgeois virtues of community, thrift, and prudence in favor of the Disco Era and the Me Generation. The inner cities were decimated and the crime rate rose. The nation was impoverished, the culture coarsened, and everything got seedier.

***

It was in this mad environment, Domitrovic recounts, that a few young men on Wall Street and Washington began to turn away from establishment economics, toward Mundell and Laffer.

"[S]upply-side economics was by all accounts a renegade, maverick movement driven largely by figures removed from or hostile to the economic establishments in academia, Washington, journalism, and business. In the early 1970s, all of two academic economists could be counted in the movement. The rest of the first "supply-siders" comprised a subterranean crew of journalists, congressional staffers, and business forecasters, many of whom were unknown to the others, and virtually all of whom were under forty years of age."

The ideas gained a following through conservative journals such as Irving Kristol's Public Interest and Bill Buckley's National Review, and were broadcast to the wider world by The Wall Street Journal's Jude Wanniski and Robert Bartley. From there, politicians including Bill Steiger, Jack Kemp, and Ronald Reagan became converts, and by 1981 the Mundellian policy mix was on its way to enactment.

The supply-side revolution's early results were mixed, as the Federal Reserve under Paul Volcker aggressively choked back money supply at the moment deep income tax cuts were incentivizing new business activity. Supply-siders argued the tax cuts had raised dollar demand and tight money was stifling the recovery. As gold dropped from its 1980 high of $850/oz to $300 in 1982, Volcker would not relent and the economy crashed into a severe deflationary recession. Domitrovic's analysis should help dispel the Keynesian chestnut that a recession was needed to wring inflation from the economy.

Curiously, Domitrovic's otherwise comprehensive reporting doesn't include the reason Volcker changed policy in summer 1982. Thanks to the dollar's rise, Mexico's economy was squeezed by falling commodity prices on one side and rising real debt costs on the other. Mexico told its American creditors it would default, which Volcker believed would seriously damage the U.S. financial system. Desperate, he abandoned his monetary targets, directly monetizing $3 billion into the cash-starved economy. Gold leapt and the stock and bond markets rallied, and kept on rallying. The Reagan Boom had begun.

Starting in 1983, annual GDP growth averaged 4.3 percent for seven years; in 1984 it was 7.2 percent, ensuring Reagan's landslide reelection. The misery index, combining inflation and unemployment, dropped from a high of 21 in 1980 to 13 in 1983 and dropped below 10 by the late ‘80s. The Dow rose an average of more than 17 percent per annum for eight years starting in late 1982, putting the 1980s on par with the historic bull markets of the 1920s and 1960s. Perhaps most impressively, inflation dropped from double digits in the late 1970s to 3.2 percent in 1983, and stayed below four percent for the rest of the decade.

Once the complete policy mix was enacted, Domitrovic notes, "to virtually everyone's astonishment and pleasure, stagflation up and vanished from the scene." In the following 20-plus years, the gold price stabilized and the U.S. returned to its average post-war levels of GDP growth, GDP per capita, inflation, unemployment, and interest rates; the stagflation era's slow growth turned out to be an aberration rather than a new long-term trend. The era took its place among the great American booms.

***

"Econoclasts" ends with a summary of 1983-present, as the supply-side revolution extended throughout the ‘90s and 2000s. Looking back, it is clear President Clinton - once he was constrained by a Republican Congress - bowed to supply-side economics: he signed a 25 percent capital gains tax cut, expanded free trade, and, under Treasury Secretary Robert Rubin, maintained a strong dollar policy.

Surprisingly, Domitrovic misses the most significant departure from supply-side economics in recent years, gold's 200 percent rise against the dollar since 2003. For decades, Keynesians argued U.S. trade deficits required a weaker dollar to support exports. Supply-siders categorically rejected this view, arguing devaluations produced inflation, poverty, and global instability, and that current account deficits were a sign of prosperity, balancing in an open economy through capital account surpluses. Today, with numerous conservative Keynesians along with most of the liberal economics establishment calling for further dollar decline, who but supply-siders can save the greenback?

Quibbles side, "Econoclasts" provides a vivid and deeply researched look at the forces that unleash prosperity, move history, and enhance great nations. In our time of loose money and rising taxes, supply-side's second revolution may begin with this book.

Rushton worked in conservative politics from 1996-2009.   Today he works in corporate communications. He can be reached at: sgrushton73@yahoo.com

Last week, Maine residents voted on a TABOR-inspired measure called the Maine Tax Relief Initiative. Proponents argued that the initiative would control outsized growth in government spending and let taxpayers keep more of their money; opponents (chiefly, public employee unions) alleged that the initiative would require cuts in basic services.

The Maine vote did not break the national trend: voters bought the union arguments and rejected the question by a 3-2 margin, more resoundingly than they'd defeated a similar proposition three years ago. Voters in Washington defeated a similar proposal last week, as did Oregon and Nebraska electorates in 2006. In the last two decades, California and Washington have eviscerated spending limits that formerly contained government growth.

Maybe the critics have a point. The problem with the TABOR resolutions that fiscal conservatives keep proposing is that they seek to shrink government as a share of the economy, every year, forever, meaning that government cannot maintain current service levels without voter overrides. A refined spending cap that uses a looser index for expense growth could avoid this perverse outcome while still restraining government --and allow proponents to better rebut scare tactics at the ballot box.

While other states have previously and subsequently capped taxes or expenditures, Colorado's TABOR stands out for its stringency as a spending cap. This is in part due to TABOR's use of inflation plus population growth as a spending increase index. Unless voters pass overrides, TABOR holds spending per capita fixed in real terms.

Since enactment, Colorado has seen notably slow growth in state and local expenditures as a share of income. On this measure, Colorado stood at 98% of the national average in 1990, but dropped to 87% by 2006, despite a voter-approved suspension of TABOR for several years this decade.

Because the economy grows in real terms over time, TABOR requires consistent reductions in government spending as a share of the economy. From 1967 to 2006, American population growth plus inflation totaled 797%. But personal income growth over this period was 1,639%, reflecting the fact that real income per capita grew 94%. If every state had enacted a TABOR-style limit on expenditures in 1967 and no overrides passed, state and local expenditures would have fallen from 16.4% of income to 8.4% over that period, even as they remained fixed in real, per capita terms.

It's hard to believe this is what voters want, to cut government so drastically relative to economic growth. It's more likely that voters want to use some of their increased productivity to grow government in real terms over time, just like private consumption grows -- which would indicate that personal income is the most appropriate index for a spending cap.

Michigan has had a spending cap in effect since 1978, but unlike TABOR it is indexed to personal income. The provision also includes a rainy day fund, which the state must replenish when income is rising quickly and can draw down when the economy slows. Dr. Barry Poulson of the University of Colorado, a key proponent of TABOR-style reforms, notes that this reform has been more effective than TABOR in smoothing budget cycles.

One thing a personal income-based cap won't do is shrink state and local government as a share of personal income. That government will grow at an appropriate pace provides little comfort if we start from a baseline that is too high. And indeed, Poulson notes that the Michigan reform has been ineffective in shrinking government. Where spending is already too high, a hybrid reform is called for.

States where government starts off too large should enact spending caps that closely restrict spending until it reaches a specified percentage of personal income, after which the cap would be linked to personal income. (The personal income measure should be a multi-year average, to avoid cyclicality in government spending.) This reform would produce an inverted hockey stick graph of spending as a share of income: falling until it reaches the target, then flat thereafter.

New York, where taxes per capita are 160% of the national average, would be well-advised to adopt such a reform. A state with a limited public sector, like South Dakota, might judge that its size of government is already appropriate and that there is no need for an initial shrink-down period.

Proponents of small government will be skeptical of the idea that a less-stringent spending limit is a preferable alternative to TABOR. If voters see TABOR as too strict, they can pass annual overrides to grow government faster. Why build real government growth into the system?

There are several responses to this. One is that TABOR is premised on the idea that institutions matter, and that a spending cap will have real effects on the size of government. In light of that, we should not set an overly strict limit with the expectation that voters will tinker with spending levels later.

Second, extremely stringent spending limits may not be sustainable. While Michigan's less-strict reform has survived for 30 years, Washington and California did away with stronger spending caps only about a decade after their enactments, as voters came to believe that the caps were reducing the quality of government services. Colorado's TABOR has been under constant political fire and was significantly weakened by referendum earlier this decade. A cap that sharply reduces spending may be a victim of its own success.

Third, voters have no apparent appetite for TABOR as currently structured. All five TABOR measures advanced in the last four years went down to defeat, with "no" votes ranging from 54% to 71%. Allowing growth with personal income would enable proponents to better rebut claims that a cap will degrade public services, making enactment more likely.

This last fact should make a personal income-linked cap especially appealing to beleaguered TABOR supporters. After all, a spending cap can't be strong or effective if it never becomes law.

Josh Barro is a Senior Fellow at the Manhattan Institute.

Earlier this month he compounded his error when he stated:

"Zombies, zombies, everywhere. One of the enduring myths of the financial crisis has been the claim that it was the result of (a) Fannie and Freddie (b) the Community Reinvestment Act, which forced poor, helpless bankers to make loans to you-know-who. It's a myth that won't go away - I get asked about it almost every time I give a public lecture - even though it has been extensively debunked." (New York Times, November 2, 2009)

Krugman could not have been more wrong in his assertions. Somehow he missed Fannie and Freddie's acquisition of $4.3 trillion in subprime, low down payment (5% or less) and Alt-A loans. How about the $2.7 trillion of CRA loans? After accounting for overlap among these groupings, he somehow missed some $5 trillion in such loans, trillions of which remain to plague the nation's economy.

Details:

Let's start with the assertion that GSEs only buy mortgages made to borrowers with substantial downpayments. While it is generally accepted that a substantial down payment would be 20% or more of a home's value, let's be charitable and call a down payment of 10% or more substantial. Over the period 1992-2007 Fannie and Freddie acquired $1.3 trillion in home purchase loans with a 5% or less, amounting to 62% of all such conventional loans originated nationwide over the same period. These loans are now defaulting at 7-8 times the level of the GSEs' traditionally underwritten loans with <=90% LTV. Fannie started buying loans with only 3% down as early as 1994 and by 2000 Fannie was buying loans with no downpayment.

How about Krugman's claim that the GSEs didn't do any subprime lending? Over the period 1997-2007 they acquired a total of $2.2 trillion in subprime loans and private securities backed by subprime loans. Conventional subprime loans came in two "flavors". The first group consisted of loans with a FICO score of less than 660 (a regulatory definition of subprime), loans which Fannie now says are similar to subprime loans in risk but have not been classified by it as subprime. The GSEs acquired $1.5 trillion of this type of subprime loan. These loans are now defaulting at 8-9 times the level of their traditionally underwritten loans with a FICO >=660. A second group consisted of private mortgage backed securities backed by subprime loans denominated as such by the originator. The GSEs acquired $700 billion of these securities, amounting to 33% of all such privately issued subprime securities. The loans backing these securities are now defaulting at 18-19 times the level of the GSEs' traditionally underwritten loans with a FICO >=660.

How about his assertion that the GSEs' loans were carefully documented? Over the period 2002-2007 they acquired $773 billion of Alt-A loans and private securities backed by Alt-A, amounting to 55% of all such loans originated nationwide over the same period. These loans are now defaulting at 9-10 times the level of the GSEs' traditionally underwritten loans.

These three loan types helped the GSEs meet their affordable housing (AH) mandates under the "Federal Housing Enterprises Financial Safety and Soundness Act of 1992" (GSE Act). They were materially assisted in this effort by big banks and thrifts originating trillions in high risk loans to meet another mandate established under the federal Community Investment Act (CRA).

Speaking of CRA, let us not forget Krugman's assertion that CRA's involvement in the financial crisis is a myth. Over the 17 year period 1992-2008, there was a total of $6 trillion in announced CRA commitments, covering all types of CRA lending. Ninety-four percent of this $6 trillion in commitments were issued by four banks or banks these four ended up purchasing by way of merger. The banks were Wells Fargo, JP Morgan Chase, Citibank, and Bank of America. As a result, CRA single family origination volume over the period 1993-2008 also exploded, totaling an estimated $2.7 trillion.

Detailed performance data for single-family CRA lending is rarely published. In a search of the top 25 banks by single family mortgage holdings, only Third Federal Savings & Loan reported on its CRA loans.

- Third Federal Savings & Loan reported that its "Home Today" community development program constituted just 3.2% of its owned mortgage loan portfolio ($299.3 million), yet these loans represented 32% of its 90+ delinquencies. Its Home Today delinquency rate is 33% vs. 2% on its non-Home Today portfolio.

Other "sightings" of CRA loan performance include:

- Bank of America, one of the nation's largest CRA lenders, noted on its Q3:08 earnings call with equity analysts that while its CRA loans constituted 7% or $18 billion of its owned residential mortgage portfolio, they represented 29% of net losses, with an annualized loss rate of 1.26%.

- The Shorebank (Chicago) has a 19% combined delinquency and non-accrual rate for its single-family first mortgage loan portfolio The Shorebank is the nation's first community development bank. In addition to its 19% rate on single-family first mortgages, it has a 12% rate on its multi-family lending, a 9% rate on its commercial real estate, a 13% rate on its commercial and industrial lending, and a 31% rate on its construction and development lending. All rates are as of 6.30.09. These loan categories account for 98% of its total lending portfolio;

- On a more general note, a recent Fed study of CRA loans, as reported by then Fed Governor Kroszner (http://www.federalreserve.gov/newsevents/speech/kroszner20081203a.htm), identified CRA loans as a type of subprime loan and noted that "CRA-related subprime loans performed in a comparable manner to other subprime loans."

There exists a proxy for national CRA performance since approximately 50% of CRA originations since early this decade were acquired by the GSEs to help them meet HUD-mandated AH goals. CRA created the supply and the GSEs created the demand. We do know both the quantity and performance of the GSEs' loans that were AH goals rich. There were two types of AH loans that have special bearing on CRA lending - loans with down payments of 5% or less and loans to borrowers with impaired credit (generally represented by borrowers with FICOs below 660).

Fannie's traditionally underwritten loans have a serious delinquency rate of 1.8%.
How are Fannie's $650 billion in loans with the above high risk characteristics doing?

- Down payment equal to or less than 5% - 11.56% serious delinquency rate
- FICO < 620 - 16.08% serious delinquency rate
- FICO >= 620 and < 660 - 11.32% serious delinquency rate

On average this rate is 7x the rate on traditionally underwritten loans. This result should come as no surprise since Freddie Mac published its estimated default rates by loan-to-value (LTV) in the late 1990s and reported that its 95% LTV loans had about 6 times the default rate of 80% loans.

CRA and GSE Act promoted "innovative or flexible" lending practices such as downpayments of 5% or less, acceptance of impaired credit, higher debt ratios and creative definitions of income. This loosened underwriting resulted in total CRA originations and non-overlapping GSE AH acquisitions by the GSEs of $7 trillion over the period 1993-2007. This tsunami of high risk lending spawned and sustained a housing bubble unlike any this country has ever seen.

Why did GSE Act and CRA's mandated lending have such a huge impact? Historically home prices were determined by supply and demand at a local level. These two acts changed this local dynamic. Both operated nationally, due to the fact the Fannie and Freddie, along with the big banks responsible for the overwhelming majority of announced CRA commitments, were all national in scope. They were not only largely independent of local supply and demand pressures; their loosened credit standards created demand.

It was a short leap from getting the facts surrounding the GSEs' and CRA's role in the financial crisis wrong, to being wrong about the causes of the financial collapse. On September 2, 2009 Krugman wrote an opinion piece entitled "How Did Economists Get It So Wrong?" In it he chastised the economics profession for its "blindness to the very possibility of catastrophic failures in a market economy...." (New York Times, September 2, 2009)

Of course, Krugman just assumed that the failure related to "a market economy". Because Krugman is wrong about Fannie, Freddie and CRA, he missed the fact that government policies, not market failure, caused the losses suffered by homeowners, investors, taxpayers, commercial banks and investment banks.

Edward Pinto is a consultant to the mortgage-finance industry and was the chief credit officer at Fannie Mae in the 1980s.

While all eyes are fixed on the cobra poised to strike the health care industry, a python is wending its way through Hill banking panels that would squeeze the life from the whole economy.

By Christmas, House Financial Services Committee Chairman Barney Frank hopes to pass legislation that would create an uber-regulatory body called the Financial Services Oversight Council.

It would give the Treasury secretary power to pick which large finance firms are "systemically critical," or too big to fail. He'd have the final call when the government steps in to save or unwind a troubled firm.

The bill would "essentially turn over control of the financial system to the government and seriously impair competition in all areas of finance," says former Treasury official Peter J. Wallison. It would put the government permanently in the business of picking winners and losers, he adds, creating a kind of permanent TARP.

The Kansas City Fed agrees. In a rare public rebuke, the branch issued a study concluding the bill "could lead to greater political interference." Indeed, such heavy-handed regulation would breed corruption, loopholes, lobbying and the very kind of perverse incentives and distortions in the market that led to Fannie and Freddie securitizing $1 trillion in bad social loans. "It's Fannie Mae and Freddie Mac all over again," said Wallison.

The new regulatory agency can regulate banks, bank holding companies, insurance companies, hedge funds, finance companies and any other kind of company that might be designated too big to fail.

"The existence of these designated companies will impair competition in every market they are allowed to enter," says Wallison, "and will force the consolidation of competitors so that markets become dominated by government-backed giants like themselves."

Under the new regime, designated companies will not be able to finance their affiliates' sales, putting them at a severe disadvantage against foreign competitors. GE Capital, for example, would not be able to finance GE sales of aircraft engines.

In effect, designated companies will fall under the control of the feds, unable to start new activities or enter new markets or perhaps even open new offices without federal approval. "This is a degree of political control of business that has never been attempted before," Wallison says.

And with politics comes favoritism. Bailouts and preferences will go to favored firms, and healthy companies will pay for the cost of propping up their sick competitors. Bad decisions will be rewarded, draining taxpayers. And once the market comes to expect that government takeovers and bailouts will occur, they will have to go forward, lest surprises trigger market crashes.

It will be a political free-for-all. R&D money devoted to new product lines and innovations will be shifted to lobbying. Before long, Wall Street will operate like K Street. Crony capitalism will be the name of the game.

"Washington and the political system - rather than competition and effective financial performance - will have become central to what happens in the financial industry," Wallison says.

In short, the regulatory regime Democrats want would be disastrous for future economic growth and living standards.

"Governments that regulate away risks destroy the growth engine of their nation," warns Swiss money manager Axel Merk. "The U.S. is the most prosperous nation because it has embraced risk taking. When we evaluate our love-hate relationship with investment banks, let's not forget that as one of their key roles, they facilitate the aggregation and deployment of risk takers' capital."

Democrats call that "greed" and are hellbent on tinkering with the American growth engine. Senate Banking Committee Chairman Chris Dodd is close to releasing a companion bill to Frank's.

The pair of New England liberals are the chief congressional architects of the regulations that created FrankenFreddie and FrankenFannie and the banking disaster that caused the Great Recession. Now they have license to create a new monster - with President Obama's full blessing.

If we are seeing a far-left coup against capitalism in this country, this bill could deliver the death blow, marching Wall Street down a road to serfdom in the name of "social justice."

The premise behind discouraging banks from getting too big is that the failure of big, interconnected banks threatens "the system" and makes bailouts unpleasant but unavoidable necessities. The logic is that if the banks were smaller, the failure of one or several would not necessarily bring down the whole edifice of finance. If firms were smaller, regulators would have an easier time letting them fail, without the knock-on effect of failing behemoths causing chain reactions of failure.

A parallel concern is that the "interconnectedness" is abetted by vast pools of unregulated derivatives. These derivative contracts are the force behind the contagion effect. Because large firms owe huge amounts to one another through derivative claims, the failure of a single systemically significant firm threatens its counterparties, and spreads out of control like a wildfire. Perhaps the only idea that has as much currency as busting up behemoths is the need to regulate derivatives.

Recently Citadel chief Ken Griffin wrote in the Financial Times advocating central clearinghouses for derivatives. He pointed out that 5 big banks hold 97% of all derivative exposures in the banking system. The creation of clearinghouses for derivatives is a good idea, and the industry was moving in that direction before the crises hit.

But another way to look at same data would be to observe that only 3% of the exposures fall outside the top five banks. The big banks are largely a closed system, trading mostly with each other. This presents another way of looking at the problem of bigness. Perhaps it is a blessing in disguise.

It has always been puzzling why this concentration of risk was not viewed as potentially a good thing. If last fall the biggest banks were either so undercapitalized or so heavily exposed to one another that they would have failed but for government assistance, was it not better that most of their claims were against each other? It seems that this high concentration of risk among relatively few players should have made the job of regulators far simpler. If these banks had been shuttered the risk to the system should have been manageable, at least in dollar terms, since only 3% of it resided outside the community of the Big 5.

Letting the large, interconnected firms fail would mean the bulk of the losses would have been borne by the creditors and stockholders of these banks. What regulators failed to do last fall was close down the weakest banks and declare the remainder healthy. Of course, they could only have done this if they knew the condition of the banks they regulated. Treasury Secretary Geithner's Stress Tests - completed 8 months after the crisis struck -- taught us more about the competence of regulators than they did about the precarious capital of the banks.

As the unemployment rate marches higher in lockstep with reports of growing bonus pools at the large banks, Main Street is asking, just what was salvaged by these bailouts? A proper concern of regulators is to protect those downstream from the giant banks from being exposed to their failure. But there are better - and probably cheaper - ways to avoid such contagion.

One approach would be to name the Federal Reserve Bank of NY or some similar risk-free entity as the omnibus counterparty to the Failed Banks. So if a failing Citibank has an interest rate swap on with a municipality in Arizona, that municipality would now face a risk-free counterparty. It would be an administrative challenge, but the cost to taxpayers should be far lower than propping up Citibank and Bank of America in perpetuity.

The FDIC has shuttered over a hundred banks this year, and hundreds more are expected to fail in the next few years. There has been some argument in favor of the operating efficiency of large banks. The point is debatable, but it seems obvious that closing one $100 billion bank is easier than closing one hundred $1 billion banks.

The premise that the insolvent banks were too big and interconnected to fail needs further examination before we concoct schemes to shrink them, or tax them into some optimal size. An alternative thesis would consider that regulators, co-opted by the big banks, missed an opportunity to wipe the slate clean and start over with a healthy remnant.

By placing the emphasis on "too big to fail" regulators can avoid the scrutiny they deserve for mismanaging the crisis. And they can continue to insist that nothing could have been done differently. In reality, the difficult work of closing big banks was passed over in favor of massive bailouts, and the bill due to bank creditors was handed to taxpayers. Were the big banks really too big, or were our regulators too small for their jobs?

James Keller is a contributor to RealClearMarkets and can be reached at jwkellerjr@gmail.com

In the age of superstition when western civilization passed through the Dark Ages the bubonic plague regularly decimated populations. While the wealthy and powerful would flee to country villas, the unwashed masses would crowd into churches and pray for deliverance. This created a perfect environment for the transmission of the disease as infected fleas hopped among parishioners making their deadly rounds.

Back then ignorance was to blame. What's our excuse now?

Everyone knows that a primary vector for person to person transmission of the flu virus is an arbitrary social custom we perform many times each day. Like programmed robots we do it without thinking. It's a custom so ingrained we feel inexplicably uneasy if we don't do it.

This custom has rational roots as a gesture of peace, though few could tell you what those roots are without resorting to Wikipedia. Fewer still carry bladed weapons, the suspicion of which launched the practice in the first place.

It's the handshake - the global village kiss of death.

Do you remember your father teaching you to "shake hands like a man," making sure to abjure the dreaded wet fish? Keep you grip firm, your eye contact steady, your smile warm. A greeting and a sizing-up rolled into one, this multi-purpose practice seals the deal, settles fights, bids farewell, offers congratulations, breaks down class boundaries, and generally lubricates our daily interactions. It will be hard to let it go. But go it must unless we want to pay the same price those medieval parishioners did.

The Center for Disease Control advises everyone to "wash hands any time after sneezing or coughing, touching someone else's hands, or touching potentially virus-contaminated surfaces." Uh-huh. How practical is this? We can't even get some doctors to wash their hands between examining patients. Yet 300 million people are supposed to run to the bathroom every time they say hi?

It doesn't take an act of Congress to solve this problem, nor a hundred million dollars. All it takes is a little common sense. So how about signing up as a thought leader and starting a fashion trend, distinguishing yourself as a rational, caring person. Stop shaking hands right now. In its place, offer a simple bow.

The bow has a tradition even more ancient than the handshake. It is universally acknowledged as a gesture of respect. It can be used to express greeting, apology, gratitude, remorse, acceptance, and humility. Its depth can be modulated to fit the occasion. Throw in a sideways cock of the head and a mischievous grin if you want to reduce the formality. Unlike the awkward elbow bump, a bow can be sprung on the unprepared without causing alarm. Best of all, a bow doesn't require ready access to a bathroom or little bottles of hand sanitizer.

Bowing is civilized.

Can bowing to someone who extended a hand in greeting rattle them a bit? Sometimes. So use it as a moment to educate and entertain. Keep a flu death statistic at hand to explain your seriousness and a quip at the ready to lighten the moment. My favorites are, "I'm not carrying a knife, are you?" as well as "I only exchange germs with someone I'm having sex with."

Not everyone agrees. Psychiatrist and media talking head Dr. Keith Ablow (that's his real name) is not giving up without a fight. "We've had threats of swine flu before, and we have faced other communicable diseases before without changing our basic pattern of interacting socially," he recently told FOXNews. "Stopping the handshake could have a negative effect. We need human touch and genuine communication more than ever right now."

OK, doc. People also needed to go to church to take comfort from prayer when their neighbors started keeling over from the Black Death. How'd that work out?

Making the transition is just a matter of reconditioning expectations. No, I am not stuck-up. No, I don't secretly dislike you. No, I am not untrustworthy. No, I am not mentally ill. I just don't want to miss a week of work or contribute to unnecessary deaths, particularly my own. Does this make me an awful person?

Everyone has the power take this matter into their own hands, so to speak. But creating a groundswell of rationality that renders bowing socially acceptable will probably require the most powerful force in modern culture. And that, of course, is a campaign by vacuous celebrities. So how about it J-lo, Justin, Whoopi, Brad, Angelina, and Leonardo? Want to save the world? With a little luck one of you might win over the Big Kahuna. Imagine how quickly the custom would spread if Oprah started bowing.

Old habits die hard. But not as hard as young children.

News that the unemployment rate jumped to 10.2% in October, its highest level since 1983, as the economy shed 190,000 nonfarm jobs, underscores the spectacular failure of the so-called fiscal stimulus to stimulate anything other than economic misery.

Since the $787 billion stimulus was passed in February, the economy has lost 2.9 million jobs - for a total of 4.3 million since the end of 2008. The silver lining, some say, is the number of jobs lost each month is shrinking. But they lose sight of this: There's no guarantee the economy's 3.5% growth in the third quarter will continue.

Indeed, some worry the economy is on a slow-growth path that will lead to permanently high joblessness, weaker income growth and fewer opportunities. The Blue Chip consensus of more than 50 economists nationwide expects unemployment to remain above 8% at least into 2012.

Why should this be? Well, start with the fact that virtually all job growth comes from companies with fewer than 500 employees, and that startups and very small businesses are responsible for more than half of all new jobs.

Today, these entrepreneurial job creators are running scared. That the White House vows to jack up taxes on those with "high incomes" (that is, entrepreneurs) is one reason why. Next year's scheduled expiration of the Bush tax cuts that pulled the economy out of the 2001 recession is another.

Higher income taxes, a flood of stiff new regulations and the possibility of at least $2 trillion in new taxes related to cap-and-trade and a health care overhaul over the next decade have created a climate of uncertainty - for small and large businesses alike.

Businesses are hunkered down. They have $1 trillion in cash stashed away, but they won't invest out of fear it'll be taxed away or some government czar will tell them how to run their business.

At the same time, banks have a record $800 billion in reserves but can't seem to find any worthy borrowers.

The White House claims its stimulus "saved or created" 640,000 to 1 million jobs. But no evidence shows that's true. Stimulus has failed. If anything, borrowing hundreds of billions of dollars to fund such feckless initiatives is destroying private-sector jobs. Time has come for a dramatic change of course.

Moderate Republicans and Blue Dog Democrats should not be deluded by rosy-scenario estimates. Government-run health care will be a budget buster. First, new subsidies and handouts will cost more than predicted. Second, tax increases won't generate as much money as projected. Third, promises to control other spending - particularly Medicare - are laughably insincere. And fourth, bigger government will hinder growth, reducing tax receipts while triggering more spending.

The Senate plan allegedly will reduce deficits over the next 10 years by $81 billion, while the House proposal will shrink deficits by $104 billion over the same period. But if the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) have even tiny errors in their optimistic estimates, the fiscal implications are enormous. If history is any guide, the errors will be significant, especially with regard to the cost of new entitlements. And if revenues and offsets are 25 percent below the forecast and spending is 50 percent higher than estimated (and that almost surely is still too optimistic), the 10-year deficits will be $600 billion to $850 billion higher.

Assuming they actually care about controlling red ink, derailing government-run health care should be the top priority for deficit hawks. The methodology of both CBO and JCT is imperfect, and experience shows that these bureaucracies do a poor job of estimating future spending and revenue.

The budget estimates put together by the CBO are far too low, for instance, because they do not properly measure how people and businesses change their behavior in response to government largesse. Moreover, there are incentives for companies to dump their healthcare plans since workers will be able to obtain government-subsidized insurance. The spending numbers also are far too low because they do not recognize that politicians in the future will be tempted to expand subsidies as part of routine vote-buying behavior, similar to what happened with Medicare and Medicaid.

The federal government's ability to predict healthcare spending leaves much to be desired. When Medicare was created in 1965, the long-run forecasts estimated that the program would cost about $12 billion by 1990. In reality, it cost more than $100 billion that year. And it now costs $500 billion. Medicaid was also created in 1965 and was supposed to be a very small program with annual expenditures of about $1 billion. It has now become a huge $250 billion entitlement.

Medicaid's disproportionate share hospital (DSH) program is a sobering example. Created in 1987, the program was supposed to cost less than $1 billion in 1992, but the actual cost that year was a staggering $17 billion. To cite another example, the Medicare Catastrophic Coverage legislation was adopted in 1988 and repealed less than two years later, in part because some provisions were already projected to cost six times more than originally forecast.

The tax provisions in the healthcare proposals will impose considerable damage without raising much revenue. Higher income tax rates on investors and entrepreneurs in the House legislation will reduce incentives to be productive and also increase incentives for evasion and avoidance. The tax on high-cost insurance plans and medical devices in the Senate plan also will not generate the expected revenue since people and companies will change their behavior.

There also is little reason to expect that politicians in the future will be willing to control Medicare spending, so projected offsets of more than $500 billion are highly unlikely.

Finally, a bigger public sector has negative implications for public finances. Higher levels of government spending will drain resources from the productive sector of the economy, undermining economic vitality. Additionally, the plans result in large implicit marginal tax rates of nearly 70 percent because of the phase-out of insurance subsidies.  So even taxpayers with modest incomes will face a staggering penalty on upward mobility that will hinder overall economic performance.

Fiscal responsibility is achieved by limiting the size of government. The President and his congressional allies, however, claim that big increases in government spending are prudent so long as there are equally large increases in the tax burden. But that's like a doctor trying to fix a broken left leg by breaking the right leg as well.

Daniel T. Mitchell is a senior fellow at the Cato Institute and co-author of International Tax Competition (2008).

When Congress doled out the Troubled Asset Relief Program money in last fall's crisis, it attached strings giving the government numerous ways to control the entities that were getting the money. At first, it sounds fair-any other lender would ask for controls for bailing out a company, wouldn't they? But most other lenders, hoping to get their money back, would want their borrowers to do everything they could to succeed. For example, they certainly would not sell assets way below their fair market value or drive talent away. Would they?

Recently, the Pay Czar struck again. Kenneth Feinberg sharply reduced the overall pay of senior executives at banks and other companies with outstanding TARP loans. There are two kinds of assets in a bank. On the one hand, there are securities, buildings and equipment. On the other hand, there are the assets that go down the elevator every night. These are the bank employees, the ones with their future currently tied to the bank, but who can go across the street.

But what do you do if your star trader, who made you most of the $ 667 million commodities trading profits reported in 2008 when it was so desperately needed, is contractually entitled to $100 million as his cut for his work? What if he worked at Citibank?

The Pay Czar recently induced Citibank to sell Philbro to avoid embarrassment over a top trader's contractual pay. Yet Occidental Petroleum stole it for $250 million, about book value, and an extremely cheap less-than-one year payback. Philbro has historically excelled at trading commodities. What are the chances that skillful commodities trading will be even more highly valued as the government prints money creating inflation risk?

So when Citibank was forced to choose between holding on to perhaps the best counter-cyclical asset it had or making its pay scales cosmetically consistent, its government overseer induced it to sell the cash generator. Whatever was saved in wages was far outweighed by the loss of enterprise value. This is good for appearances when you are waging class warfare, but lousy for getting your money back as a lender. Ironically, it also resulted in many bankers' pay having a bigger component of salary making it less tied to performance and more like Congress' pay, which is completely divorced from whether America is doing better.....or worse from their efforts.

The Pay Czar said today he "doubts" cuts will make bankers leave. But when bank employees go down the elevator, they know that if they have the slightest foot fault, it could be "off with their heads." No wonder 11 of the 25 Bank of America employees left before Feinberg could take a whack at them.

Meanwhile, the pay committees can reduce bonuses, and the Pay Czar gets a second whack. Life becomes tough to plan. And those that remain employees pull in their horns, keep their heads down, and contribute to the slowdown. To avoid risk at the bank, consumer loans are off. Sharply. Commercial real estate loans are down. The private securitization market for loans is a shadow of its former self. While the Fed has doubled the money supply, all the inhibitions on bankers have helped to slow the velocity of money to a crawl. So the conflicting forces creating inflation and deflation rise in intensity, increasing the chances of a volatile outcome.

The problem with the Pay Czar is that he shows that contracts don't mean a thing. What's worse is he is not acting alone, but doing the bidding of Congress, which is imposing punitive pay cuts that will have the net effect of driving talent out of the companies that need it so badly. So now we know. Good results will be tossed overboard if they don't fit into the class warfare kabuki. While this is done in the name of protecting the taxpayer, it's really for purposes of finding a whipping boy to help re-elect Congress.

A real lender would want the bank to be worth as much as possible, and understand that if you drive the smart guys out and show contracts don't mean anything, you will poison your institution, and damage its value. If its value is damaged, your loan won't be repaid. In a world where your boss's word means nothing and your compensation is at more at risk, you will become demoralized, and will reduce your lending commitments. So the velocity of money slows down, and the crisis of confidence is renewed. That is the most likely result when the short term re-election interests of a posturing Congress are put first, far ahead of the taxpayers' and shareholders' long term needs to re-build bank value.

Mr. Singer runs Congressional Effect, a mutual fund that only puts money to work when Congress is in recess. 

"Job creation" is the altar at which politicians worship. Last spring President Obama defended his administration's near trillion dollar "stimulus" plan because it would supposedly lead to the creation of 3 million new jobs, while House Minority Leader John Boehner explained Republican opposition to Obama's plan because it would create too few jobs.

It seems both sides miss the point.

That is so given the paradoxical truth that economic growth is at its core all about destroying jobs. Rather than a signal of an economically advanced country, what economists term "full employment" is more realistically the property of industrially backward countries.

In impoverished countries like Bangladesh it's a near certainty that everyone works. And for those who beg, that's their work. Back during the Bosnian conflict of the mid ‘90s, news reports suggested that unemployment there was 75 percent, but for the U.S. military personnel in country, they witnessed the greater truth that the impoverished Bosnians were constantly working.

In economically advanced countries, the obvious goal is to produce more with less effort or, to produce plenty with as few workers as possible. In that sense the advance of machines and other forms of automation in the developed world has been profoundly good for all of us.

Thanks to the rise of the machine, children no longer have to work, and while the massive influx of women into the U.S. workplace has been profoundly good for economic growth, increased efficiency when it comes to production means that for two-parent families, work by both parents is increasingly a choice rather than a necessity. In short, a society is progressing when there is not full employment.

If jobs were the be all, end all for U.S. citizens, the path to full employment would be pretty simple, and it might include abolishing some of the labor-saving devices that have destroyed jobs including the computer, the ATM and the automobile. Jobs themselves can always be created, particularly if we're willing to lower our standard of living in concert with doing work that intellectual advances previously made unnecessary.

Of course most wouldn't recommend going down such a path, and with good reason. Not only would our day-to-day existence be more difficult, but for individuals to cheer the unnecessary creation of jobs is for them also to cheer a reduction in their pay.

Indeed, it can't be stressed enough that in modern economies, one individual's work is an investor's cost. Or to put it more simply, there aren't many good jobs without investors willing to supply capital so that they can be created.

In that sense, when Americans decry the offshoring of work or technological advances that make certain jobs superfluous, they're shooting themselves in the proverbial foot. They are because while outsourcing and technical advances lead to job destruction, they also make the cost of doing business less expensive which frees up the capital necessary to fund the pursuit of other works.

Harsh as it may sound to some, businesses are only in business thanks to investors willing to support their operations. But what this means is that if businesses successfully destroy jobs on the way to profitability, the act of doing so enables them to attract the capital necessary to enter into new lines of work that almost as a rule will require them to hire people. Production is always the end, while employment is frequently the means to that end.

Returning to politicians and their peculiar worship of jobs, rather than devising endless programs meant to create them, they would do best by those eager to work if they did nothing at all. That's the case because it is government intervention in the economy in the name of jobs that is scaring off investors.

Corporate bailouts are supported by politicians owing to their belief that they'll save jobs. In the near-term that's true, but over the long-term bailouts repel the capital necessary for true job creation for keeping human and physical capital locked in the hands of failed managers. Investors as a rule invest to make money, and as such, they're logically unwilling to commit capital to the prominent business concepts of the past.

President George W. Bush foisted no less than two stimulus packages on the economy to President Obama's one (so far?), and both did so in name of job creation. But the obvious problem beyond stimulus merely redistributing wealth is that it too is anti-investment.

Investors correctly see that only the politically connected will receive stimulus funds, and they deduce that those in receipt will forever be in thrall to governments who seek to achieve social goals over profits. Stimulus similarly repels investment for those with capital being well aware that far from generating productivity, stimulus rewards the indolent at the expense of the productive.

Lastly, the Obama administration is mimicking the Bush administration in its support of a weak dollar, once again in the name of jobs. Sadly, Obama like Bush before him is failing to consider the investor in possession of capital in pursuing this most foolish of policies. Indeed, investors have to consider inflation before committing job-creating capital, and if monetary debasement is going to erode any returns, they logically invest elsewhere. It seems nearly every politician and economist believes in the power of debased money to create jobs, but reality and rational investors keep proving them wrong.

Looking ahead to tomorrow, whatever the unemployment number it's certain that politicians from both sides will wail about those out of work and what they're doing to improve things. Readers shouldn't be fooled by their sympathetic tones because in truth, it is the political class itself that is alienating the very investors possessing the ability to actually put people back to work.

John Tamny is editor of RealClearMarkets, 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 cyclical bull market in stocks and positive print on GDP has caused some on Wall Street and in Washington to claim the recession has ended. Despite all the good economic news, an end to fiscal and monetary stimulus is nowhere in sight, precisely because policymakers know the happy news is artificially derived.

A closer look indicates that neither the administration nor the Federal Reserve believes its own recovery rhetoric. They understand that the economy will not prosper without continued life support.

I believe removing such artificial stimulus is needed so the country can immediately begin de-leveraging and to prevent the accumulation of yet more baneful debt. What is truly amazing is how many people on Wall Street are foolish enough to postulate that our problems have been solved. The stock market will not be so easily fooled for much longer.

The Great Depression Part II was narrowly averted last year by slashing interest rates to near zero. The Fed made money virtually free because the record level of indebtedness ($34 trillion) in the economy required such low rates so that borrowers could service their obligations. Otherwise a cataclysmic domino effect of defaults and bankruptcies would have occurred. To avoid that scenario, the public sector assumed some of the private sector's debt and then subsequently took on a significant amount more. The debt of the nation continues to increase at a 4.9% annual rate. All public debt is ultimately the responsibility of the private sector to pay off--either directly or through future taxes. As a result, the economy has never been more precarious than it is today.

In spite of this, the stock market appears to be doing quite well. We've seen a 57% rally off the March lows in the S&P 500. However, if you measure the market against other assets its performance is much less impressive. Since the beginning of 2000 the S&P is down about 50% measured in terms of a basket of currencies other than the falling U.S. dollar. The index is down nearly 80% against the real inflation hedge--gold!

The sad truth is that this recent market rally has been produced on the back of a weakening dollar and the slashing of corporate overhead. Cutting payrolls and research and product development projects are not a prescription for sustainable growth. As I like to say, you can't burn your furniture to keep your house warm forever. Eventually, top-line revenue growth must emerge or Wall Street's game of beat-the-expectations will be short lived.

It's also worth noting that a country cannot devalue itself to prosperity and that a bull market cannot survive an inflationary environment for long. In the short run, nominal gains in the averages can occur since everything priced in dollars tends to increase in value. However, the rally will be truncated unless the Fed provides consumers and corporations with a stable currency.

The ramifications of a crumbling currency are vastly misunderstood. A strong dollar is the cornerstone of a healthy economy. It is essential for balanced growth and healthy investment to occur. On the other hand a weak currency decimates the middle class and the corporate sector's ability to maintain earnings growth. Inflation lies behind all infirm currencies, and it is inflation that destroys the purchasing power of consumers. The diminished value of their wallets leaves them with the ability to buy only non-discretionary items. As a direct result, unemployment rates soar and economic output plunges.

I believe we will suffer from a protracted period of stagflation. Money supply, as measured by M2, has increased 5% Y.O.Y. Meanwhile the output of goods and services is falling. As long as the money supply is chasing a shrinking GDP pie, there will be upward pressure on prices.

Making the situation even worse is the manner in which the money supply is growing. The quality of growth is very low because the increase in supply is coming from commercial bank purchases of Treasury debt, rather from an issuance of credit to the private sector for capital goods creation. Total Loans and Leases at Commercial banks are down 8.2% from last year. Meanwhile, the amount of Treasuries held at all commercial banks is up 20% year-on-year.

That means money supply growth is emanating from government's misallocation and redirection of capital. It isn't being loaned out to build mines and factories; it is instead being loaned out to increase consumption and build even more consumer debt.

If the Treasury and Federal Reserve truly believed the economy and the stock market were on a sustainable recovery path, talk of extending and increasing the home buyer's tax credit would be off the table. The Fed would already be reducing the size of the monetary base. The truth, however, is that no one in government really believes in this recovery. If they did, they would be hiking interest rates and the deficit would be shrinking.

The government's realization of our precarious economic condition means its largess will continue. Near term, that may ease some pain. So did the artificial stimulus that gave rise to the housing boom. In the end, a protracted period of a near-zero interest rates, along with endless economic stimulus, will spawn another bubble and not a genuine recovery.

Michael Pento is chief economist at Delta Global Advisors and a contributor to greenfaucet.com.

Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

'Our Choice: A Plan to Solve the Climate Crisis," Al Gore's sequel to his 2006 tome "An Inconvenient Truth," came out Tuesday. Printed on recycled paper using low-VOC (volatile organic compound) ink, it will undoubtedly be a best-seller and on the desk of every attendee at next month's climate change conference in Copenhagen.

In a press release announcing the book, the Oscar- and Nobel Prize-winning former vice president writes: "Now that the need for urgent action is even clearer with the alarming new findings of the last three years, it is time for a comprehensive global plan that actually solves the climate crisis. 'Our Choice' will answer that call."

The book's cover depicts one of the hurricanes Gore still claims are increasing in frequency and intensity. What has happened in the past three years is that such claims have been thoroughly debunked as the earth has cooled, possibly for decades hence.

For example, a recent study by researchers at Florida State University determined that the 2007 and 2008 hurricane seasons had the least tropical activity in the Northern Hemisphere in 30 years.

Ryan Maue, co-author of the report released in November 2008 on "Global Tropical Cyclone Activity," used a measurement called accumulated cyclone energy (ACE) that combines a storm's duration and its wind speed in six-hour intervals. The years 2007 and 2008 had among the lowest ACE measurements since reliable global satellite data were first available three decades ago.

In a New York Times puff piece the same day Gore's book was released, "Gore's Dual Role: Advocate And Investor," it's described just how profitable saving the earth can be. Considering the accuracy of Gore's climate data, his role would be better described as "storyteller and profiteer."

In November 2007, Gore joined the investment firm Kleiner Perkins Caufield & Byers. The following May the firm announced a $500 million investment in maturing green technology firms called the Green Growth Fund.

The group then announced an additional $700 million to be invested the next three years in green-tech startup firms. But there will be no return on these investments if the green technology business, uh, cools down. The hype and interest must be maintained. Climate change skeptics must be denounced as "deniers."

Financial disclosure documents released before the 2000 election put the Gore family's net worth at $1 million to $2 million.

A mere nine years later, estimates put his net worth at about $100 million. Gore's spokeswoman wouldn't give a current figure for his net worth, but, according to the Times, "the scale of his wealth is evident in a single investment of $35 million in Capricorn Equity Group," a Palo Alto, Calif., firm that directs clients to conservation investments, namely environmentally correct products.

Last year, Gore was the star witness at the hearings on cap-and trade-legislation in front of the House Energy and Commerce Committee. Rep. Marsha Blackburn, R-Tenn., asked how a man dedicated to saving the planet could get so wealthy so quickly.

Blackburn noted that Kleiner Perkins at last count had "about $1 billion dollars invested in 40 companies that are going to benefit from cap-and-trade legislation that we are discussing here today."

Gore replied he was only being a good businessman in a capitalist economy, that he was putting his money where his mouth was.

Perhaps, but at the same time he is advocating policies based on junk science that, while he enriches himself, will devastate the American economy, causing huge losses in jobs, economic growth and GDP.

The American consumer and taxpayer are on the wrong end of his green Ponzi scheme. Somewhere, Bernie Madoff is smiling.

But that's not the half of it. There's an Internal Revenue Service auditor poring over your books in the conference room. A state sales tax agent has left you a phone message that he wants to come in for a visit, and city fire inspectors just dropped off a violations summons.

With government budgets sharply constrained and likely to be under pressure for years to come, businesses struggling in the recession are now facing intense and rising scrutiny from tax and regulatory authorities. Across the country, governments are ramping up their audits of businesses, increasing fines and fees, and aggressively interpreting their tax codes to maximize collections. Meanwhile, tax codes and regulations continue to grow more complex and difficult to follow, sharply increasing the cost of compliance. As the technology consulting firm Sabrix recently put it: "Make no mistake: to cash-hungry tax authorities, your business represents a revenue stream." That's blunt.

The more intense scrutiny of firms actually started at the federal level before the recession began. From 2005 through 2007, the IRS increased audits on small-to-mid-sized firms, those with revenues between $10 million and $50 million, by 41 percent, according to a study by Syracuse University. The IRS says it thinks there's substantial ‘noncompliance' among firms in that revenue range. But IRS Taxpayer Advocate says a big problem is that the tax code is too complex and many taxpayers, their tax-preparers and the IRS's auditors simply don't agree on how to interpret the code.

But the feds aren't business's only concern. Since the recession began, governments with the biggest financial woes are being the most aggressive, starting with California. Among its moves the state has been sending letters to businesses telling them to check their records for out-of-state purchases, and then instructing them to pay back taxes they owe on goods or services they've bought in another state. In the first half of the year 25,000 firms got hit with the letters, whose tone is intimidating, to say the least: "Industry studies indicate there is a likelihood that your business has purchased fixtures, equipment...or other items...outside California," the letter reads. It then advises the business that the state has the right to audit it if it doesn't self-audit.

Across the country in New York City, whose $60 billion budget is larger than most states, the growing bite on business also comes from new fees and aggressive enforcement of regulations. The city's budget this year contains a whopping $100 million in projected new fine and fee revenues, up 12.5 percent from the $800 million the city already collects. What's particularly alarming to local businesses is that most of that additional money will come from estimated increased ticketing, as if they city knows that firms and city residents will behave that much more badly this year.

Some groups applaud such initiatives because they believe that businesses are simply being forced to pay what's due and keeping government coffers full in the process. The California Tax Association, a union group that advocates for a strong public sector, commended the state's letter-writing initiative because there is "a ton of tax avoidance out there," as a spokesperson said. Meanwhile, New York's businessman Mayor, Mike Bloomberg, told the press that firms that obey the laws have nothing to worry about from new enforcement efforts.

But the reality is more complicated. In New York, city inspectors under pressure to boost revenues have resurrected obscure laws that haven't been enforced for years. Meanwhile, tax codes are getting so complicated that firms struggle to comply at huge costs, and many still run afoul of the law. A survey last year by Tallman Insights, a technology consulting firm, found that small and mid-sized businesses spend on average $327,000 a year just to conform to sales and use taxes. At the heart of those costs are constant increases in tax rates, changes in clauses of the tax code, and complex lists of what qualifies as taxable and what doesn't.

In California, for instance, retailers are supposed to collect taxes on sales of fertilizer for flower gardens, but not on fertilizer used in vegetable gardens. If a store gets confused and collects for both, customers will complain. But if the store collects for neither, it's liable for the taxes and penalties on those items that are taxable. And the penalties add up. The Tallman surveyed estimated that businesses pay on average $34,000 in penalties and interest over and above back taxes.

Many firms that do business over state lines are finding that the cost of expanding in even a minor way, such as by enlisting an independent agent to represent the firm in a new state, can lead to a big tax bite. A recent article in CFO Magazine recounted the tax woes of a small Arizona furniture manufacturer which had a sales rep who made one trip a year to Washington State to service just two clients. When the state's tax authorities surveyed the firm and found out about the business, they sent it a substantial income tax bill based on just three days of activity every year in Washington. A poll by the magazine found that the states that were most aggressive about trying to extend their tax reach in this manner to out-of-state firms were New York, California, Massachusetts, New Jersey and Texas.

The good news in all of this, I suppose, is that it's worse elsewhere, such as in Europe, because of the widespread use of the Value-Added Tax, or VAT, which is a multi-stage levy which requires firms to calculate the value they add to a product or service and then pay taxes, which are eventually passed along to the consumer.

I guess business owners can thank heaven that America doesn't have a VAT, for now at least.

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

Bernanke's Fed operates on the wrong symptom after misdiagnosing the patient. We're not suffering a crunch slowing the credit he believes to be the lifeblood of capitalism. We're hemorrhaging credit after engorging on too much debt. Our debts are staggering. We need additional savings to replenish capital rather than borrowing to keep spending it frivolously. Bernanke would serve us better with a tourniquet rather than these excessive credit transfusions.

Bernanke may have us all borrowing and spending again. GDP appears to be recovering. Unfortunately, the market's corrective medicine was stunted and these interventions bear inflationary consequences. Despite Bernanke's assertion that, "The US government has a technology, called a printing-press, that allows it to produce as many dollars as it wishes at essentially no cost," the costs are real and painful.

Since last September, they have created trillions of dollars to backstop crumbling financial markets by purchasing worthless bank assets and lending freely. Short-term interest rates barely hover above zero. They have also been monetizing treasuries to reduce long-term rates. This was done ostensibly to make mortgages more affordable.

Not only are these false cures to what ails us; they also reveal the futility of staving off asset deflation while facing an inevitable correction. The Fed's customary interventionist practices taken to their extremes failed to stanch the bleeding. Bernanke has authored numerous intrusions beyond his customary treatment manual because his usual cures were rendered ineffective.

We monetized treasury debt during WWII, but that enabled our survival and had a definite end. Now we play this check-kiting fraud to fund self-perpetuating welfare programs. Welfare won't end. These programs accelerate. We once traversed this monetary high-wire for a legitimate purpose requiring economic risk. Now we finance society's moral rot.

This fights a symptom of inflation (rising LT rates) with an inherently inflationary cure. The longer Bernanke persists, the more pent-up inflation gets unleashed when he stops. Nonetheless, Bernanke claims he can undo these policies without endangering us.

Today, much of the excess liquidity remains essentially book-keeping entries. These monies replenished bank reserves decimated by faulty lending. Bernanke intends to prevent banks from lending them out by paying additional interest.

No value was created in conjunction with these new dollars. To the extent they have any value; it reflects an enormous transfer of wealth from the rest of us to Wall Street. Or, if they have no value, these banks are still failing. It's either theft or fraud?

Supposedly, if these freshly printed dollars never circulate, they will not raise the price level and thus there is no inflation. This idea mistakes one painful symptom with the disease itself. The CPI does not measure inflation. It measures consumer prices which is usually the last symptom to arise.

The CPI is like a stock price after a company issues additional equity. The price may rise despite its dilution as there are scores of factors impacting equity markets. But even more factors influence consumer prices. Unlike a stock investment, where its return is likely our primary concern, the consequences of monetary dilution are numerous. But prices will rise as confidence in the dollar erodes reversing last fall's flight to safety.

Bernanke misses on three points:

a) This equates to stealing someone's lawnmower in the dead of winter and claiming that it's not really theft if you return it before spring. Even if we never feel the pinch of higher prices, our government just bestowed colossal sums of money on its politically-connected friends. Shifts in monetary policy take time. The prices of oil and other commodities have risen substantially. Just because these haven't yet increased the price of bread doesn't mean your lawnmower wasn't stolen.

b) This is uncharted territory. Never has so much money been created so quickly. Nobody, Bernanke included, knows if it's even possible to extract these funds before the price level surges. Dr. Bernanke's patient lies exposed in the operating room, but he's never performed this procedure before. He plays a dangerous game with our financial health.

c) He walks a tight-rope. Even if you ascribe to his faulty logic, this procedure requires uncanny balance between inflation and growth. If the Fed's over-heated printing-press served as an antibiotic; what happens if the treatment ends before the infection is contained? If he moves quickly to avoid inflation, he may instead undermine our fragile recovery.

Bernanke faces a dilemma. He must manage interest rates and the proliferation of new dollars by walking a very thin line. If he moves too slowly, inflation will spiral out of control. If he acts too soon, he may dash the recovery. This highlights one of many fallacies in the statist argument extolling government intervention. Once recovered, we still depend on the programs that turned things around. Then what?

It is virtually impossible to manage these dials effectively. Bernanke will likely err on the side of inflation. Upending the recovery will embarrass politicians leaving him a scapegoat. Inflation makes the massive debt incident to their deficits relatively cheaper. Painful consumer price inflation won't be felt for some time allowing political cover.

Meanwhile, the cheap money will trigger an artificial boom. Dr. Bernanke will look brilliant and politicians will take credit for saving us. The press will authenticate this falsehood before equilibrium catches us from behind yanking us back to reality. When price inflation hits, it will hit hard.

Bill Flax works in the banking industry. This column reflects his views and not those of his employer. Please contact him at billflax2@yahoo.com.

The Intrade pay-to-play betting/investment parlor shows big wins for Bob McDonnell in Virginia and Doug Hoffman in upstate New York's 23rd congressional district. The New Jersey race for governor is too close to call, with the probabilities swinging wildly. Late last night, Chris Christie's victory probability was 56-46 over Jon Corzine, a 16-point gain for the Republican. This morning, Christie showed a 55 percent chance of victory, with Corzine at 47.

It's interesting that early signs of economic recovery are not helping the Obama Democrats. This is largely because of the 9.8 percent unemployment rate, which is expected to move higher. Even the crazy jobs-saved-or-created campaign is having no discernable impact while the Obamacons try to fight the unemployment rate.

If you go to recovery.gov, the official stimulus website, you'll find that there has been $207 billion in stimulus spending through October 30, 2009 - including $84 billion in tax benefits, $52 billion in contract grants and loans, and $71 billion in entitlements. So even if we give my friend Jared Bernstein his highly flawed "one million jobs saved or created," that's $207,000 per job in an economy where the average wage is about $46,000. Not good. Wasteful and ineffectual spending. (In reality, tax credits are spending. For incentivizing, you need marginal tax-rate cuts.)

Mike Flynn of Breitbart's biggovernment.com notes that the government pumped $170 billion into the third-quarter economy. But GDP grew by only $150 billion. As I said, ineffectual spending.

That doesn't mean the economy isn't rebounding. It is. Glitches and all, third-quarter GDP popped up 3.5 percent at an annual rate after inflation. Statistically, the recession is over. That's good. And it corroborates the big stock market rally over the past seven months. This is going to be a business-led recovery as self-correcting firms build profits on top of huge cash flows.

Yesterday's ISM manufacturing report for October also confirms the growth trend with a recovery reading of 55.7, the strongest since April 2006. And this morning's factory orders for September also show a stronger-than-expected gain. Even car sales are expected to rise in October by more than ten million, at least one million better than September. Ford, which refused to take TARP bailout money, reported a surprise increase in profits.

But the depreciating dollar remains a storm cloud over recovery. So are scheduled tax-rate increases and health-care legislation that will slam individuals and firms with higher tax burdens and higher tax costs for job creation.

And then there's the Federal Reserve. With gold up another $25 - setting a new nominal record of $1,079 - the Fed will release a policy statement tomorrow, one that is likely to continue a program of massive money-pumping and a zero interest rate.

This whole Obama policy mix of huge government spending and a depreciating greenback is all wrong. It's pro-inflation, not pro-growth. For a true economic recovery, we need a stable King Dollar and lower marginal tax rates to incentivize job creation.

Jimmy Pethokoukis and others have noted that the first recovery quarter under Reagan was better than 8 percent, not 3.5 percent. In fact, the average real GDP growth rate for the first quarter of the ten post-war recoveries is 7.3 percent.

So the economic-recovery story, and even the stock market rally, won't bail out the Obamacons today, although it remains to be seen whether a free-market, anti-tax-and-spend message will emerge from a three-election sweep by the GOP. If so, it could doom the so-called health-care reform that has become a symbol of the leftward-tilting, big-government, economic-control policies emanating from Washington.

The Office of Management and Budget projects a $1.5 trillion federal budget deficit for 2010, with deficits greater than $700 billion in each of the next 10 years. From 2010 to 2019, estimated deficits will total $9 trillion. That will increase the public debt from 41% of GDP in 2008 to 75% in 2019, a level not seen since the early 1950s. Even once the economy returns to normal (in OMB's view, that means 2012), deficits are expected to remain in the range of 3.7% to 5% of GDP.

It is possible for a government to run deficits continuously -- ours has done it almost every year for the last four decades -- but not on this scale. Since paying down the massive debts run up to finance World War II, United States public debt has varied within a band from about 25% to 50% of GDP, with the debt growing on a manageable scale as the economy also grew-typically, outside of recession, that has meant a deficit under 3% of GDP.

When we last ran such large deficits on a prolonged basis (from the early 1980s to the early 1990s) our finances were bailed out by the end of the Cold War, which enabled drastic cuts in military spending. It's not easy to envision a similar resolution for the deficits projected for the next decade. If we keep current levels of government spending, or substantially increase them as Congress is poised to do with health care reform, massive tax increases will eventually be necessary to prevent a debt spiral that undermines the creditworthiness of the United States government. What form will these tax increases take?

New taxes on the wealthy aren't likely to suffice. In 2007, before the Great Recession, the top 5% of income tax filers (those with income over approximately $160,000) had income of $3.29 trillion and paid $676 billion in federal income tax. Raising another $800 billion a year (enough to close the budget gap in 2012) would require taking over a third of their remaining income in new taxes, an outlandish sum. And of course, many of those people have incomes below Obama's stated tax increase threshold.

An across-the-board income tax increase is also an unpalatable answer. A new study from the Tax Foundation finds you could raise an additional $800 billion a year if you raise all income tax rates by 87%, starting from the elevated 2012 baseline after the Bush tax cuts for the wealthy expire. That would mean a bottom rate of 18.7% and a top rate of 74.1%. However, that figure assumes people wouldn't work less even though their tax rates nearly doubled. In reality, dynamic effects would reduce revenue and an even larger tax increase would be necessary to raise the $800 billion. Even a more modest goal like cutting out-year deficits in half, to a manageable 2% of GDP, would require a move to drastically higher marginal rates.

These ugly choices will have lawmakers casting about for other options, and Europe provides a guideline for how to finance high government spending. Contrary to popular belief, (much) higher income tax rates on the wealthy are not a hallmark of European tax systems outside Scandinavia. European countries levy income taxes that are broadly similar to the American tax, even somewhat less progressive. The main differences that support the larger European public sector are higher payroll taxes -- politically undesirable for the same reason as a general income tax increase -- and the inclusion of value added tax in the revenue mix.

A VAT, which taxes businesses on the difference between the price of goods sold and purchased, is economically similar to a sales tax but more difficult to evade. Like most consumption taxes, VATs are regressive, but they've also proved to be a money machine for European governments, with rates gradually creeping up over time. Last month, Nancy Pelosi said a VAT is "on the table". Sen. Kent Conrad has made similar remarks.

Imposing a new, regressive tax might seem like a strange play for the Democrats, but it's not unprecedented. Remember the Obama pledge not to raise taxes on people making less than $200,000? He already broke it, less than two weeks into his term, when he signed a bill raising the federal cigarette excise tax by 61 cents a pack. The cigarette tax is the most regressive tax levied by the federal government. Indeed, President Obama smokes, but few other wealthy people do.

White House Press Secretary Robert Gibbs contends that Obama's pledge not to raise "any kind of tax" on middle income people didn't cover the cigarette tax. Obama might similarly claim a VAT doesn't violate his pledge because it's a tax on businesses, not people. Pelosi is already peddling that line, saying taxes on the middle class are out but the VAT might be in. Of course, the VAT is like sales tax, so it's a tax on the middle class (and the upper class, and the lower class) but in Washington, semantics can matter more than reality.

Democrats will likely contend that new regressive taxes are justified because they will fund programs that disproportionately benefit lower-income people. To a significant extent, that is true. But contrary to President Obama's campaign promise, shiny new government programs won't be free for most Americans.  Instead, they'll come at a cost of increased taxation, reduced incentives for productivity, and a less robust private sector.

Josh Barro is a Senior Fellow at the Manhattan Institute.

Though economic logic tells us that GMAC should never have received even one dollar of federal largesse, if the planned handout of an additional $5.6 billion is approved by Treasury, GMAC will be the unworthy recipient of $17 billion of taxpayer funds. The latest GMAC lifeline is being defended as a way to revive carmakers GM and Chrysler, which politicians see as important to the health of the U.S. economy.

The problems with this thinking are many, however. Put simply, everything Washington gives out must somehow be paid for, and in this case the political class will seek to stimulate two companies left for dead by private investors. But in order to do so it must by definition depress the commercial outlook for successful companies that don't require government funds to survive.

It is frequently said by Republicans and Democrats that the government served a necessary, economy-boosting role in "bailing out" dying businesses over the past 18 months, but nothing could be further from the truth. To "bail out" the politically connected, one must as a rule harm the economic chances of business entities not so lucky as to have Washington connections.

In this case, just as tariffs subsidize the growth of the inefficient in concert with the starving of the efficient, the funds earmarked for GMAC's continued existence mean that the firms in possession of business plans that might actually be profitable will necessarily go without. The economic impact of such charitably backward thinking promises to be profound.

Indeed, the notion of access to "capital" isn't so much about money per se as capital consists of labor and equipment. When the failures in our midst are given funds by a government lacking any of its own resources, what's really happening is that capital of the human and physical variety is placed into the hands of the talentless over the talented.

Thinking about the above in real terms, if politicians had bailed out failed Internet firms of the Webvan and Globe.com variety earlier in the decade, the losers would have been productive Internet concerns like Amazon and Google, not to mention other technology firms who've yet to improve our lives through innovation. Going back even further in time, had the horse and buggy industry been politically connected, the rise of the previously vibrant U.S. auto industry would have necessarily been slowed for it being less able to access what is always limited capital in order to grow.

In today's case, the "seen" will be the jobs and factories preserved thanks to the continued support lent to automakers headquartered in the U.S., but the "unseen" will be what our economy loses for the entrepreneurs in our midst not being allowed to redirect limited resources to productive concepts that private investors might support. Indeed, not asked enough is what major industrial advances will never see the light of day in order to save a couple of automakers that have so stupendously failed consumers.

Ultimately it all comes down to the basic economic concept that as workers, we can only do so much. And when governments such as ours seek to control the flow of capital from the Commanding Heights, they tragically support unprofitable economic effort at the expense of the profitable.

No doubt if we as individual Americans chose to, we could likely make the best t-shirts, televisions and paperclips in the world, but in order to do so, we would have to cease engaging in other kinds of labor at which we excel even more. The tradeoff would surely be negative, but presently this economy-retarding deal is what's being foisted on us by our allegedly benevolent handlers in Washington.

In short, the bailout of GMAC will do nothing to stimulate the U.S. economy, and a lot to depress it for ensuring the continued misuse of human and physical capital. This should be remembered the next time politicians express hurt over a downcast economic and jobs outlook. Their sadness is all too fake, because the downturn has nothing to do with the private sector, and everything to do with a public sector too self-important to simply get out of the way.

John Tamny is editor of RealClearMarkets, 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.

There's good reason to believe that Gasparino's latest book, The Sellout, will become the definitive book on the current financial crisis and the events that led up to "The Great Recession." Spanning three decades, The Sellout pulls no punches in chronicling the rise and fall of excessive Wall Street leverage and risk taking, as well as the cast of colorful characters that ultimately brought the U.S. financial system to its knees. It hits bookshelves tomorrow.

RealClearMarkets: You sat down recently with Wall Street legend Teddy Forstmann to discuss your new book and the genesis of the mess we now find ourselves in. Forstmann said it all began as a "cold" back in the 1970s and 1980s, and that since no one ever learned much about that cold, or did anything to treat it, it developed into the "cancer" that rocked the market and economy last year. As you pointed out during your conversation, these guys have been bailed out several times before, and that the risk-taking grew-exponentially-each time as a result. So where does that leave us today? Have we at last cured what ails us, or are we going to be reading another Gasparino book about a future Wall Street disaster that we could have prevented?

Charlie Gasparino: I don't know when it's going to happen, but if history is any guide, it has to happen again--the "it" being another financial crash. Of course, it won't happen tomorrow or next week, or maybe not even two years from now. But when the memory of 2008 wears off, and mark my words it will wear off, excessive risk taking will be back in a form that evades all these alleged regulatory controls that have been established. Regulation can never cure the disease of excessive risk.

The only thing that can cure it is tough love--allowing firms to fail. That doesn't mean I wanted the Fed and the Treasury to walk away last year. That would have meant Armageddon. But they should have walked away before that, when the systemic risk was smaller and the damage would have been limited. 1998 would have been a great place to start. Let Long Term Capital Management fail; let Lehman, and as I show in my book, possibly Merrill to fail, because the trades were the most vulnerable to LTCM's bad bond market bets.

Instead, by arranging a bailout, and by using free money to juice up the markets, policy makers emboldened Wall Street to take even more risk. That's what they did then, and that's what I fear is happening all over again.

RCM: As you are well aware, Goldman Sachs now has a serious PR headache on its hands with reports of $16 billion in bonuses in the pipeline. There's widespread anger that Goldman has been milking the system and profiting from a sort of incestuous, government-subsidized, "heads I win, tails you lose" paradigm-that the firm has profited off the taxpayer's dime after being rescued by Uncle Sam. Do you think the public outrage toward Goldman is justified?

Gasparino: Absolutely. Now I'm not in the Goldman is the center of all evil camp. But I know a lot of really smart people who believe that Goldman's bankers and traders virtually control the federal government in order to advance their own notorious agenda.

In fact, as I show in The Sellout, there were far worse players whose risk taking led to last year's meltdown, starting with Merrill Lynch and Citigroup. They were equally powerful from a policy making standpoint.

Remember, after Robert Rubin fought to end Glass-Steagall's separation of investment and commercial banking, he didn't go back to his old firm, Goldman Sachs, he went to work for the firm that benefited the most from the law's demise, Citigroup.

But Goldman in many ways crystallizes all that is wrong with the financial bailout, started by the Bush Administration, but carried on and expanded by Obama's. Goldman has been declared a bank, not much different than the old Bailey Building and Loan, and yet they don't take deposits or offer checking accounts. So what do they do? They trade, and they are trading as a federally protected bank, meaning they get to borrow at cheaper rates and they are Too Big To Fail.

How anyone considering themselves to be a capitalist can support this arrangement is beyond me.

RCM: Hedge-fund manager David Einhorn delivered a heck of a speech at the recent Value Investing Congress. He didn't pull any punches. Of particular note, he said the "failure of Lehman meant that, barring extraordinary measures, Merrill Lynch, Morgan Stanley, and Goldman Sachs would have failed as the credit market realized that if the government were willing to permit failures, then the cost of financing such institutions needed to be re-priced so as to invalidate their business models." Do you agree with Einhorn? But for the bailouts, would those firms have failed?

Gasparino: Yes I do. What's interesting about what Einhorn said is that even though he predicted Lehman's demise, he never thought the feds would let the firm fail. There's a section in the book that discusses this very point.

So think of it this way: if a notorious skeptic like Einhorn thinks the government is going to bailout a firm like Lehman, why wouldn't the irrational exuberants at Morgan, Goldman, and Merrill think that they can take enormous leverage and carry enormous amounts of high-yielding but high risk debt on their books? They all thought when things got tough Uncle Sam would be there with a paycheck ready to bail them out.

RCM: Who's at the top of your list of people who should be held accountable for the unraveling of the global financial system?

Gasparino: The politically correct answer would list a long line of risk-taking CEOs starting with Stan O'Neal at Merrill, Sandy Weill and Chuck Prince at Citi, Jimmy Cayne at Bear, and of course former Lehman CEO Dick Fuld, as well as various senior traders at these firms. They're all in my book with their contributions to the demise of the financial system.

But what you will also find in my book, which I guarantee is absent from most of the others, is the root cause of the risk taking, which I believe begins and ends with the policy makers. The various heads of HUD, like Henry Cisneros, Andrew Cuomo and those in the Bush Administration who believed owning a home was a right, rather than something that should be earned, led to the disaster at Fannie Mae and Freddie Mac, which spread its guarantees to subprime loans, a place it traditionally stayed away from.

You also can't excuse Alan Greenspan for handing out free money to Wall Street every time the big firms screwed up over the past thirty years. It gave them incentive to double down on their risky bets until of course they double-downed so much the system blew up.

RCM: What are your thoughts on President Obama's approach to the economy and his administration's handling of the financial crisis?

Gasparino: What the book says pretty emphatically is that the banking crisis is far from over; that for all the billions handed to Wall Street and the banking system, the crisis has merely abated. The prime reason for this is pretty simple--the Obama administration has done nothing more than maintain the status quo that began under Bush. The banks and Wall Street are being bailed out through subsidies, but Main Street gets no relief, other than stimulus money that does very little to stimulate the part of the economy that creates jobs outside of Wall Street.

RCM: Last question. Terminal curmudgeon Pat Buchanan recently wrote a column titled: "Traditional Americans Are Losing Their Nation." In it he basically argues that the U.S. is going to hell in a hand basket.

Here's an abridged excerpt:

"[Traditional Americans] see Wall Street banks bailed out as they sweat their next paycheck, then read that bank profits are soaring, and the big bonuses for the brilliant bankers are back . . . They see a government in Washington that cannot balance its books . . . The government shovels out trillions to Fortune 500 corporations and banks to rescue the country from a crisis created by the government and Fortune 500 corporations and banks. America was once their country. They sense they are losing it. And they are right."

What's your take?

Gasparino: It's hard to argue with much of his analysis. Unemployment is growing above 10 percent, and yet, bankers are making money based on government subsidy. Now we need a healthy banking system to survive, but Goldman isn't even a real "bank" and yet it gets treated like one from a policy standpoint, but not when it hands out bonuses.

It's about time someone in Washington says the following: "Okay, it's time to sink or swim on your own. Next time you screw up, the taxpayer isn't footing the bill." Goldman for one should become a hedge fund if it likes to trade so much and end this charade.

Dan Holland is an editor for RealClearMarkets.

The question is so unfamiliar that the past provides few clues to the future. Psychology is crucial. To take a parallel example: the dollar. The fear is that foreigners (and Americans, too) will lose confidence in its value and dump it for yen, euros, gold or oil. If too many investors do that, a self-fulfilling stampede could trigger sell-offs in U.S. stocks and bonds. People have predicted such a crisis for decades. It hasn't happened yet. The currency's decline has been orderly, because the dollar retains a bedrock confidence based on America's political stability, openness, wealth and low inflation. But something could shatter that confidence -- tomorrow or 10 years from tomorrow.

The same logic applies to exploding government debt. We have moved into uncharted territory and are prisoners of psychology. Consider Japan. In 2009, its budget deficit -- the gap between spending and taxes -- amounts to 10 percent or more of gross domestic product (GDP). The total government debt -- the borrowing to cover all its deficits -- is approaching 200 percent of GDP. That's twice the size of its economy. The mountainous debt reflects years of slow economic growth, many "stimulus" plans, an aging society and the impact of the global recession. By 2019, the debt-to-GDP ratio could hit 300 percent, says a report from JPMorgan Chase.

No one knows how to interpret these numbers. If someone had predicted 20 years ago that Japan's debt would rise so spectacularly, the forecast would doubtlessly have inspired this alarm: Japan will pay crushing interest rates as fearful lenders demand high returns to compensate for the risk that government might default or inflate away its debt. Instead, the opposite has happened. Japanese investors -- households, banks, insurers -- have absorbed 94 percent of the debt, reports JPMorgan. Interest rates on 10-year Japanese government bonds have dropped from 7.1 percent in 1990 to 1.4 percent now.

Superficially, it's possible to explain this. Japan has ample private savings to buy bonds; modest deflation -- falling prices -- makes low interest rates acceptable; and investors remain confident that new and maturing debt will be financed.

The American situation is similar. Despite huge deficits, interest rates on 10-year Treasury bonds have hovered around 3.5 percent. In time of financial crisis, investors have sought the apparent sanctuary of government bonds. But the correct conclusion to draw is not that major governments (such as Japan and the United States) can easily borrow as much as they want. It is that they can easily borrow as much as they want until confidence that they can do so evaporates -- and we don't know when, how or whether that may happen.

Wealthy societies everywhere face a similar dilemma. Debt is ballooning from already high levels. The Congressional Budget Office reckons the Obama administration's planned budgets would increase the debt-to-GDP ratio from 41 percent in 2008 to 82 percent in 2019. Higher interest rates would aggravate the debt burden. Anticipating higher rates, the CBO estimates annual interest payments on the federal debt at $799 billion in 2019, up from $170 billion in 2009. Even the size of exposed debt is unclear; adding Fannie Mae's and Freddie Mac's debts (effectively guaranteed by the government) to Treasury debt would raise the total sharply.

But containing debt by spending cuts or tax increases would involve wrenching and unpopular measures that might, perversely, weaken the economy and worsen deficits. In Japan, the existing value-added tax (national sales tax) of 5 percent would have to go to 12 percent, says JPMorgan, along with deep spending cuts. Against choices like that, some advanced country might decide that a partial or complete default, though dire, would be less damaging economically and politically than the alternatives.

Deprived of international or domestic credit, defaulting countries in the past have suffered deep economic downturns, hyperinflation, or both. The odds may be against a wealthy society tempting that fate, but even the remote possibility underlines the precariousness and the novelty of the present situation. The arguments over whether we need more "stimulus" (and debt) obscure the larger reality that past debt increasingly constricts governments' economic maneuvering room.

To paraphrase a once famous mayor of New York - So how's he doing so far?

You're probably aware that the H1N1 swine flu vaccine supply has fallen dangerously short of the level required to protect the most vulnerable among us. In the spring Federal officials predicted that as many as 120 million doses would be available by now, as opposed to the 16 million doses that actually arrived. Flu vaccine is tricky to make under the best of circumstances, but there are scientifically safe and proven ways to stretch supplies. Are you aware that the Federal Government refuses to allow the use of adjuvants that can be used to produce twice as many doses from the same vaccine stock? This despite the fact that over 40 million doses of flu vaccine containing adjuvants have been dispensed in Europe over the past dozen years without any indication of a safety issue. Some people denied shots because of this decision are going to die. Does this policy sound scientific or political?

You're probably aware that a mercury-containing preservative called thimerosal was removed from children's vaccines in 2001 to mollify activists promoting the theory that thimerosal causes autism. According to the Centers for Disease Control, there was then and is still now no scientific evidence linking thimerosal to autism. Despite numerous peer-reviewed studies as well as the empirical fact that autism rates have not plunged since the 2001 thimerosal ban, as one would expect if the preservative were a leading cause of this heart breaking illness, the administration recently made a decision that further reduced the supply of H1N1 vaccine. It switched our country's emergency H1N1 vaccine order from multi-dose to single-dose vials, causing production chain backups as vendors scrambled to accommodate the last-minute switch. Why the change? Because single-dose vials contain a lower concentration of thimerosal. Some people denied shots because of this decision are going to die. Does this policy sound scientific or political?

Did you know that despite the melting ice cap there are estimated to be five times as many polar bears wandering the northern regions of our planet today than there were fifty years ago? Studies indicate that the biggest threat to polar bears are not present climate conditions but forecasts of future conditions made by climate models. These are the same models that have been unable to explain why the hottest year on record was actually 11 years ago despite increases in atmospheric carbon dioxide and that the world's oceans appear to be cooling. This has not stopped the administration from proposing that 200,000 square miles of land, sea, and ice along the northern coast of Alaska be designated as "critical habitat for this iconic species." Does reading this statement make you wonder whether polar bears are genuinely endangered or merely charismatic? Does this policy sound scientific or political?

Did you catch the recent peer-reviewed article by Princeton's Tim Searchinger in Science magazine on the impact of biofuels on global warming? The authors found that "corn-based ethanol, instead of producing a 20% savings, nearly doubles greenhouse emissions over 30 years and increases greenhouse gases for 167 years. Biofuels from switchgrass, if grown on U.S. corn lands, increase emissions by 50%." Has the White House called for a halt on ethanol subsidies and blending mandates? Is Obama asking legislators to heed the scientific evidence and pull back from this widely recognized economic and ecological blunder? No. Does this policy sound scientific or political?

Have you looked at the background and track record of the chief scientist the president chose to advise him? In a book co-authored earlier in his career with Population Bomb alarmist Paul Erhlich, Presidential science advisor John Holdren discussed the merits of adding a sterilant to public drinking water supplies to reduce population growth. The book goes on to note that "compulsory population-control laws, even including laws requiring compulsory abortion, could be sustained under the existing Constitution." You see we, dear readers, are not citizens meant to be served by our government. We are pollutants. Does this policy sound scientific or insane?

It's almost certain that the U.S. emerged from recession sometime during the summer, most likely in June. But those who want to credit the $787 billion "stimulus" package passed in February should likewise refrain from saying "I told you so."

They include presidential adviser Larry Summers, who said last week that "thanks largely to the Recovery Act, we have walked a substantial distance back from the economic abyss and are on the path toward economic recovery."

We have, in truth, stepped back from the abyss. But sorry, Dr. Summers, it was no thanks to government.

The strongest parts of the third-quarter GDP report came from personal consumption (up at an annual rate of 3.4%), inventories (up almost 1%) and homebuilding (up 23.3% after declining for 14 straight quarters). Government's contribution to GDP growth was up just 2.3%, slower than overall growth.

Cash for Clunkers and the $8,000 first-time homebuyer credit boosted consumer spending and housing. But these gains are one-time, not permanent. In reality, we merely took money from one hand and put it into another. Net change: zero.

With 4.1 million jobs lost this year and no verifiable boost to the economy from the stimulus, it's fair to say this has been a bust.

The average workweek is 31.1 hours, the lowest in decades. And 9.8% of Americans don't have jobs, the highest since 1983. White House officials promised that 3.5 million jobs would be saved or created as a result of the stimulus. But so far, the Associated Press reported Thursday, "the government has overstated by thousands the number of jobs it has created or saved."

In late July, economist J.D. Foster of the Heritage Foundation put it succinctly: "This is no longer an experiment in economic policy. The results are in: Keynesian stimulus does not work." This GDP report doesn't change that conclusion a bit.

If that's so, our only hope going forward is the private economy. Though hindered by massive government intervention in housing, banking and industry, it's still the most resilient in the world.

Businesses and households have cut spending to the proverbial bone. Now they're reaping the first benefits of all that pain.

That, and a flood of fresh money printed by the Federal Reserve - bank reserves, at over $800 billion, are about 200 times higher than normal - are the main reason for the third-quarter bounce.

What's of greater concern is the future. In a normal recovery we'd be growing much faster than 3.5%. That's what usually happens when you have a huge drop in output - a V-shaped recovery.

Few think that will happen this time. More likely we'll see slow growth of 2% or so, with fewer jobs and slower income gains - a real jobless recovery.

Why? Big government threatens our well-being with irresponsible health care "reform," higher taxes on entrepreneurs, a tax-filled cap-and-trade energy bill, a host of new business-strangling regulations and trillion-dollar deficits as far as the eye can see.

Champagne? No thanks. Put it on ice until a real recovery begins.

The distinguished Judge Richard Posner of the 7th Circuit Court of Appeals nailed the problem when he wrote last year: "Executive compensation in large publicly traded firms often is excessive because of the feeble incentives of boards of directors to police compensation."

But what does this have to do with mutual funds?

The answer: Nothing. While corporate shareholders watched more and more of their potential dividends flow to top executives, fees and expenses that mutual fund investors pay fell by about 60% over the last three decades.

And while some irresponsible corporate boards fueled a cycle of can-you-top-this CEO pay packages, independent mutual fund directors were scrutinizing the performance, costs, and competitiveness of fund advisers, driving better deals for the shareholders they represent.

Unfortunately, Judge Posner chose to unleash his anger in an opinion he wrote on Jones v. Harris Associates LP. At issue in Jones: the legal standards used to weigh whether a mutual fund's advisory fees are excessive. Posner's comments were manna from heaven for trial lawyers, who are eager to turn unfounded allegations about fund fees into a steady stream of lucrative lawsuits.

So as Jones moves to the Supreme Court, with arguments scheduled for next Monday, Nov. 2, the plaintiffs bar gloats whenever gullible commentators use this case to hammer on padded paychecks.

The real story of mutual fund fees is far different.

The fund industry is virtually a textbook case of a competitive market. More than 8,000 mutual funds vie daily for the dollars of cost-conscious investors. If investors are happy with the price, performance, and service of their fund, they stay and invest more. If not, they walk - because it only takes a couple phone calls or a few clicks of the mouse to move to another fund.

There's plenty of evidence that investors do just that: In any given year, 25% to 70% of mutual fund advisers experience net outflows.

Funds have no choice but to compete, because investors have ready access to a wealth of information on every fund - and all of its competitors. Investors can mine a rich vein of fund data on fund Web sites, investing Web sites, and easy-to-use rating services like Morningstar and Lipper.

And those investors are checking fees: In the 10 years to 2008, every net new dollar invested in stock funds went into funds with below-average fees.

Competition and disclosure are backed up by a tough regulatory regime, with independent directors standing as the investors' first line of defense. A fund adviser's contract - including fees - must be approved every year by the fund's independent directors.

These directors spend months reviewing reams of information about the adviser's performance, services, costs and more. They have to be thorough, because they're required by the Securities and Exchange Commission to document their decisions.

An efficient market, combined with effective regulation, produces results. The 2009 Morningstar global mutual fund survey, measuring the experiences of investors in 16 countries in North America, Europe and Asia, gave U.S. funds an A - the highest grade in any of the countries measured.

The study found that U.S. mutual funds have the lowest annual expense ratio, with most investors in America paying less than 0.75% of assets for fixed-income funds and less than 1% for equity funds.

Sharp competition, strict oversight and tight regulation - that doesn't sound much like the mess in executive compensation, does it? Nor does the result - investors paying half as much per dollar of assets invested as in 1980.

Shareholders, watchdogs, lawmakers - and, yes, judges - have every right to be mad about CEOs' bloated pay. But don't use that issue to destroy a mutual fund market that is delivering results for millions of Americans.

Stevens is president and CEO of the Investment Company Institute, the national association for mutual funds.

Mr. Reid's compromise is a bill with a public plan that allows individual states to opt out. That puts him squarely in the liberal camp, because few states end up opting out of federal benefits, however hard their initial resolve. The question is whether he can carry the votes of all senators of his own party and muster the 60 ayes needed to block a filibuster.

There are just 60 senators in the Democratic caucus, and Joe Lieberman (Connecticut), Ben Nelson (Nebraska), Blanche Lincoln (Arkansas), Evan Bayh (Indiana) and Mary Landrieu (Louisiana) are said to be especially wary of any form of public option. Mr. Lieberman has even threatened a filibuster.

Mr. Reid's decision tilts the Senate toward the bill passed by the Committee on Health, Education, Labor and Pensions, which contains a public option and is similar to the bill headed for passage in the House of Representatives. The Senate Finance Committee bill focuses on regulation of insurance companies and omits a public option.

Why does Mr. Reid choose the public option, even with an opt-out? It was the object of widespread vilification in the noisy August town hall meetings between members of Congress and constituents. It is a statist approach to health care, costing almost a trillion dollars over the next decade, which some Democrats may find they cannot support. Mr. Reid is cooperating with President Obama, who is committed to the public plan and cannot be seen to abandon it unless and until it fails to clear the filibuster hurdle.

In remarks on Monday, Mr. Reid said, "I believe that a public option can achieve the goal of bringing meaningful reform to our broken system. It will protect consumers, keep insurers honest and ensure competition."

That's the Reid-Obama argument. What it omits is that the public plan would result in the disappearance of competition, because private companies cannot compete against a government plan with its explicit government guarantee and its insulation from failure. When Medicare's costs exceed its revenues, as is happening at present, the program collects an additional $20 billion annually from the public purse. Private companies with similar cost overruns would go out of business.

The House bill and a Senate bill with a public option would drive the public into the arms of the government plan. The bills include penalties on firms that do not offer health insurance to employees, a requirement that everyone-man, woman, and child-have comprehensive insurance, and requirements on whom insurers must cover, what benefits must be provided, and the extent of variation in premiums.

This would solidify government control of health care, force many private insurers out of business, and lead to a single-payer health system, as in Britain and Canada.
Americans would have a financial incentive to sign up for the new public health-care plan, or for Medicaid, the federal-state plan for low-income people. The existence of a public option would motivate many employers to drop insurance and pay the annual penalty-in some versions of the legislation, only $400 or $750 per worker, in others, 8% of payroll-effectively pushing employees to the new public plan.

All bills would create health insurance exchanges. There the public plan would compete against "qualified health benefit plans," the only ones allowed to advertise their health insurance plans to individuals and firms. Qualified plans would be those that offer specified generous packages of benefits, meet guidelines on who could sign up, and agree to limits on the range of premiums.

In all, premiums would necessarily have to be very high. Insurers would be required to accept all applicants, no matter how sick. With the exception of variations for age and, in some versions, geography and tobacco use, everyone, no matter how sick or healthy, would be charged the same premiums. That would tend to lift premiums charged for young, healthy adults.

This pricing mechanism would quickly force private plans out of business-and leave consumers with the public plan.
In order to prevent insurance companies from offering plans unlisted on the health exchanges, lower-income Americans who receive federal financial help in paying for insurance would be required to buy only plans listed on an exchange. They could not select minimal plans with low premiums and high deductibles offered on the open market, even though such insurance makes sense to many people and encourages shopping around for less expensive services.

With restrictions on insurance companies driving prices of private insurance higher, it is unrealistic to believe that states would opt out of this sweeping, expensive proposed public insurance scheme. People would ask why residents of other states had access to inexpensive federal plans, yet they were prohibited from purchasing them. It's as though Medicare was offered in some states but not others.

Any health care bill that includes a public plan, with or without a state opt-out, will inevitably put private insurance out of business for the vast majority of Americans. Then, it's a short step toward a single-payer system.

Reacting to this critique, in the spring of 1979 economist George Reisman published a short book with an arresting title: The Government Against the Economy. At the time, Mr. Carter was pursuing a growth-limiting windfall profits tax on oil companies, and calling for an expansion of price controls on oil and natural gas. Talk was in the air of wider industrial price controls as a way to stem inflation, which had plagued Americans for much of the 1970s - since, not un-coincidentally, Richard Nixon's final abandonment of a gold-linked dollar on August 15, 1971. Mr. Reisman's book was largely a description of the harm and sheer stupidity of such price controls, and the nonsense of any limits-to-growth argument. His larger implicit thesis, though, is one worth pondering today: no matter how well-intended may be the designs of politicians, activist intervention by government often brings about the curtailment of growth, and even, as in the 1930s, disaster and impoverishment.

After a global recession engendered by Federal Reserve policy errors, Fannie/Freddie corruption and incompetence, and harmful legislation in many areas (e.g., bank lending mandates to poor credit risks), one would think Reisman's thesis is beyond dispute: government failure is a reality that can lead to economic hardship, however well-intended the policy aims. Yet gifted politicians and policy intellectuals favoring activist government concede nothing to Reisman. It's important for investors to understand Obama Administration thinking on this - and to analyze whether the current U.S. government is, however ironically, "against" the economy - in order to plan ahead.

Consider some basic facts:

First, the simplest proxy measure for government's involvement in an economy is the metric of government spending as a percentage of total economic output (Gross Domestic Product, or GDP). This *Government Spending/Total GDP* metric isn't perfect, as it doesn't cover other important factors such as tax rates, inflation and monetary stability, the regulatory regime, or levels of human and physical capital. Nonetheless it captures the size of government's "footprint" in an economy to a fair degree. And the first observation here - so prevalent that it may be regarded as a canonical law of economics - is that there is a significant inverse correlation between the size of this government footprint and GDP growth (and, by extension, standards of living). This is true beyond any timeframe other than the very short run. Communist economies, where government's footprint is biggest, exhibited very slow growth across the 20th century. But European welfare states do not fare well, either, in comparison to the growth engendered by the more limited-government policies of, say, Hong Kong, the U.S., or pre-1990 Japan (after 1990, Japanese government spending accelerated dramatically, and economic growth stalled). More recently, the People's Republic of China has witnessed strong growth only as rising economic liberalization, greater levels of foreign direct investment, wider property rights, and significant market-based reforms became policy.

Secondly, in the post-War era, U.S. federal spending, as a percentage of GDP, peaked at 48% in the war year of 1945, then fell back to the persistent low-20% range of recent decades (prior to a sharp increase to 28% in 2009). By contrast, in most European economies the government spending footprint is sharply higher (e.g., *Government Spending/GDP* has been above 60% many times in Sweden, and is 56% there in 2009). Meanwhile, inflation-adjusted economic growth has averaged 3.4% per annum since 1948 in the U.S.; this compares with a range of 1.8-2.7% for the economies in western Europe. Over time, this economic growth differential drives gaps in other such standard-of-living metrics as per capita income, or unemployment. Per capita income in the U.S. was over $44,000 last year, versus $32,000 in France, for example. And, persistently high unemployment levels have become the norm in Europe, often registering double digits in many countries for long periods. Sadly, in 1970 western Europe had 20 million more jobs than the United States; today the U.S. has 25 million more people employed than in Europe.

These differences in economic growth and employment rates have led to a growing gap in living standards not captured fully by the numbers themselves. Tax rates on personal income have generally been lower in the U.S. than in most European countries (though this is changing). And the cost of living, as measured by consumer staples ranging from milk to gasoline, is considerably lower in the U.S., meaning higher American income levels buy even more of the "real stuff" of life. Finally, the U.S. outspends more than the next 9 countries combined on national defense; whether that's for better or worse, it means many countries effectively live under an American defense shield, freeing up billions for welfare spending. Absent this implicit subsidy, higher tax rates to pay for their own security would imply a lower level of consumer welfare and living standards elsewhere, in the sense that "more guns" would mean "less butter" - and this comparative analysis ignores the rather stark differences in quality, service, availability, and convenience between, say, Europe, and a 24/7, please-the-customer-first, competitive culture in America.

Likewise, the rest of the world lives in the back-draft of U.S.-led innovation, entrepreneurial dynamism, technological advance, and capital deepening. The U.S. dominates the scene in private equity and venture capital spending, as well as corporate capital investment. More than one-fourth of all patents are issued in America, and these often comprise the most important and commercially viable over time. At over $300 billion per year, the U.S. dwarfs the rest of the world in absolute R&D spending, with three-fourths of that private sector- or academia-based. And, at a long term average of 2.7%, the U.S. is near the top in terms of the *R&D Spending/GDP* ratio (only a few Scandinavian countries, Israel, and Japan are higher; the European Union is 1.9%, by comparison). Outside of mobile wireless technology development in Japan and Scandinavia, one is hard-pressed to name a significant industrial advance emanating from anywhere other than the United States since 1980. From health sciences to software engineering, electronics, industrial ceramics, basic manufacturing, and countless other sectors, U.S. advances have been proliferated quickly throughout the world after commercialization. This is one reason the U.S. has run a persistent trade deficit; capital has found consistently solid returns here more than anywhere else over time, to the world's enrichment. Combined with continual U.S. innovation in corporate strategy, finance, management methods, and ever-deepening liquidity of capital markets, American technology, research, and know-how all combine to benefit the world via the entrepreneurial dynamism of our private sector.

All this matters for a simple reason: the superior wealth creation and higher standard of living in the United States result with a lighter footprint of government than elsewhere. A corollary of this is that if the United States did not exist - that is to say, if the European welfare states and Japan and others had no ability to benefit from American entrepreneurial dynamism, capital, technological innovation, management methods, or defense and security services - the global standard of living would surely be materially lower. Or to make the same point more realistically, if, since World War II, the United States had had the welfare state economy and growth rate of, say, France or Sweden, the world would be significantly poorer.

This is a seminal fact which President Obama would not deny. But he evidently does not agree that economic growth, based on superior American exploitation of entrepreneurship and a friendlier environment for capital investment, is the most important end of policy. Nor, concomitantly, is wealth generation the most important aim. He has spoken fondly of European health care systems, for example, and laments that the U.S. is the "only advanced democracy on Earth - the only wealthy nation" that does not provide universal health care to its citizens. Likewise he considers Club of Rome positions on energy and climate change to be enlightened, though effecting their policies here in the U.S. will mean hundreds of thousands of job losses and lower industrial profits. Again following the Club of Rome, Mr. Obama recently declaimed at the U.N. and G-20 that there is nothing inherent in the U.S. economic system which could be considered superior to the rest of the world. Given the standard of living differentials described above, this is rather astonishing, but illuminating in terms of where policy is headed.

To be sure, Mr. Obama has occasionally spoken favorably about America's private sector. But for him there is a danger of too little government, just as there is from too much. As he said last month in a joint session of Congress:

"You see, our predecessors understood that government could not, and should not, solve every problem....[B]ut they also understood that the danger of too much government is matched by the perils of too little; that without the leavening hand of wise policy, markets can crash, monopolies can stifle competition, and the vulnerable can be exploited."

This is a critical revelation of Mr. Obama's worldview, and is explanative with respect to current and future policy from this Administration. Economic growth is not the most critical lodestar for public policy, as long as business professionals exploit the "vulnerable" along the way. Further, as Mr. Obama has stated elsewhere, while the Civil Rights movement vested formal rights in such vulnerable, "dispossessed" people, little has been accomplished with respect to "political and economic justice in this society". He has opined as well that a shortcoming of the U.S. Constitution is that it does not enumerate "what the federal government must do" on behalf of people to effectuate "redistributive change".

Therefore there are societal goals to be pursued beyond economic growth which might fall under the rubric of what Mr. Obama has termed economic justice. That is to say, for Mr. Obama, there is an "optimal level" of government intervention in an economy which, far from harmful, can be of great assistance both in the short run of a crisis as well as for longer term resource coordination - and happily, at the same time such intervention can effect "redistributive change" and promote other policy preferences of the governing class, such as on environmental or energy matters.

Even if only implicit, a U.S. government policy agenda which places other goals above economic growth has enormous implications for American taxpayers, investors, and ultimately the world itself. For it portends the imposition of a European-style welfare state economy on the American people, the first result of which is a permanently lowered trajectory for the standard of living here. One of the immediate consequences of this is, as Mr. Obama's chief economist admitted last week, higher unemployment levels for the long term. Higher levels of taxation seem assured, again, for most all Americans - the top 1% of wage earners paid 17% of all personal taxes at the federal level in 1980; today this group pays over 39% of all personal taxes, so "help" must come from lower-income earners. And corporate tax rates in the U.S., already the 2nd highest in the developed world, will see no relief.

Other results of this policy set surely include a weaker-valued U.S. dollar, which puts at risk all dollar-denominated assets, particularly the U.S. bond market. Sharply higher interest rates and inflation are in the offing eventually, and prospects for a bond market collapse cannot be ruled out. All of this implies that on a relative valuation basis, U.S. assets will not yield returns available abroad, especially given the pro-growth policy pursuits announced now in several Asian countries, and most recently Germany. Oil is now at $80 and in the short run will surpass $100, with long term higher price levels in store - Asian demand and U.S. monetary policy will ensure that.

Of course, in the very short run, higher levels of new government spending induce greater consumption, per the present moment. And Mr. Obama is globally popular, as is his agenda for "economic justice". But the world will come to regret that the engine of the U.S. economy is now being shifted to a lower gear, for in time it means the same for them.

Mr. Chapman is an Adjunct Scholar at the American Enterprise Institute.  Please direct comments to john.chapman@aei.org

A recent New York Times editorial acknowledges that the economy is weak, but it pleads for yet another federal stimulus package. The Times editors want another round of unemployment benefits (this would be the third) to subsidize non-work welfarism. They also want more federal spending on state Medicaid -- an area that already has been showered with federal taxpayer money to no economic avail since it has nothing to do with economic growth.

Can't we do better?

Or let's take the case of Rep. Barney Frank, a smart guy. He told MSNBC that "The right wing took control of government and ruined it. They gave it a bad reputation. Now we are trying on every front to increase the role of government in the regulatory area."

Ah! Re-regulation. What a great idea. As I recall, the Soviet Union and old Eastern Bloc tried heavy government control and regulation, and it didn't work. The people rebelled. They wanted economic freedom; the right to keep their own money; the right to start their own businesses; and the right to climb the ladder of success in a free economy.

Now here's a counter-thought. The Reagan free-market revolution, which included regulation lite, a sound dollar, and low tax rates, launched a three-decade-long boom. And yes, the Gipper's policies were copied around the world. (What does Barney Frank know that the rest of the world doesn't?) Even the communists in China have adopted deregulated free-market capitalism.

The battle between democratic entrepreneurial capitalism and heavy-handed statism has already been won by the economic freedom fighters around the globe. That's one reason why the capitalist emerging economies in Asia, Eastern Europe, and many parts of Latin America (think Brazil) are challenging U.S. economic supremacy and the American dollar.

Prodded by the New York Times and other media organs, the Democrats in Congress are going in the wrong direction. They don't seem to realize that growth and wealth come from individuals and human action, not the heavy footprint of the state.

Here's another example of drinking from the wrong water. Top administration economist Christina Romer delivered a very gloomy forecast to Congress last week. She said unemployment will remain at a "severely elevated level," and that the U.S. jobs market will stay painfully weak next year. She was just being honest. Ms. Romer, who has written about the benefits of permanent tax cuts to stimulate GDP growth, might in fact be sending a shot across the bow to her fellow Obamacons. She even said the Obama stimulus plan will contribute little to economic growth in 2010. From her own work, she knows that big-government spending and temporary tax credits have no economic-growth power.

So why not try something different? Unfashionable as it may be today, why not go back to the supply-side model of lower marginal tax rates for individuals and businesses, large and small? That's the model my late dear friend Jack Kemp successfully espoused to President Reagan more than 30 year ago. It's the incentive model of economic growth. At lower tax rates, where folks keep more of what they earn and invest, greater after-tax rewards spur greater work effort and investment risk. They also boost asset values. This is exactly what the economy needs: a rejuvenated dose of incentives -- permanent incentives.

Think of this: At the same wage level from cost-conscious businesses, a 10 percent personal tax cut provides a handsome after-tax wage-increase incentive that will spur individuals to go back to work -- simply because work will pay more after-tax.

When I spoke last week at the launch of the Jack Kemp Foundation in Washington, D.C., I emphasized the supply-side model of a sound dollar, flat tax rates, free trade, limited government, and market-driven solutions for better schooling, more efficient health care, and the amelioration of poverty. Jack Kemp believed in these principles. He believed in growing the economic pie, not redistributing it. And he believed in growing it large. He would have hated today's notion of a "new normal" of 2 percent growth and high unemployment. He would have argued for the need to give everyone greater economic-empowerment opportunities and incentives. And he would be just as right today as he was when he began his crusade in the mid-1970s.

Kemp's universal principles have stood the test of time. His was a genuine growth solution, one that is essential to America's greatness, her boundless optimism, her prosperity, and her success. Today's anti-growth economic policies would have driven him crazy. And he would have fought back.

That's the message for economic freedom fighters everywhere: Unite, and throw off your chains. Especially here in America.

Oops.

In what amounts to the most underreported story of the year, the Treasury Department's Inspector General testified last week that in an effort to get money into the economy quickly the Internal Revenue Service rubber-stamped most applications for the $8,000 tax credit for first time homebuyers, and in the process the government has paid out hundreds of millions of dollars to people who probably scammed the feds out of our money.

About 107,000 taxpayers out of 1.4 million who claimed the credit so far may have abused the program, the IG estimated, including about 74,000 whose previous tax returns indicate they were not actually first time buyers (No doubt many of these will claim the Rep. Charlie Rangel rule of home ownership, which is simultaneously to declare several homes as a primary residence in order to secure a tax break on one or more). Another 19,300 applicants apparently received the tax credit even though they didn't buy a home (okay, that's my emphasis, not the Inspector General's). And then, in the final absurdity, 580 of the applications approved by the IRS listed homeowners who were under 18 years of age, including some four-year-olds. No doubt the $4 million that the feds paid to these kids will go into their college savings accounts.

The IG testified that prior to the start of the program his office advised the IRS on several procedures to identify potentially fraudulent claims before sending out checks, but the agency ignored the recommendations because officials were apparently concerned about getting the money into the economy as quickly as possible. Whether IRS officials were pressed by someone in the White House or Congress to get the checks out quickly is an issue worth investigating, if the media were interested.

But apparently they are not. The IG's revelations provoked a collective yawn in the press. According to the Nexis newspaper database, the testimony garnered barely more than a dozen mentions in stories, including a few buried deep in pieces about efforts to extend the tax credit. Newspaper opinion editors yawned too. I could find just a few editorials, including one mild tsk-tsk in the Boston Globe. The major TV networks and cable news programs mentioned the fraud just a handful of times.

What's most remarkable is that at about the same time the IG was dropping this bomb on Congress last Thursday the issue of fat bonuses on Wall Street also surfaced in the press. Since then newspapers have published about 430 stories about financial firms' compensation, while the electronic media ran some 130 pieces on bonuses, including multiple mentions on CNN, MSNBC and that rogue outfit, Fox News.

Talk about a double standard. I'm sympathetic to anger on Main Street against banks and investment banks that accepted government money to stay afloat and now are paying big bonuses out of profits. But what the big banks are doing is still legal, if controversial. Compare that to potentially $500 million in homebuyers' tax credit fraud, according to estimates by the IG. Somehow it seems disproportionate to evoke more outrage about how banks will disperse their earnings than how the IRS may have squandered our money.

The IG's report raises all sorts of provocative issues. During the many stimulus debates that took place last winter, advocates simultaneously assured us that programs would get underway quickly and that fraud and abuse would be held at bay. But many of the stimulus programs are far more complex than the homebuyers' tax credit, including construction projects that will hand out huge chunks of money to private firms under fast-tracked bidding procedures. Big dollars are also going through programs that are habitually subject to widespread fraud, like Medicaid. If it was boorish of critics to complain about potential fraud when the stimulus hadn't yet even been approved, it certainly isn't now that the Treasury's IG has uncovered the first widespread abuses.

The IG's testimony came at hearings to extend the tax credit beyond its Nov. 30 expiration. The real estate industry and its supporters in Congress are worried about what will happen to the home market without this big government subsidy. The industry generously estimates that of the estimated 1.8 million buyers who will take advantage of the tax credit by the end of November, about 350,000 would not have purchased a home if the credit didn't exist. But some nonpartisan experts believe that many of those buyers would have bought a home eventually anyway and the credit merely pulled their buying forward by six months to a year, just as cash for clunkers pulled forward some car buying but resulted in a sales slump when the program expired. The IG's testimony raises the additional question of how many of those incremental 350,000 buyers were legitimate first-time purchasers.

The underwhelming reaction to the tax credit rip-off helps explain how the federal government can just keep merrily subsidizing home buying in America despite one calamity after another. Two weeks before the IG's testimony, officials at the Federal Housing Administration were forced in Congressional hearings to acknowledge problems with their portfolio of insured mortgages, which grew rapidly when Congress pressed the agency to step in to the home market after Fannie Mae and Freddie Mac crashed. Still, you are more likely to find over the last three weeks stories in the press about how to obtain an FHA-insured mortgage than read reports on how the agency may need a bailout because of unwise mortgage subsidies and risky underwriting strategies.

If it seems like hardly anyone in Washington is learning anything from our current economic turmoil, it's because there apparently isn't any penalty in national politics for being foolish and imprudent with our money. It's only when people on Wall Street are foolish and imprudent with their money that everybody seems to get really upset.

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

The party's future direction is unclear.

But as America struggles to emerge from a financial crisis, any renewal of the right will require Republicans to rethink their approach to the economy. An agenda focused chiefly on tax cuts, as the Republicans' has been since Ronald Reagan's presidency, is no longer enough.

In 1980, Reagan won the election by attracting a substantial portion of Democrats with three simple ideas.

First was the fight against the Soviet Union.

Second, the battle against the excesses of the state: "Government is the problem, not the solution," Reagan famously said.

Third, and most relevant to this discussion, was faith in economic growth.

Growth improves everyone's well-being, lifting the underprivileged from poverty and eliminating the need for costly fiscal redistribution. With growth as the objective, a deep cut in tax rates for higher-income people was justifiable and necessary because it would increase the incentive to work and foster productivity.

Lower taxes became a winning political weapon for the Republican Party. In 1980, when the highest marginal income-tax rate stood at 70%, this economic platform was extremely attractive, as were Reagan's other key ideas. The country had just seen a decade of low growth and high inflation, defeat in Vietnam, the Soviet invasion of Afghanistan and the humiliation of the American hostages in Tehran. It was ready for change.

An entire generation adhered to the Republican Party, forming a majority so solid that it lifted George W. Bush to the presidency 20 years later. A golden era of economic growth began in the early '80s and continued, aside from a few minor recessionary interludes, until 2007 - a quarter-century of unparalleled prosperity.

Yet today the Republican brand, so successful for over two decades, has lost some of its luster. In part, it's simply the curse of success. The war against the evil empire has been won. Taxes were substantially reduced. The battle for deregulation has achieved many of its main objectives.

In part, too, Reagan's platform lost its appeal because the Republican Party frequently betrayed it. The size of government increased by 33% during W's first term, the largest increase in federal spending since Lyndon Johnson. Bush's last Treasury secretary, Hank Paulson, orchestrated the most massive state intervention in a Western economy since Francois Mitterrand's nationalization of French banks.

The situation of Americans has changed, too. Though American GDP has doubled in real terms the past 25 years, median real income has grown by only 17%. While the richest 1% of the population has tripled its real income, with the richest 0.01% finding its real income quintupled, the bottom 10% has increased its income by only 12%.

Now the financial crisis has created significant discontent. In a survey taken last December, 60% of Americans declared themselves "angry" or "very angry" about the economic situation.

If Republicans ignore this popular anger, as the party establishment did last autumn, they leave a powerful and potentially disruptive force in the hands of Democrats. The Democrats could channel popular anger into protectionism, 90% tax rates and onerous new market constraints.

In Republican hands, populism could become a strong force for positive change.

The Republican Party has to move from a pro-business strategy that defends the interests of existing companies to a pro- market strategy that fosters open competition and freedom of entry.

While the two agendas sometimes coincide, they are often at odds. Established firms are threatened by competition and frequently use their political muscle to restrict new entries into their industry, strengthening their positions but putting their customers at a disadvantage.

A pro-market strategy aims to encourage the best conditions for doing business, for everyone. Large banks benefit from trading derivatives (such as credit default swaps) over the counter, rather than in an organized exchange.

They can charge wider spreads that way, and they can afford to post less collateral by using their credit ratings.

For this reason, they oppose moving such trades to organized exchanges, where transactions would be conducted with greater transparency, liquidity and collateralization - and so with greater financial stability. This is where a pro-market party needs the courage to take on the financial industry on behalf of everyone else.

A pro-market strategy rejects subsidies because they're a waste of taxpayers' money and because they prop up inefficient firms, delaying the entry of new and more efficient competitors.

And a pro-market approach holds companies financially accountable for their mistakes - an essential policy if free markets are to produce sound decisions.

A pro-market party will fight tirelessly against letting firms become so big that they cannot be allowed to fail, since such firms may take risks that ordinary companies would never dream of.

A pro-market party should favor a robust safety net - for people, not companies. Of course, this safety net should be run on market principles as much as possible. Unemployment insurance should retain incentives for people to look for work, and the health-insurance industry should be opened up to competition. But defenders of markets cannot ignore the importance of providing such security for citizens.

They also cannot ignore the nation's growing income inequality and the widespread loss of confidence that the future will be better than the past. The knee-jerk Democratic reaction is to give these poorer citizens entitlements disguised as rights.

The Republican response should focus on providing opportunities. Parents should have access to good schools for their kids, regardless of their financial means or where they live. The best way to deliver on that promise is through a voucher system.

Students should have better access to loans to finance their education because everyone gains from a better-educated work force. The unemployed should have access to retraining, which can also be designed through a voucher system.

Health care should be available in the marketplace. The current system, in which only employers get a tax deduction for health insurance, reduces labor mobility and increases the cost of becoming unemployed.

The U.S. has been the inspiration for all who believe in freedom, both political and economic. Its identity, however, is predicated on maintaining a political consensus that supports market values.

Growing income inequality, the financial crisis and the perceived unfairness of the market system are undermining this consensus. If Republicans don't stand up for markets, who will?

Zingales is the Robert C. McCormack professor of entrepreneurship and finance at the University of Chicago Booth School of Business and the co-author of "Saving Capitalism From the Capitalists." This column is adapted from the autumn issue of City Journal.

Now numerous commentators bemoan that banks are borrowing from the Fed only to invest in treasuries, rather than lend those monies out to struggling businesses. Some are frustrated that Wall Street villains enjoy a game of arbitrage at taxpayer expense. Others lament that no safeguards were enacted last fall to prevent this malfeasance. Some believe this reflects an underhanded ploy to monetize additional treasuries. It is a vulgar thought that the Fed could be employing banks under its purview in order to secretly monetize public debt. This is particularly frustrating to those who fear that aggressive monetary policies are harbingers of massive inflation.

However, nobody acknowledges that the expected crowding out occurs right before our eyes. The same economists who disregard capital maintain that "credit is the lifeblood of the economy." As if there can be credit without capital. As if people using other people's money (credit) offer more financial value than those providing the money (capital). These Keynesian enthusiasts of deficit spending and easy credit then whine that banks are lending to Washington instead of into the private sector.

The bankers, nearly wrecked by aggressive lending practices, may be "greedy," but they aren't stupid. Why lend to struggling firms in uncertain times when you can borrow cheaply from a quasi-government entity and then can lend it back to Washington at a risk-free profit? How can lending to high-risk borrowers improve an economy nearly capsized by aggressive lending practices?

Those same borrowers are now that much weaker amidst the throes of recession. Bankers were "greedy" when they lent to people unable to repay them and now they're "greedy" because they don't. But we want bankers, like all market participants, to operate in their own interests. Profits don't reflect greed so much as sound business practices efficiently satisfying market needs.

America's capital was depleted by the stock market crash and real estate bust. Therefore our markets can sustain less credit, not more, until savings accumulate or foreign investment accelerates. There can be no credit without capital. Fiat dollars can be printed in an attempt to offset the lack of capital with easy credit, but debasing the currency thwarts the savings vital to capital restoration. Why save with historically low interest rates promising no return and inflation that will eviscerate your holdings? The threat of higher taxes, suffocating regulation and general disdain for private enterprise emanating from Washington repels investment from our private sector.

Businesses repay their lenders by using said credit productively rather than conjuring up dubious capital via the printing press. Businesses provide the goods and services enriching our lives. Washington uses your money to entice votes. Printing money doesn't put those funds in the hands of the small businesses and entrepreneurs government claims to be helping. Instead, the new money flows back and forth between Washington and Wall Street finally arriving at Main Street in devalued terms.

Government handouts skew incentives and undermine growth. Paying people not to produce or enabling them to continue producing inefficiently cannot stimulate production. Don't blame banks for lending to Washington instead of capital starved businesses; blame the politicians devouring our scarce capital for blatantly uneconomic purposes. As Washington voraciously consumes credit, there is less available for private borrowers.

The solution to the ongoing credit crunch is simple. Cut government spending and stop debasing our currency. Only then will capital begin to restore and ultimately flow to the next round of visionaries with new innovations that better all of our lives.

The credit markets marry financial capital to intellectual capital. Banks serve as intermediaries connecting the capital of savers to people with promising new ideas requiring capital to become a reality. This can't happen when government intercepts the flow of capital for political purposes.

Capital is finite, but it isn't static. Businesses grow the pie or they go out of business. Public spending shrinks the pie. We don't suffer a credit shortage. We suffer a shortage of capital and a government vulture feasting on what remains while sabotaging the market's inherent restorative powers. Government spending must subside so capital can replenish. Interest rates should revert to higher levels as determined by market forces. This would attract investment from abroad and bring capital out of hiding.

As we contemplate a second stimulus package, Milton Friedman's words come to mind, "If a private enterprise is a failure, it closes down, unless it can get a government subsidy to keep it going; if a government enterprise fails, it is expanded. I challenge you to find exceptions." The last stimulus proved a disaster. Why would we go there again?

Bill Flax works in the banking industry. This column reflects his views and not those of his employer. Please contact him at billflax2@yahoo.com.

As Bartlett put it, the "individual entrepreneur is still the basic motivating force in the economy " and any "measures which suppress entrepreneurship will ultimately cause the economy to stagnate." With the top tax rate at the nosebleed level of 71 percent at the time of the book's publication, Bartlett's cure was among other things lower taxes in order to reduce the cost of innovation.

Fast forward twenty-eight years, and Bartlett is presently promoting a new book titled The New American Economy. In it, he argues that supply-siders have won, so it's time for the individuals behind the cause to "declare victory and then go out of existence." Bartlett correctly points out that the whole notion of supply-side economics (SSE) has been perverted by various give-aways and tax credits authored by the economically tragic George W. Bush administration, and that the concept has lost meaning.

Given the substantial role that Bartlett played in the U.S. economy's classical/supply-side economic revival of twenty-five years ago, it would be foolish to denounce his views out of hand. At the same time, much of what Bartlett is presently suggesting as a way of righting the economic ship he decried long ago; that, or he makes suggestions that are simply untrue.

Bartlett notes that he had a "front-row seat to the creation of SSE", and sure enough he was a staffer for Congressman Jack Kemp as the latter rolled out the eponymous Kemp-Roth tax cuts. Still, as Bartlett's 1981 book makes plain, supply side economics has long been with us, though before Herbert Stein pejoratively coined the phrase "supply side economics", this kind of thinking was phrased "classical economics."

In truth, Bartlett and others simply resuscitated the centuries-old ideas of classical thinkers ranging from Adam Smith to John Stuart Mill to Jean-Baptiste Say. Major media have reduced supply-side/classical theory to tax cuts paying for themselves, but the main point of the original classical thinkers was that demand is an afterthought because our demands are unlimited, so the trick to stimulating economic activity is to remove the barriers to production. Production is itself demand, so if taxes are low, money sound, regulation light and trade free, individuals will produce with strong demand being the certain result.

Bartlett should be lauded for being a part of the revival of this kind of thinking, but for him to suggest that he had a front-row seat at the creation is for Bartlett to somewhat dig spikes into the shoulders of the giants on which he once stood. Incentive economics has long been with us, and well before Bartlett assisted in its happy revival.

While tax cuts have historically loomed largest in historical accounts of the classical economic revival, Bartlett correctly points out that monetary policy played a large role too. The problem there is that Bartlett incorrectly argues that the notion of "money supply" most associated with the late Milton Friedman was a big part of the supply-side/classical mix. Nothing could be further from the truth.

For evidence we can refer first to the late Robert Bartley's 1992 book, The Seven Fat Years, a book widely seen as the diary of the economic revolution that Bartlett participated in. Importantly, money supply was never part of the equation.

As Bartley put it about Friedman's relations with supply-siders, "On most issues - Say's law, price controls, energy efficient markets, deficits, Keynes or whatever - he would be entirely at home at Michael 1. But not on his centerpiece, controlling the ‘money supply.'"

Indeed, as the late Jude Wanniski wrote in The Way The World Works, the book seen by many modern supply-siders as the Bible of the modern classical movement, "Supply-siders are concerned with the quality of money, not its quantity. Nobody, except the market as a whole, could ever know how much of what kind of money is appropriate to finance expansion without inflation." Not only did supply-siders think it impossible to know the correct supply of money, they also knew that with dollars everywhere in the world, efforts to control the supply would fail impressively.

Still, Fed Chairman Paul Volcker certainly did foist Friedman's monetarism on the U.S. economy for three years (from 1979-1982), and the results were disastrous. Money values and interest rates fluctuated wildly, and in a 1981 New York Times piece meant to clearly separate supply-side economics from economy-sapping attempts to control the supply of money, Wanniski observed "How ironic" it was "that ‘Reaganomics' has come to be identified as the twinning of ''tax cuts and tight money".

And with Reagan's presidency imperiled by monetarist prescriptions amid a collapsing economy, Barlett's boss the late Jack Kemp remarked about the Volcker Fed that "One has to question whether or not they know what they're doing." Kemp later asked for Volcker's resignation, but by October of 1982 the Fed ceased its reliance on money-supply targets and the economy/stock market began their long march upward.

To this day it's fascinating that Volcker is given so much credit for the 1980s boom. The truth is that the dollar collapsed once he began targeting money supply, and only came back once Reagan's election (and a return to strong-dollar policies) became likely. The reality is that growing economies need more money, not less, so the idea that money supply should be vainly restricted amid tax cuts was and is a perversion of the growth idea altogether. Rather than a Reagan ally, Volcker's monetarist flirtation nearly made Reagan a one-term president.

On the government-revenue front, Bartlett seeks a "tax system capable of raising considerably more revenue at the least possible economic cost", and among other things has said we need a VAT tax imposed to pay for the enormous unfunded liabilities in our future. As evidenced by Bartlett's book Imposter, he's of the view that the U.S. is bankrupt.

Not excusing the ridiculous spending under George W. Bush and others for one second, if the U.S. is bankrupt, it's funny how the market for Treasuries suggests something quite the opposite. Bankrupt entities pay enormous rates of interest on debt, and that in no way describes our present situation.

Furthermore, Bartlett was at least in the past a fan of Muslim philosopher Ibn Khaldun, and in Reaganomics prominently featured Khaldun's observation that "at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments." Bartlett is clear about his desire for higher taxes, but what's not been explained is why he thinks higher assessments will be any more successful today. Reaganomics is full of statistics about how lower tax rates frequently yield higher revenues, along with quotes (including one from Woodrow Wilson) bolstering the claim, but now Bartlett seems to think history with regard to taxation lacks meaning.

When it comes to the call for tax cuts during the financial crisis of one year ago, Bartlett has written that he really doesn't understand "how tax cuts could have done the slightest bit of good when millions of people had no income." What's confusing here is that back in 1981 it was very apparent to him why tax cuts would work well in periods of high unemployment. They would because as Bartlett noted in Reaganomics, "the largest proportion of important new inventions are still the result of individuals working virtually alone, rather than by big corporate laboratories."

Taxes are once again merely a price put on work, and while Bartlett would doubtless know better than anyone that tax cuts can be overrated, if he still believes that the individual is the source of economic health, one way to stimulate the minds of idle individuals would be to reduce the cost of their economic innovations. If it's agreed that tax cuts aren't the be-all, end all that some suggest, Bartlett's clear logic of long ago makes plain that they're less than hurtful, and more likely effective in facilitating economic creativity.

Considering budgets and deficits, Bartlett decries a Republican Party that has abandoned "the balanced budget as its signature economic policy". So while only a blind partisan could defend egregious spending during the GOP's control of same, one question has to be asked: would we prefer a balanced budget amid $2 trillion in spending, or a $250 billion deficit with $500 billion in federal spending?

The answer is obvious, and in pure economic terms the aforementioned deficit in concert with lower spending would be much preferred. Government spending is a tax like any other for depriving private interests of capital, so for Bartlett to elevate a balanced budget is for him to similarly elevate a great deal of economy-enervating spending.

Bartlett seeks higher taxes to balance the budget, and correctly notes an utter lack of discipline when it comes to Congress appropriating the massive amounts of dollars that reach Washington. A fair point for sure, but if Congress is as wasteful as Bartlett suggests, isn't it the height of naivete for him to suggest that our legislators would somehow discover their inner parsimony if tax increases actually produced the higher revenues he desires?

What's interesting about all this is that during George W. Bush's presidency, Bartlett happily exposed the revolting spending increases on the watch of a Party that billed itself as fiscally prudent. Nosebleed spending under Bush logically did nothing for the economy, and Bartlett is owed a great debt for revealing Bush as an "Imposter."

But despite the fact that it didn't work for the Bushies, Bartlett has turned in the other direction, has found his own inner Keynesian, and believes that heavy federal spending is now the cure for a weakened economy. As he sees it, the New Deal failed because FDR "didn't run deficits nearly large enough until the war forced his hand."

In making the claim that deficits would serve today's economy well, Bartlett ignores simple history from the ‘20s and ‘30s. Indeed, the U.S. economy roared back from a 1920 downturn greater than the one which began what is termed the Great Depression despite spending cuts that he newly scoffs at. Back then legislators correctly knew that government spending would retard the flow of capital to the private sector.

Conversely, FDR asked Congress for a $7 billion deficit in 1933, achieved a record deficit of $4 billion that year, but the economy essentially achieved a round-trip in terms of growth. In short, heavy spending in the ‘30s did little to nothing for economic growth, while the economy boomed after the ‘20s recession for the federal government doing next to nothing. Bartlett sees doing nothing now as some kind of libertarian fantasy, but it surely worked in the early ‘20s.

But more important in considering the ‘30s through Bartlett's eyes is his failure to account for one of the most basic laws of economics, one taught in Econ 101 classes around the country. Specifically, it is the law telling us that human wants are unlimited.

Thinking about the above, to believe Bartlett's take on why the economy didn't revive in the ‘30s, one would have to believe that for ten years the most entrepreneurial individuals on earth buried their natural instincts and simply chose to do nothing. What Bartlett presumes flies in the face of basic economic logic, not to mention human nature most notable in a uniquely American culture which elevates productivity above most everything else.

Worse, assuming his present views hold sway, to believe Barlett's contention that a government possessing no resources other than those provided it by private individuals helped us exit the Great Depression (through excessive wartime spending) is for one to believe that the production of weapons meant to kill potential customers (not to mention all the human capital the U.S. lost during WWII) and destroy economic assets is somehow stimulative.

Bastiat is doubtless spinning in his grave that someone as smart as Bartlett could buy into one of the oldest fallacies in the book that to kill and destroy is the way to grow an economy. Bartlett would also have to explain why the U.S. economy continued to grow in the war's aftermath despite a demobilization of the military. One possible hint exists in Reaganomics, as in Bartlett notes that the total U.S. tax burden had the average American working "only" three months a year to pay taxes versus 6 plus months today.

More realistically, it is government intervention that has caused every downturn in the history of mankind, because only government can create the needless wedges between work and reward. As Albert Jay Nock put it in explaining the 1930s downturn, "The present paralysis is due solely to State intervention, and uncertainty concerning future intervention."

Bartlett used to know all this, and sure enough on page 89 of Reaganomics he scoffed at a CBO study suggesting that there is a greater economic effect from government spending than tax cuts. As a modern reviver of classical economics, Bartlett knew then that government spending is the equivalent of shifting $50 from one set of pockets to another, while creating no incentives to produce. Rather than stimulative, those redistributed to would have less reason to work and produce, while those redistributed from would work less for their enterprise being expropriated.

Bartlett of course argues now that times are different, that we're in a "liquidity trap" and only government can spend our way out. And despite a dollar testing all-time lows versus foreign currencies and gold, Bartlett suggests we're suffering from deflation.

He misreads both. For one, no act of saving on the part of an individual ever detracts from demand. The liquidity trap he speaks of is far from a deflationary concept (when money rises in value), but instead the predictable result of monetary debasement. Indeed, who would lend to or invest in productive concepts if their returns are to be eroded by inflation?

Bartlett correctly points to the Fed's role in tight liquidity, but rather than an argument for a government with no resources expropriating funds from the productive, this merely points to the need for the Fed to float the cash rate it sets. If it does, individuals will achieve a market rate of return on their savings, and banks will lend those savings out.

Contrary to Bartlett's assertion that the banks in the ‘30s lacked money, in truth they were awash in cash during the Depression years as William Greider noted in Secrets of the Temple. But the problem then, much as it's the problem today, is that banks were fearful about lending due to a federal government that felt a need to involve itself in most aspects of the private economy. Leaving aside the inflation and resulting capital disappearance that Bartlett incorrectly sees as deflation, is it any wonder after the treatment of Chrysler's secured bondholders (to name one wronged source of capital) that investment is presently tight?

Ultimately Bartlett believes that "what the supply-siders did was good for the economy, good for the country and good for the advancement of science." Despite that, he now feels it's time for the concept to take a rest for the George W. Bush years having distorted it altogether.

But as Bartlett correctly states, the Bush years had very little to do with supply-side economics. From two stimulus packages, to record spending, to regulation of the Sarbanes-Oxley variety, to the imposition of tariffs on foreign goods, to dollar debasement, the Bush years were the very opposite of the idea that Bartlett says is spent.

In truth, and as Bartlett so helpfully shows us, supply-side economics at least in modern times never was. So rather than a signal that the classical viewpoint should be put to bed, it's time for the experts such as Bruce Bartlett to revive supply-side's true meaning. In short, those of us who admired Bruce Bartlett for years are desperately seeking the old Bruce Bartlett. We need him to revive an idea that always works, but that was wholly discredited by a Republican administration that never practiced it.

John Tamny is editor of RealClearMarkets, 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.

With the firm just posting over $3 billion in profit for the quarter and planning to dispense $16.7 billion in annual bonuses in a year which the country's unemployment rate is set to breach the politically-important 10% level, a circumstance that would normally allow top executives at a publicly-traded Wall Street firm to sleep the sleep of the just is engendering no shortage of sleepless nights. They ask themselves, "how do we do what we normally do (i.e. take the money and run), when it would, at best, appear unseemly, and, at worst, attract the ire of a restless and increasingly populist nation?"

While this is, to be sure, a high class problem, it is no less a simple one. There is of course a question of the "optics" of it all, especially when the country's top financial cops are looking for more scalps than Navajo Joe. Regretfully, early indications suggest that Mr. Blankfein and his lieutenants are going to take their cues from our political elite, designing a Rube Goldberg compensation scheme that will attempt to fool enough people into thinking that they have satisfied both their top producers and the needs of the greater financial system simultaneously.

Of course, like all politically motivated decisions designed to have one's cake and eat it too, it will fool no one, and probably only result in making both the firm's stake-holders and the public at large unbearably self-righteous once bonuses are paid. The pre-emptive announcement of a $200 million donation to the company's education foundation foreshadows this coming kabuki dance and would almost be hilarious if it weren't so hideously transparent and unnecessary. In free societies, good companies should have nothing to fear from their successes and charity should be accompanied, not by cynicism, but by at least some modicum of the milk of human kindness.

Austrian writer and satirist Karl Kraus once advised that in the "case of doubt, decide in favor of what is correct." And so, it would seem that the irony of Goldman's attempts "to suffer the slings and arrows" of their outrageous fortune gracefully may lie with perhaps the most inherently capitalistic solution of all - distributing this year's windfall to the actual shareholders (formerly known as "owners") of the company in the form of a special dividend. This would provide an instant and not insignificant return to countless individual investors, pension plans and endowments. Corporate management and the employees would also receive tax-advantaged compensation. And maybe, just maybe, it would discourage the ugly mercenary culture that has surrounded investment banks since they abandoned their partnership structures and became public companies.

Dividends are, of course, still considered a Victorian notion for many in corporate America, a less muscular, creative, and fun choice for any self-respecting imperial CEO. But, a good bar bet, at let's say Rothmann's on 54th, might be to ask your average financial services professional what percentage of the equity market's historical return has been derived from dividends. Chances are pretty good that there wouldn't be one in ten that would be within 5% of the correct answer - 51.5% - although nine out of ten could probably tell you how much median home prices in the Hamptons have declined year over year out to two decimal places. Goldman's record in this regard has been less-than-stellar, its current dividend yield is 0.8% and it has paid out a little less than 9% of its $46 billion in net income it has earned as a public company. With the stock at $180, no one's complaining, but what happens if, however implausibly, the firm's principal transactions dice turn cold?

Of course there will be those that claim that such a scheme would unnecessarily place the firm's talent (perhaps the most over-used term in American English today) at risk of mass exodus. But let's face it, we've all been re-priced in this business over the last year. Intelligence, ambition, and a willingness to work hard are admirable qualities but are hardly in short supply today given the carnage that has taken place in our industry.

Being the proprietor of a small Wall Street partnership, it is obvious that I have no clue about the stresses that accompany a CEO of a large public traded financial services firm with over 30,000 employees. Hamlet reminds us that "conscience does make cowards of us all," and so I would be lying if I didn't say that I'm speaking my own book here - I am a shareholder and have an intense interest in how our industry is perceived by the public at large. I met Mr. Blankfein only once, during an interview for a trading job coming out of business school. I remember only that he asked me about my SAT scores and his saying, perhaps presciently given my career and his own current circumstance, that good salesmen rarely make good traders and that good traders rarely make good salesmen. A special dividend from Goldman might just prove that he can be both.

Jason Trennert is chief investment strategist and a managing partner at Strategas Research Partners.