Estate taxes must be equal to be fair

Although estate taxes could be a good idea, today’s tax exemplifies the dangers of an unprincipled democracy that ignores the principle of equality before the law.

Defenders of the recent legislation proclaim that the estate tax exempts 99.8% of Americans. The non-partisan Tax Policy Center estimates that with the new $5 million exemption, only 3,600 estates (in a country of over 300 million people) will pay any tax in 2011.

Everybody wants government spending on purposes they approve of and wants “someone else” to pay for it. But historically we avoided pushing “tax someone else” to extremes because that would have contradicted another important thing that we value: equality before the law.

According to Jean Jacques Rousseau, legitimate government must express the “general will” in two different dimensions. Laws must be general rules (equality before the law) generally arrived at (democracy).

A rule equally applicable to everyone could be highly obnoxious to most people. Imagine a 90% flat rate income tax. But it is impossible to imagine such a tax getting majority support. Democracy protects us from this kind of thing.

But democracy by itself does not protect us enough. Remember the intolerable segregation “laws” in large parts of the U.S. just 50 years ago. These perfectly democratic “laws” did not apply equally to the entire population (and if they had so applied they would never have been enacted).

Rousseau was right: To be legitimate, government must both be democratic and guarantee equality before all laws.

Recent estate tax discussions reflect our increased willingness to ignore equality before the law when enacting taxes. Oregon voters recently approved a state income tax increase that supporters bragged would only affect the top 2% of the population. Arguments in Washington, D.C. in favor of raising taxes only on incomes greater than $250,000 a year showed this same willingness.

We have never decided whether the estate tax’s principal purpose is to help fund government or to prevent vast concentrations of private wealth from being transferred from one generation to another. Estates have never been a major source of revenue for the government, and we could avoid unequal transmission of unearned wealth without the unseemliness of the current tax.

We could enact a 100% estate tax applicable to all estates. Since the purpose is not to raise money for the government, all of the resulting money would go into a trust fund disbursed annually in equal amounts to every man, woman, and child subject to the jurisdiction of our government-----a “social dividend.” We would all be each other’s heirs, and inheritances would increase economic equality instead of reducing it.

To reduce administrative costs, a small deductible could be sheltered from the tax. To discourage evasion of this tax, gifts (above a small exemption) should be considered taxable income, as would dividends people receive from the trust fund.

Ideally all taxes would resemble property taxes, where the same rate applies to all property and the only issue is whether to raise the rate or to lower it. If estate and income taxes worked like this, a lot of the current wheeling and dealing in Salem and Washington, D.C. would be eliminated and government could concentrate on more important business.

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This article ran in the Corvallis, Oregon Gazette-Times on December 28, 2010.

Protest letter to president of Qwest

I do not often send off a letter by snail-mail, but day before yesterday I sent one off the the president of the mega-corporation from which we get our telephone service and DSL internet. The points made may be of general interest, as I am sure I am not the only person who has had trouble communicating with a corporation. (It is ironic that Qwest's very business is communications.) The letter follows:

Mr. Ed Mueller, President

Qwest

1801 California Street

Denver, Colorado 80202

Dear Mr. Mueller:

We do our phone service and DSL internet through Qwest. Last week, for a whole week our DSL service was not right. For three or four days it was on again, off again, and then for four days it was totally off. Refusing to consider the days of spotty service, your business office this morning gave me a $3.74 rebate for the four days of no service despite my suggestion that it should be for the whole month since we suffered the inconvenience and cost of driving to check our email on other people’s wifi.

My main complaint, however, is with the difficulty I had communicating with Qwest and finding out what was going on. At first, your reps (in the Philippines!) insisted everything was ok at Qwest and said we should take it up with proaxis.com, our ISP. Then they grudgingly admitted it was Qwest and said it was being taken care of. Later they said a new piece of equipment needed to be ordered (and apparently hadn’t heard of air freight). They finally told us it would be fixed within 24 hours, but it was actually more than 72 hours. A lot of other people were affected, apparently, and apparently it was local to Corvallis, Oregon, but nobody would or could tell us how to talk with some responsible person in Corvallis to find out what was really happening. There are no local phone numbers or addresses for Qwest in our local phone book.

We hear much talk about banks that are too big to fail. I wonder if Qwest has gotten too big to succeed.

Sincerely,

Paul deLespinasse

Thinking About Bomb Plots

Like other Corvallis residents, I was startled to read the headline in Saturday’s GT: “OSU student arrested in bomb plot.” Also like other Corvallis residents, I hope that people here and elsewhere will not jump to conclusions about Muslims in general from the fact that Mohamed Osman Mohamud styles himself a Muslim.

My personal experiences with Muslims have been positive. I remember with particular fondness one of my students at Adrian College who, although an American by birth, had grown up in Lebanon during the civil war there, and then returned to the U.S. with her parents. And over the years several Muslims were fine faculty colleagues in our college, which was founded by Methodists and is still affiliated with that church.

This said, I find it disturbing that even a few individuals of any faith can become so obsessed with political or religious abstractions that they take actions which are intentionally devastating to fellow human beings.

When I was a student at Willamette University in the 1950s, a political science professor told us that the only way Republicans could win Multnomah Country would be to shut down the Portland telephone system on election day. He thought that Republicans would probably vote anyhow, but Democrats needed to phone people who hadn’t voted and offer to drive them to the polling places.

Since I was a Republican back then I figured out two different ways to shut down the telephone system. I am afraid that one of them, however, was not very practical. It involved hijacking an atomic submarine from the U.S. Navy, running it up the Columbia to Portland, plugging the output from its reactor into the local phone network, and then revving the reactor up to full power and burning out all the telephone circuits.

The other approach, which I won’t disclose for fear someone might actually try it, would have been easy to do. But once I considered the side effects of shutting down the Portland phone network, the idea lost its charm for me, as I think it would for most people. It would have been nice to have the Republicans take Multnomah County. But what about people who couldn’t call the fire department about a house fire? Or those who couldn’t call an ambulance for a heart attack?

Defensible ethical generalizations are hard to come by, but I think there are two such generalizations that apply both to my own case and to Mohamed Osman Mohamud:

First, in a fully civilized world children must be brought up to think concretely about all of the consequences their actions will produce and to evaluate their actions in terms of the Golden Rule (which has analogies in many religions).

Second, no religion can be all good that tolerates any of its members bringing up children to hate people of other races, nationalities, or religions. Islam is not alone in suffering from this imperfection; it has Christian brethren.

Members of an Islamic peace group were handing out leaflets protesting terrorism to the crowd awaiting the Christmas tree lighting in Portland Friday. Ironically, if the bomb had worked, a number of Muslims would have been among the dead and injured, just as a number of Muslim workers were killed when the World Trade Center towers fell.

Clearly, the world is not yet fully civilized. We should avoid reacting to situations like that in Portland in ways that make it even less civilized.

HOW OBAMA, AND ONLY OBAMA, CAN PREVENT NATIONAL BANKRUPTCY

Discussion of what to do about our government’s looming financial catastrophe has become really interesting. It is increasingly obvious that disaster cannot be avoided if we continue political business as usual.

As Rand Paul has warned, our national debt is growing so fast that the interest paid on that debt will be bigger than our annual defense budget within a handful of years. This would obviously be intolerable. But when presidential commission co-chairs Alan Simpson and Erskine Bowles pointed out the tax increases and expenditure reductions necessary to reduce the annual deficit to a manageable 2% of the GDP, politicians all over the spectrum angrily declared the proposals dead on arrival.

David Brooks probably is right: without dramatic public opinion changes, Congress won’t dare to enact the changes proposed by Simpson and Bowles. Some congressmen might be willing to save the country even though it is political suicide for them personally. But a majority would not be willing, so these individuals won’t speak up since their suicides would serve no purpose.

The only person whose political suicide could save us is, therefore, President Obama. A proposal put forward recently by David Stockman suggests how the President could save the country without any cooperation from Congress. Stockman, Ronald Reagan’s director of the Office of Management and Budget, says that all of the Bush era tax reductions should be allowed to expire, not just the reductions for upper income people.

This would put taxes back where they were during the prosperous Clinton years and bring in huge amounts of extra revenue. Any short run harm to the economy, which various interests always exaggerate, would be outweighed by renewed confidence in the dollar and in the stability of our system.

Since the Bush tax cuts expire automatically on December 31, this fix would require no action by Congress. If Congress couldn’t resist extending some of the tax cuts, Obama could implement Stockman’s proposal by vetoing this legislation. He would then go on TV with a candid analysis of the disaster facing us if he didn’t veto the bill. He could point out that he is not increasing taxes in violation of his pledge, since the increase resulted from the expiration written into the law by an earlier, Republican congress. The key paragraph in his speech would be something along these lines:

“I am aware that by vetoing this bill I am probably signing my own political death warrant for 2012. But it is absolutely necessary for the general welfare. My sacrifice will be a small one compared to those made by our brave men and women serving in Afghanistan and Iraq.”

Of course Congress might override the veto. But the President could head this off by promising that if this veto is overridden (which would require bipartisan support) he and Vice President Biden will resign. They would not be willing to assume responsibility for the financial disasters that would then be inevitable. Since this would propel House Speaker John Boehner, Republican, into the White House, this should have a calming effect on Obama’s fellow Democrats.

Stockman’s proposal does not reduce government expenditures. But it increases revenues so much that smaller reductions in expenditures than those contemplated by Simpson and Bowles could put government finances on a solid footing. Given the new Republican majority in the House such modest reductions might be politically feasible.

Supreme Court Should Overturn State Establishment Clause Cases

The establishment clause again has come up for discussion. Delaware Republican Christine O’Donnell brought it up in a debate with her Democratic opponent Chris Coons.

O’Donnell asked Coons (who is a lawyer) exactly where the Constitution requires “separation of church and state.” The law school audience laughed, evidently finding it a stupid question. But in fact “separation of church and state” is not mentioned in the Constitution. Coons’ reply was that “The First Amendment establishes a separation.” And so it does, if we believe the Supreme Court.

But this is a case where we should not believe the Court, which actually found “wall of separation between church and state” in a letter written by President Jefferson. Jefferson’s colorful words are a grossly inadequate generalization about the establishment clause.

The clause reads: “Congress shall make no law respecting an establishment of religion . . . .”; The key word is “respecting,” which means “having to do with” an establishment of religion. This awkward expression was used because the amendment’s drafters intended it to do two things, not just one: 1) prevent Congress from establishing a religion, and 2) prevent Congress from interfering if state governments establish a religion. (Several states had established churches when the First Amendment was written; others had religious tests for public officials.)

Most establishment clause cases challenge actions by state governments (including school districts) rather than by the federal government. If the clause were interpreted as written all these cases would be thrown out of court. Most of them involve actions (monuments in parks, prayer in public schools, Bible reading in schools, etc) which it is a stretch to consider “establishments” of religion. But, assuming that they are indeed establishments, the right of the states and school districts to engage in them would be protected by the establishment clause, not prohibited!

But the Supreme Court has been striking down state government actions under the establishment clause for more than half a century. It has held that although the original Bill of Rights (amendments 1-10) placed limits only on the federal government, the Fourteenth Amendment, added after the Civil War, was intended to place many of these same limits on the state governments.

There is convincing evidence that this was indeed intended when Congress wrote the Fourteenth Amendment. And for the most part this “incorporation” of the Bill of Rights made sense. It did not undermine our protection against federal censorship, for example, to hold that the First Amendment also protects us from state government censorship.

But when the Court “incorporated” the first purpose of the establishment clause to prevent state establishments as well as federal establishments, this totally contradicted the clause’s second purpose, protecting the right of states to establish a religion. The Fourteenth Amendment’s drafters intended no such result. Their report to Congress conspicuously omitted the establishment clause as one of the long list of provisions that would be “incorporated” against the states.

No doubt it would be a bad idea for a state to establish a religion today. But letting nine unelected justices twist a key clause of the Constitution so that it means the opposite of what it originally meant is an even worse idea.

There can be no doubt that the Supreme Court has pulled a fast one here, quite possibly without realizing what they were doing. The proper thing for them to do now would be to recognize their error, overturn all of the cases based on that error, and leave issues of church-state relations to the political and legal process at the state level as our Founders intended.

Reminder: See my website

My companion website includes free access to four of my books, music that I have written, the rules of Perplexichess---a 7-board variation on chess for use by groups---and other materials. To go there click here.

How To Exercise and Still Get Your Work Done

During my recent visit to Adrian College, where I taught for 36 years, my friend Beth Myers asked if I was still riding my indoors bicycle, a Schwinn Airdyne. When I mentioned the things I have done over the last 25 years while wearing out two of these contraptions and starting on a third, she suggested I should write it up as a possible inspiration to others.

So here I sit on Amtrak heading for my next stop in Boston, taking Beth up on this proposal on my netbook.

I bought my first Airdyne because I had made a serious mistake. Feeling cooped up, I rode my bicycle during a cold Michigan January, wearing two pairs of socks for added warmth. Instead of protecting me, the extra pressure inside my shoes reduced blood circulation to my feet and I froze my toes. This put an abrupt end to cold weather bicycling.

Still restless, I bought an indoors bicycle. I got the optional reading rack because without something interesting to do I would be horribly bored within two miles. (The boredom factor may be why, when we moved to Oregon, the movers were astonished by my Airdyne’s odometer. The average mileage they were seeing was about 75---total.) Boredom is not a problem for outdoor bicyclists who have scenery to admire and the danger of being hit by cars to keep their interest up.

I found I could do all my class reading while riding. Many of the assigned books were things I had already read, but I still re-read them all so they would be fresh in mind when we discussed them in class.

I taught a course on the Soviet Union until it disappeared in 1991. I then renamed it: “Autopsy, USSR.” ( We dissected the Soviet corpse--its birth, life, and death.) For background I had subscribed to Pravda, the Communist Party newspaper, in 1962 and continued reading it until 1991. Despite Pravda’s small type I was able to read it on the bicycle, and since I read Russian more slowly than English that added more weekly miles to the odometer.

Later I found I could also do some writing. I printed out a triple spaced draft of a book I was writing. Then I rewrote it by propping the pages up on the reading rack, making changes by hand. Later I quickly typed the changes into my computer (not while riding!).

Recently, having had to clean out my late parents’ house, I have taken pity on our own kids and begun cleaning out my extensive files while riding. In the process I am sorting out and keeping quotations and other material that might be useful for another book I might write.

There are thus many things one can do while getting some exercise. (Some people even watch TV. I have only done this once, in order to observe President Clinton’s impeachment trial while also getting my usual miles. In general, for me TV does not work.)

The bottom line is that I have worn out two Airdynes, the first after riding 55,000 miles, the second considerably more than that, and am working on the third. I rode about 200 miles per week and 10,000 miles per year for many years before I retired and continue to do so since retiring ten years ago. About four fifths of this was indoors, the rest on my real bicycle.

In a nation that has become sedentary, where obesity is increasing, and where time is scarce, I hope my experience can inspire other people to give this approach a try. I will enjoy hearing from those who do.

A GREAT OP-ED BY AHSAN HABIB

This piece, by my colleague and friend Ahsan Habib, recently ran in the (Adrian, Michigan) Daily Telegram. I am posting it here with his permission.
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ADRIAN, Mich. — Recently it was announced that the current U.S. recession ended 14 months ago and our Gross Domestic Product (GDP) has started to increase since then. Surprisingly there has been very little improvement in the employment situation. In fact during some of those months of recovery the country actually lost jobs. More surprisingly, despite the end or recession, the Federal Reserve Bank has indicated that the economy needs more support in coming months. This raises the question: Does GDP measure the health of the economy anymore?

In dealing with many situations, economists have stopped looking at GDP as an indicator of economic performance. Concepts like the Human Development Index or Fulfillment of Basic Needs have been created as alternatives. It is high time that we create a new measure of economic performance which reflects the employment and economic conditions more pragmatically.

Changing or switching economic definitions is not new in this country. In 1991 we changed from Gross National Product (GNP) to GDP reporting for political expediency. GNP does not include the income earned by foreigners but GDP does. Therefore, as long as foreigners earned more in the USA than Americans earned abroad, GDP will be to our advantage. There were other political reasons as well. At that time the dollar gained strength in the world market. So American overseas income deflated when converted to dollars for GNP calculation. GDP did not have that problem. Also as America’s overseas debt burden was growing, GDP appeared to be a better choice since income earned by foreign investors in the U.S. is not subtracted from the U.S. GDP.

The essential point is that the federal government has a vested interest in trying to change the definition of sensitive economic terms. The definitions used for budget deficit, unemployment and many more have been modified for political gains. But these “convenient” economic numbers fail to reflect the real picture. So GDP increases but misery continues to grow, budgets show a surplus but national debt rises, and jobs are lost but unemployment stays the same!

We are entitled to vital economic data that are not deemed to be tailored with November in mind. Look at employment numbers. It is being claimed a success that the private sector has added jobs for several months in a row and that it surprised experts by adding 67,000 jobs in August. But that number is not very meaningful. All these 67,000 people could have worked for just one hour per week and no more! Also they all could be hired at minimum wage and with no additional benefits. Surely government economists can devise an employment number that would be simple but convey the real picture of employment. The Bureau of Labor Statistics does report an unemployment number called U6 which counts the discouraged workers — who stopped looking for jobs, and hence are not called “unemployed” in the primary statistics — as unemployed. The question that comes to mind is why that number is not publicized more widely?

The desperate desire of governments to show bright economic numbers has come from a false premise. For a long time governments of all countries including the U.S. have been asking for more power from citizens with a false promise to deliver economic prosperity. But the truth is governments can make noticeable economic impact (good or bad) only in centrally planned economies. In capitalist economies, governments’ power to change the economic landscape is very limited. It is about time that they recognize this and abandon their futile efforts to create economic prosperity.

To show that they can create economic miracles, governments have tried to produce artificial economic results by resorting to bad economic practices; indiscriminate borrowing being one of them. Also a host of benefit seekers who could use their resources elsewhere more productively are misusing it to gain government favor. Most importantly, many government policies have created fundamental distortions in the operation of free market economy.

This is not to suggest that the government should abstain from promising and undertaking every economic activity. They should produce highways, defense services, income safety programs and so on. But they should make it clear that they do not have power to make the economy grow or to fix the private sector employment problems. Of course, if recession strikes, government should step forward to help the people who are suffering, the same way as it steps in to help flood victims. But just as government does not promise good weather, they should not promise a prosperous economy.

An economy is too big for government to handle. Many former socialist countries learned that lesson the hard way. Instead, governments should focus only on specific targets. Then the public will expect less from them and there will be less pressure on them to create and publish politically motivated economic data.

Ahsan Habib is a professor and chair of the economics department at Adrian College.

Reminder: See my website

My companion website includes free access to four of my books, music that I have written, the rules of Perplexichess---a 7-board variation on chess for use by groups---and other materials. To go there click here.

Ban The Asterisk!

According to polls, increasing numbers of Americans do not trust our leaders. I have not seen any polls measuring trust in advertising, but if public confidence in ads is not way down it probably should be. To see why, we need only consider the asterisks (**) so often encountered in commercials.

Deceptive advertising is nothing new. Otherwise, why would we need the Federal Trade Commission? I well remember my first youthful encounter with a deceptive ad. Efforts (pre-transistor) to miniaturize radios fascinated me. An outfit advertised a kit for a “pocket radio” which measured only 2 by 4 inches. I ordered it and it was true that the radio was 2 inches wide and 4 inches high. But it was also 4 inches deep, a fact the seller neglected to disclose and I hadn’t noticed. Not being a kangaroo, I couldn’t get the thing in my pocket. Since then I have read ads more carefully and taken them with a grain of salt.

I now put less and less salt on my food, but I find myself needing a lot more of it when coping with ads. There are the ads for TV cable, internet, or phone service at amazingly low prices. The asterisk points to a statement, in exceedingly small type: “for 6 months.” You must sign a contract for a lot more than 6 months to get this price, and they don’t bother to say what the price will be then.

Perhaps these guys figure if it is ok for banks to push adjustable rate mortgages on folks, thereby subjecting people to increased risk of bankruptcy when low initial interest rates inevitably skyrocket, it is ok to quote misleading initial prices for lower cost items.

Or how about the furniture store offering wonderful low prices, free delivery, delayed payment, etc., but with the asterisk pointing to a message which flashes briefly across the bottom of the TV screen in very small and blurry type: “minimum purchase $2999”!

Then there are the dentists offering mouthfuls of implanted teeth in one day. The asterisk points to small, blurred, fleeting type at the bottom of the screen: “after initial workup.”

And we all know about the airline fares, in big type, followed by the usual asterisk pointing to the fact that this price is for one-way but you must buy a round trip, and that taxes and fees are on top of all this.

The most ridiculous ad I have encountered offered subscriptions to The New Yorker for a very good price. I almost sent off my money before I noticed the asterisk pointing to the words: “plus postage and handling.”

Ads like these help create a climate of general mistrust and suspicion. They somehow slip through the Federal Trade Commission nets, and crafting laws to prohibit them might be very difficult.

Absent law, there is something we can all do to discourage businesses from putting asterisks in their ads: we can resolve to have nothing to do with businesses which use asterisks.

LET’S END UNEMPLOYMENT ONCE AND FOR ALL

Buried in discouraging unemployment numbers recently released was proof that a straightforward way to end unemployment (and not just reduce it) actually exists.

The private sector of the economy created 83,000 additional jobs in June, but total employment fell because 225,000 temporary census workers were let go.

The census workers had real jobs and these were additional jobs that reduced unemployment. They demonstrate that there are two possible ways to reduce unemployment, not just one.

The government has been trying to reduce unemployment by “stimulating” the economy so that private employers would become willing and able to put more people to work. But it is unclear how well this strategy has worked.

The alternative is for government itself to hire the unemployed and put them to doing useful things. This is what the Census Bureau did, and back during the Great Depression this is what the WPA and other government programs did. In Oregon many public improvements, including Timberline Lodge at Mt. Hood, were produced by these “make-work” programs. The only public swimming pool in Redmond, where I lived during my grade-school years, was constructed by one of these programs.

President Franklin D. Roosevelt felt that it was better to pay people to do something than to pay them to do nothing. They could be doing something constructive, and there was more dignity in working than in just receiving a dole.

There is plenty of work that needs doing. It would seem, therefore, that we shouldn’t be repeatedly extending eligibility for unemployment compensation payments. Instead, the government should offer to hire everyone who is willing and able to work but cannot find another job and pay them the federal minimum wage of $7.25 per hour for 40 hours a week.

People could receive unemployment compensation while their eligibility remains, and then take one of the new jobs, or they could forgo unemployment compensation and go directly into a job.

As soon as they can find private sector jobs that pay better, of course these people will do so. But in the meantime even minimum wage employment will be a lot better than nothing.

If all 14.6 million currently unemployed took such government jobs, and if on top of minimum wages the government paid $400 per month towards medical insurance for each employee, it would cost about $24 billion per month, or $289 billion per year, not including administrative costs.

We have certainly been paying at least this much for the current “stimulus” programs

whose results are debatable and which at best have only slightly reduced unemployment rather than eliminating it.

If we have a pool we want to fill with water, does it make more sense to turn on a faucet and fill it up, or to hire pilots to seed the clouds and try to make it rain? Cloud-seeding, like our current approach to dealing with unemployment, would be discredited “trickle down” theory with a vengeance!

Why not go with a straightforward approach whose costs and results are measurable, which has worked in the past, and which could put a total end to unemployment rather than just reducing it?

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This article appeared on CommonDreams on July 6, 2010.

Why we should fire all civil servants and public school employees (but only for five minutes)

It is troubling that in a time of high unemployment state governments and school districts in Oregon and other states may have to lay off hundreds of thousands of people. The U.S. Education Secretary has warned that without an additional $23 billion in emergency federal aid, 100,000 to 300,000 public school teachers and administrators could lose their jobs. But the federal government itself is already running alarming deficits and might not come up with the money.

There is an obvious alternative to firing so many people: keep them all on but make the necessary savings by reducing their salaries and fringe benefits. To some extent this has already been done, with freezes in salaries and benefits here and there, and perhaps even a few actual reductions in pay. But other public employees continue getting raises, and cutting pay is politically difficult even for a lame duck like Governor Kulongoski.

Even leaders who are willing to cut salaries might not legally be able to do so because of collective bargaining contracts with various unions. “A contract’s a contract,” as Ken Allen, director of the state American Federation of State, Country and Municipal Employees was recently quoted in an Oregonian headline.

This indeed is a problem. Oregon unions are reported to be hopping mad about Kulongoski’s proposed continuation of pay freezes, and the chances they would agree to substantial reductions in pay are nil. And starting July 1 the Oregonian reports that “union-represented state workers are scheduled to get step increases of 4.75 percent.” Just to pay for this raise for those remaining would require firing about 5% of these workers. (So much for labor “solidarity”!)

Perhaps I am wrong here, but normally collective bargaining contracts merely specify what people will be paid if they have a job and do not guarantee that anybody will have such a job. That is why layoffs are possible when money must be saved.

If this is the case, there is a solution to our current woes. It is an unhappy solution, one that no one would advocate except for the fact that the alternatives are all worse. The state of Oregon must fire all state civil servants and school employees. The laws providing for collective bargaining for state employees must be repealed. All former employees who would like a job would be hired with salaries and fringes determined on the basis of the available money (subject to further reductions later on if that proves necessary). Although vested rights in PERS would be preserved, just as they are for layoffs today, no future rights would be accrued and the state would shift to a defined contribution retirement system for all workers.

To avoid even temporary closing of schools, lack of police and fire protection, and throwing the prison gates open, the newly hired employees could go on the payrolls five minutes after they are fired from their previous positions. (Details could be worked out in advance.)

These admittedly draconian steps would avoid increasing unemployment, keep our schools fully staffed, and allow the state budget to be balanced. They would inflict moderate amounts of pain on all state workers rather than the huge amounts of pain that would be inflicted on those state workers who will lose their jobs under our current system.

The bottom-line question we must answer is whether Oregon government primarily exists to serve the people of Oregon, or whether its prime function is to promote the well-being of the people who work for it even when this conflicts with the general interest.

More on the "carried interest" scandal

To their credit, Congressional Democrats have proposed legislation greatly reducing the ability of investment fund managers to get away with paying a 15% capital gains rate income tax on their sometimes billion dollar earnings.

This morning the Wall Street Journal published an attack on this proposed legislation. Unfortunately, the article is available on-line only to subscribers to the on-line WSJ, so I cannot direct you to it here.

I have sent a letter to the editor responding to this article. It follows:


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To the editor:

John Rutledge’s defense of allowing investment partnership managers to pay a 15% federal income tax on their often huge compensation is not lacking in nerve.

Rutledge points out that no special loophole was created to allow them to get away with this, since it just “reflects two long-accepted tax practices.” But the very fact that these “practices” allow managers who make a billion dollars a year to pay a much smaller percentage of their income than do the custodians who clean their offices suggests that these practices should no longer be accepted.

This injustice is just one more example of the pernicious gamesmanship encouraged by taxing income from different sources at different rates in the first place. The proposed legislation that Rutledge criticizes does not go far enough. Congress needs to tax all personal income----salaries, dividends, capital gains, you name it!----at the same rate. While this might produce adverse economic effects in the short run, in the long run it would make our economy more efficient by eliminating much complexity and releasing a lot of accountants and tax lawyers to more productive activities.

Paul F. deLespinasse, Ph.D.

Corvallis, Oregon

A version of this letter appeared in the Wall Street Journal on May 28, 2010.

Masking the federal budget deficit

A very good article by my colleague, Ahsan Habib:

By Ahsan Habib
Daily Telegram

ADRIAN, Mich. —

Two things happened on April 21. First, I looked at my copy of the Wall Street Journal. The headline said “Debt Masking Under Fire,” referring to a practice of Wall Street banks.

Second, the 2010 edition of the Economic Report of the President came in the mail. I opened to Page 423, a historical table of government finance. According to the table, in 2009 the federal debt reached an unprecedented level of $1.5 trillion. The same table also shows that during 2009 and 2010, the federal government’s debt increased by about $1.9 trillion dollars not by 1.5 trillion, the size of the deficit.

Why did the debt increase by about half a trillion dollars more than the budget deficit? Is there a debt masking by the federal government as well?

The answer is yes. In 1968 President Johnson signed into law a provision which would let the federal government treat Social Security funds as current year revenue. They gave up the age-old principle of measuring revenue by the taxes collected for current expenditures. Every year the federal government receives some money from the public not as tax per se but as payment for future claims.

There are about half a dozen such accounts. The list includes Social Security trust fund, civil service retirement fund, federal supplementary medical insurance trust fund, federal hospital insurance trust fund, unemployment trust fund, military retirement fund, transportation trust funds, employee life insurance and more. Money in these accounts is not tax revenue for current expenditures. These are payments for the future obligations and are meant to be kept as reserve. That is how these funds operated since their inception, and it continued until 1968.

The net effect of the new reporting rule was to reduce (mask) the federal deficit as long as the trust funds were in surplus. In subsequent years, several attempts were made to reverse the procedure and treat Social Security as an off-budget item. 1986 was set as a target year when this reversal would take place. But in that year, the Gramm-Rudman-Hollings rule threatened to cut many programs. So the federal government found an easy escape from Gramm-Rudman-Hollings mandated cuts by using the trust funds surpluses to reduce a deficit. Similar concerns also prevented another attempt to revert to the old system during early 1990s.

With President Johnson’s proclamation, “reported” federal deficits went down. But some people were not happy with that. That is why they refused use it in showing the debt level of the government. As a result, the economic report of the president reports two types of federal debt: one that is held by the public and the other, the gross federal debt. Clearly the latter is larger than the former. To see why the latter is the true measure, ask anyone what is our current national debt. No one will say it is $7.5 trillion, which emerges if we ignore intragovernment debts. Rather, everyone will say that the federal debt now is about $12 trillion or about 83 percent of our GDP.

This masking of federal budget deficit also explains the paradox of how we had federal budget surplus for three years during the time of President Clinton, but our national debt still increased every year. This happened because in each of those so-called surplus years the federal budget would have shown a deficit if the intragovernment debts were not counted as current revenue.

In March of 2010, an unprecedented thing happened. For the first time, Social Security paid more than it collected in revenue. Which means instead of adding to the Social Security trust fund and hence lowering the federal budget deficit, it will actually increase the federal budget deficit. This will make the people in Washington very uncomfortable.

My prediction is that sometime in the future, either by President Obama or by a future president, rules of the game will change again. Instead of including Social Security funds in the current budget, they will propose to treat the funds as off-budget item, the way it was prior to 1968.

Perhaps the practice of debt masking will be clear from the following example. Say my monthly income is $600 and each month I spend $800. I have a monthly deficit of $200. But suppose my brother gives me $250 each month to save for his son’s college education. I use that money to mask my deficit and claim to have a surplus of $50.

Looks great until my nephew goes to college. Then I will have to come up with a huge sum of money to start the payback phase of my life. It appears our federal government has now entered its payback phase.

Ahsan Habib is a professor and chair of the economics department at Adrian College.

Excellent denunciation of anonymous on-line comments

Columnist Leonard Pitts Jr. has once again written a column I have been tempted to write, thus relieving me of the need to do so.

This one is a fervent denunciation of the things people seem to say when they post anonymous on-line comments about published op-ed newspaper columns.

Pitts thinks newspapers should stop allowing people to post anonymously, and I think he has a good idea.

Read his column here.

Sense and nonsense about Social Security

Now that the basic medical legislation has passed, it sounds like new efforts will be made to fix Social Security.

Thanks to the recent meltdown in stocks, it is unlikely that quack panaceas like “privatization” will have much support this time except among diehard conservative fanatics. But reasonable Social Security reforms will be very difficult politically as long as public understanding of the situation is as muddled as is presently the case.

The principal misunderstanding concerns the Social Security Trust Fund, which currently amounts to about 2.5 trillion dollars. The Fund was built up during the last several dozen years because Social Security taxes collected greatly exceeded payments to Social Security beneficiaries.

The stated purpose for building up the Fund was to provide the money needed when Baby Boomers started retiring in larger numbers and the number of taxpaying workers per retiree begins decreasing. This time is now coming.

Many people, however, believe that “there is no money in the Fund” because the U.S. government has borrowed all the money and spent it. This belief reflects basic misunderstandings of how money and banking work.

It is true that the government has borrowed and spent all the money in the Fund, but in return it has placed government bonds for the 2.5 trillion dollars in the Fund, and it pays interest on these bonds. In 2009 it paid the Fund approximately $120 billion dollars in interest, an average rate of 4.86%. The government owes the money it has borrowed from the Fund just as much as it owes money to private individuals and banks that have bought government bonds.

Recent scare articles have claimed that the Trust Fund is already starting to decrease because Social Security payments this year will exceed by $29 billion the amount brought in by Social Security taxes. This is untrue, because the $120 billion in interest coming in will more than take care of the $29 billion shortfall.

However soon enough the time will come when the Fund really begins to be reduced. But why have the Fund at all if this was not going to happen? This will be politically awkward, though, because the government will have to stop financing current operations with the regressive Social Security tax and rely more on the progressive income tax.

Or it can sell more bonds privately to make up the difference, which will not increase the total national debt but simply change its structure----less owed to the Trust Fund, equal amount more owed to other bondholders.

It is true that in several dozen years the Trust Fund will be exhausted, since people are living longer and hence are retired for more years than was assumed when the system was designed. But relatively small increases in the Social Security tax can take care of this problem, and the sooner it is done the smaller those increases will need to be.

[To access some interesting Q & A on the Social Security Trust Fund, click here.]

[This article has run in the Adrian Daily Telegram in Michigan]

As we await Congressional action on health care this afternoon, I read a wonderful letter in the Adrian Daily Telegram (Michigan). It puts the case very neatly that even those of us with good insurance now cannot assume we won't lose it.

I am still not sure whether the current legislation is a good idea. It is beginning to look like we will find out.



Pass health insurance
To the editor,

I have never written a letter to the editor, maybe I was saving up for this one. I love our generous, giving country and all of the generous, giving people who live here. I am proud that we as a nation and as individuals step up and come to the aid of those less fortunate in time of disaster.

As I read Wednesday’s Telegram, I felt disappointed and heartsick. For many in our country, this is their earthquake, tsunami, tornado and hurricane all rolled into one. Approximately 47 million Americans have no or inadequate health care, but many seem not to care. As I read the full-page ad asking Mark Schauer to vote “no” on the health care reform bill, I realized that I know many of the people who are in favor of denying health care to those in need. There was one common denominator among those I know, though I admit that I don’t know all on the list. That common denominator is that they have health care. They all are able to be treated for the serious and the common health issues which face all of us.

The people I know on the list are all very hard workers. They are good people. They deserve everything they have. For those of you who signed the ad, I only wish you the best.

May you always be healthy.

May you never lose your job, thereby losing your health insurance.

May you never lose your health insurance and have a “pre-existing condition” which keeps you from securing subsequent healthcare.

May you never have to choose between medication and food.

May you never have to ignore a lump, an ache or a pain because you can’t afford a visit to the doctor.

May you never have a health emergency which puts you so far in debt you are forced to lose your home.

May your children and grandchildren always be healthy because your health insurance covers the little things which sometimes become big things.

May you take five minutes every day to realize how lucky you are and what you are denying to the less fortunate. If you have positive ideas for providing health care to the approximately 47 million un- or underinsured, please share those ideas with Mark Schauer. I would gladly pay more taxes so that every man, woman and child in our great country would have adequate health care.

Jan Parson
Adrian

Review of Burns' book: Packing the Court

James MacGregor Burns' newest book, Packing the Court: The Rise of Judicial Power and the Coming Crisis of the Supreme Court, will not increase his reputation.

The basic premise of the book is that the Supreme Court invented the power of judicial review out of whole cloth back in 1803, in Marbury v. Madison, without any grounding in the actual Constitution.

It is true that the Constitution does not explicitly grant the courts the power to strike down laws which violate its rules. But it does provide that “This Constitution, and the laws of the United States which shall be made in pursuance thereof . . . shall be the supreme law of the land . . . .” (Article VI.) Note that it only refers to laws which have been made “in pursuance” of the Constitution.

A contemporaneous analysis by Alexander Hamilton, a member of the Constitutional Convention which drafted the present document, can be found in The Federalist Papers, #78:

“The complete independence of the courts of justice is peculiarly essential in a limited Constitution. By a limited Constitution, I understand one which contains certain specified exceptions to the legislative authority; such, for instance, as that it shall pass no bills of attainder, no ex-post-facto laws, and the like. Limitations of this kind can be preserved in practice no other way than through the medium of the courts of justice, whose duty it must be to declare all acts contrary to the manifest tenor of the Constitution void. Without this, all the reservations of particular rights or privileges would amount to nothing.”

The Federalist Papers were written by Madison, Hamilton, and Jay and published under the penname “Publius” in the newspapers of New York, attempting to convince New Yorkers to ratify the proposed new Constitution. They are considered a very authoritative indication of the intentions of those who drafted the Constitution.

The very first Congress elected under the new Constitution proposed what became the Bill of Rights as the first 10 amendments to the new document. They did this to satisfy critics who opposed ratification because the original document did not have a bill of rights. And the very first Amendment, which set the tone for the whole set of amendments, states that “Congress shall make no law ….” doing a whole lot of things.

What possible purpose would have been served by adding this language to the Constitution if the courts were required to enforce anything enacted by Congress no matter how flagrantly it came into conflict with the Bill of Rights?

Judicial review is so firmly established in the clear language and intent of the Constitution and in over two centuries of precedent that Burns is reduced to a desperate recommendation for how to put an end to it. He wants President Obama to defy the Court the next time it makes a decision he doesn’t like and announce (in effect) that “John Roberts has made his decision; now let us see him enforce it.” (My wording, modeled on President Jackson’s famous fight with Chief Justice John Marshall, not Burns’.) The president would say that he would respect judicial review only if its supporters formally amend the Constitution to explicitly provide for it. Of course this would take years to do.

Obama, who knows a lot more about constitutional law than Burns does, is highly unlikely to follow this recommendation. But I am not sure that Burns himself would care for the uses to which his own logic could be put if we elect a right-wing president sometime.

Such a president could, with much more grounding in the language and history of the Constitution than Burns has, proclaim that Roe v. Wade, the original abortion rights decision, did not have a legal leg to stand on. Our right-winger would announce that Roe v. Wade would no longer be enforced unless abortion advocates formally amend the Constitution to explicitly provide for it. Again, this could not be done overnight, if at all.

Burns needs to remember that we need to be cautious when we articulate principles, since they have a way of coming back to haunt us.

Double jeopardy reexamined

At our book discussion group Sunday evening I handed out reprints of the First, Fifth, and Eighth amendments in order to make some points about constitutional interpretation. Ed Miller, reading the Fifth Amendment, noticed the expression "nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb." He noted the difference from the due process clause, which prohibits deprivations of "life, liberty, or property," and wondered if the prohibition of double jeopardy only extended to capital punishment cases.

Of course, this is not presently the case, but I was amazed that I had not noticed this difference during some 50 years of reading and teaching about the Constitution.

Afterwards, Ed Googled around and found a fascinating law review article discussing this very issue, and proposing that our protection against double jeopardy be narrowed by taking the wording in the Constitution more literally.

The article can be read here.