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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

NUMBER & PERCENT OF FOREIGN BORN AMERICANS

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.

Who Are Those People?

Diogenes is a sometimes competitor in age group tennis tournaments sanctioned by the United States Tennis Association (USTA). At the end of this month he will return to competition after a seven month hiatus occasioned by yet another surgery (his 8th) to repair a minor injury sustained during competition last year. Thinking about competing again prompted consideration of who else participates in adult competitions.

About 7,000,000 million Americans self report that they play tennis 21 or more times per year. Of those frequent participants, over 400,000 play in the USTA Eastern Section, which includesNew YorkStateand parts ofConnecticutandNew Jersey. About 50,000 are dues paying members of USTA Eastern. One of the reasons to join the USTA is to take advantage of it’s many programs for all ages and levels of play. At the top of the age, and perhaps skills, pyramid are senior adult players, where age groups are organized by 5-year cohorts starting with 25&over and extending to 90&over. Men, women, singles, doubles and mixed doubles events are held in various locations.

Most USTA members today play Adult Team League Competitions, which are organized by both National Tennis Rating Program (NTRP) levels, gender and finally, by age. The most skilled members are among the over 7000 individual competitors that played in a USTA Eastern Adult Competition Sanctioned Event, and almost 2500 of these lived within Metro NYC. There were about 20 of those tournaments per month throughout the section. Many players compete in leagues during the week, and in tournaments on the weekends. Most are 4.0+ NTRP players. Not all are world beaters. Many former ranked ATP and WTA tour players compete in age group events around the country, but they are certainly a minority. There seem to be teaching professionals in almost every event, but most tournament players are just pretty good public parks or club players.

Why do they (still) compete?

It turns out that older people who are athletes from around the world in many sports still compete for many of the same reasons across age, sport, and birthplace.  A study (Rylee, Baker and Horton “Older Athletes’ Perceived Benefits of Competition”) conducted among competitors in the World Masters Games inAustralia in 2009 found five common themes to explain what the athletes gained from continuing to compete:

  • “I like a challenge” depicts Adult Competition as an ideal context to test one’s abilities. In particular, lifelong athletes (or those who had returned to sport after a long break) enjoyed the satisfaction of knowing they “can still do it!”
  • “I discovered that at this age group I could win things!”
  • “I’m more motivated to work harder”, describes how regular competitions provided goals for participants which structured their training. Also, the act of competing brought out their best performances.
  • “You know where you stand”, shows how participants liked that competition enabled them to compare themselves with others of their own age cohort.
  • “Travel” and “companionship”, explains how the organized, competitive structure of Adult Competition allowed for regular travel, the establishment of ongoing friendships and weekly social interaction.

How Does Competing Affect the Competitors?

Most children born before the 1980s were nurtured with competition in sports before the new age of collaborative efforts. The theory was that tough competition would give kids a realistic view of their own strengths and weaknesses. An accurate sense of one’s own ability could help the process of acquiring expertise, and aid in the development of self discipline. Now we have no-cut athletic teams, and the theory that “everyone is special”. Children are discouraged from concentrating on only one sport and competing much before the age of 12 in the hopes of preventing “burnout” and encouraging the development of cooperative skills required for team play.

If we no longer believe that individual competition is great for children, how has thinking evolved on benefits for older competitors? Are champions wiser than their non competing peers? Given the adoration we lavish upon our champions, one might wish this were so. Studies comparing professional athletes with amateurs and non athletes don’t seem to fully address the question, although many anecdotal references can be found. Analysts at Mint.com report that 60% of NBA players file bankruptcy within five years of retirement. Football players are even worse. More than 78% of NFL stars will file for bankruptcy within five years. Major League Baseball players have only mildly better luck, filing for bankruptcy four times more often than the average U.S. citizen. On the other hand, contrary examples are easily found of great athletes that appear to be superior, generous human beings. In tennis, we need look no further than Roger Federer and Rafa Nadal, who have endowed large philanthropic efforts and are humble and gracious to a fault.

Interacting with the champions at national age group competitions has convinced Diogenes that they have about the same, or even greater, personality issues and disorders as the rest of us. Certainly as athletes they are a bit healthier than Americans as a whole, but more than a few are hyper competitive. They are great in high stress moments during tournaments and would be great as soldiers at the front in time of war. The reality is many of them are hard to live with, lots have difficulty in sustaining a  job, and most have moved often during their professional lives. The lesson is that moderation is probably good in sports competition as in most things in life, and keeping the proper perspective is the healthiest approach. Well experienced coaches teach their students that one should treat every match as if it is the most important thing in the world, while realizing at the same time that it really doesn’t matter much at all.

President Obama said in his State of the Union Address that his ability to effect legislative change is severely hampered by excessive partisanship in Congress. He declared that he would start using the power of the Presidential pen to dictate change through Executive Orders. Mr. Obama decided to selectively enforce the law of the land by unilaterally deferring various Affordable Care Act mandates until after the mid-term elections this year.

The chances of enacting new anti poverty programs or getting more money for education are virtually nil. The President’s domestic agenda is stalled and his signature legislative achievement is unpopular. International relations are perceived to be in disarray as Russia’s Mr. Putin carves up eastern Europe. Most Americans don’t quite agree with Mr. Obama’s view that America’s history of oppressing minorities at home and imperialism abroad means we do not have the moral authority to dictate how other nations are to behave. Our President is in danger of being marginalized as a lame duck for the next two years.

Trust in government is at near all time lows, and surveys now show that Americans on average believe that over half of all federal spending is wasted, a sharp increase from the 40% estimated by a Gallup Poll in 1979. This explains why most Americans believe that we do not need to cut spending on popular social programs and defense even as we run huge deficits. The President has given VP Joe Biden the task of reforming the 47 different federal jobs training programs that collectively cost about $20 billion, out of about $3.45 trillion in 2013 federal spending. But that’s playing “small ball”! Why not go much bigger and use his powers to structurally reform government to be more responsive to the needs of the 21st century?

It has been 80 years since FDR massively reformed the organization and cost of government. Instead of piling on more government, why not attack the waste of resources implied by the overlapping of many government departments? In the private sector, resources and organizations are reorganized regularly. Program or department reductions of 20% are not unusual. Contrast that picture with the public sector. When sequestration mandated cuts of $85 billion in 2013 (half from defense and half from discretionary spending), or about 2.5% of federal spending, one might have thought from administration warnings that the sky was falling, even as total expenditures for the year proceeded to rise anyway. The major problem with this approach was that cuts were made across the board without serious consideration to relative priorities. Air Traffic Controllers were furloughed, causing massive travel disruptions and most other employees were furloughed only to be paid later for their enforced time off.

When discussing waste and inefficiency in government, we are really discussing three separate issues: waste/fraud, duplication of programs, and unnecessary/low priority programs.  Most Americans can agree that waste and fraud could and should be eliminated, and eliminating duplication is also popular. But few can agree on what are unnecessary programs, each of which has or had a champion in Congress that worked to get the program enacted typically years ago. That’s because old federal programs never seem to die; over time they become local work programs.

Retiring Senator Tom Coburn (R-OK) has been one of the few in government that has valiantly fought to expose and eliminate waste and fraud in spending. For several years he has published The Waste Book documenting 100 separate programs or instances of low or questionable priority. The 2013 edition’s programs total about $30 billion and include such gems as $432 million for new aircraft the Air Force neither wants or needs, and which are being mothballed even before being put into service! A thorough restructuring plan should generate savings of at least 10% of federal spending, or about $350 billion annually, enough to continue funding for social programs and take a big chunk out of the federal deficit.

To do an effective restructuring, the President needs to control the agenda. He should create two new bipartisan commissions. The first would be a “Low Priority Programs Sunset Group” to do away with the silly programs that are so politically difficult to kill without the cover of a bipartisan up or down vote for the entirety of program revisions. The second bipartisan commission would be a “Departmental Restructuring Group” to recommend ways to reorganize all government departments other than Defense, which should have it’s own Low Priority Programs Sunset Group and a new Base Realignment and Closure Commission (BRAC) whose recommendations would also be subjected to a complete package up or down vote.

At the start of the process, the President should develop his own ideas as to where he wants these commissions to end up. Before appointing any Democrats to serve on these commissions, he should have frank discussions with the candidates, and not appoint anyone that has fundamentally different opinions. He should do the same with Republicans under consideration for the commissions to ensure they are at least vaguely in agreement with his goals. The President can do this because these commissions are his initiative, and not directed by Congress. Ultimately Congress will need to bless the results, but surely Mr. Obama will be able to guide the commissions conclusions more than he was able to do with the Simpson-Bowles Commission. Now is time for Mr. Obama to invest the last of his presidential capital in something he believes in: making government work so well that we can afford to provide for all.

Recently elected New York City Mayor Bill de Blasio campaigned on the theme that he will seek to end “the tale of two cities” and narrow the gap between rich and poor in America’s largest city. He claimed to have achieved an electoral mandate, winning about 73% of the vote in the general election.

The Mayor’s first major policy initiative was to call for citywide pre-kindergarten for all children and the addition of after-school programs for older students. In order to fund this $540 million initiative, Mayor de Blasio wants a 0.5% tax increase on residents making over $500,000/year. However, the city does not set its own tax rates; the state retains that power. Longtime de Blasio ally Governor Andrew Cuomo fully supports that goal, and announced that he will create a statewide pre-k program, pre-empting the need for a tax increase. The Mayor responded that the state initiative did not provide long term committed funding for the pre-k initiative, and that he wanted the tax increase anyway even if it is not used for pre-k.  In other words, the affluent must be taxed more not for any public purpose but merely because the new mayor believes it’s ”fair and just.”

Let’s examine some of the Mayor’s assertions concerning the electoral mandate he claims. De Blasio captured an overwhelming percentage of the votes cast in this city, where Democrats outnumber Republicans six to one, representing some 85% of registered voters. So the Mayor actually received fewer than a representative  percentage of his party’s voters. All told, de Blasio received 74%, or about 753,000 of the 1,026,000 votes cast in the election, which had a turnout of less than one quarter of registered voters. When one examines the composition of those votes, the claimed mandate appears much narrower.

In 2012-2013, there were about 729,500 union members in the five boroughs of New York City. There are about 325,000 NY City employees, most of whom are union members. More than a quarter of New York’s wage and salary workers belonged to a union last year, according to a recent Labor Department report. That’s the highest rate of any state in the nation. In fact, New York has had the highest membership rate for 13 of the last 15 years, in part because of the many public-sector union members in New York City. So one might say that this is the mayor brought to you by union central casting, with the overwhelming percentage of his vote tally comprised of union members, even though union members represent less than 25% of total registered voters.

Now let’s look at the assertion that universal pre-k is a proper means of creating equal opportunity for the city’s poor children to narrow income inequality. Here, the results are mostly positive, although there appears to be substantial room for discussion. A  2012 Department of Health and Human Services review of the federal Head Start program found that the effects of such programs were initially positive but had dissipated by the 3rd grade.

If the Mayor is serious about creating equal educational opportunities for the city’s poor and minority children, why is he opposed to teacher reforms and accountability and to support for charter schools as advocated by his predecessor? Recent research at Harvard, MIT and Princeton has confirmed that well-run charter schools are achieving remarkable success compared with traditional public schools in improving the educational achievements of disadvantaged students in inner cities. The secret is autonomy. Freed from the bureaucratic straitjacket of teachers unions, charter-school leaders can hire and fire teachers more freely. They can also enforce standards for teachers and students that might spark protests and union grievances at a traditional public school. Charter schools take more risks, and they are held accountable for the results. When charter schools fail, they close. When other public schools fail their students, they mostly continue to cut off opportunity for more, mostly poor children.

In one of Mayor Bill de Blasio’s first shots at charter schools, his administration has proposed pulling $210 million in funds slated for buildings used by charters and nonprofit groups and using it instead for prekindergarten space. The city is effectively killing a Bloomberg administration program that paid for buildings that were mostly used by charter schools. The city owned the buildings but allowed charters to use the space. ”Once again, thousands of minority and low-income students and families have their educational future unfairly put in jeopardy,” said Jeremiah Kittredge, executive director of Families for Excellent Schools, which supports charter schools.

About 50,000 children in NYC attend charter schools, and because of capacity limitations, 50,000 more are on on wait-lists to get in , out of a total school population of a little over one million children. Those who have the most skin in the game, the parents of children who are poor, are voting with their feet. The education battle is between a failing union monopoly and schools that are actually educating children.

So there you have it; the paradox of populism. Mayor de Blasio claims that his most important goal is to end income inequality, and that this goal is best achieved through education. But his solution is to pile on programs designed to feather the bed of teacher’s and other public worker’s unions rather than fix failing public schools. The pre-k programs he is proposing are little more than free day care for the children of the city’s poorer workers while at the same time vastly increasing union jobs to staff them. Because these programs will allow low income residents to spend even less time reading and playing with their children, does anyone really expect that the opportunity gap will be narrowed?

The big news at this year’s Australian Open has been the weather. For four days temperatures hovered above 100 degrees Fahrenheit, peaking at 111 before breaking for the second week of play. These extreme conditions hobbled many competitors in both the ladies’ and gentlemen’s draws. The players in the Oz Open are all finely conditioned athletes, but the top players are also the most fit. Grand Slam champions win many matches with physicality rather than stroke production .

Many spectators are not aware that whatever the ambient temperature, it feels much warmer on the court. The Plexi-Cushion surface is an acrylic paint on top of a ground rubber cushion layer laid over an asphalt base. A thermometer hung off the net post would register 12-15 degrees warmer than the ambient temperature, while the surface of the court would have been 140-150 degrees F. during this period. Caroline Wozniaki claimed that she put a plastic water bottle on the court surface and it melted. Many players came to the court with multiple pairs of shoes because their feet blistered while frying on the court. Ice vests were placed over the competitors at changeovers. Even a couple of the ball kids passed out.

Using Ice to Battle the Heat in Oz c. Firstpost Australia

Under WTA rules the women (who play best 2 of 3 set matches) can get a 10 minute break after the second set in the heat. Men playing best of 5 sets (and getting equal pay) get no such accommodation. Players who have competitive 5 set encounters will be on court for around four hours. Expecting players to compete at such a high level for so long under ordinary summer conditions is tough enough. To do so in this level of heat borders on the ridiculous in that it ceases to be about the tennis and becomes strictly a test of endurance.

Early on the second day of the heat wave, Australian Open tournament officials invoked their “Extreme Heat Policy”. First introduced in 1998 at the insistence of the players, the EHP comes into play when a combination of temperature and heat stress makes play dangerous. They calculate the Wet Bulb Globe Temperature which is a combination of ambient temperature, wind speed, humidity and the intensity of solar radiation.  A combination of the WBGT with the actual air temperature is used to decide whether the EHP is activated. On Tuesday, the 109 degree F. ambient temperature was high enough, but the WBGT was not, presumably because the humidity level was only 44%. On Wednesday, with temperatures at 111 degrees and humidity on the rise, play was stopped for several hours on the outside courts.

“Grinding” an opponent by extending rallies and refusing to miss is a time tested low risk strategy for well conditioned competitors to play their matches. Many top players who are also extremely fit welcome the heat. Jim Courier, known as a physically intimidating presence while on the tour and a resident of Florida, won the Oz Open twice. In 1993, the tournament discussed closing the roof of the arena to lower the court surface temperature. At the time the world #1 ranked player, Courier declared his refusal to play the final if that were done. The court stayed hot and he won. Today’s classic grinder is David Ferrer, the number 3 seed who today advanced to the quarterfinals.

Fitness can vary dependent upon training, and adaptations can improve resistance, but some players (as all people) are more susceptible to heat than others. Heat of 110+ degrees F. will eventually cause dehydration  in all athletes. The symptoms include headaches, dizziness and cramping, which can set in even after the match ends. Part of the code of tennis etiquette is that default is anathema. If you are still on your feet, always believe that you can come back…and win! But when dehydration sets in, your brain becomes fuzzy. That can be dangerous, because if one continues to play, heat stroke or worse can follow.

Although they dread it, most competitors are prepared to suffer to win. They recognize that fitness is a weapon honorably employed. The television audience was treated to the gladiatorial spectacle of athletes struggling to stay coherent in the heat, even as the live audience was surely discomforted almost as much as the players. Diogenes believes that Grand Slam matches are tough enough and that play should be stopped at temperatures above 100 degrees F. If it’s sufficiently hot that a sensible individual wouldn’t volunteer to venture out anywhere other than to a beach or pool, then it’s just too hot to play!

What would happen if heat delays the competition early in the tournament? At the Oz Open, play could continue around the clock inside the two enclosed arenas (a third stadium will be finished by next year). The players are used to extended delays and playing at odd hours around the globe. Most of the television audience watches the matches on tape delays because of the time difference from Australia to the rest of the world. The Grand Slams are all grueling competitions. They should be more about tennis skills than physical endurance.