• Blackstone Group (Financial Services)
• Bain Capital
• FPL Group (Energy)
• DLA Piper (Corporate law firm, representing Global 1,000 and Fortune 500 companies)
• Kindred Healthcare
• Beacon Capital Partners
• Comcast Corp
• Brownstein, Hyatt et al (Corporate law firm)
• Venable LLP (Corporate law firm)
• Hummer Winblad Venture Partners
• Apollo Advisors (Private equity firm)
• River Terminal Development
• Time Warner

We’ll have the answer for you at the bottom.

Now, let’s look at a stereotyping process that’s quite popular these days. I used a term in part two of this series that may be new to you: iconography. In his fantastic new novel, Anathem, Neal Stephenson adapts the term to describe “an oversimplified, and in most cases, wildly inaccurate schema used…to make sense” of the cloistered world of intellectuals at the center of the story’s narrative. These schema often take “the form of a conspiracy theory or an allusion to characters and situations from popular entertainments.”

Stephenson is obviously riffing on a common tendency in our culture, which relies on the simplistic type at every turn. Think about the stereotype of the mad scientist. Or popular depictions of the tranquil-but-lethal kung fu master (one imagines that The Real Monks of Shao-Lin lead far less eventful lives than film or television depictions would lead us to believe). Or the trope of the crooked used car salesman. Or the ambulance-chasing lawyer, or the narcissistic model, or the eggheaded professor who doesn’t have enough sense to come in out of the rain. We have clichés for all sorts of types or groups of people, and more often than not these quick, cheap categorizations prevent us from understanding the humans depicted in meaningful ways. That is, iconography is no substitute for character development.

We especially use iconographies to help us deal with types of people that need demonizing.

Meet the Straw Man

Thanks to our popular media and partisan noise machines, the public now has a clear picture of the brie-sucking, hyper-liberal (dare I say socialist) kingmaker conspiring with others of his/her ilk (over a bottle of fine chardonnay) to impose a new Golden Age of Communism on ordinary, God-fearing working folks. (I say noise machines, plural – despite the fact that this phenomenon, in its current incarnation, is a primarily Republican production, we now have muddle-headed progressives reproducing this fictive meme, as well.)

But there are some problems with the Evil Librul Intellectual Elite meme.

First, note that these people all seem to exist in big cities in the Northeast (that’d be New York, the home of Alpha Socialista/She-Demon Hillary Clinton, and the capital of the People’s Republic of Taxachusetts, Boston) or on college campuses. These strange elite enclaves are depicted as alien to “real America,” which seems, in the popular iconography, to correlate with “middle America,” “flyover country,” the “Heartland” or “Red America.” New Yorkers, Bostonians and those who live in college towns apparently aren’t real Americans.

But we might productively argue that you can learn a lot about what’s real and what isn’t by looking at the largest groupings, right? If there are X number of people in location Y and 2X in location Z, it makes no sense to pretend that those in Y are somehow more typical, more authentic and more legitimate representations of the overall population than the citizens of Z.

I’ve lived in New York, Massachusetts, North Carolina, Iowa and Colorado, and I’ve visited a majority of the states in the Union. From what I can tell, and for better or worse, no state or region that I’ve visited is more “real American” than any other. Regarding Boston, for instance, I assure you that my neighborhood just around the bay from Southie was extremely real and American.

Second, these evil librul elites are depicted as having massive amounts of money and power. Well, there’s no doubt that some Northeastern liberals have money and power (John Kerry is richer than Croesus, and the Kennedys come to mind, as well). The iconography also depicts this mysterious group as tax-happy in the extreme. There is a grain of truth in here, in that legislators like Kerry and the Kennedys do support higher tax rates than their GOP and Blue Dog Democrat opponents.

But, the straw man makes no coherent sense. The fact is that the policies these elites explicitly support would take lots of money out of their own pockets while lowering taxes on working class people in “real America” – the people that the anti-librul elite iconographies are targeted to. When talk turns to an issue like health care, the stereotypes present us with all sorts of noise about “government control,” which might make more sense if the puppetmasters weren’t already rich enough to have the best care available. In what plausible way is their personal power and wealth enhanced by policies that cost them money and make them powerful corporate enemies?

It’s easy enough to believe that rich and powerful people want more money and power, but what are we to conclude about politico-apocalyptic narratives that lack basic internal consistency?

Remember, motive matters.

While some intellectual elites may have power and money, a vast majority live their lives far removed from wealth or broad influence. More commonly, performance elites have jobs like teacher or professor or social worker or community organizer or non-profit manager. In the corporate world you’re likely to find them in middle-management, and some of them helm small, medium and large businesses. You’ll find them in IT groups everywhere, and you may even find people working with their brains in marketing departments. Some of these knowledge workers do okay financially, to be sure, but as a rule they’ll laugh until their sides hurt at the idea that they have access to disproportionate levels of power.

The point is that our popular stereotype of the liberal socialist power elitist looking to deliver America into the arms of a new Soviet world order is a laughable fiction. In a country with 300 million people, it would be remarkable if you couldn’t find one or two people fitting just about any description, probably, but in reality the image that we’re being asked to buy is an urban legend that can’t withstand even mild scrutiny. Heck, a good hard look at their election donor lists indicates that even the people who seem to fit the stereotype to a T aren’t doing a very good job of threatening Kapitalism.

Which brings us back to our trivia question. Did you figure it out yet? If not, it’s this guy. Right. One of our most visible effete northern socialist liberals.

So, what do we do with stereotypes that simply don’t square with the facts and that ask us to believe the most improbable things about human behavior at every turn?

More importantly, what do we do with the people who keep peddling these implausibilities?

____________

Next: Elitism vs Egalitarianism vs Freedom

Image Credit: Tennessee Guerilla Women

What’s worse is you’ve got a pediatrician appointment today for both of your kids – their asthma is acting up and the drugs aren’t working as well as they should be. Furthermore, your son is still recovering from a case of malaria he picked up, probably from a mosquito bite he got during the pee wee football game by the reservoir a couple of months ago. At least the rains will damp down on your environmental allergies some today. Better rain, even flooding, than the dust storm that blew through the area a couple of weeks ago. That caused several major pileups and fouled up ventilation so bad that some of the buildings downtown are still closed..

As you pull together breakfast for the family, there’s no milk because it’s too expensive. Most of the local dairies were forced to close down over the last few years as the drought reduced the cows’ milk production. The few diaries that survived can charge almost as much as they want to since the supply is far lower than the demand. The same is true of eggs and cheese, although beef has been cheaper recently as dairy cows are slaughtered for their meat in a last-ditch effort to pay off drought-driven debts.

You take the kids to their appointments and find out that your son’s malaria isn’t quite gone yet – it’s apparently a strain that’s become resistant to the more common, and cheaper, anti-malarial drugs. The next course of drugs is not only more expensive, but also has more side effects that will make it harder for your son to be effective in school. Both kids’ asthma is doing OK, but the pediatrician points out for the third time that you might want to consider moving out of the suburbs and into a rural area with cleaner air. Unfortunately, because of your spouse’s job, that’s just not possible. And with the chronic conditions you and the kids have, you need the company’s good health insurance.

After dropping off the kids at school, you head to the grocery store. The produce section is half the size that it was just a few years ago, and all the produce you do see is expensive – almost all of it was shipped in from out of state. Over the last three months there have been two e. coli recalls of produce from out-of-state farms where the water got polluted, and there have been dozens of others over the last few years. You’ve tried to grow a garden yourself to supplement the meager grocery store selection, but growth issues and the drought has forced your town to go on strict water restrictions. It doesn’t help that the garden plants always seem to be out-competed by the invasive weeds in your yard. The bindweed and thistle have grown largely immune to the commercially avaialble herbicides.

There have been several large dry lightning-sparked wildfires recently that tore through mountain communities. As a result, the insurance companies gave up on insuring homes in the mountains. The regional wildfire fighting coordination office had to give up on fighting fires – there is just too much fuel and temperatures have been too high for safe fire suppression, and when the city’s conserving every drop of water for human consumption, using city water to fight wildfires just was not possible. As a result, your neighbors were driven out of their beloved mountains down to the suburbs where they could be safe and get homeowners insurance.

Your neighbors’ daughter is in the U.S. Air Force, piloting an armed drone patrolling the Mexican border as air cover for the Border Patrol. There’s been a massive influx of immigrants and refugees from Central and South America recently, and even though the Border Patrol is now three times the size it was in the early 2000’s, there’s still not enough agents to police the border without military help. She’s worried that she’ll be deployed soon to southern Europe as back-up for our allies’ efforts at keeping the EU from being overwhelmed by Turks, Arabs, and Africans pouring northward. There have been a few brushfire wars recently, but most of Africa and parts of the Middle East are looking more and more like a powder keg just waiting for the right spark. As a result of the worsening national security situation, taxes have skyrocketed to pay for the large military required to maintain all the active deployments. Worse yet, there’s a chance that your neighbors’ daughter might be deployed to guard the Venezuelan oil fields that the previous President “annexed” in support of U.S national security interests and that the Venezuelans are resisting as an invasion and occupation.

After dinner, you let the kids stay up late for the first time in months – the flooding dumped enough water into the reservoirs and local streams that the power plants have enough water to operate all day instead of shutting down or operating on a rolling blackout schedule. You wish now you hadn’t voted to approve the nuclear plant (or elected the public utilities commissioners who approved the increase in your electricity rates to pay for it), since it’s no better than the coal plants – they all need so much water for cooling that just hasn’t been there the last few years. Well, until today’s flooding, anyway. So you let the kids enjoy the special treat.

———-

According to the Intergovernmental Panel on Climate Change Fourth Assessment Report, one of the largest peer-reviewed studies of climate science performed to date, a scenario similar to that described above is 90% likely. More recent scientific data suggests that the IPCC’s conclusions about the severity of climate disruption were overly conservative. As a result, both the IPCC’s projections for climatic upheavals later this century and their 90% confidence in those projections are very likely under-estimates of the severity of the problem.

Knowing all of this, how much would you spend on an insurance policy that lowers the chances that the overly conservative scenario described above happens? How much is your quality of life, your family’s health, your friend’s well being, your lower tax rate, worth to you? 1% of your annual income? 5%? 10%? More? Or nothing at all?

In 2008, the average American spent approximately 16% of their salary on health, home, car, and life insurance premiums¹. That’s a huge amount of money. The reason people pay that much is because they want to be insured against the likelihood of something horrible and expensive occurring. And the more likely something is, combined with how expensive it it is, the more we pay in insurance.

The table below illustrates the difference^{2, 3}:

The table clearly shows that Americans pay the most overall money for our health insurance, but given how high the risk of needing the insurance is (estimated at 100% in a given year), the risk value metric is actually pretty good.

What the table doesn’t show, however, is that we have homeowners or renters insurance not because of the average claim, but because the small chance of a severe financial loss is still risky. The table below illustrates this point:

Remember, insurance premiums cost the average American 16% of their annual salary in order to insure against future financial losses that could be, but usually aren’t, extraordinarily high. So the question is how much should the world be willing to pay in order to insure against future financial losses?

As was mentioned above, the likelihood of substantial risk is at least 90%, with more recent studies than the 2007 IPCC report saying that the risk is actually higher. The next question has to be “how much is the future financial risk” of doing nothing?

A University of Oregon analysis estimated 4% as the bare minimum cost of doing nothing. An International Institute for Environment and Development (IIED) study estimated that the benefit:cost ratio of addressing climate change was at least 8:1. Recent worst-case estimates (discussed below) say that the annual GWP cost of addressing climate disruption is approximately 3%, so the IIED study says that the cost of doing nothing could be as much as 24% of GWP. This number is similar to that calculated by the Stern Review (which, not coincidentally, is what the IIED used as their baseline) back in 2006. The lowest estimates of the cost of doing nothing are in the range of 1-2% of GWP, and a few scientists have suggested that the upper range of the cost could literally be the end of human civilization.

As for the cost of mitigation, aka climate insurance, a recently released study by the E3 Network calculated how much money the world would have to spend in order to return the carbon dioxide (CO₂) in the Earth’s air to a recent estimate of a “safe” level – 350 parts per million (ppm). The study reviewed the available literature and found that the worst case estimate was 3.0% of global gross domestic product (aka gross world product, GWP), and the E3N models estimated the estimate put the cost at approximately 2.5% of GWP.

The table below compares the insurance paid by Americans to three projected climate costs vs. risks.

Notice that Americans pay more in premiums than they get in benefits (ie claims), so the risk divided by the expense is less than 1. The difference represents insurance company profits, and clearly Americans are willing to pay for the comfort that insurance gives them. The table also shows that the risk of significant damage due to climate disruption divided by the global expense of addressing climate disruption varies from 0.33 to 100, and in five out of the six cases shown above, the future financial risk that is effectively insured equals or significantly exceeds the cost of insurance.

To put this all into perspective, the GDP of the U.S economy in 2008 was about $14.4 trillion. 16% of that (the money spent on average for insurance) is a little less than $2.6 trillion. According to the World Bank, the GWP was just over $60 trillion in 2008. The percentage of the global economy that is likely at risk is 24%, or $14.4 trillion. And the economists are estimating that the cost of insuring against losses that could equal the size of the entire U.S. economy will be no more than 3% of GWP, or $1.8 trillion.

In other words, for less money that the U.S. spends on insuring itself, the entire globe could be insured against climate disruption. Then imagine taking your four favorite cities in the world – and then erasing one.

And for another dose of reality, the United States is presently arguing over spending money to insure the U.S. against climate disruption to the tune of 0.25% to 3.5% of GDP (ACES analysis by the CBO). 0.25% to 3.5% of U.S. GDP in 2008 would be between $36 and $500 billion ($0.5 trillion)⁴. That’s well below what the U.S. already pays for insurance and is several hundred billion dollars less than the financial bailouts.

Ultimately, the analysis of what the U.S. already pays to voluntarily insure itself against future losses illustrates that insuring the global economy against future financial losses makes economic sense. After all, Americans already pay more to insure against smaller future losses that have a smaller chance of occurring than does climate disruption.

If the U.S. is willing to insure itself against future financial losses due to damage to home, vehicle, and health, then there’s no good reason why the U.S. and the world should be unwilling to insure themselves against future financial losses due to climate disruption.

———-

¹ According to the national car insurance comparison site CarInsurance.com, the national average annual premium for car insurance was $1,600 in 2008. According to the National Association of Insurance Commissioners, the national average premium for homeowners insurance was around $800, although it varies widely from state to state. The Kaiser Family Foundation estimates that the annual cost of health care per person in the U.S. is nearly $5,300. Life insurance premiums vary so widely that it’s difficult to come up with a solid number, but $300 per year is a reasonable estimate. The total from this estimate is $8,000.

Average salary was derived from 2008 Census Bureau data.

² Derived from the Federal Highway Administration and the National Highway Transportation Safety Board, and the Insurance Industry Institute. Percentage is defined by the number of collisions divided by the total number of private, commercial, and publicly-owned vehicles on the road. Average Insurance claim is the total for all claim types (injury, collision, comprehensive, and property damage) divided by the number of accidents.

³ “Risk value” is a term defined for this analysis only. While the insurance industry undoubtedly has its own metrics, this metric is my own and may or may not be equivalent to an official industry metric.

⁴ This “cost” is not an accurate accounting of the actual costs to the economy. This money would be circulating in the economy still, but would not be going to the interests that it goes to presently, especially oil and coal companies and coal-burning utilities. Instead, the money would be directed toward energy and carbon-efficient companies. As a result, the argument in Congress is clearly not one of economics, but rather a battle between entrenched, old-energy interests protecting their profits and influence and up-and-coming, new energy interests hoping to gain profits and influence.

In fact, this entire analysis illustrates that the reasons behind opposing insuring the world against losses due to climate disruption are neither scientific nor economic. Instead, the reasons are ideology, profit, and political power.

According to The New York Times, former Sen. Daschle has been spending quality time in the White House holding forth on health-care reform. Reports The Times: “He still speaks frequently to the president, who met with him as recently as Friday morning in the Oval Office. And he remains a highly paid policy adviser to hospital, drug, pharmaceutical and other health care industry clients of Alston & Bird, the law and lobbying firm.”

He says he’s not a lobbyist. He says he’s a “resource” for his clients and former legislative colleagues. “I do not tailor my views to any specific group or client.”

How believable — or unbelievable — is that claim?

The 900-lawyer firm he works for has received more than $5 million in lobbying fees so far this year, much of it from companies and associations with an abiding interest in influencing the outcome of health-care reform efforts. From 2005 (when the firm’s lobbying revenues nearly tripled) to 2008, the firm’s lobbying fees totaled $24.2 million, according to the lobbying database of the non-partisan Center for Responsive Politics.

Mr. Daschle joined the K Street firm after losing his Senate re-election bid in 2004 to Sen. John Thune. Mr. Daschle is an expert in health-care matters; Alston & Bird has numerous clients interested in health-care reform; and the firm’s annual lobbying fees skyrocketed. Surprise!

The Washington Post pegged Mr. Daschle’s salary at $2 million. He also received $2 million last year from business partner Leo Hindery, whose gift of a car and driver led to Mr. Daschle’s withdrawal from cabinet consideration.

“We know that many power brokers never register as lobbyists, but they are every bit as powerful,” said Ellen Miller, executive director of the Sunlight Foundation watchdog group.

Over his congressional career, Mr. Daschle has enjoyed considerable financial support from the health-care industries. Since 1998, he has received $1,517,020 in campaign contributions from PACs and individuals associated with the health-care fields.

After amending his tax returns for 2005 through 2007 for failing to disclose income (the car and driver) from Mr. Hindery, he paid $101,943 in back taxes plus interest. Then he withdrew from consideration for secretary of Health and Human Services. In this post, he would have served as point man for the president’s health-care reform plans.

But, reports The Times, he appears to have sufficient access to the president’s ear to be an effective advocate on health care. But for whose benefit?

White House officials say they appreciate his help. “He is one of a number of people that provides outside advice to the White House, and the president greatly appreciates that advice and Tom’s friendship,” said Dan Pfeiffer, a spokesman for the White House who previously worked for Mr. Daschle. Mr. Pfeiffer added that the former senator was “a recognized expert on health reform who knows more about the legislative process than just about anyone.”

Critics, though, say his ex officio role gives Alston & Bird’s health care clients privileged insights into the policy process. They say Mr. Daschle’s multiple advisory roles illustrate the kind of coziness with the lobbying world that Mr. Obama vowed to end. If he had been confirmed as health secretary, Mr. Daschle would have been subject to strict transparency and ethics rules. [emphasis added]

Mr. Daschle has not registered as a lobbyist. Nor does he have an enviable track record of disclosing the health-care clients in his portfolio when addressing public-policy issues — as he failed to do on Aug. 16 on NBC’s Meet the Press. He told host David Gregory this:

Well, David, I guess the, the basic question is, are we building this new system for the American people or for the insurance companies?  I mean, that’s really the key question.  How will they be better served?

But, complains Time’s Michael Scherer:

Left unmentioned was the fact that Daschle, in his capacity as a high-paid consultant at the law firm Alston and Bird, is once again working closely with lobbyists for UnitedHealth, the largest U.S. industry player, aiding the company’s effort to convince moderate Senate and House Democrats to, among other things, kill the public option and keep company profits high.

(BusinessWeek’s Chad Terhune and Keith Epstein think the insurers have already won.)

Here’s how his employer describes Mr. Daschle’s role:

Senator Tom Daschle is a Special Public Policy Advisor in Alston & Bird’s Washington, D.C., office, and is a member of the Legislative & Public Policy Group. As a non-attorney, Senator Daschle focuses his services on advising the firm’s clients on issues related to all aspects of public policy with a particular emphasis on issues related to financial services, health care, energy, telecommunications and taxes. In addition, he advises on trade and international matters. He spends a substantial amount of time providing strategic and policy advice to clients in renewable energy.

Mr. Daschle could not formally lobby for a year after leaving the Senate because of ethics rules. Five years later, he has not registered as a lobbyist. Yet he maintains a portfolio of health-care industry clients, gives paid speeches to health-care industry groups, and has, apparently, unlimited access to the White House and its decision makers — including President Obama.

If it looks like a duck and quacks like a duck, it must be a duck. Mr. Daschle should register as a lobbyist.

That’s the conclusion of three University of Kansas professors who undertook an empirical analysis of the American Jobs Creation Act of 2004 to study rates of return for money spent on lobbying, reported The Washington Post in an April 12 story by Dan Eggen.

This law — this shady excuse for a law with a name only charlatans could love — allowed companies that had earned profits overseas to inexpensively bring that money back into the States. The customary tax rate on such profits was 35 percent. But this elegantly named process — repatriation of profits — gave companies a one-time chance four years ago to haul the money home, paying only 5.25 percent.

The act was a tax holiday sought by a coalition of companies, primarily big pharmaceutical and high-technology corporations, all because they sought to pay little or no taxes on profits generated overseas — and they concocted a successful scheme to pull it off.

Mr. Eggen summarized the Kansas professors’ study:

The largest recipients of tax breaks were concentrated in the pharmaceutical and technology fields, including Pfizer, Merck, Hewlett Packard, Johnson & Johnson and IBM. Pfizer alone repatriated $37 billion, representing 70 percent of its revenue in 2004, the study found. The now-beleaguered financial industry also benefited from the provision, including Citigroup, J.P. Morgan Chase, Morgan Stanley and Merrill Lynch, all of which have since received tens of billions of dollars in federal bailout money. [emphasis added]

Critics argued that the act would benefit multinational corporations to the detriment of domestic firms, reported Jonathan Weisman of the Post in August 2005. Even the Bush White House was dubious over the alleged economic benefits of the bill:

“There will be some stimulative effect because it pumps money into the economy,” said Phillip L. Swagel, a former chief of staff on President Bush’s Council of Economic Advisers, which had opposed the tax holiday. “But you might as well have taken a helicopter over 90210 [Beverly Hills] and pushed the money out the door. That would have stimulated the economy as well.”

In 2006, Washington Post business columnist Allan Sloan wrote of Ford Motor Co.’s abuse of the misnamed act:

It’s almost enough to make you laugh — bitterly, of course. Here was Ford Motor Co. announcing yesterday that it had cut 10,000 jobs last year and that it will cut up to 30,000 more. But shedding jobs at muscle-car acceleration rates didn’t stop Ford from pocketing hundreds of millions of dollars courtesy of the American Jobs Creation Act. … Hello? How can you simultaneously cut jobs and benefit from the American Jobs Creation Act? Welcome to the wonderful world of Washington nomenclature. [emphasis added]

Mr. Sloan estimated that Ford saved $850 million in taxes, not the $250 million the company suggested in its press release.

So how did corporations that don’t believe in paying their appropriate share of taxes finagle this?

Here’s one story, as reported by Mr. Eggen:

The provision was championed in part by the Homeland Investment Coalition, a group of companies and trade associations that was formed to push for the repatriation holiday. The Pharmaceutical Research and Manufacturers of America (PhRMA), one of the disbanded coalition’s members, said in a statement Friday that “repatriation of profits provided a new source of investment for American companies.”

“PhRMA supported the legislation four years ago as part of a broad business coalition because of the additional economic benefits the bill would provide,” senior vice president Ken Johnson said. “It meant jobs and skilled training for American workers, as well as a shot in the arm for local economies.” [emphasis added]

This coalition of multinationals had worked on getting its profits home earlier— and falsely articulated its intent regarding jobs. In 2003, seeking support for the then-named Invest in the U.S.A. Act of 2003, the coalition sent a letter to Sen. Chuck Grassley, chair of the Senate Finance Committee, and Sen. Max Baucus, ranking member. The letter said that “The $135 billion currently offshore that would be invested in America would benefit the U.S. economy by increasing domestic investment in plant, equipment, R&D and job creation” among other benefits, including investments in emerging technologies, funding for pension plans hurt by stock market declines, and, especially:

“[i]mproving the long term financial strength of U.S.-based companies by reducing domestic debt loads, strengthening corporate balance sheets, and lowering corporate bond rates; increasing dividends to shareholders (which can be productively redeployed); and raising equity market valuations by increasing funds available for share repurchases.”

Parse it any way you wish — creating jobs was the intended political cover for any member of Congress to sign on as a co-sponsor of the legislation.

But did the American Jobs Creation Act of 2004 actually lead to a net gain in jobs? Nope. Did it provide “a new source of investment for American companies”? Not even close. And supporters of this tax holiday tried to get another such tax break. Reported Mr. Eggen:

… the Congressional Research Service and others have since found that many companies cut jobs in the wake of the tax break and that nearly all the money was used for stock buybacks or dividends. Supporters failed in a bid to include a similar tax break in this year’s stimulus legislation, and a Senate subcommittee has launched an investigation into how companies used their tax savings under the 2004 program. [emphasis added]

Any congressional investigation lags reporting by The New York Times by four years. An August 2005 Times editorial said:

A month ago, Hewlett-Packard announced it would lay off 14,500 workers by November 2006. Meanwhile, the company is about to repatriate $14.5 billion in profits it has in overseas accounts at a measly tax of 5.25 percent — an 85 percent discount off the normal corporate rate. The cut-rate repatriation, offered by Congress to American companies that bring profits held in foreign lands home in 2005, was sold to the public as a one-shot deal to generate cash for new hiring. But as its critics warned, the tax cut is functioning instead as a handout for America’s most profitable companies.

Hewlett is just one example. Normally, the tax on a $14.5 billion repatriation would be about $5 billion. Because of the bargain rate in 2005, Hewlett expects to pay roughly $800 million. Hewlett also expects its layoffs to cost the company about $1 billion. Thus, in Hewlett’s case, the tax holiday has not only failed to create jobs, but has also more than covered the cost of cutting workers from the payroll.

Dozens of other companies are also bringing billions home with no mention of new hiring. [emphasis added]

Drug companies especially needed to bring the overseas profits home — but not, as the act’s name suggests, to create jobs. They had big financial problems looming. Patents on brand-name drugs worth billions in sales were about to expire, leading to competition by companies producing generic versions.

Upcoming patent expirations for [Pfizer] include Lipitor in 2011, ‘the little blue pill’ Viagra in 2012, and the allergy medicine Zyrtec in 2012 as well. The loss of these patents would see Pfizer losing more than $14 billion in revenue. [emphasis added]

During the last six months of 2004, as the bill was manuevered successfully through Congress, the stock prices of drug companies were falling, in part because of scandals over the safety of drugs that had long been approved by the FDA. For example, government regulators said Merck & Co.’s arthritis drug Vioxx may have led to more than 27,000 heart attacks and sudden cardiac deaths before it was pulled from the market in October 2004.That happened just two weeks before the American Jobs Creation Act was signed into law by President Bush. Merck badly needed its overseas profits, if only to deal with what might be a litigation bill of $10 billion to $15 billion.

Merck, like other companies, also had developed what Motley Fool columnist Robert Steyer in February called

a version of Pfizer’s “Lipitor disease” — a best-selling drug with limited remaining patent life accounting for a huge percentage of revenue:
• Merck lost protection on Fosamax early last year.
• Merck is seeing protection disappear by 2012 on the two drugs that made up 40 percent of revenue through the first nine months of 2008 — Cozaar/Hyzaar and Singulair.
• Bristol-Myers’ Plavix, creating 27 percent of 2008 revenue, gets chopped in 2011.
• Lilly’s Zyprexa, bringing in 23 percent of last year’s revenue, is also done for in 2011.

Big Pharma knew long before 2004 it needed to get every last dollar of overseas profits back into the States — at the lowest tax rate possible. It had to shore up declining revenues and dividends to stockholders — and to fuel big mergers, which it saw as the best cure for Lipitor disease.

But job creation? Merely a fig leaf for public consumption to make this tax holiday palatable to politicians. Jobs were lost, not created.

By August 2007, as the AP graphic shows, pharmaceutical companies had announced thousands of jobs cuts just two years after the repatriation of overseas profits.

Four years ago, Mr. Weisman of the Post reported others were lining up at the tax-break trough:

Procter & Gamble Co. intends to bring home $10.7 billion, and Johnson & Johnson Inc. has an $11 billion plan. Schering-Plough Corp. could bring back $9 billion. This week, Hewlett-Packard Co. announced it will repatriate $14.5 billion in the second half of the year, mainly for “strategic acquisitions,” said Ryan Donovan, an HP spokesman.

Strategic acquisitions made possible by a jobs creation act? More than 800 companies took advantage of the tax break.

Here’s another way to examine passage of the 2004 act. Cui bono politically?

Apparently, the congressional sponsor and 40 co-sponsors did. Let’s look at how just one member of the coalition — the pharmaceutical industry — sought to influence members of Congress through donations to their campaigns.

The Ways and Means Committee, by constitutional fiat, is the chief tax-writing committee of the House of Representatives. The 2004 bill was primarily a creation of the House.

Former congressman Bill Thomas (R-Calif) served as chairman of the House Ways and Means Committee during the run-up to the bill’s passage. He’s listed as the prime House sponsor of the American Jobs Creation Act. During his congressional career, the pharmaceutical industry gave his campaign more than $407,000.

The bill had 40 sponsors. All but one were Republicans. A review of the campaign contributions records of these 40 men and women aggregated by the Center for Responsive Politics showed that since 1998, the pharmaceutical industry has given their campaign committees $4.49 million. Of those 40 co-sponsors, 14 served on the Ways and Means Committee: They have received, since 1998, $2.5 million from Big Pharma.

Recall that, thanks to the act’s tax break, Pfizer repatriated $37 billion.

Former Rep. Nancy L. Johnson, Democrat of Connecticut (where drug-maker Pfizer has a significant research and development presence), received more than $692,000 from Big Pharma between 1998 and her departure from office. She is now a senior public policy adviser (er, lobbyist) for Baker, Donelson, Bearman, Caldwell & Berkowitz and serves on the Pfizer U.S. Health Advisory Board.

The bill had no serious opposition in Congress. The Senate voted 69-17 on the bill; The House, 207-16. Their acquiesance allowed an average rate of return of 22,000 percent for the corporations who lobbied for this bill, say the Kansas professors.

If $1 invested in lobbying earns a $220 return, as the Kansas study suggests, then the pharmaceutical industry has invested, for the 41 sponsors and co-sponsors of the American Jobs Creation Act of 2004, about $4.5 million. That’s a return of $990 million. That’s pretty good ROI for buying only 7 percent of the members of Congress.

Markets don’t work for everything, however. The sulfur dioxide emissions market works because the effects are not hyper-localized – farmers in Kansas and Iowa won’t notice the difference between the emissions from coal plants in Denver, Boulder, or Fort Collins. However, in the case of mercury emissions from coal plants, an emissions market would be a very, very bad idea. Coal-produced mercury precipitates out of the air in a plume immediately downwind of the emissions source, and so there’s no way to fairly balance the increased emissions of one coal plant with the lower emissions of another. In this case, all the increased mercury emissions would to is poison more mothers and children.

But because markets work so well for so many things, the creation of a cap-and-trade market for carbon dioxide (CO₂) makes a lot of sense. In a similar fashion to sulfur dioxide and unlike mercury emissions, CO₂ emissions mix well with the atmosphere and so trading emission credits between one source and another is viable.

Add into the cap-and-trade equation so-called emissions banking (the ability to hold over CO₂ emissions credits from one year to a later year when meeting the cap could be more expensive) and other price control schemes and you’ve got the makings of a complete market and financial system based exclusively around trading CO₂ emissions credits. And that’s carbon capitalism.

But if cap-and-trade is really carbon capitalism, why do so many supposed capitalists hate the idea of a market in CO₂? Simply put, it’s politics. Supposedly John Boehner is a free-marketeer, yet he’s calling carbon capitalism a “code for increasing taxes.” Paul Chagon of OneNewsNow quotes Dan Simmons of the Institute for Energy Research as saying that carbon capitalism would be “the largest tax increase of all time of all American history and probably all world history.” The conservative, pro-business National Center for Policy Analysis called carbon capitalism a “$646 billion cap-and-trade tax.” And a short piece on the pro-business, libertarian website American Thinker says “Paying more for energy as a result of federal policies is not considered a “tax” because after all, it’s not going to be called that. It will be named “Cap and Trade” – but the effect will be exactly the same.”

Even the Wall Street Journal, that very bastion of business and capitalism, has called carbon capitalism Obama’s “carbon tax policies,” “a cap-and-trade tax,” and “cap-and-tax.” You’d think that, if anyone would understand the fundamentally capitalistic nature of cap-and-trade, the Wall Street Journal would.

In other words, politicians and partisans aren’t above hypocrisy or the abandonment of their supposedly treasured ideals for political advantage.

Carbon capitalism is just that – capitalism. It will increase the price of energy somewhat, but that happens any time a market externality is priced. Making something a valuable commodity also increases the price of products made with that commodity, but you don’t see corn or oil commodities traders shouting that we shouldn’t trade corn and oil just because the price of tortillas and plastic sometimes rises. All of that trade is capitalism in action – putting money to work for the nation’s and the world’s best interests. The only difference is that this time the government is creating the market because business won’t step up to the plate and discover the price of something that’s currently free.

The same thing happened with sulfur dioxide, and the utilities claimed then that the sulfur emissions cap-and-trade system would put them out of business. It didn’t. The utilities predicted skyrocketing energy prices. That didn’t happen either. What did happen is our air and rivers and lakes got a lot cleaner as a result. And now the American Coalition for Clean Coal Electricity touts the results of that government-required market as a reason that “coal is clean”:

Even as the use of coal for generating electricity has nearly tripled over the past 30 years, emissions from coal-based power plants have been dramatically reduced through the use of advanced technologies. Today’s coal-based electricity generating fleet is 70% cleaner than it was in 1970 (based upon emissions per unit of energy produced).

That’s the power of the cap-and-trade market for sulfur dioxide emission credits – it’s been so successful that even the coal industry front groups want to claim it as their own.

And just as the utilities and naysayers were wrong about the costs of the sulfur dioxide market, they’ll be wrong about the costs of the carbon market too.

It’s not a tax, it’s not even cap-and-trade – it’s carbon capitalism.

Let’s put aside for a moment the audacious claim made by the Heritage Institute (source of the 85% number mentioned at Boehner’s website) that nuclear power is renewable – it’s lower carbon, but it’s hardly renewable in the same sense as solar, wind, tidal, or geothermal. No, let’s focus instead on Boehner’s intentional blurring of the definitions of “capitalism” and “taxation.”

Cap-and-trade systems are fundamentally a market scheme whereby the government creates a market for carbon emissions by fiat. This has the effect of using price pressure on the highest carbon emitters to lower their emissions through the application of private capital. And because it’s based on a market system, the costs aren’t fixed and will fluctuate quickly with the introduction of new technologies, energy consumption forecasts, and so on. In addition, the lower someone’s (or a company’s) carbon emissions are, the less they pay. In other words, a cap-and-trade system makes carbon a tradeable commodity like pork bellies or oil, and it’s fundamentally a capitalist approach to reducing carbon emissions.

Taxation, on the other hand, is a government levy on personal property or income for public use or to defray expenses. It doesn’t adjust to new technologies or changing economic conditions without legislative intervention like a market does.

In both cases, however, prices for energy will increase. That’s pretty much inevitable. But just because they both raise prices doesn’t mean that they’re both a tax. We don’t call it a tax when prices for oil increase because rebels shut down production in the Niger delta. We don’t call it a tax when food prices rise because corn ethanol production is increasing the price per bushel of corn. We don’t call it a tax increase when a storm shuts down a liquefied natural gas terminal and the price of electricity rises. Similarly, we don’t call it a tax decrease when we can buy a new SUV for less than the manufacturer’s cost because no-one wants to buy one. We call that “the risks of doing business” and, as consumers, we’re just as subject to those risks as any corporation – or any utility.

Or, put another way:

When the price of gasoline goes up in the winter due to heating oil demand and up in the summer due to the summer vacation driving season, those are tax increases as well, right? Great! That means I get a twice-yearly tax cut when the price of oil drops in the spring and autumn as a result of lower demand for heating oil and fewer people driving long distances. Whew, I was all worried there for a second that it was all tax increases, no tax cuts.

Boehner is relying on the public’s irrational dislike of taxation to abort cap-and-trade system before it can see the light of day. And in the process he’s trying to pull a fast one and trick people into believing that the very capitalist system he supposedly believes in is a tax.

I guess it’s only a market-based capitalist system when it supports deregulation of the financial markets (something that Boehner supported). And we all know how well that turned out….

Don’t buy John Boehner’s lies and hypocrisy.

In 1976, the then-Labour government of James Callaghan became the first developed-nation member of the OECD to have to beg the IMF for a bail-out after economic collapse. The top tax bracket was 83%, excluding tax on dividends and interest, while the bottom bracket was 33%. The European Economic Community (precursor to the EU) made an additional $3 billion available on top of the $3.6 billion from the IMF.

The damage of high taxation, high wages and terrible red tape was causing businesses to collapse and, as they fell, government nationalised them.

The Britain that Margaret Thatcher “won” 30 years ago, in 1979, was wracked by daily strikes by millions of unionised workers. Their wage packets, under the Labour government, were being increased by 30% annually but with no concomitant increase in efficiency or production.

The setting for a battle royal was in place. No-one doubted that getting England back to work would require incredible hardship. Few felt it would be possible.

Most of the problems were caused by state expenditure and promises that were completely out of control. When asked, by a very hostile “meet the press” panel on Panorama on the BBC in 1977, whether the Thatcher government would be opposed to unions, she replied, “Unions are not confronting government. Government doesn’t pay for anything. People do.”

“If they’re going to earn their increases then jolly good luck to them, and jolly good luck to anyone who earns their increase. We all need them. If not, then those increases have to come out in higher prices or in higher unemployment.”

It was a turning-point for the economic fortunes of the UK.

Now we are in the grip of an economic crisis that threatens a similar disaster, this time to the world.

The seeds of the credit crisis

There are two crises at work.

The first is caused by a shortage of liquidity. Businesses regularly use short-term finance to cover daily costs like stock, and wages and so on. This allows them to cover the variance between product sales and business expenses. However, the credit crisis has not only reduced the absolute amount of cash for lending, but also made banks and investors with cash somewhat paranoid.

The knock-on effect of limited liquidity has seen consumers stop spending, companies cut production, and millions of people around the world lose their jobs.

Export-driven economies, like Germany, Japan and China, have seen catastrophic falls in production even though they had virtually no exposure to the subprime credit mess.

The second crisis was one that has been around for a while; that of overcapacity and weak business models in a number of large industries. The most obvious of these is the motor industry. GM, Ford and Chrysler were in plenty of trouble long before the credit crisis, however, their marginal businesses have been crushed by falling demand.

All of these things have come together in a moment of horror for legislators and the general public.

There is a lot of debate about how to solve the problem. Where businesses are unable to provide liquidity, governments believe they should step in to ensure that liquidity flows. However, at the same time, governments are attempting to support larger businesses that they feel are “too big to fail” with direct subsidies and bail-outs.

While central bankers look to loosen lending policy, governments are raising big stimulus packages to finance their new industry subsidies.

It is estimated that some $ 3 trillion of additional state expenditure will have to be raised over the next 12 months to support these promises.

This money is not going to come from taxpayers just yet. They will certainly have to foot the bill into the future, but – in the short term – that money has to come from somewhere else.

Paying for the rescue

Ordinarily, the US runs a deficit of around $ 300 million a year (at least, since George W’s tax cuts in 2001) and has a total deficit of around $10.6 trillion, or 76% of GDP (and 212% of annual tax revenues). New spending plans will increase that deficit by $1.75 trillion in 2009/10 alone.

Ordinarily, a few hundred billion dollars can be sold as sovereign bonds on the capital markets. Ordinarily.

These are not ordinary times. There are few investors around with hundreds of billions of dollars to spend all in one go.

Which is why Hillary Clinton, US Secretary of State, was in China “begging” the Chinese government to keep buying US bonds. The Chinese already own around $700 billion of these and may be very concerned that the US could either default, or devalue the dollar, leaving the Chinese with the losses.

China has reserves of around $1.3 trillion in cash, and a rapidly cooling economy as factories fall idle and millions of workers are laid off. They need to get those factories working again.

At the same time, President Barack Obama’s stimulus plan contains obvious protectionist “Buy American” provisions that would further weaken China’s manufacturing.

When debtors fail, their creditors get to set strict terms for compliance. America, as the world’s biggest debtor, now requires the world’s biggest exporters – particularly China, Japan and Germany – to pull together to finance this bailout.

None of them may be completely convinced that the US will not default on the debt, or that a weakened dollar won’t wipe any meaning out of those investments. However, they all need a market for their goods.

Over the next ten years, it is likely that China and India will add some 300 million people to the ranks of the world’s middle class. That is the equivalent of adding another America to the planet.

China might just bargain on building access to that new market and keep its factories running by selling to the US in the short term.

If the US wants China’s money, then expect China to set the terms of any future trade agreements.

There are no nations at either end.

The current approach to ensuring some degree of fairness is to use the tax system. And, here presented, are various systems of taxation as well as the impacts of targeted changes to tax systems. It does involve some maths, but it is presented as simple tables. Like this one…

Figure 1: Equal Taxation

Much of modern economic theory has been about reducing the gap between rich and poor, and making a more equitable society. Troublingly for social scientists, GINI varies wildly irrespective of economic system. However, poor and autocratic societies tend to be more unequal than wealthy and free ones. And even where income disparities are wide (as in the US, where the poorest 20% of Americans earn as much as the richest 20% of Russians) it doesn’t always mean that the poorest are scrabbling in the dirt while the rich dine on caviar.

In Figure 1, we have a tax system that really would be unfair. But first, the rules behind these graphs:

1. Total GDP (or Gross Domestic Product – the wealth generated by the entire “nation”) is set at 100;
2. The income brackets of this society have been divided into five, with income presented pretty much as it breaks down in the US, with the top 20% earning some 9 time more than the bottom 20%. The sum of all the incomes adds up to 100, so the top 20% earn 45, and the bottom 20% earn 5;
3. Total tax levied against the nation is 17 – this is equivalent to what the US raises from its citizens currently – note that the current deficit of 4% implies that there is a tax under-collection of 19% which is where the current national debt comes in;
4. The blue bar is the gross income accrued by the particular income bracket;
5. The red bar is the total tax levied from that particular income bracket;
6. The green line is a % and reflects the proportion of income that is paid in tax (this definition will change in later figures, but I’ll let you know when);
7. You can click on the images to see a larger figure (and so read the text).

Back to Figure 1

Here, total tax is 17 and has been divided equally (and fairly) across the population. So, everyone gets to pay 3.4. Only problem is, income is not distributed equally, so the poor pay relatively more than do the rich. This is a recipe for riots. There aren’t really any countries in the world that practice this one on purpose.

Lets try some redistribution

There are many different tax systems in the world. Some breathtakingly complex (the US one is quite frightening), and some quite straightforward. One of the easiest (at least, to understand) is the concept of a flat tax. The government intends to raise 17% of GDP to spend on things it deems important, therefore everyone must pay 17% of their revenue to the state.

This looks like this:

Figure 2: Flat Taxation

This is much better, don’t you think? The rich are clearly paying much more in absolute terms than are the poor, and everyone pays the same proportion of their incomes. There is little incentive to try and manipulate things by changing tax brackets, because there is only one bracket.

What’s this bracket thing? Well, the alternative to a flat tax is what is known as a progressive tax. This basically means that income is divided into a set of brackets and, depending on what you earn, you pay a different amount of tax. This is the most popular form of income tax around and results in monstrously complex tax law. The reason is that the last thing any government wants is to create moral hazard here. For instance, if you knew that a salary raise was going to place you in a higher tax bracket and your net take-home pay would actually be LESS than what you were earning before, you wouldn’t want a raise.

Worse, is that investors wouldn’t invest either since any increase in their profits would leave them worse-off than if they hadn’t invested at all. So there are usually all sorts of grants, and back-payments and things like that to make sure that it remains “fair”. Now you get that usual distribution curve where the people at the bottom don’t pay taxes, and the people at the top cover the bill:

Figure 3: Progressive Taxation

This is the situation for most taxpayers in most democracies. Unfortunately, this system creates a lot of problems. Actually … let me demonstrate.

Progressing the tax further

Say a government decides to give tax relief to the middle class (i.e. bracket 3 and, to a lesser extent, 2; brackets 4 and 5 don’t pay tax anyway so you’ll never hear anyone offering to give them tax relief). Let’s take a look at how everyone imagines this will work out (and here, the green line reflects – not the % of income paid as tax – but the % change in gross income, where negative numbers imply a decrease):

Figure 4: Redistributive Taxation

This is what we imagine will happen. The rich will trouser the 2.4% loss to their gross income, while the middle classes earn an extra 1.7% to 4.1%, while the poor don’t experience much of an impact and the net tax effect is neutral since the total collection remains 17.

However, money is liquid and mobile and the rich are – by virtue of the fact that they’re in the top 20% – quite good with money. They have options. For starters, they can simply increase their fees (either in their time, or for the products they sell):

Figure 5: Scenario 1 – Increased Prices

The rich were expected to absorb a 0.9% decrease in their overall take-home pay. Instead, they increased their charges. Their total revenue went from 45 to 45.9. You can see the impact which is felt equally across society. Brackets 2 and 3 are still up from their original salaries – the redistributive tax has still left them better-off – but the poor have taken it in the neck. The poorest 20% have actually seen their salaries negatively impacted by 4.4%.

In other words, a redistributive tax has the impact of making the rich richer and the poor poorer. Exactly the opposite effect of what was intended. But this isn’t the worst scenario.

You see, the rich really do have other options. They could decide to invest their money offshore.

Investing Offshore

The rich may decide that the tax option of declaring an income one bracket down is very attractive. So they move a proportion of their investment offshore. Either they close down a factory and move it to China, or they place their investment equity holdings in an emerging market. Consider, emerging markets are expected to grow by 6 to 8% over the next 12 months, while US and EU economies are either to hold still, or even contract. A lot of cash could start moving in unusual directions – especially since US and EU banks now belong to their governments.

Figure 6: Scenario 2 – Investing elsewhere

The richest 20% decided to become the 2nd richest 20%, and sent the rest of their money overseas. Now the total tax take has changed dramatically. Instead of collecting 17, the state now collects 5.1.

Instead of the deficit being 4, the deficit now expands to 15.9. In other words, for every $1 that the state raises through taxes, it is spending another $4.1. That is a recipe for economic collapse.

Conclusions

The most likely result of a tax redistribution is a mix of scenarios 1 and 2. The US deficit will go up as a result of taxing the rich more heavily, but inflation (as the rich raise their fees) will also erode the gains experienced by the rest of the population while increasing the absolute levels of inequality.

Now, we can argue about this. Maybe the rich shouldn’t be so “selfish”. Maybe you can come up with a way to stop them taking the money they already have away. What you can’t do is force investment that did not happen to happen.

You can’t force the young inventor who would have built his new factory in the US from seeking a more favourable tax environment elsewhere. You can’t enslave the young engineering graduate to prevent her from taking her skills to a more favourable country.

The only way is to offer ostensible advantages.

That’s if you want them at all.

West:  “You may recognize this famous quote:  ‘From each according to his abilities, to each according to his needs.’  That’s from Karl Marx.  How is Senator Obama not being a Marxist if he intends to spread the wealth around.”

Biden:  “Are you joking?  Is … is this a joke?”

West:  “No.”

Biden:  “Is that a real question?”

West:  “That’s a real question.”

Biden, of course, being caught by surprise, could say little that would be of much use on a television screen.  He could have made the point that all taxation does, in some manner, spread wealth.  Even soldiers are paid from tax dollars and, while they earn their pay, there’s no question that they are being paid from taxpayer’s wealth.  Anyone being paid to serve taxpayers, from dog catchers to police, are part of a wealth spreading scheme of some sort.

What Biden should have done, had he not been blind-sided, was to make the point that all Obama is doing is adjusting the progressive income tax structure that was supported by none other than Adam Smith, the patron saint of free markets, and introduced to the US, originally, by Republican Abraham Lincoln.  Later, the progressive income tax was supported so heavily by Republican Teddy Roosevelt that the Constitution was amended to accommodate the income tax, and Roosevelt made it clear, in a speech delivered in 1910, why he thought a progressive tax was the right way to go.

No man should receive a dollar unless that dollar has been fairly earned. Every dollar received should represent a dollar’s worth of service rendered, not gambling in stocks, but service rendered. The really big fortune, the swollen fortune, by the mere fact of its size, acquires qualities which differentiate it in kind as well as in degree from what is possessed by men of relatively small means. Therefore, I believe in a graduated income tax on big fortunes, and in another tax which is far more easily collected and far more effective, a graduated inheritance tax on big fortunes, properly safeguarded against evasion, and increasing rapidly in amount with the size of the estate.

When it comes to redistributing wealth, good ol’ Republican Teddy was pretty clear, wasn’t he?  Maybe Teddy Roosevelt was a Marxist.

What about Republican Ronald Reagan, the modern patron saint of conservatism?  Reagan was a big supporter of the earned income credit (EIC), a distribution from wealthy taxpayers to less wealthy ones, saying it is, “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.”   Both Reagan and George Bush the First increased funding for the EIC.  Are they both Marxists?

But perhaps the most effective response might have gone like something like this:

Barbara, I’m glad you asked that question, because words like “socialist” and “Marxist” are getting tossed around by people who are afraid of losing an election, hoping that these words will sway enough votes to get them into the White House, riding on a lie.

The fact is, Barbara, that if there is a socialist or Marxist in this race — and I don’t really believe there is — then it has to be Sarah Palin.

In Sarah Palin’s state of Alaska, every citizen gets a check from the government every year for doing absolutely nothing.  Not for work.  Not for anything they’ve earned.  They get that check just for breathing and living in Alaska.  Last year, that check amounted to $3,269 per taxpayer.  And all for nothing.

Do you know where Alaska gets that money?  They get it mostly from the oil companies that pump oil from the state.  More than half of Alaska’s total tax revenues come from separation taxes, which are basically taxes on oil and minerals taken from the ground.  Another 25% or so comes from corporate taxes.  Because companies are paying so much, Alaska citizens pay no income or state sales taxes.

But they do get a check generated from the wealth those big companies generate.  And there is no other state in the Union that doesn’t require either a sales or income tax from its citizens, yet gives them a check every year from money those citizens didn’t earn.

I don’t really think Sarah Palin is a Marxist, Barbara.  I think that’s a word made up by desperate people who will do anything to win – even tear our country apart by demonizing their opponents.  But if there is a Marxist in this race, Sarah Palin would have to be the one.

Maybe we could get Michele Bachmann to investigate Sarah for being un-American.

He tells the candidate he’s trying to buy a business that brings in more than $250,000 a year, and that would mean he would have to pay more taxes, wouldn’t it?  The candidate probably should have probed Joe a bit about whether he meant that the business charged a total of $250,000 or whether that was the profit, but he probably figured that Joe was a businessman and didn’t want to insult his intelligence.  So, the candidate from Chicago told him it would, but that tax savings for those earning less than he does would benefit others who could then afford his services more easily, meaning he could make more money from getting them as customers in a Keynesian “spreading the wealth around.”

Joe’s encounter with Senator Obama was duly reported in the media, and as befits the news cycle in this time of rapid change, quickly forgotten.

Except by John McCain and his campaign staff.

McCain, you see, had a tough debate coming up soon, and he thought that Joe’s story and Obama’s “spread the wealth” comment could be used to advantage, so he went to the debate and constantly brought up Joe’s name in an attempt to hammer Obama on tax fairness, making the point that if a plumber who had worked so hard and earned enough to buy a business could be hurt by Obama’s tax plan, then so could other ordinary Americans.

There was just one problem:  Joe wasn’t exactly who and what he said he was, and the media quickly found out about it and published what they found.

It turns out that Joe is not a licensed plumber and has never gone through any plumbing courses, which makes his work in Ohio illegal.  His employer has a license, but not to do work in Joe’s county.  Uh oh.  Joe also owes nearly $1,200 in back taxes and there’s a lien on his property.  He almost certainly doesn’t have the money to buy a business (his last public report of income was only $40,000), doesn’t really know much about business, and if the business he’s dreaming of buying (his boss’s) earns $250,000+ as he says, it must be the only two-man plumbing business in the world to do so.  And, there’s an outside chance that Joe is related to Charles Keating’s son in law.  Charles Keating is the swindler John McCain got entangled with that earned McCain a reprimand from the Senate Ethics Committee.

So where does this leave Joe?  Well, he’ll almost certainly be told to cease and desist working as a plumber until he gets a license.  The tax people will come after him.  His employer is bound to be angry.  He’s about to become a national laughingstock.  There’s a good chance that all those TV interviews people have been wanting will be canceled.  Joe is about to lose his livelihood, his good name, and his dignity.

And what about John McCain?  Well, he’s not only crushed Joe with his maverickness loose cannon-ness, he’s also made himself look like a fool for running with a story that turns out to be just another Republican fairy tale (see “Reagan, welfare queen, the”).

And this is the overarching reason why Americans should run screaming from John McCain.

I can imagine that carrier jet pilots need quick reactions and must sometimes make split-second decisions.  I’m sure John McCain’s willingness to make those quick decisions was very useful to him in wrecking three aircraft.  But who earth wants a president who makes snap judgments on complex issues?  Do we really want a man who plays Lone Ranger, parachuting into delicate legislative negotiations to “fix” things, only to exit stage right (Heavens to Murgatroid) on a whim for a debate after those negotiations fall apart?  Do we really want a guy who makes a snap judgment on a running mate, and gives us a woman who is undereducated, underexperienced, underbrained, undercurious, and under Todd Palin (surely Paris Hilton has better taste)?  A woman who has spent enough time in beauty pageants and being a television sports announcer to give a professional look on camera, but who is stumped by that most difficult of questions:  “What publications do you read?”  Do we want a man who lurches from one campaign message to another every 32 seconds, hoping something, anything, will resonate?

This time, John McCain hurt only Joe the Plumber with his impulsive behavior.  Give him the reins of the executive branch, and there’s no end to the damage he can do.  We should know, shouldn’t we?  “Fire, ready, aim” has been the motto of the White House for eight long years.

And it’s been a great ride, hasn’t it?

Welcome to your 15 minutes of fame. It’s not everyone who gets his name mentioned 286 times in a presidential debate.  If you haven’t already, you simply must change your business’s name to Joe the Plumber.  That’s just good marketing.  Oh, and don’t forget to add the tag line, “As seen on TV!”

OK, Joe, so you had a conversation with Barack Obama and, while media reports are very sketchy about exactly what your circumstances are (not surprising), it appears you want to buy a business that “brings in” more than $250,000.  I have yet to find out if “brings in” means $250,000 in revenue or profit (a very important distinction, Joe), but let’s assume for a moment that it’s profit we’re talking about.  Under Barack Obama’s plan (as sketchy as it is on his website), a good guess would be that you would go into a higher tax bracket, paying about 3.6% more in taxes on every dollar you earn over $250,000, for a total marginal tax rate of 39.6% — exactly the same as it was in the 1990s.

But let’s take a closer look at your situation, shall we Joe?

You say you’re planning to buy this business, and it must be a very large small business, indeed, if it covers salaries, expenses, trucks, inventory and the like and still yields a $250,000 + profit.  I’m going to guess that you don’t have the cash to buy this business outright, Joe, and if you do, I think you’re holding back on us.  I think you’ve inherited some money.  But let’s assume that you’re borrowing a fair amount of money to buy the business, using its book value (what the business is worth if you sold all the assets and paid off all your debts) as security and using the revenue stream to pay off the loan.  Let’s also assume a business this size is incorporated.

Here’s what you do, Joe.  First off, you have your corporation pay you a salary of, say, $249,000 per year.  Now you’re not in the higher marginal tax bracket, right?  Payments on the loan you took out to buy the business are fully tax deductible, so profits will be reduced by that amount.  If you still have more than $250,000 in profit, we’re talking about a rather large business here, and probably a very large down payment (which suggests that you can manipulate your down payment to reduce your taxes, doesn’t it?)

But here’s the thing, Joe.  When you own a business, you can do all kinds of things to reduce taxable income (profit).  For instance, you can buy more equipment, which can then be depreciated over the years, providing a tax deduction and increasing the company’s book value and, thus, your wealth.  Even fully depreciated equipment can generally be sold, in the future, for something.  You can spend more money on advertising and hire on a new plumber or two.  The advertising costs and the employment costs are generally fully tax deductible.  Well, let me take that back.  If you provide your employees with health insurance, your costs for health insurance won’t be tax deductible under John McCain’s plan, but who’s counting, right?

By advertising and hiring on, you can drastically increase your revenues (the amount of money coming in) while keeping profits below the $250,000 mark.  The increased revenues will make the resale value of your business much higher than it already is, increasing your wealth without getting taxed on that increase.  If you want to take more wealth out right now without paying taxes, there is a cornucopia of tax-free or tax-deferred retirement options, benefits, and the like that can move money right around the IRS’s outstretched palm.

Eventually, Joe, your company will be so large, and you will be so wealthy, than an extra 3.5 pennies in tax on each dollar on income you earn over $250,000 will be chickenfeed to you (if it isn’t already).  But, hey, it’s up to you.  Increase the underlying wealth in your company without paying taxes, or take cash now and pay a few additional taxes on it.

But, please, don’t complain to me about paying more taxes.  All it says to me is that you’re not smart enough to run your business’s financial side.

All the best to you and yours,

JS O’Brien

UPDATE

It turns out that Joe is not a good businessman for a simple reason:  He doesn’t own a business, appears to have no immediate prospects to do so, has no plumber’s license, works for a small firm doing residential work (which means his employer is unlikely to be clearing $250k per year), and has occasionally talked to the owner about buying the business — someday.

Poor Joe.  He’s about to get ripped to shreds by the media, and he seems like a pretty decent guy.  I feel for him.

On the other hand, Joe is a great example of those who are so terrified that they’ll get rich some day and owe an extra 3.5 cents on every dollar over $250,000 that they spend a lot of time worrying about it.  Joe doesn’t know that he is unlikely ever to make that kind of money.

UPDATE #2

It just gets better and better.  Bloomberg is reporting that Joe owes around $1200 in back taxes, and there is an Ohio lien filed against him.

Across the Atlantic, in the UK, the FTSE 100 index of companies contributes 3.3% of Her Majesty’s tax take. Even if you add in the salaries and other taxes that these companies manage on behalf of Treasury, it is no more than 7%.

The US taxation system is what is known as progressive; it falls more heavily on the wealthy than on the poor. The intention is that it is to be fairer. And so, in the US, the top 10% of taxpayers contribute 70% of taxes, and the top 1% contribute 40% of taxes. Conversely, the bottom 40% of registered taxpayers actually received more money back through tax grants than they contributed through their incomes.

Depending on how you feel about rich people, you could be cheered or charged about such information. However, you shouldn’t be surprised at the consequences.

Since 2000, the number of lobbyists in Washington has doubled to 34,750.

Because, you see, when a small number of businesses are responsible for such a large proportion of the tax-take, they have a special interest in ensuring that the money is spent on their interests, and a lot of influence in making sure it happens.

Oil companies, which pay taxes of around $ 60 billion, received $ 12 billion back in special tax concessions. Hardly a surprise when they’re actually paying 1.4 times more tax than they earn in profits.

That old joke, “When you owe the bank $100, they own you. When you owe the bank $1billion, you own them,” is still true. When a government depends on a very small base for its tax revenue then it is also in the pocket of their special interests.

Just as true is that, when a government pushes all its money into a few specialist vehicles designed to deliver on its promises (such as Fannie Mae, Freddie Mac, Medicare and Medicaid) it also stimulates them to spend vast amounts of money ensuring the largess continues.

Charities, too, vary widely in the amount they spend on fundraising relative to the amount they spend on their stated mission (from 15 to 25% for “good” ones, through to 95% for “bad” ones).

The point here is that this is hardly wise investment. If you put all your money in one investment, then that is a very concentrated risk. Most investors regard diversification as critical.

A call to a senior executive at Sony this week about how they were dealing with the credit crisis resulted in the response, “ Same as always, some parts of the business are up, and some parts of the business are down.” Sony is highly diversified, so they can ride this out.

But a government that depends on such a focused number of businesses for its tax take is going to have to ride up and down with those businesses. And when those self-same businesses demand a $700 billion bailout because they fucked up, then the government belongs to them and has to play ball.

As the US election runs to its final conclusion, it is very tempting to demand of politicians that they take more tax from the few than spreading the load around.

The consequence will be a government even more in hock to special interests.

Barack Obama wants to reduce taxes for roughly 95% of the United States while raising taxes on the other 5% – those making more than $200,000 per year. John McCain wants to lower taxes on everyone, and attacks Obama’s tax increase on the upper 5% as destroying small businesses and jobs. I decided to do some research on this issues to see if, in fact, raising taxes on those individuals making more than $200,000 would reduce employment or not, and I found out some interesting things. The conclusion, however, is this: Obama’s tax increase on the wealthy will not directly harm small businesses. At. All.

First, some definitions so we all know what I’m talking about. So far as I can tell, the only small businesses that pay taxes at the personal income rate are “sole proprietorships”, the simplest type of business in the U.S. According to NOLO.com, a sole proprietorship may have employees, but the census indicates that the bulk of sole propreitorships do not – they’re considered nonemployers, and they are the largest portion of all U.S. businesses.

In 2005 (the last year for which there is both data on nonemployers and employers at the U.S. Census Bureau), there were 20,392,068 nonemployers with a total income of $951 billion (Source: Nonemployer Statistics, 2005, Total for all sectors, United States). Small business employers¹ numbered 5,878,784 (Source: Statistics of U.S. Businesses, All Industries, 2005). The total number of all employer and nonemployer businesses in 2005 was 26,375,614, of which 26,270,852 (or 99.6%) would qualify as small businesses as I’ve defined it above. This would be why people respond when you threaten to increase taxes on small businesses – there’s a LOT of small businesses.

But look closer at those numbers. The average income per nonemployer small business is the total income divided by the number of employers, which in this case is only $46,635. What that means is that the vast majority of nonemployer small businesses (which we can probably fairly say are mostly sole proprietorships) would be unaffected by the Obama tax cut. In fact, since they make so little, they’d get a tax cut, not a tax increase.

Yes, you read that right: the average small business would get a tax cut under Obama’s tax plan, not a tax increase as McCain has suggested.

Various websites have suggested that there are between 15 and 20 million sole proprietorships – that’s less than the number of nonemployers from the Census data, but since some employers are certainly covered while some non-employers certainly aren’t, we’ll assume that all the nonemployers are sole proprietorships. Further, if you look at the Census household income survey for 2005, you’ll find that only 3% of all households made more than $200,000. Since sole proprietorship income is taxed as household income, we can probably fairly assume that only about 3% of all sole proprietorships in 2005 would be affected by Obama’s tax increase.

This means that only 3% of all businesses would see their taxes go up as a result of the Obama tax plan.

And this will cause our employment situation to get dramatically worse how, exactly? It’s not like all 3% will go out of business entirely as a result of the tax increase – the increase just isn’t big enough to drive them all out of business. In fact, according to this BusinessWeek Q&A, the numbers are hard to estimate, but that 9% per year is a commonly used value. If we assume that the Obama tax increase boosts the failure rate for sole proprietorships from 9% to 14%, then that’s approximately an additional 31,000 jobs lost.

Of course, if we say that the tax cut to the other 97% of sole proprietorships drops the failure rate from 9% to 8%, then that’s an additional 198,000 jobs created by the other sole proprietorships, for a net increase of 167,000 jobs. Annually.

Or, as Factcheck.org said when they tackled this issue earlier this year:

McCain has repeatedly claimed that Obama would raise tax rates for 23 million small-business owners. It’s a false and preposterously inflated figure.

UPDATE: Let’s broaden the definition to assume that all small business employers with less than 10 employees are also sole proprietorships. From the employer Census link for 2005 above, there were 4.72 million employers with fewer than 10 with a total of 12.83 million employees. Let’s assume that, as above, no more than 3% of those employers fall into the $200,000+ individual pay bracket. That’s a total 110,000 employers and 31,000 employers for businesses with 0-4 employees and 5-9 employees respectively. Again, if we assume that there’s a 5% increase in business failures equally through both sizes of businesses (from 9% to 14%), that’s a total of 5500 businesses sized 0-4 employees and 2790 businesses sized 5-9 employees that would fail due to the tax increase.

The average number of employees for all businesses in the 0-4 employees category is 1.66 employees per business. The average number of employees for businesses in the 5-9 employees category is 6.66 employees per business. Calculating the job losses we get 8,855 employees in those 5500 newly failed businesses (0-4 employees), plus 5500 for the owners themselves, and 18,582 employees in the other 2790 businesses (5-9 employees) plus another 2790 for the owners. Total is 35,036 extra employees losing their jobs.

Adding that to the 31,000 sole proprietorships from the first analysis, that’s a total of roughly 66,000 jobs lost every year. And just in sole proprietorships alone (never mind the newly expanded 0-9 employees category) we created 167,000 new jobs. Include the 1% decrease in employer small business failures (from 9% to 8%) on businesses sized 0-9 employees and that’s an additional 176,000 new jobs, for a total of 343,000 new jobs across all nonemployer and employer small businesses.

Put bluntly, even if we assume the worst case cost of 66,000 jobs and that every business with fewer than 10 employees is a sole proprietorship (and it’s not), the Obama tax plan is still creating 277,000 new jobs every year.

¹ I chose to define “small businesses” as those businesses with fewer than 100 employees. The Small Business Administration uses a much more complicated measurement that depends on the industry and total revenues/number of employees.

UPDATE #2: I’ve been able to do some more accurate calculations with the IRS data from 2005, and the numbers of small businesses (defined as all partnerships, S corps, and sole proprietorships) that fall in to the Obama tax increase zone is actually just over 7%, not 3% as I’d originally estimated. However, the rate of business failure and closure is much closer to 2% of all businesses, and so I’ll need to rework my analysis some. Instead of tagging that rework onto this post, I’ll do a new post sometime next week with the updated analysis.

Senator McCain, Senator Obama, President Bush, and congressional leaders met yesterday afternoon with the congressional leaders thinking they were near a deal.  By the end of the meeting, there was no deal, participants were visibly upset, and an attempt by Treasury Secretary Henry Paulson to convene an evening meeting failed, as the House minority leadership refused to send a negotiator.

This morning the outline of what happened yesterday is beginning to emerge. Members of the House minority leadership, and specifically House Minority Leader John Boehner of Ohio, are rebelling against the administration’s plan, apparently even in its original form.  Their alternative plan involves insuring bad loans and providing tax cuts to infuse the market with private-sector money.  According to the AP, there was “sudden momentum” behind the alternate plan, presumably when John McCain said he was returning to Washington and, in fact, the AP is reporting that a “Republican source” quoted John McCain as saying in the high-level meeting that “I support the principles that House Republicans are fighting for.”

The as-yet-incomplete picture suggests that McCain returned to Washington not to smooth the process, which was already near completion, but to support House Republicans in their revolt against the administration’s plan.

The implications of this turn of events are astonishing.

1. Democrats accepted the administration’s baseline plan, presented by the leader of the Republican Party, negotiated changes in order to obtain the necessary cover of bi-partisan support, and then were blind-sided by rebel members of the president’s own party.
2. The president must be very, very politically weak indeed if he can’t marshal his own party members to support his plan.
3. John McCain may be using the public outcry at “rescuing” Wall Street to derail the process, calculating that, at worst, he can claim that he stopped the Democrats (and his own president, presumably) from giving taxpayer money away to those who don’t deserve it.  This would help distance him from the very unpopular president, improving his “maverick” status.
4. In the process, he is supporting a plan that offers more tax cuts to investors, opening himself up to charges of further tax favoritism to those who don’t deserve it.
5. McCain is also in mortal danger of being perceived, by the electorate, as a dangerous loose cannon (the flip side of the “maverick” coin) whose leadership style is more destructive than helpful.

The next few days will be fascinating, and undoubtedly maddening.  If the Democrats wanted to, they could probably drag the entire economy down by killing any deal, say it’s John McCain’s and his Republicans’ faults, and use the shield President Bush gave them, and their cooperation with him, to deflect criticism from themselves.  Presumably, if it’s managed right, the Democrats could trade something close to an economic depression to win the White House and take large majorities in both houses.

Will statesmanship win out?

Stay tuned.

*******************************

UPDATE: John McCain has announced that he will attend tonight’s debate, which means that this entire thing just gets stranger and stranger.  He parachutes in, making a big deal out of bringing parties together and bipartisanship, leadership, and the like, disrupting a process near completion.  Then, when everything is up in the air again and it seems that the deal won’t get done, he decides to leave and go to the debate.

What am I missing, here?  How is he going to sell this behavior to the American public?  Are they really too tuned out and/or stupid to see what just happened?  How can he claim to have provided leadership when he bails out and leaves with things still unsettled?

Is he just so brilliant that I don’t get it?  Or is he truly, truly deranged?

Friday, Transportation Secretary Mary Peters asked the Senate to prop up the federal highway trust fund with $8 billion. The fund, established in 1956 as the national financial engine of road building and repair, has a deficit. The fund provides the money the federal government uses to reimburse states for up to 80 to 90 percent of highway construction and maintenance costs. The House has already approved the extra cash.

If the Senate fails to add its approval, at the end of this month the federal government will delay and occasionally reduce the payments it sends to the states for construction it has agreed to underwrite. That means you’ll keep on driving your vehicle over the same badly damaged, poorly maintained roads that you have been, probably for years.

What should anger you is that every time you fill your tank, you’re paying 18.4 cents a gallon into that fund (24.4 cents if you’re tanking with diesel).

Why has this deficit come to pass?

Americans have been driving less — 50 billion miles less between November 2007 and June than the same period a year ago. Writes Eric M. Weiss of The Washington Post:

The trust has been hammered because its main source of funding is the gas tax, which has not been increased since the Clinton administration. The high cost of gasoline has resulted in less consumption and, therefore, fewer dollars flowing into the trust fund.

What are the consequences?

Secretary Peters says the fund will take in $4.4 billion in funding requests this month — with only $2.7 billion available. Payments will delayed or pro-rated. Projects may be stalled or stopped. Added interest costs may be shifted to the states. Reports Mr. Weiss:

Transportation officials said the move will not result in the wholesale cancellation of road projects, but could have a profound effect on future contracting and the reliability of the federal government as a partner. [emphasis added]

Whom should we blame?

The usual suspects, of course, are the legislative and executive branches of government. Congress has not raised the federal excise tax on motor fuels since 1993. In January, after a two-year study, the National Surface Transportation Policy and Revenue Study Commission called for raising the tax by 40 cents a gallon over five years as a drastic fix for just as drastic national infrastructure needs. But a few years ago, even a modest increase of 5.45 cents brought on the analytical ire of conservatives.

Politicians won’t touch the gasoline tax. They believe it would be political suicide to add a greater burden to taxpayers and consumers already stuck paying on average $3.68 a gallon as of Sept. 1.

But politician do, in fact, touch the federal highway trust fund. Repeatedly. Reports Joan Lowy of the Associated Press:

Compounding the problem, Peters said, is federal lawmakers’ habit of loading up highway spending bills with pet projects, or earmarks, for their home states. The current highway spending bill has more than 6,000 earmarks totaling $24 billion, she said. [emphasis added]

Secretary Peters pointedly blames Congress for failing to act on administration initiative (she is, after all, a September 2006 appointee of President Bush) in a DOT press release:

Secretary Peters noted that today’s problem would have been avoided had Congress acted on the President’s fiscally responsible proposal from last February to transfer funds from the highway trust fund’s mass transit account, which has a surplus. That measure would not have affected current transit investments at all …

Congress, of course, does not believe robbing Peter to pay Paul is wise. If the mass transit account has a surplus — why? Is it because the Bush administration has not properly focused on maintaining present mass transit and expanding it as a means to lower overall transportation costs for commuters and reduce national greenhouse gas emissions?

Congressional Democrats blame the Bush administration for the delicate condition of the highway trust fund, accusing it of “nickel and diming our degrading roads, bridges, highways,” said Sen. Chuck Schumer, D-N.Y. In a statement, he said:

For years, we have been trying to increase funding to repair our nation’s antiquated infrastructure, but the Bush administration and the Republicans in Congress have thrown up ideological roadblocks in front of every effort. Now, we are facing a severe crisis that could delay vital modernization projects across the country.

Meanwhile, Sen. Schumer’s lovely scapegoating rhetoric notwithstanding, the trust fund remains in arrears. The gas tax remains untouchable. Earmarks in transportation persist. Democrats blame Republicans; Republicans blame Democrats. In the next two months as one Democratic senator pummels a Republican senator before we vote for president, just now much attention do you think the federal motor fuels excise tax and the highway trust fund are likely to get?

About as much as those potholes you see every day.

Additional reading:

• “Highway Trust Fund: Fact Sheet” by the federal Department of Transportation.
• I-35W bridge and the nation’s infrastructure: Little has changed.
• Pols fail to comprehend breadth of infrastructure crisis.
• Bad highways? Blame politics, technology, new driving habits.
• Bad bridges? Still far too few fixes.

Periander, however, understood Thrasybulus’ actions. He realised that he had been advising him to kill outstanding citizens, and from then on he treated his people with unremitting brutality.

Herodotus, Histories

What Herodotus knew in 440BC, some 2,500 years ago, was this: opportunity is set on the margin. It is the historical power to choose either astonishing innovation, or “unremitting brutality”.

Consider the power of the margin. Say the average inter-city passenger airplane can carry a maximum of 150 passengers. Now, they may fly full at peak times, but they don’t at others, so the airline will set themselves a target of 85% occupancy. Plus, they’ll want a 15% profit (at least) on their capital.

This means that the airline doesn’t begin to make a profit until the 109th person gets on board. Everyone is important, but a plane that flies with only 108 people on board runs at a loss.

These subtle marginal effects can rock markets, bankrupt companies, and destroy nations.

The inequality of nations

Governments have fixed costs for fulfilling their obligations for all the things they promise to do. Unlike businesses, they don’t charge directly for their services. You don’t pay a road surcharge to drive in your area, any more than you pay a monthly subscription to the local police.

The reason for this is one of “fairness”; everyone benefits from these services, but not everyone can afford to pay for them. So governments have introduced a system of charges known as regressive taxation. This means that the wealthiest are charged more, and the poorest are charged less.

The balance of where to place taxes, and how to weight the different groups’ obligations, is the source of much debate and political intrigue.

Consider: rich people spend a smaller proportion of their money on food and clothing, but more of their money on big houses, flashy cars and other obvious markers of wealth. You could tax everyone the same proportion of their incomes and then charge targeted consumption taxes on specific products.

But consumption taxes are unpopular, difficult to enforce and can result in peculiar avoidance behaviour.

In 1662 Charles II, king of England, imposed a hearth tax on his island nation. Henceforth every household would have to pay two shillings per year, per chimney. It was designed to be fair, in that the wealthy had more chimneys and should, therefore, pay more.

It was an extremely unpopular tax, not least because tax inspectors had to come into people’s homes to inspect. Almost immediately people began to avoid the tax by bricking up their chimneys. In 1684 a fire broke out, destroying 20 houses and killing four people in Oxfordshire, after a baker broke through from her stove into a neighbour’s chimney in order to avoid the tax.

In 1689 the tax was repealed and replaced with one that was even sillier; a window tax. People avoided it by, as expected, bricking up their windows. It was even more unpopular being seen as a tax on “light and air”. It may, or may not, have been the origin of the phrase “daylight robbery”.

The point is that people are not mindless automatons. They will react to protect themselves from silly and victimising pieces of legislation.

A careful politician may consider it an equitable tax, but, if it is at all targeted, then those within the target zone will try to avoid it.

Tax one, tax all

When you select against a particular group, then the most ambitious and creative people within that group move. Sometimes they hide out within society by simply quashing the thing that makes them a target. Sometimes they go somewhere else where they feel more accepted.

So, we punish murderers, not to redress the harm they have done, but to frighten other potential murderers into thinking a bit more deeply before committing a murder. And Gary Glitter, a paedophile convicted in the UK, goes to Vietnam in the hopes that he won’t be prosecuted there.

But say you started punishing people for things that are not necessarily harmful, perhaps even beneficial? Racial, religious, gender or sexual orientation laws also act to select for, or against particular groups.

South Africa’s Apartheid laws denied dark-skinned citizens not only the right to vote, but also to work. This allowed the minority of light-skinned South Africans to dominate and control a majority of dark-skinned fellow citizens. Following Thrasybulus’ instructions, the minority leadership sought out and punished outstanding individuals from amongst the dark-skinned citizens. But this also meant that talented doctors, engineers and scientists – who just happened to be dark-skinned – either didn’t work at all, or emigrated and made their skills available to other nations.

Promoting people based on their skin-colour also meant that those in the most responsible positions frequently lacked the ability to perform their jobs. Inadequacy became the expected performance level.

When South Africa eventually discarded Apartheid, the economy was shattered and dominated by idiots.

Any type of bias levied against a particular segment of the population goes on to affect the entire population. In the case of preventing murderers and rapists from being able to operate, this is a bias that society is probably very happy with. In the case of preventing talented surgeons from pursuing their craft because they happen to be female, then the whole of society may not be so happy with the arrangement.

A bias is a form of tax. Some taxes we’re happy to pay; other taxes may please a particular subgroup, but leave the whole of society worse off.

Now consider how much excluding outstanding individuals can hurt a society when marginal effects come into play.

Marginal bias, general effect

Say that a country is able to manage its health needs if it has more than 1.40 doctors per 1,000 people in its population. Turkey has 1.37, about 116,000 doctors. Many of these are women, and many of these women are devout Muslims. At present, wearing a head-scarf, a traditional sign of piety amongst Muslim women, is illegal. So, some women who are pious and doctors made a choice to remove their scarves in order to continue working, some stopped working altogether, and some emigrated to countries where they can be doctors and wear a scarf.

It is the same situation as the airline. All the doctors are equally important, but only a small number need to stop working for all the rest to be unable to meet the demand. In other words, a discriminatory law punishes a small number of people for their beliefs but denies an entire nation good healthcare.

This can work the other way round as well. The Cuban dictator, Fidel Castro, was determined that his small island nation would excel at something. He chose public health and subsidised the training of a vast number of doctors. There are now almost six doctors per 1,000 people in Cuba.

This may sound like a good thing but, if you’re a doctor, it’s a bit of a disaster. A society may suffer if it has too few doctors but, once it hits the appropriate level, any extra doctors merely increase supply without adding to demand. The only way doctors can get sufficient business is to discount their prices. In Cuba, doctors are plentiful but poorly paid.

Cuba, poor in so much, has resolved this conflict by becoming probably the only nation to deliberately export doctors on work contracts to other nations in order to purchase foreign currency.

Perverse, too, is promoting individuals based on characteristics that have nothing to do with their performance. You lower the standard for everyone, as in South Africa under Apartheid where people were hired on the basis of being light-skinned and male.

Sometimes the desire to extend a product or service beyond reason results in harm to all. Sub-prime lending is just such an example. It seemed like a reasonable set of assumptions. Most people don’t default on their loans, no matter how onerous they may be. Insurance works on a similar principle; I don’t know which person is going to have their car stolen, but most people manage to get through a year without incident. Work out the base probability of disaster and charge everyone sufficient to cover the disaster, plus a bit extra for your trouble. Hence, insurance.

Very smart people built mathematical models to calculate the cost of sub-prime default, given certain assumptions. Loans were bundled together, discounted for the expected defaults, and sold to hedge funds who would carry the risk of failure if the assumptions were wrong.

This was quite a bit of money and so the hedge funds borrowed the money they used to buy the sub-prime bundles. They borrowed this from banks who, themselves, were selling sub-prime bundles. Everything relied on those assumptions.

It didn’t need everyone to bail on paying their mortgages back, it just needed to happen on the margin. And then all hell broke loose.

The balancing act and the perversity of incentives

So, here we are, trying to design an equitable society that gives those who lack ostensible advantages a shot at improving themselves, while tapping those who got a lot more advantages to pay for it.

Marginal effects mean that, if we don’t allow the most disadvantaged a shot at success, they may take their potential talents elsewhere as economic migrants. Or, some may decide that, since society has failed them, society owes them, and steal what they want.

On the other end, though, if we tax the wealthy too much, they could simply take their cash and go elsewhere, as tax exiles. Or, they may decide not to produce any more wealth than they have to for themselves.

The balance is critical. Get the balance wrong and you introduce asymmetries.

For instance, when the US Forest Service manages an area of environmental value purely for recreational purposes, they have to send that money directly to the Treasury. When they licence an area for logging, they get to keep a portion of that revenue, plus they get cash from Congress to manage the land afterwards.

If the US Forest Service wants to make enough money to carry out its functions, it can only do so by logging the forests it is supposed to be looking after.

This is a perverse incentive. There are lots of them in the average economy.

Consider autoworkers. The rise of manufacturing in Eastern Europe and Asia Pacific has resulted in a falling cost of motor vehicles as companies locate their factories in low-cost production centres. The prices of cars are falling and old manufacturing hubs in the US, Germany and the UK are feeling the pressure.

Both workers and investors stand to lose what they have, their livelihoods. Arguably, it is the owners of these businesses fault. They should have invested in more efficient, lean manufacturing systems, designed more interesting vehicles, or come up with a better strategy.

That shareholders should lose their investments is just-desserts and a powerful part of the capitalist system which ensures that cash should follow value. However, it’s pretty unfair on the workers, who were just doing what they were told.

There are many ways you could help these workers. The most common is to raise tariffs on imports and to pass a subsidy to the manufacturer to allow them to improve their profits without raising their prices too much.

However, this is a distortion. There are plenty of people who work in the auto industry who don’t actually make cars. There are people who import them, have showrooms, service and repair them, or simply write about them. None of these people are affected in any way by the collapse of local manufacturing. However, all of them and every car buyer, is affected by higher prices.

Plus, a company that is protected from competition is also protected from innovation. Forget fuel efficiency or environmental compliance.

In exchange for protecting a handful of jobs, the entire nation has to suffer.

Worse, the benefit doesn’t even go to the workers, who merely get to keep their jobs. Tax money is channelled directly to shareholders who no longer have to work for their money.

A far better response is to admit that the industry is no longer competitive, tell the shareholders to get shafted, and bail out the employees through income support and reskilling.

The marginal effects also come into play. The protection of a small number of businesses deprives the state of using that revenue to pay for other things that may have a significant return on investment. It deprives investors in other industries of a level competitive environment and so denies citizens of their opportunity to benefit from innovation and price drops.

Protecting a few hurts a lot of people and also chases the other few innovators out of the market, since there is no place for them.

The leverage of innovators

Ever wondered what would have happened if Bill Gates had decided to set up in Canada instead of the US? Or if Russia had tried informed capitalism instead of Communism?

When the Berlin Wall came down, the real cost of “from each according to his ability, to each according to his needs” became apparent. Those with the most ability left, leaving everyone getting only as they could produce. The society balanced. You really can only consume as much as you can produce. Any extra comes from the margins.

As with all marginal effects, any society needs a certain number of innovators just to break even. The variance triggers booms or busts.

Innovators have no more votes than does anyone else in their nations, yet they have disproportionate impacts on their societies. Countries that can attract the best and the brightest do better than those who chase them away.

Subsidies and tariffs aimed at the few distort markets in outlandish ways. Subsidies to oil producers push entire economies to rely on cheap oil at the expense of, seemingly, more expensive alternatives. Not costing in the impact of pollution leads to more pollution.

The next time a politician promises you a benefit that you don’t have to pay for, ask yourself who it is costing and how they may react. And not just now, but into the future. No matter how much benefit you may feel that you will derive, you have to remember that the others who must pay for it are not slaves. They may shut-down or go elsewhere.

In the case of murderers, that may make you quite happy. But it if it results in services denied, jobs not created, opportunities foregone, or a future that never happens, then that sounds like a costly bargain.

You’re eager to get that water-emissions-only Beemer out on the open road and see what it’ll do. But the road won’t be that open any more, and the road’s lousy condition is likely to chew up your umpteen-thousand-dollar green-mobile’s undercarriage. The road just plain sucks because politicians haven’t been able to stop themselves from screwing around with the federal highway trust fund. That leaves the ride bumpy and, no doubt, unsafe.

Congress created the highway trust fund in 1956 to maintain the 40,000 miles of interstate highway President Eisenhower had begun to build to bolster national defense. Congress directed that federal motor fuel and motor vehicle taxes, which used to go into the general fund, go directly to the highway trust fund. Congress originally intended the fund to be solely used for the nation’s highways — but that didn’t last long. Congress long ago dipped into the fund to siphon off money for mass transit. That was its first diversion.

Today, those fuel taxes still prop up the highway trust fund, which is a principal source of highway maintenance money. That 18-cent (18.4, actually, and 24.4 for diesel) tax that presidential candidate John McCain wants to park temporarily to “give you a holiday” from $4 a gallon gasoline is all we’ve got for fixing the nation’s roads.

Well, the trust fund’s in trouble — big trouble. The Treasury Department says the fund faces a $3.2 billion deficit for fiscal 2009. That, Treasury says, would result in $13.5 billion less in federal funding that flows to the states for maintaining highways. Ah, you think: The states can make up the shortfall for fixing potholes (let alone shoring up unsafe highway bridges and overpasses.)

Nope. They’ve got their own money woes (public employee pensions, unfunded federal mandates, health care, underfunded public schools, overburdened property-tax payers, etc.). Twenty-nine states and the District of Columbia face an estimated combined $48 billion in budget shortfalls for fiscal 2009. So the states won’t be passing out money to pave over those potholes — or fund the $65 billion needed to inspect and repair the 78,000 bridges identified as deficient by the feds.

The roads will need more, not less, maintenance because the federal highways are going to get more, not less use, especially by heavy trucks. Says the Federal Highway Administration: “By 2020, more than 25,000 miles of highway are likely to carry over 5,000 commodity-carrying trucks each day. Roughly one-fifth of that mileage will be significantly congested.”

Some of those trucks will be longer — and therefore heavier. Congress approved and the Federal Highway Administration enacted a rule that lengthened the limit for trucks with trailers from 75 feet to 97 feet. That’s more wear and tear on the roadway.

That leaves us with roads now in bad shape getting even worse in the future. But the highway trust fund is increasingly unlikely to be the means to achieve driveable, safe roads — because of changes in driving habits, technology, and especially politics.

Less money will flow into the the trust fund. Even though the cost of gasoline has been climbing dramatically, the federal fuel excise tax has not. People are cutting back on driving. The federal Department of Transportation says Americans collectively drove 1.4 billion fewer highway miles in April compared with the same month last year, reports The Hill. Americans’ demand for gasoline is declining as prices increase. That means fewer fuel tax dollars flowing into the highway trust fund.

Americans, however, because the population of legal-age drivers will grow, will eventually drive more in the long run — but on vehicles that use less gasoline (we hope). Net result remains the same: Less fuel tax money but more highway use — and cracked, crumbling pavement.

On top of that, many politicians such as Sen. McCain want to suspend the fuel excise for varying lengths of time. Such a short-term, mock populist, pandering move would have long-term consequences on the highway trust fund — and therefore, on the roads it’s supposed to maintain.

It’s ironic: Politicians clamor for alternative-fuel vehicles — electric, hybrid, solar, fuel cell — but pay little attention to the fundamental mechanism that maintains the highways on which those cool, carbon-less putt-putts would drive. As gasoline use declines, so does the fuel tax money on which the highway trust fund depends.

As it is, Congress owes the highway trust fund $8 billion. In 1998, when the trust fund was fat and happy, Congress moved that $8 billion from the trust fund to the transportation department’s general fund — and hasn’t put it back. Several attempts this year have failed.

The condition of the nation’s roads will worsen over the next few decades, if not longer. Deferred maintenance, due largely to the lack of political courage and wisdom, will continue to plague the nation’s transportation system, allowing it to deteriorate further.

Your cool new fuel-cell Beemer better be strongly built. Otherwise the potholes will eat it alive.

1.  It allows Republicans to say that the Republican president wants to do something about the oil crisis and gasoline costs, even if the Democratic Congress does not, and

2. It allows Congressional Republicans to introduce a bill lifting the moratorium, forcing Democrats to vote on the measure, while robbing Democrats of the ability to say that what Congress votes doesn’t matter, because the presidential executive order is still in effect.

Most of those who read widely understand that additional drilling will do nothing to increase oil supply for many years, and most analysts are saying that the impact on prices, even when the new oil starts pumping, will be small.  At least one pundit, though, thinks that there could be a short-term drop in prices as speculators unload long-term positions, and that it just might come in time for the 2008 election.

And maybe it will.

The question of the moment, though, is:  What should Barack Obama do to counter the political charge that Democrats are not doing enough to alleviate gasoline prices and, worse, that Democratic initiatives banning offshore drilling, and drilling in the ANWR, are responsible for the high prices we have, today?

The temptation is to make a complex argument, because a complex argument is true.  Obama could say, for instance, that the real issue is that oil will not last forever, that the real way out of this mess in the long term is to develop alternative sources of energy, that even if we could get oil prices to drop today, our children will face an even greater crisis in the future as oil literally disappears off the earth.  He could go on to tell Americans that increasing use of oil will just increase global warming, so that our grandchildren might well face a world in which mass starvation and worlwide poverty are facts of life.

He could say all that — if he wants to lose.

The American people will not sit still for complex arguments.  Even if they are well enough educated to understand those arguments, complex messages almost always lose to simple messages in today’s sound-bite world, even if the simple message is dead wrong.

So, here’s my suggestion for Obama’s next speech on the matter of energy costs and offshore drilling.

My fellow Americans,

We are facing an energy crisis today that is new in all our memories.  No one alive today has ever seen anything like this.  If we don’t act swiftly, we can expect many, many years of increased costs for everything, and lowered expectations for our children.  Already, many of you are finding that things you once found easily affordable, like driving to work and buying food, are pinching your pocketbooks.  I’ve spoken with many people who are angry about this — and they have a right to be angry.

The fact is, your leaders have failed you.  By 1979, at the very latest, it was clear to any leader paying attention that the world would one day find itself addicted to oil, and that the oil would one day be used up.  For a while, we were serious about conserving energy, so that the day we used up all our oil could be put off as long as possible.  And we were serious about developing alternative forms of energy, so that we could one day put the oil addiction behind us.  But the lobbyists and special interests, the oil companies and oil-producing nations in the Middle East and the like, soon convinced our leaders that oil addiction is a good thing — or at the very least, that the special interests would contribute a great deal of money toward seeing that anyone who didn’t think oil addiction was a good thing didn’t get reelected.

The solution Republicans are putting forward today is just another addition to the same policy that has failed us for almost three decades.  If I’m elected president, here is what I will do to alleviate the energy crisis so that we get a real solution — not a solution that makes us more dependent on an oil supply that will dry up, someday.

1.  I will ask Congress to authorize offshore drilling to ease gasoline prices as soon as we can get more gasoline to the pumps, but ONLY to produce oil company profits at pre-crisis levels.  Any additional profits will go to research into alternative energy sources so that we can beat this thing forever.

2.  I will ask Congress to allow people to deduct the cost of travel to and from work.  That will decrease commuters’ taxes, and provide them with more disposable income to pay for gasoline.

3.  I will push hard for more money, a lot more money, to research and develop alternative energy technologies, and push to get those technologies on line as soon as possible.  American ingenuity has not failed us in the past, and it will not fail us now.  All it needs is seed money.

Voters have two starkly contrasting energy policies to choose from in the coming election:  continue the failed policies of George W. Bush and other leaders who increased our dependence on oil, or take steps to free us from enslavement to the oil companies, oil-producing nations, and other special interests who care little for America, but a great deal for themselves.

Thank you.

This policy speech does good things for Obama’s campaign.

1.  It acknowledges pain and anger, shows empathy, and tells people that the pain and anger is justified.  This is classic customer-service practice for organizations that do customer service well.

2.  It gives people a villain — leadership — that has mostly been Republican at the presidential level since 1979.

3.  It ties current Republican tactics to the villains of the past and present (including oil-producing nations in the Middle East), as well as that always-useful populist bugbear: special interests.

4.  It proposes solutions people can readily understand, and readily relate to the positive effect on their finances now and in the future.

5.  It means that there will probably never be any offshore drilling, since oil companies can earn higher-than-pre-crisis profits from other sources.  If they complain, they will have to use a complex argument against a simple one, which means they lose.

6.  It ties McCain and other Republicans to George W. Bush, one of the most unpopular presidents in history.  That fits in well with Democratic talking points, to date.

When we do, an industry with 100,000 employees will annually collect about $11 billion in revenue from our survivors, who presumably love us and wish to put us to rest with appropriate pomp and circumstance. Requiescat in pace, although survivors’ wallets might not.

Since 2002, after authorities found the remains of 339 people scattered about the grounds of a Georgia crematorium, the funeral industry has been visited by a wave of regulatory activity in many states. Not surprisingly, the funeral industry, a monopoly in many ways, wishes to influence that regulatory activity. It has also sought to influence drafting and revision of federal regulations, most notably the Federal Trade Commission’s “Funeral Rule.”

According to a richly detailed and footnoted report by Scott Jordan of the National Institute on Money in State Politics, from 1999 to 2006 the industry has coughed up $6 million in political contributions spread over political parties and state-level candidates in 46 states, positioning itself “to have a hand in shaping legislation and regulation” [emphasis added]. Millions more have gone to federal candidates.

This is what lobbyists principally do — act to influence legislation and regulation. And they’re really good at it. Therefore it’s important to take notice when presidential candidates spout rhetoric promising to “curb this industry” and “control that industry.” How will they do that?

A principal function of government is to necessarily regulate behavior of the governed. Some would argue about the definition of “necessarily,” but for people to live relatively peacefully in communities, states and nations, some agreement must be reached regarding individual and communal behaviors. But if a behavior is viewed as overly or improperly restricted, lobbying for behavioral change results. If one entity’s behavior unduly affects another, lobbying again results. Often, those doing the lobbying are referred to as “special interests.”

In America, government regulates a boatload of stuff. What we eat. The drugs we use (and abuse). How the barber and the butcher must be trained. How much of our earnings we may keep. The conditions of our workplaces. What tax we must pay to maintain the common good. The environmental quality of our air, water and land. The conduct of markets. Medical care. How some products and services are produced. Certain kinds of information. What the military may or may not do. How we collectively and individually protect ourselves and our property. How we marry. How our children are schooled and for how long. And what happens when we die.

Ah. Back to the funeral industry.

For industries, consistency of regulation, and, perhaps, minimizing it, is a desirable goal. Reports Mr. Jordan: “The interests of the funeral industry are not completely monolithic. They fight some oversight, but often support other regulations that may hinder competition.” Mr. Jordan details the uneven oversight of funeral industry regulation from state to state regarding apprenticeships and mortuary science diplomas, trust accounts for prepayment of funeral services, funeral merchandise, package sales vs. itemized billings, and monopolistic behavior. (Did you know that 10 states have “virtual casket monopolies” that allow markups of 300 to 400 percent?)

So the funeral industry set out to seek influence. Here’s the tale of its $6 million:

• State funeral director associations were the leading contributors,
accounting for $3.3 million, or more than half of the industry’s $6
million in contributions.
• The industry placed its bets wisely, with current officeholders receiving 82 percent of the $4.5 million given to candidates and incumbents not up for re-election.
• Party committees in 34 states received $1.5 million, or 25 percent of the industry’s contributions. The industry favored Republican Party.

Like any industry, the funeral industry seeks to influence regulation to further its ability to maximize profit. Its current problem is the patchwork of state regulations affecting the industry, hence its significant contributions at the state level. But gosh, wouldn’t it be easier all around if the funeral industry only had to deal with federal regulations — a single, known, consistent set of rules — rather than 50 different sets of state regs? That’s the wet dream of industries.

That’s what industries claim when faced with conflicting and contradictory regulations from state to state. It inhibits the ability to plan, industries say. It costs more to operate in one state than other. Jobs are at risk, too, they say. Give us one set of rules, please.

When the state of Maine passed a law in 2003 “requiring those who sell tobacco products directly to consumers to use only those delivery services that verify the age of the recipient,” thus superseding a federal statute, the trucking industry took Maine to the Supreme Court. It argued Maine’s law opened “the door to the very patchwork of conflicting state regulations that Congress meant to pre-empt when it deregulated motor transportation.” Industries hate “patchworks of conflicting state regulations.” That creates roadblocks to maximizing profit.

Consider what the auto industry confronts regarding emissions. The federal Clean Air Act gave California “the unique authority to set its own emissions standards and allows other states to adopt California’s rules instead of the federal rules.” So far, more than a dozen states have done so. The auto industry is not happy with that.

Methinks, though, that a principal reason industries seek a single consistent federal regulation is simple: the cost-effectiveness of lobbying. If the feds control the regulations, then the lobbyists only have to deal with Washington, D.C., legislators and regulators rather than those scattered through 50 different state capitals.

See, that’s the thing. Lobbying is most effective when it’s a person-to-person enterprise. The lobbyist takes the politician or regulator to lunch, contributes to his or her favorite charities, attends his or her fundraisers — and makes lots and lots of donations. It’s squeeze and please. One-stop shopping makes that easier.

Why spin the federal regulators? Easy. Congress passes laws in broad strokes that enable regulation. It leaves the details of actually writing the regs to “experts” in federal agencies and departments. If you cover a legislative body as a journalist long enough, as I did, you discover that much legislation is actually drafted by lobbyists. General Electric is the acknowledged master:

[I]n a two-year campaign, fueled as much by brains as political brawn, GE has shaped the legislation that would replace the old export-promotion law in ways that would allow it to save as much, if not more, in taxes, according to both GE lobbyists and congressional aides. In pursuing its financial interest, the company may also have turned the U.S. corporate tax code away from domestic manufacturing and toward expansion of operations abroad.

Industries routinely seek to write tax benefits into legislation. Remember the jobs act that created no jobs? The American Jobs Creation Act of 2004 allowed numerous multinationals a one-time chance to repatriate profits abroad at a tax rate of 5 percent instead of 35 percent. Now, that’s lobbying for you.

How can a president control the wholesale drafting of legislation by lobbyists that time and again becomes the law of the land? I don’t have an answer for that. Perhaps the press that reports on our current crop of contenders could actually ask that question.

But a president does have some control over who writes the regulations mandated by Congress. It’s called The U.S. Constitution, Article II, section 2, clause 2, which says:

The president shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States …[emphasis added]

The president appoints a few thousand people to serve in the federal government. Those hire others. Sometimes those appointments are rather iffy. As I’ve written previously, “Congress makes laws. But presidents appoint the regulators who actually write the policies that implement those laws. While Democratic presidents have had controversies with regulators being too close to the regulated, President Bush’s appointments have been particularly noteworthy as pals of industry.” (Other times, regulators act honorably. It’s a mixed bag.)

President Bush is a dwindling irritant. The next president will likely sweep out hundreds of Bush political appointees in favor of those more palatable to the new president’s philosophy (which, in turn, may be shaped by the influence of those “special interests” who contributed to his or her campaign money, influence or service.)

But whom will the next president appoint to act as writers of regulations? Again, perhaps the press that reports on the campaigns could actually ask that question. So far, only Washington Post columnist David Broder has prominently done so. In wondering why his colleagues spent so much ink and air on the Rev. Jeremiah Wright’s preaching, given that the reverend won’t be a member of an Obama administration, Mr. Broder says:

I’d like to know what kind of people Obama would bring into his White House and where he would turn for a Cabinet, because there is so much uncertainty about his actual policies at home and abroad.

The presidency is routinely referred as the most powerful position in the world. But in the context of legislation and regulation, that ain’t necessarily so. He or she cannot effectively control the former, but he or she may significantly affect the latter through his or her presidential appointments.

Instead of “he said, she said,” horse-race, trivial coverage of the presidential campaign, more light ought to be focused on the qualifications a candidate would demand of potential appointees. The press isn’t doing it.

Meanwhile, back in the $10,000 copper or bronze casket:

The National Funeral Directors Association, “the leading funeral service association, serving 19,500 individual members who represent more than 10,000 funeral homes in the United States and other countries,” continues to lobby the Federal Trade Commission to reopen its regulatory review of the “Funeral Rule” and its decision to retain the rule as it stands.

Says the association’s CEO, Christine Pepper:

After almost a decade of review, during which time NFDA continually offered written comments hoping to tighten and improve the rule to better protect both funeral service professionals and consumers, it is disheartening to see the FTC take this position. While the review process may be over, NFDA will continue to advocate through all available channels of government for a Funeral Rule that provides those meaningful protections. [emphasis added]

Ah, the language of lobbying. Mention those consumers. Discuss meaningful protections. Refer to improvements. Meanwhile, under the FTC’s Funeral Rule, “law enforcement sweeps of 174 funeral homes in nine states found significant violations of the FTC’s Funeral Rule at 26 funeral homes and minor compliance deficiencies at 66 others.” The violations included failure to provide itemized price lists and casket price lists.

In 2006, FTC regulators obtained a consent settlement when they “contended that Service Corporation International’s (SCI) proposed acquisition of Alderwoods Group Inc. would lessen competition in 47 markets for funeral or cemetery services, leaving consumers with fewer choices and the prospect of higher prices or reduced levels of service. [emphasis added]”

Since 1990, the funeral industry has made more than $7 million in campaign contributions to federal candidates or PACs, leaning toward Republicans.
According to Mr. Jordan, Service Corporation International, “which bills itself as ‘North America’s largest single provider of funeral, cremation and cemetery services,’ contributed more than $319,800 in 19 states.”

So many industries, such as the funeral industry, through their lobbyists and professional associations seek to influence legislation and regulation. Lip service is indeed given by industries to “protecting the consumer” and other politically correct niceties, but don’t be fooled: protection for industry is the holy grail sought.

If your favorite presidential candidate stands up at a rally, looks you straight in the eye, and boldly claims, “I will stand up to the special interests,” you look him or her right back and just as boldly ask: “How?”

It could not be, and should not be, a sound-bite answer.

xpost: Scholars & Rogues