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In 2003, Mayor Joe Ganim of Bridgeport, Connecticut was convicted by a federal jury on 16 felony counts of racketeering, bribery, conspiracy, mail fraud, and tax evasion for accepting more than $500,000 in cash, diamonds, expensive wine, tailored clothing, high-priced meals, and home renovations in a widespread kickback scheme that also led to the convictions of 10 of his associates. He served seven years in federal prison. Despite running a notorious pay for play administration, getting caught and going to jail, Ganim was again elected as the Mayor of Bridgeport on November 3 with more than 60% of the vote and more than a 2-1 margin against his closest challenger. Although he is an attorney, as a convicted felon, he could not vote in the election, and he is no longer licensed to practice law.

How is it possible that voters could return to office someone who definitively violated their trust for personal gain? Let’s examine the primary reasons why:

  • Everybody deserves a second chance. The National Employment Law Project (NELP) estimates that almost one in three Americans has been arrested for a non-traffic offense. Assuming that many of those arrested have families, it is possible that over half of all Americans have either been arrested or have had someone in their close family who was, making them sympathetic to reform stories.
  • He was a good mayor in the past who helped me and my family/friends. What he did wrong didn’t hurt me.  The “see no evil, hear no evil” approach. If you don’t pay any taxes, who cares if the mayor robs the city blind?
  • He was the Democrat on the ballot. ”I always vote the party line.” Well, one simply can’t fix stupid! Just because a person gets into a voting booth doesn’t mean they have any idea what the issues are.
  • Everybody in politics lies or cheats. Hilary Clinton is the Democratic Presidential front runner for 2016. She has a long history of controversial truth bending and extending. In the latest scandal, emails to daughter Chelsea from the night of the Benghazi attack on the US embassy, the former Secretary of State acknowledges a terrorist action even as she tells the families of American casualties the event happened because of a Hollywood video (so as not to disrupt a coming election with any facts detrimental to administration story lines that terrorism was receding). Polls are variable, but recently as few as 29% of voters think she is trustworthy, and yet over 60% of democrats would be happy to vote for her.
  • Even though I knew he was corrupt, his policies were better than anyone else running. This is the hardest reason to truly understand, because of the presumption that character simply doesn’t matter. It is a thought corrosive to the idea of a civil society.

The re-election of a politician who betrayed the people’s trust in a brazen manner is not a new phenomenon. In victory, Ganim is reminiscent of Buddy Cianci, the mayor of Providence, RI who was forced to resign from office twice after felony convictions for corruption. Marion Barry of Washington, D.C. is another example, although Barry was caught up in felonious drug usage and possession instead of taking bribes. In both of these cases, the Mayors continued their felonious conduct after their first convictions. Ganim’s prospects for rehabilitation are likely dim as well, given that after being in prison for five years, he gamed the system to claim a previously undisclosed substance abuse problem. With successful completion of a treatment program, and good behavior while behind bars, Ganim was able to shave 32 months from his sentence.

Giving someone a second chance sounds eminently reasonable. But that doesn’t mean one would want to simply put an offender into the same position where they have previously betrayed you. Just look at the Catholic Church’s decision to allow pedophile priests continuing access to children. Why would one place an admitted thief and corrupt bureaucrat back into the same job where he can steal and racketeer again? Fool me once, shame on you. Fool me twice, shame on me!

In his fascinating book The Wisdom of Crowds, James Surowiecki argues that even absent specific knowledge, a crowd of diverse individuals can often make a more informed decision than any one person. Surowiecki also points out that the crowd is far from infallible. He explains that good crowd judgements require people’s decisions to be made independently rather than be influenced by others. The undermining effect of social influence was demonstrated by a group at the Swiss Federal Institute of Technology  in 2011. The Swiss team commented that a detrimental herding effect is likely to be even stronger for deciding problems for which no objective answer exists, which perhaps explains how democratic countries occasionally elect astonishingly inept leaders.

Then again, sometimes, voters are just stupid. Adolf Hitler, Hugo Chavez and Christina Kirchner were all elected heads of state. Americans are supposed to be better than that. Our heritage of independent thought and actions should require a minimum standard of character that would prevent bad people from being elected. Closer examination of this assertion shows that such high expectations are not based in fact. According to exit polls, Bill Clinton won re-election in 1996 in part because 58% of poll respondents cited issues as being more important than a candidate’s character when it came time to deciding their vote.

If character issues are not alone enough to disqualify a political candidate, all manner of charlatans and crooks become eligible to lead us. When most voters believe all politicians lie and cheat, you wind up with leading Republican presidential candidates wholly unprepared by relevant experience to lead. If we don’t demand a higher standard of ethics and behavior from our leaders than we may perhaps require of ourselves, we deserve to be lied to, misled and cheated.

More than 3 million Americans carry the hepatitis C virus, and many don’t realize it. It’s a public health concern since the disease can be transmitted by contact with infected blood, and sometimes through sexual activity. Health officials advise all baby boomers to get tested. The illness is complex, with distinct virus types requiring different treatments. While it progresses gradually, it can ultimately destroy the liver. An estimated 15,000 people died from hepatitis C in the U.S. in 2007, when it surpassed AIDS as a cause of death.

It costs about $500 million to get a new drug approved by the FDA. So it’s not surprising that sometimes, newly approved drugs are priced far above marginal manufacturing cost in order to recoup research and development expenses. Early last year a blockbuster new drug from Gilead Sciences named Sovaldi came to market with the ability to effectively cure 90% of patients with genotype 1 of hepatitis C, a form of the liver-destroying virus that accounts for 70 percent of the estimated hep-C cases in the U.S. Patients will not have to take an older combination of drugs that can cause flu-like side effects and which have cure rates of around 60% after six months. 

Sovaldi came to the market at the then astonishing price of about $1000 per pill. A full course of treatment cost about $85,000 per patient, leading some pundits to warn that such drugs will bankrupt ObamaCare or rates will need to rise astronomically. According to Karen Ignani, CEO of America’s Health Insurance Plans, a trade association with 1,300 member companies

“Specialty drugs, which only make up 1% of prescriptions, already account for 25% of total U.S. drug spending, moving toward 50%. The amount spent on these drugs is expected to quadruple over an eight-year period to more than $400 billion. For perspective, the country spent $263 billion on all prescription drugs in 2012. Specialty drugs contributed to a nearly 12% increase last year in the average price of brand-name medicines.”

By July, Senators Charles Grassley (R-IA) and Ron Wyden (D-OR) began a Senate Finance Committee investigation into how Gilead had determined the sales price.

Under federal law, developers of newly approved drugs are granted the right to be the exclusive providers of that drug for a set period of time, similar to the advantage patent holders in other industries enjoy. However, the prices for other products are constrained by what consumers are willing and able to pay. The market dynamic is different with pharmaceuticals because insurers or government health programs typically pay all but a small portion of the tab. Insurers and government are expected to pay – no matter the cost.

Most health insurance policies kick the can down the road by offering less effective treatments at lower annual costs that can limit the damages caused by the hep-c for years, so longer term costs will likely be borne by some other insurance provider  over time. Most policies restrict access to drugs such as Sovaldi in several ways. Many simply do not include these drugs in their formularies, so they pay nothing if a patient chooses to fill a prescription. Other policies require large annual deductible  amounts (NY Health Policies are around $6000 for Silver plans) and 20% co-pays that could amount to as much as $20,000 per patient. Some policies simply limit the total amount of pharmacy coverage. Many policies use combinations of these tactics to control access to expensive drugs as they treat patients with significantly less expensive medicines. 

Even as it was subjected to withering criticism in the US for it’s pricing policy, Gilead Sciences announced in September that it had signed a licensing agreement with seven companies in India to make generic versions of Sovaldi, and sell it in 91 countries. Those countries are home to more than 100 million people with chronic hepatitis C infection, or more than half of the world’s patients. Sovaldi is going to be sold in the developing world at a 99% discount to it’s US list price. (By law, the VA gets drug discounts of over 40% and Medicaid gets 23% on US pricing.)

So despite the high price in the US, Sovaldi is being sold near cost in developed markets that would otherwise have essentially no access to the drug. In this, the US company is exhibiting humanitarian largess towards the rest of the world. Critics counter that Gilead bought a smaller company that developed Sovaldi for only $11 billion in 2011, and yet stands to make nearly $200 billion if it were to treat the over 2 million Americans who could benefit from the drug. While acknowledging that Gilead should be allowed to recoup it’s investment, doing so would require treatment of less than 10% of the patient population. Sovaldi, which is estimated to cost no more than $30 per month of treatment to manufacture, generated revenue of $12 billion in its first year. 

Others defend Sovaldi’s price because the drug is about half the longer term average cost of older treatments. The new pills are easier to take and cause fewer disabling side effects than other medications. Older regimens included up to 12 pills a day for six months, plus the immune drug interferon, which can cause severe flu-like symptoms, including fevers, nausea, fatigue, mood swings and other side effects.

In December, Express Scripts, the largest US Pharmacy Benefits Manager (PBM), announced that it had struck a (discounted pricing) deal with AbbVie, Inc. for it’s newly approved hep-C cure named VeiKira Pac whereby it would exclusively dispense the drug to its hep-C patients. The rumor is that the prior PBM discount was only 8%, and Express Scrips got substantially more. Not to be outdone, rival PBM CVS announced it’s own exclusivity deal with Gilead in the last couple of weeks. So it seems the market is working exactly like it’s supposed to, with competition forcing down prices. Gilead officials have acknowledged that average discounts in 2014 were about 22%, but expects that competition will force discounts of up to 46% this year.

Now that the genetic code has been cracked, watch for amazing new drugs to appear that will cure ancient scourges. We are likely at the advent of an amazing flow of innovation just as we have seen in the last twenty years with computers.  Let them be encouraged to be brought forth by the profit motive of the markets. Government should stay out of the way in private company pricing decisions.

Every business executive knows that negotiating with customers, suppliers, financiers, regulators and employees is a constant. Sometimes one is able to conclude satisfactory negotiations, and sometimes not. Generally, there is confidence that the rule of law would allow parties to demand specific performance when other parties fail to meet their obligations. This is only in the worst possible outcome, because we expect our counter-parties to deal fairly with us. In conducting international government level negotiations, there is little assurance that the counter-party nation will abide by their agreements and obligations, and the rule of might sometimes supersedes the rule of law.

Prime Minister Neville Chamberlain returned from Munich in 1938 declaring that he and Adolf Hitler had constructed an agreement that would lead to “peace for our time”. Chamberlain appeased Germany with the Sudetenland region of Czechoslovakia, only to have Hitler invade Poland and plunge Europe into World War the following year.  His motive was to avoid a disastrous war, and the Prime Minister was hailed by cheering crowds in London. History has judged his mission an utter failure, and it is now understood that appeasement is a poor strategy when negotiating with an aggressive opponent. There was probably no strategy that could have averted war, and the delay between the Munich Agreement and the invasion of Poland allowed Germany to increase its military strength while Britain mostly squandered its chances to better prepare for war.

During her time as Secretary of State, Hillary Clinton was the most traveled Secretary of State in history but substantive achievement escaped her. In partial fairness, beyond Egyptian and Libyan disasters, she was negotiating with North Korea, which has never honored its international agreements. She also tried negotiating with Iran, which pretends to negotiate in the run up to obtaining America’s 70 year old nuclear weapons technology. Current Secretary of State John Kerry naively decided he could conjure a peace treaty between Israel and the Palestinians. But how can Israel make peace with a “government” that won’t recognize the validity of the State of Israel and whose people celebrate  the suicide bombing of innocent civilians?

In making hard decisions, one of the toughest things to learn is when to simply walk away from a negotiation. Sometimes there is no overlap in acceptable outcomes between negotiating parties, and getting to “yes” means different things to each party. Which brings us to the announcement this week of the reestablishing of diplomatic relations with Cuba. As a Cuban American and a refugee from that dictatorship, conditions on the Island are of keen interest.

It always struck me as odd that American policy towards Cuba seemed frozen in time. Whereas the US had implemented a trade embargo against Cuba in 1960, we routinely dealt with repressive dictators around the globe who violated what we see as the civil rights of their citizens, such as in Saudi Arabia and Egypt. Many Americans expected the first foreign policy initiative of the Obama administration in 2009 would be opening diplomatic relations with Cuba. This would have been a popular and bipartisan move domestically in both political and economic terms. More trade is generally perceived to increase the flow of information citizens of repressed countries can readily obtain. Even Cuban dissidents mostly supported the normalization of relations. So why didn’t this happen earlier?  

Only the close circle around Presidents Obama and Raul Castro could be able to say for certain, but my suspicion is that the makings of the deal only came into view in recent weeks. For years, America has used economic sanctions to conduct a carrot and stick foreign policy. It has avoided the use of force in multiple countries, but perhaps none more so than in the evolving “democracy” of Myanmar. America and Europe have been instrumental in helping to transition the military dictatorship toward open elections and inclusive government. With the defeat of the Democratic Party in the mid-term elections, Mr. Obama has gotten into the habit of unilateral policy initiatives. He is able to establish diplomatic relations without consulting Congress. Trade is restricted by multiple laws, but the President has put this item on the Congressional agenda. It is unfortunate that he did so without requiring more changes from the Cubans, but this president never mastered the fine art of negotiation.

From the Cuban perspective, the reasons to open diplomatic relations were not apparent even six months ago. The Castros have long used “scarecrows” (underfed kids drafted into the army and sent into Havana) from the outer provinces to impose military command over the streets of inhabited Cuba. There is an 18-year old kid with a sub-machine gun and a radio on virtually every populated corner of Havana…just in case anyone should want to “misbehave”. The reason the regime claims this is necessary is the threat of American invasion… not that the US has considered invading Cuba in over 50 years. Cuba’s current primary benefactor, Venezuela, was providing up to 100,000 barrels of oil/day to Cuba in exchange for the work of Cuban doctors in its remote areas. This deal provided as much as 60% of Cuban energy needs. The collapse of world oil prices amid increased supply and slightly reduced demand has wrought havoc to Venezuela, and they will likely be unable to continue to support the Cuban regime at those levels. Hence, Cuba has a renewed motivation to deal with the US.

Many Cuban Americans have long anticipated normalization of relations and the ending of the trade embargo. While Cuba claims that the embargo has caused suffering to its citizens, many believe that it has been more of an annoyance than a true impediment. Spain, Canada and other Latin American countries have long had open economic ties to Cuba, but per capita income on the island remains at 40% of the world average because of the economic shackles imposed by the repressive regime. Things will only change very gradually because the government still will not operate under the rule of law. International businesses are usually required to partner with the state, and wages for Cuban employees are paid to the state in convertible currencies. The state pockets what it receives and pays the workers in a non-convertible local currency.

On balance, the opening of diplomatic ties is a slightly better than neutral change. The release of even a few of the hundreds of political prisoners is also a plus. The Castro brothers will be gone from the scene in the next few years no matter what anyone does. Opening diplomatic relations should allow for more US input in the transition process towards new leadership. One never knows, but in this case, we are all hopeful.

I watch live tennis on television most of the year, keeping The Tennis Channel’s weekly tournament telecast on my office TV with the sound muted, only tuning in on big points. But the ATP Tour ends it’s season in mid-November each year. The off season is only six weeks, so during the hiatus, I record the final couple of events on my DVR, and savor the matches one at a time at my own pace. The final tournament final was to be played last Sunday inLondon. Happily, there were 24 two hour or more “episodes” of the event recorded on my DVR. It was my personal time-shifting pleasure.

As I headed home from playing tennis Sunday, I ran into a neighbor who is also a tennis enthusiast with whom I often discuss the tour results. As we approached each other, I held up my hand and said “please say nothing about the Tour Masters; I have only begun to watch the event and I have it recorded”. Unthinkingly, she responded that her news “wouldn’t matter, because Federer had just defaulted the final.” To which I said, “gee, thanks for wiping out half the tournament for me”. She thought for a moment and then, realizing her error, apologized profusely, but the damage was done. A known fact cannot be selectively forgotten.

Contemplating the incident later, it seemed to me that all of us place differing values on immediacy, which is defined by Webster’s as “the quality that makes something seem important or interesting because it is or seems to be happening now!” It is clear that even in the digital age, live performances are highly valued in music and theater, even though we know that the studio music performances are likely to be cut and edited for perfection not often to be found in a live concert. Broadway performance tickets easily cost ten times the admission price for movie theaters, where we know the production values can be spectacular compared to live theater.

Some people have no interest in watching sports that were recorded to DVR, even though they may be great fans of the live event, and they do not yet know the results of the contest being shown. For others, it’s about watching the competition. Knowing the result absolutely kills interest for some, yet makes no difference to others. Some prospective parents ask their obstetrician to tell them the sex of their baby from the ultrasound. Long ago, I chose not to know because I didn’t want to spoil the surprise. I figured once we knew, we’d know forever.

Hot Tub Time Machine explores the absurd question of what it would be like to know the future. In the film, when the backwards time travelers have a small opening to return to the present, one of the three friends opts to stay in the past. Ironically, in the old present he was a ne’er do well, but after being re-united with his friends in the new present, he has become a successful businessman and family man. One of the many things I love about sports is that the favorites do not always win. You never know how the competition will turn out. If you did, it might still be fun, but it certainly wouldn’t be as exciting.

The United States accepts more legal immigrants every year than the any other country in the world, taking in about 20% of the world’s migrants. Other countries limit immigration to the talented, educated and the rich. The poetic notion of taking in the world’s “tired, hungry and poor yearning to be free” is quintessentially American. Of the million or so legal immigrants every year, about 70% obtain their status by being closely related to another legal immigrant.

Number & Percent Foreign Born


For many generations, the United States has been a beacon for people of many nations seeking a “better” life. Today there are almost 40 million foreign born residents in the US, the largest number in our history. Yet immigrants were a larger component of our total population during the sixty year period from the 1860s through the 1920s, when the US first enacted defined immigration quotas to restrict migrants from Southern and Eastern Europe such as Jews, Italians and Slavs. Those country quotas were only abolished in 1965 during the wave of civil rights legislation, and led to many more immigrants from Asia and Africa.

When one discusses immigration policy in America, there are two entirely separate issues which need reform. The first is to define how we are to select new legal immigrants. The second is to find a way to legitimize those 11 million or so illegal aliens in our midst. Many believe that each issue requires different solutions. Diogenes is not so sure.

Perhaps the most effective argument against our current immigration policies are economic ones. Labor unionists bemoan the presence of immigrants willing to work for lower wages, taking jobs away from the working poor and lower middle income Americans. Conservatives argue that immigrants utilize government services at higher rates than the native born, straining limited resources. These arguments are mostly true, especially in the short term, although over time immigrants have added much to the growth and vitality of the American economy. They also mirror the fears of yesteryear. In the 1840s and 1850s, many Americans feared the onslaught of the Irish escaping the Potato Famine. After the Civil War, northern laborers feared the newly freed slaves as economic competitors. One of the hard choices we must all make is whether we want to simply provide for our poor and lower income citizens at the expense of those aiding unfortunates from abroad and who have far less economic means and opportunities. With budgets already strained, it’s not likely that we could do both.

Diogenes believes that America’s standing as an exceptional place in the world is in part based on the fact that most of us, or our parents or grandparents were immigrants. Our school children are already majority-minority and soon our entire society will be so. Let’s open our borders to once again become the home to the world’s huddled masses yearning to live free and brave enough to make the journey. For all the challenges we have and for all the criticism we may take in any part of the world, at the end of the day people want to be like Americans—they want to pursue opportunities that Americans have. We can easily absorb another million immigrants every year. Instead of fencing our borders and increasing the border patrol, let’s control immigration by limiting access to social services and employment to those here legally.

Forget the barriers to change for a moment. If we designed a new system to deal with the problem, what would it look like? For one thing, a fully operational E-Verify system would be needed, and would require bio-metric IDs. Many would claim that biometric IDs would be a huge invasion of privacy. In a 21st century world, this is a canard. (See On Bio-metric Identity Cards) We need such a system for the administration of a host of government programs and to reduce fraud. E-verify could also be used to determine legal eligibility for all government assistance.

Concern that immigrants may become a burden on society has been a long-standing issue in the United States. It’s not clear that recent immigrants consume government services at higher rates than native born Americans. Larger average family size makes immigrants more likely to have children in schools. Since legal immigrants are likely to be lower wage earners, they are more likely than  the general population to utilize welfare or other anti-poverty programs. Others note that illegal immigrants, who total more than 25% of our foreign born population, utilize services at lower rates than the native born. But what if we removed the economic argument entirely?

Diogenes proposes that the United States throw open it’s borders to allow another one million immigrants into the country each year if those immigrants agree to do public service or jobs left wanting by native Americans for two years. These would include serving in the armed forces, taking designated agricultural jobs, working for Americorps, the Peace Corps or Habitat for Humanity. Failure to complete satisfactory service should lead to immediate deportation. The economic argument for accepting people after they have done their public service is that they will have earned their way in.

One might ask how such a solution would affect illegal immigrants? Some would argue that illegals should be given amnesty and a path to citizenship, but we have tried that before. We know it only makes it likely that we will repeat the cycle after several years and several million more illegal immigrants. Forcing illegal immigrants to contribute to our society would legitimize their standing here. We need all of our residents to abide by the rule of law. Having undocumented illegal residents in large numbers in our society encourages their exploitation and teaches them to evade our laws.

Many conservatives would argue that our public school system would be overwhelmed by an influx of immigrants if we radically increase the numbers we allow in. Ironically, most of those are the same Americans are opposed to readily available, safe and inexpensive abortions. There are about 800,000 legal abortions performed in the US each year. The Pro-Life movement should be called out for the hypocrisy of  their opposition to terminating the pregnancies of unwanted children while also opposing accepting immigrant children as refugees. Further, the majority of Hispanic illegals are coming from countries where drug cartels fueled by American dollars have overwhelmed the efforts of the state. America should take responsibility. Let’s reform a broken system while simultaneously reinvigorating our reputation as the one country in the world with opportunity for all who are willing to work.

The first known reference to identity documents is from the Bible’s Book of Nehemiah from around 450 BC. The documents were orders from the Persian King Antaxerxes to distant governors to have his messenger given safe passage. Such documents were rarely needed prior to the Industrial Revolution for the simple reason that few people around the world traveled beyond their local communities.  National passports were first routinely issued in the early 20th century, and by the 1930s, passports bearing photos of the holder were commonplace in many countries. Today, 117 million Americans hold valid passports.

Since the 9/11 attacks, security measures require government issued identity documents to enter most large office buildings or schools if you are not a student, get on a commercial flight or cash a check. Unlike many countries around the world, the US government does not issue identity documents or driver’s licenses. Historically, this is because of the 10th Amendment claim of enumerated powers of the federal government, which by not specifically granting the power to the federal government devolves it to the states.  By 2005, Congress passed the Real ID Act of 2005 to require the states to issue IDs that met a minimum set of security standards. The new law also specifies what information should be on the ID, how that information is shared among the states, and what documentation had to be presented and stored electronically before the ID is issued. Due to partisan and bureaucratic delays, only 21 states were in compliance as of January 2014.

Why do we need a standardized bio-metric identity card? Because it would present solutions to a myriad of problems facing our society and which can be readily addressed with laws already on the books but cannot be enforced without universal bio-metric security IDs. We could in one fell swoop create the framework to:

  • register every citizen for voting and authenticate them at the polling booth
  • mostly solve the illegal immigration problem
  • create the opportunity to encode health care/medical records for every citizen to carry with them
  • vastly reduce Social Security and other fraud in government programs
  • implement much better gun registration information sharing between the states
  • be able to track many of the 800,000 children who each year go missing/are kidnapped/run away 
What is a bio-metric identity card? It is any card which incorporates identifiers that contain distinctive, measurable physiological characteristics used to label and describe individuals. The oldest and most common of these are fingerprints, which were first used by police in the late 19th century. Other bio-metric identifiers include palm prints, retinal scans, facial recognition, and a newborn baby’s footprints. There are many opponents of bio-metric ID requirements from both sides of the political spectrum. On the right are those who claim that bio-metric IDs are a bad idea because they infringe the right to privacy. They argue that movement, spending and activity of citizens could be easily tracked and would be a violation of civil liberties. On the left are those who claim a hardship for the poor, and those in remote locations to get access to these IDs. 

One can readily respond to these claims of potential harms. First, privacy in the developed world is already infringed by various commercial interests. Everyone who has shopped on Amazon, or has a Facebook, Twitter or other social media account already divulges more about themselves than they realize. Today’s world regularly requires some way to accurately identify individuals for security and other reasons. Old technology documents such as birth certificates or old fashioned driver’s licenses are too easily counterfeited. Safety protocols securing the information and preventing the unauthorized access to databases that would be created with a national system of IDs are exactly what the Real ID Act seeks to ensure. Failure to implement such a system means that our government will continue to be unable to effectively enforce many important laws that allow us to maintain our civil society.

Implementing nationwide issuance of bio-metric identity cards is a large, expensive and complex undertaking. Most citizens will be able to get one at their local DMV whenever they renew a driver’s license. For those who claim hardships to reach an issuing location, special efforts such as mobile vans going to remote or poor communities can increase the opportunities for all to receive an ID. Because these IDs will also register all citizens to vote, one presumes that Democrats and other progressives would mobilize their collective resources to increase the number of voters sympathetic to their policies.

The hottest corporate finance topic in recent weeks has been “merger inversions”, in which American companies are acquired by or merge with non-US based corporations. The combined entity is then re-incorporated abroad in order to shield future earnings from high US corporate income taxes. Treasury Secretary Jack Lew and the President have called these transaction “economically unpatriotic”and have called on Congress to raise the drawbridge and only allow corporations to escape the IRS if foreign share ownership is more than 50% of the combined entity.

History of the US Corporate Tax

The first US corporate income tax was implemented from 1861-1872. The current iteration began with the federal excise tax on corporate income in 1909, which predated the ratification of the 16th Amendment in 1913 that gave Congress power to levy income taxes on individuals. The original tax rate was 1% of income for both individuals and corporations. As with any other tax, the rate paid only increased over time.

Today the U.S. has the highest nominal corporate income-tax rate in the developed world. While U.S. corporations face a combined federal-state statutory tax rate of 39.1%, our competitors in the Organization for Economic Cooperation and Development (OECD) face an average rate of 25%. France’s tax code—typical of most OECD countries—exempts 95% of foreign-source income from taxation, while the U.S. tax code fully taxes such income.

Corporate Tax Rates In the OECD

Despite the high nominal rates, the US tax code is littered with deductions and preferences that dramatically lower the effective tax rate paid by corporations, leading many Americans to consider the “crony capitalist system” essentially corrupt. Overseas income of American corporations is taxed only when it is repatriated to the US. This has led to the holding of as much as $2 in unrepatriated corporate profits and huge disincentives to ever bring it home. The following chart indicates that the effective tax rate is actually lower in the US than in most of the OECD.  

Effective Corporate Tax Rates in OECD, 2000-2005 average

As one can discern from the chart above, it’s not that the average amount of tax paid is too high, because corporations utilize deductions like depreciation and interest. It is the marginal tax rate that is the impediment to the US economy.

According to Laura Tyson, former chairwoman of President Clinton’s Council of Economic Advisers,

“America’s relatively high rate encourages U.S. companies to locate their investment, production, and employment in foreign countries, and discourages foreign companies from locating in the U.S., which means slower growth, fewer jobs, smaller productivity gains, and lower real wages.”

Why do we have a Corporate Tax?

Economists are broadly divided about whether corporate taxes are paid by capital or by workers. Superficially the corporate tax is on capital, but many economists believe that workers ultimately pay much of the tax in the form of lower wages. This results from lower capital investment due to a higher cost of capital, which reduces productivity and therefore wages, and because capital investment moves to other countries where corporate income taxes are lower. The Tax Policy Center pegs the portion of corporate taxes paid by workers as 20% of such taxes. 

What cannot be argued is how the current tax regime is affecting corporate behavior. Corporate taxes encourage the use of debt rather than equity financing because interest reduces taxes and paying dividends increase taxes. More debt increases business risk of failure and discourages new investment by increasing the cost of capital. 

Overall, corporate taxes generated in 2013 were $330 billion, about 10% of federal revenues from all sources. If there were no corporate tax, from where will the tax revenue be replaced? A recent National Bureau of Economic Research paper titled Simulating the Elimination of the US Corporate Income Tax shows the many positive effects of eliminating the tax entirely. Summarizing the findings, author Laurence Kotlikoff said

“They simulate corporate tax reform in a single good, five-region (U.S., Europe, Japan, China, India) model, featuring skilled and unskilled labor, detailed region-specific demographics and fiscal policies. Eliminating the model’s U.S. corporate income tax produces rapid and dramatic increases in the model’s level of U.S. investment, output, and real wages, making the tax cut self-financing to a significant extent. Somewhat smaller gains arise from revenue-neutral base broadening, specifically cutting the corporate tax rate to 9 percent and eliminating tax loop-holes.”

As this study shows, cutting the corporate tax rate would increase total corporate tax receipts. At first blush, this might seem to be a surprising result. It shouldn’t be. Corporations, run by people, respond like individuals to incentives. By taxing repatriated profits at 39%+, the federal government gets far fewer repatriated profits. If one examines tax receipts following tax cuts, it is clear that tax cuts yield higher federal tax receipts. In the last instance, the four years of the Bush Presidency after the 2003 reduction in tax rates saw a 44% increase in Federal tax revenues. With regard to corporate taxes, revenue increased following rate cuts in Canada in recent years. Some economists dispute the correlation as less than perfect due to many other factors including the business cycle of recession and expansion, but these results are mirrored across the OECD.

Diogenes Proposes…

It’s time for Congress to reform a tax system that mainly benefits other countries. Ideally, Congress would pass comprehensive tax reform for both business and individuals, but reforming today’s corporate tax alone is easier to do. The argument for reform is that it can be easily made to be revenue neutral or better, it improves “social equity”, and reform provides ongoing incentives for corporations to remain and invest in America. Theoretically, reform should receive broad bi-partisan support.

The US should lower the corporate income tax to 10% and eliminate the capital gains and dividends tax preferences for stocks and mutual funds for individuals. These gains have traditionally been taxed at lower rates (to the dismay of progressives) to mitigate the impact of “double taxation” since every dollar of corporate income is taxed before it is distributed to shareholders. Excluding non profit institutions, about 91% of stocks and mutual funds are held by those in the top 10% of household wealth, or foreigners, so this is a very progressive, well targeted tax.

Eliminating corporate taxation reduces the incentive to lobby for special tax breaks, reducing crony capitalism. Further, reducing the tax to about a quarter of what it was greatly reduces the incentive for corporations to spend money on non-productive tax sheltering activities.  

Lowering the corporate tax rate from the highest in the OECD world to the lowest would be an incredible draw to companies currently domiciled abroad. If a corporation can move its headquarters and tax base to the premier destination in the world where their operations are protected by the American rule of law, we would eliminate the inversion issue entirely. Instead of trying to intimidate American corporations into remaining here, let’s just make it more attractive to stay. Turn the problem into an opportunity for any multinational company to pay their (lower) taxes here.

Why do we watch televised sports? On a base level, it’s about competition played out as a public surrogate for blood sports. However, true aficionados of any sport also savor the subtleties of the interplay of differing styles that competitors bring to the arena. Watching athletes more gifted than ourselves try to solve the riddle of how to win using agreed upon rules provides endlessly interesting human drama.

Champions aren’t born; they are made by hours of unrelenting, purposeful practice. In the book Outliers, Malcolm Gladwell popularized the notion that it takes about 10,000 hours to achieve expertise in many sports as well as for performing artists and musicians. Yet there is still considerable variance between the abilities of the best athletes in any sport or among musicians playing the same instrument. As David Epstein makes clear in The Sports Gene, some athletes and musicians achieve expertise in far fewer hours. They may have physical attributes that leverage their ability to perform at elite levels that others can never attain no matter how hard and long they practice.

It takes many years in most sports to attain true expertise. It is during this development process that athletes and musicians are most keenly aware of how much variation in levels is required to continue to improve. Performance in sports and music, as in almost all human activities, fluctuates. Players get better, and they can also get worse. The sport of tennis readily illustrates this principle. Junior Tour champions can take years to transition their games to the main tour. At the age of 14 Pete Sampras changed from a 2-handed backhand to a one hander and almost dropped out of the junior rankings before it became a weapon that later helped him win 14 major titles.  And we have all seen many of our favorite athletes become just a step slower one year to the next, prompting their retirements.

Fluctuations in performance levels are not limited to juniors in development or those at the height of their physical prowess. We are all subject to the ravages of time, but even those who have played for decades are able to improve. They can get better primarily versus their own age cohort, and also on an absolute level. Part of absolute improvement for every player at any age is raising the technical aspects of their game, and part is mental. The higher the level, the more the mental aspects of the game play a part. In tennis, some players have such overwhelming physical/technical weapons that they play a dominant style. If their weapons are better than an opponent’s defense, they win. If not they lose.

Most players are not able to simply dominate. They employ an array of strategies, any or all of which can work at any level. These include defensive “don’t miss” styles and  counter punching defensive to offensive players. It’s all about featuring your strengths against an opponent’s weaknesses. As a competitor playing cerebral tennis, you want to make the opponent feel like he’s just not playing well by not letting him set up for his favorite or best shots.

Like most tennis players Diogenes has always had a weaker backhand side. During a recent layoff for injuries, he decided to try to remake it into a weapon (again). There had been a multiyear attempt at learning a two-hander. It was steady but never had any real “pop”, and steady wasn’t good enough to raise his level. But knowledge in tennis, or any human pursuit, is never wasted. Diogenes still uses the 2-hander to block big serves and hit short angle shots from the forecourt.

In the current improvement effort, Diogenes has drilled his one handed topspin backhand for hours trying to change his contact point forward by about three to four inches. This small but fundamental technical change allows him to more often be moving forward on hitting his backhand, whereas the prior technique often resulted in weak hits off the back foot. The new stroke is both bigger and has more spin. The cross court shot has become dependable, and up the line backhands are a new option. The new backhand was good enough to add pressure to his everyday opponents, but playing tournaments is the true crucible for Diogenes. The pressure is immediate and unrelenting. At a national indoors event a couple of weeks ago, the new backhand broke down under increased pressure from better, harder hitting and more precise players.

Diogenes will continue to work on improving the new backhand because it could bring an ability to change his entire style of play. In the past, he was mostly an attacking forehand player who often employed serve and volley tactics to avoid baseline rallies that would expose his weak backhand. Transitioning his mental approach to that of a balanced forehand and backhand player would allow him to grind from the back of the court and stay in points longer waiting for better opportunities to attack. The return of serve can be made from further back and be both a higher percentage play and more offensive. This changes everything…maybe.

Since early May of this year, the Veteran’s Administration hospital system has been in the news when it was revealed that at least 40 veterans had died while awaiting care at the Phoenix VA hospital. An investigation of the delays revealed that delays were not only widespread throughout the VA system, but that personnel at many facilities had collected bonuses in part because of outright deception related to the reporting of backlogs. At the end of May, VA Director Eric Shinseki took the blame and resigned.

History of the VA system

The first federal government agency to treat armed forces veterans was established in 1812. It wasn’t until after the Civil War ended in 1865 that Congress established homes for disabled veterans. President Hoover, an engineer who took pride in efficiently solving problems, created the Veterans Administration to consolidate all services for veterans in 1930. The modern VA hospital system was created in 1945 with the building of new hospitals to specifically serve veterans. During that time, many of those hospitals became affiliated with medical schools and still continue to serve as training grounds for newly minted doctors. There are now nearly 1700 separate VA facilities including hospitals, outpatient clinics, and nursing homes. The VA system employs about 280,000 full time workers, has a budget of about $55 billion per year, and treats as many as 9 million veterans annually

The VA system is completely separate and distinct from the Military Health System, which is geared to serve active duty personnel. Like the VA, however, the military’s health facilities cannot accommodate the demand for care by all active duty service people, their dependents, and retirees (many of whom are not eligible for VA services). So it has its own government-provided insurance plan, called TRICARE, for those who cannot obtain care at a military health hospitals or clinics. TRICARE, much like Medicare, is insurance that is paid by the government, but uses private doctors and hospitals. In fact, TRICARE rates are tied to Medicare rates. 

The scope of the problem

The entire VA system is the purest realization of single payor government health care. Although progressives believe such a system is preferable to the Affordable Care Act, which combines government benefits mandates administered through private insurance companies, it should be no surprise to anyone that the system is broken. An audit by the VA Inspector General found nearly 60,000 veterans are waiting to get appointments at the VA, and 70% of facilities have used an alternative to official appointment schedules to make wait times appear shorter. The audit of 731 VA facilities and nearly 4,000 employees found widespread problems that included pressuring of employees to change data. More than 10% of scheduling staff were given instructions on how to alter patient-appointment scheduling, according to the audit.

Since 2005, the agency’s inspector general has issued 18 separate reports identifying national and local problems with scheduling.  Why is it any surprise to hear how awful they can be? Has anyone been to the DMV or Post Office lately? The typical congressional solution is to simply throw more money at the problem rather than fix the inherent problems at the VA. Which is exactly what they did last week.

What is the cost of the VA relative to private hospitals?

Operating rooms at VA hospitals are typically used for 2-3 operations/day instead of the 4-6 in private hospitals. Nevertheless, the VA may in some aspects be cost effective. The advantages of a single payor system has made the logistics of care more efficient at VA compared to private hospitals. The VA has electronically integrated records for labs, pharmacies and imaging. Its physicians do not utilize heavily promoted but only marginally more effective but wildly more expensive drugs. Certainly the care at some hospitals has been substandard, but stories abound of veterans who claim wonderful outcomes. The social aspects of veterans’ care alongside that of other vets is repeatedly cited as a huge benefit.

How do we fix the problems?

Perhaps the fastest way to improve the VA system would be to make Congress and staff use the facilities and just watch how fast they improve. This is of course unrealistic as Congress and their staff don’t even subject themselves to the provisions of the Affordable Care Act.

Few Americans would deny that our veterans are entitled to quality care. But the reality is that the 20 million or so of our veterans primarily use the VA system for old age related problems. That care is readily replicated elsewhere. Government does nothing as well as the private sector because they are legally unable to respond to problems and change. There is no one to complain to, and administrators are essentially unable to fire under performing personnel. Scapegoating Eric Shinseki won’t change very much. He probably didn’t even know about the problems. Several layers of bureaucracy were either lied to or so unreliable that they didn’t look.

The best solution to the never ending pattern of scandals and funding increases is to get the government out of the business of providing general health care. The VA system should be privatized and our veterans should be brought into the Medicare system. Let’s let individuals sort out where to receive their care and vote with their feet if that care is not provided in a timely and professional manner.

Current Monetary Policy

American monetary policy is implemented by the independent, a-political (and unelected) Federal Reserve Bank. It’s actions control the money supply primarily by setting targets for the key federal funds rates.  The Fed also controls the money supply and interest rates through open market operations (buying and selling government bonds) and by setting reserve requirements for banks. Theoretically, these actions serve to influence output and inflation, although in reality, the velocity of money changes in response to variables related to risk and return, and often may not respond directly to Fed policy desires.

Long time Fed Chairman Alan Greenspan maintained an implicit inflation target of zero from 1987-2006, which he believed would yield maximum sustainable economic growth. Under his successor Ben Bernanke, the Federal Reserve Board in January 2012 set an explicit inflation target for the first time with a ”longer-run goals and policy strategy” statement.

“The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve’s mandate for price stability and maximum employment. Over time, a higher inflation rate would reduce the public’s ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling–a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken.”

Inflation targeting steers monetary policy to try to hit the target inflation rate. This approach has for years been the official policy of Britain, Canada, Australia, Sweden, New Zealand, Brazil, and South Korea, among others. The theory is that inflation-targeting policies tend to stabilize their inflation rates while keeping economic growth on an even keel.

Is Inflation Targeting the Right Approach?

The link between inflation rate targets, price stability and full employment is far from a settled issue because many other factors can affect economic growth, from natural disasters, energy policy, fiscal policy and wars. Increases in inflation as measured by the Consumer Price Index (CPI) are not necessarily coupled to any factor internal to a country’s economy and strictly or blindly adjusting interest rates would potentially be ineffectual and restrict economic growth.

Most economists today agree with the Fed that inflation is a necessary evil, and advocate for low, stable levels of inflation.  Deflation is often seen as a worse danger in a modern economy because it increases the real value of debt, may aggravate recessions and has potential to lead to a deflationary spiral. Yet research from the Fed’s own Minneapolis Reserve Bank shows that deflation does not automatically lead to depression and need not be a barrier to economic growth.

Until the 1930s, it was commonly believed by economists that deflation would cure itself. As prices decreased, demand would naturally increase and the economic system would correct itself without outside intervention. This view was challenged during the Great Depression. Keynesian economists argued that the economic system was not self-correcting with respect to deflation and that governments and central banks had to take active measures to boost demand through tax cuts or increases in government spending.  This message was well received by officials who wanted to believe that government actions control the economy instead of the “animal spirits” of a jumble of factors.

For 50 years, monetarism has been the foremost alternative to Keynesian-ism as a means of understanding inflation. Monetarists think that inflation results from too much money chasing too few goods, rather than from interest rates, demand, and the slack or tightness of markets. The matter is far from settled, but the majority of leading economists today are post-Keynesian in thought and almost constantly advocate for active monetary stimulus to induce economic growth, despite the absence of evidence that such stimulus is effective. Even new Fed Chairwoman Janet Yellen recently admitted that the central bank doesn’t have a good model of inflation. (The Fed relies on the Phillips Curve, which charts a tendency for inflation to rise when unemployment is low and to fall when unemployment is high.)

The notion that nobody who expects prices to fall in the future would spend money today is nonsense. It ignores entirely the concept of time preference, and we can see that this is not the case every day in the market for computers or smart phones. These products get cheaper and better every year, yet demand for them is strong and people spend considerable amounts of money on them today. In other areas such as clothing, products are far less expensive today than they were a generation ago, in large part due to less expensive offshore labor, falling trade barriers and Wal-Mart.

Is there a Better Way?

The primary reason inflation is desirable in public policy is because it facilitates use of government debt to accommodate federal fiscal irresponsibility and permanently stimulates home ownership by inflating away the value of mortgages. Inflation is a form of sovereign default. Paying off bonds with currency after ten or twenty years that is worth half as much as it used to be is like defaulting on half of the debt. Government can steal value out of your pocket full of money without you even seeing anything happen.

For nearly 5,000 years, the majority of countries have used money denominated in or backed by metals such as gold or silver. As long as governments have been in power, they have sought to increase their ability to spend money in excess of their receipts. During the Roman Empire, the Emperor Nero debased his currency by reducing the percentage of silver in minted coins. Paper money was first introduced in Medieval times in Italy. Why does paper money have any value at all? In our economy, the basic answer is that it has value because the government accepts dollars, and only dollars, in payment of taxes.

The key problem with fiat money is that governments have the power to arbitrarily produce more of it, debasing it’s value. In the era of metal currency, there was neither inherent long term inflation or deflation. The United States, despite prior episodes of paper money failures (Continentals during and after the Revolutionary war, and Greenbacks during the Civil War), issued the predecessor of today’s paper currency in 1913, revalued it against gold in 1934, and suspended any convertibility into gold in 1971. Meanwhile, the value of the dollar in gold terms has fallen 92% since 1913. As the chart below shows, inflation of the US$ is the norm, and deflation is an unusual phenomenon. 2009 was the most recent year of deflation, and it was 54 years since deflation had occurred. In both 1955 and 2009, the US had positive GDP growth. 

source: US Bureau of Labor Statistics

So what are the alternatives to using paper money and the inflation that inevitably follows? In the internet age, there have been a series of attempts to create a medium of exchange that does not inflate and is not subject to government exchange controls and taxation. These attempts are based on securely exchanging information which is a process made possible by certain principles of cryptography. The first “cryptocurrency” to begin trading was Bitcoin in 2009 although numerous other cryptocurrencies have been created since then. Fundamentally, cryptocurrencies are specifications regarding the use of currency which seek to incorporate principles of cryptography to implement a distributed, decentralized and secure information economy.

Bitcoin appears to be a brilliant solution to the problems of fiat currencies and inflation. But it fails on a variety of other key measures, the most important of which is a relatively stable store of value. Bitcoin has been plagued with extreme value volatility. Further, the anonymous nature of its transactions enable it to be easily used for illicit and illegal activities such as drug trafficking. Because  government regulators are not involved in Bitcoin administration, it’s value can be erased by computer viruses or outright fraud. Mt. Gox, a key Bitcoin exchange, collapsed into bankruptcy in February taking $500 million of Bitcoin value with it.

In the history of man, no fiat currency has ever survived as long as the US dollar without the restructuring the American dollar is experiencing. Inflation, and monetary policy by the Fed is effectively defaulting our debt and devaluing our currency every year. This inflation is another form of stealth taxation which promotes and enables profligate federal spending.  Our central bank’s primary mandate is price “stability” (and full employment). One need not be an economics PhD to recognize that a monetary policy of taking 2% of its citizens money annually is simply wrong.