We're Relying on Phantom Wealth to Fund Our Retirement

Phantom wealth cannot possibly fund unprecedented retirement and healthcare promises.

The narrative that Social Security, Medicare and pension funds invested in stocks and bonds can fund the retirement of 65 million people is a misleading fantasy. The sad reality is we can’t fund the enormous expense of retirement/healthcare for 20% of the populace out of our national earned income, and the savings that have been set aside are either fictitious (the Social Security Trust Fund) or based on phantom wealth created by speculative asset bubbles in stocks, bonds and real estate.

I explain the fraud of the Social Security Trust Fund in detail in The Fraud at the Heart of Social Security (January 17, 2011).

In the bogus “Trust Fund,” the cash has been siphoned off and spent on Federal government outlays. The Fund holds no cash. Instead, it has been given IOUs “backed by the full faith and credit of the United States,” the non-marketable securities.

Now what happens when the Social Security system redeems $100 billion of those securities? the Treasury goes out and borrows the $100 billion on the global bond market, and taxpayers are on the hook for the debt and the interest on that freshly issued debt.

This isn’t that difficult to understand, but let’s go through it again:

In a real Trust Fund, taxpayers pay in their cash, and the surplus cash is invested in marketable bonds–not IOUs, but real assets that pile up in the Trust Fund just like savings in a savings account. That cash is then withdrawn later, as needed, via the sale of bonds purchased with the cash. Taxpayers (employees and employers) pay nothing above and beyond their payroll taxes to fund Social Security.

In the fraudulent “Trust Fund,” taxpayers’ Social Security taxes have been squandered on other Federal expenses, and they have to pay interest on Treasury debt which is borrowed to pay their SSA benefits. In other words, taxpayers pay twice: once via Social Security taxes, a substantial 12.4% of all wages, and then they pay again to borrow cash on the bond market to actually pay the Social Security benefits.

Medicare is equally unsustainable: please read these for the full story:

The Problem with Social Security and Medicare (July 17, 2013)

The Problem with Pay-As-You-Go Social Programs: They’re Ponzi Schemes (November 5, 2013)

Rather than face up to the reality that we face an impossible dilemma–either workers will be slowly impoverished by taxes that must go up to fund unrealistic retirement/healthcare promises, or those promises will have to be drastically scaled back–we have chosen to believe the happy illusion that inflating asset bubbles will painlessly conjure up enough phantom wealth to pay all those promises.

How can an unprecedented number of people (65 million Baby Boomers) all retire with unprecedented pension payouts and unprecedented healthcare expenses, and do so without raising taxes? Easy–just inflate asset bubbles that create trillions of dollars in magical wealth.

But as I explained in The Happy Story of Boomers Retiring on Their Generational Wealth Is Wrong (June 25, 2014), the assumption that there will be buyers of stocks, bonds and real estate at bubble-level valuations is not based on demographic realities.

The phantom wealth of asset bubbles is based on anomalously low interest rates and equally anomalous central bank intervention in capital markets. The base assumption is that these anomalous conditions are not anomalous but the New Normal: central banks can intervene without any negative consequences forever, interest rates can be suppressed to near-zero without any negative consequences forever, and sovereign debt (government deficits) can rise indefinitely without any negative consequences forever.

Oh, and corporate profits can also rise indefinitely, too, even as earned income (as a share of gross domestic product–GDP) declines:


To tap this phantom wealth, assets must be sold at bubblicious valuations; this raise the question, Who Will Boomers Sell Their Stocks To? (June 23, 2014)

Consider the fundamental relationship of stocks to the nation’s gross domestic product (GDP). Current sky-high stock valuations are not just aberrations in terms of previous stock prices–they’re aberrations in terms of stocks’ valuations compared to the nation’s entire economy.


So if bonds decline by 50% as interest rates normalize (i.e. rise), and stocks fall 50% as corporate profits and central bank intervention normalize, and real estate declines 50% in most locales as declining wages meet rising interest rates, then what source of funding will replace the $30 trillion in phantom wealth that evaporated?

Declining wages? A new speculative asset bubble in bat guano?

Perhaps it’s time that we face up to the fiscal reality that unprecedented promises can only be paid out of current income and hard assets that can be sold in vast quantities without depressing the price of those assets. As earned income declines as a share of the economy and asset bubbles based on liquidity and financialization pop, we will eventually have to deal with the difficult reality that government debt is not a hard asset that can be sold in vast quantities without depressing the value of that asset.

In sum, phantom wealth cannot possibly fund unprecedented retirement and healthcare promises. Only real wealth can do that, and central bank liquidity and the asset bubbles it inflates are not real wealth.

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About the Author: Charles Hugh Smith as a writer and financial commentator living in Hawaii. His blog, Of Two Minds.com, is ranked #7 in CNBC’s top alternative financial sites, and is republished on numerous popular sites such as Zero Hedge, Financial Sense, and David Stockman’s Contra Corner. Smith is frequently interviewed by alternative media personalities such as Max Keiser, and is a contributing writer on PeakProsperity.com. This article originally appeared on Smith’s blog, and is republished here with permission.

Bubbles & Schemes

Editor’s Note: Consistent with our ongoing determination to publish in-depth analysis along with the more digestible tidbits that should never be an exclusive source of political and economic analysis and commentary, here is a 2,400 word piece that exposes and dissects the sources of instability and speculative excess in global financial markets. Anyone who has a strong opinion on the sustainability of, for example, 7.75% projected average annual returns for the Los Angeles Fire and Police Pension system, or, for that matter, any other public employee pension system, needs to wade through material like this. Because global financial markets, as author Doug Noland states, are now driving the economy, instead of the other way around. The result are assets that are artificially inflated; to quote Noland, “Contemporary central banking has regressed to little more than a scheme intent upon bolstering securities and asset prices.” Central banking policies, and the ecosystem of financial special interests that exploit them, are creating a global pricing bubble of dangerous proportions, across all classes of assets.

The “economic sphere” versus “financial sphere” analytical framework has in the past been a focal point, but over recent years I have not given this type of analysis the attention it deserves. Conventional analysis holds that the real economy drives the performance of the markets. During bull markets, pundits fixate on every little indicator supposedly corroborating the optimistic view. These days, the bulls trumpet strong underlying profit growth as supporting ever higher stock prices.

Especially in this Age of Unfettered Finance, I’m convinced that the “financial sphere” commands the “economic sphere.” Profits are generally a byproduct of strong underlying growth in finance – hence a lagging indicator. Corporate earnings will appear absolutely stellar at market peaks – as Credit flows freely and financial conditions remain ultra-loose. Profits will be lousy at market bottoms, when risk aversion and attendant tight financial conditions dominate.

Going back now more than twenty years, one of my primary analytical objectives has been to identify, study and monitor the underlying finance fueling booms in markets and economic activity. Fundamental analytical issues include: What is the nucleus of the underlying Credit expansion? Whose balance sheets/liabilities are growing? What is the nature of prevailing financial flows? How stable are the underlying Credit and flow dynamics? What is the role of policymaking and government market intervention? Are there major market misperceptions and resulting mispricings?

Today’s consensus view holds that the economy and markets are sound – robust even. The economy is finally emerging from a difficult post-Bubble period, with the markets appropriately valued based on improving fundamentals. Central bankers and pundits alike assure us that markets have not succumbed to yet another Bubble. Top officials at the Fed and ECB have both recently stated that underlying Credit growth and market leverage are inconsistent with a problematic Bubble backdrop.

I have repeatedly identified troubling parallels between the past twenty year cycle and the protracted boom that ended with the 1929 stock market crash. Having extensively studied the late-twenties period, I was repeatedly struck by how virtually everyone was caught unaware of acute underlying financial and economic fragilities. “How could they have not seen it coming?,” I often asked myself. It all makes clearer sense to me now.

Importantly, this has been a particularly prolonged Credit and speculative cycle (exceeding even the historic 1914-1929 boom). Similar to 1929, everyone has become numb to the scope of Credit excess, speculative leveraging and economic maladjustment. Back in the sixties, Alan Greenspan was said to have pointed responsibility for the financial collapse and resulting Great Depression on a misguided Federal Reserve that had repeatedly placed “coins in the fuse box” to sustain the Twenties boom.

Clearly, a protracted period of repeated central bank market interventions will solidify the notion that adroit policymakers have everything under control. And given enough time – and sufficient inflation in Credit and financial asset markets – price distortions will become deeply systemic – if not commonly appreciated. Importantly, protracted booms create cumulative deleterious effects that, by the nature of things, go completely unappreciated even in the face of precarious “terminal phase” Bubble excess.

I titled a presentation back in early-2000, “How Could Irving Fisher Have been so Wrong?” Only days before the great 1929 crash, the leading American economist at the time famously stated: “Stock prices have reached what looks like a permanently high plateau. I do not feel there will be if ever a 50 or 60 point break from present levels…”

Fisher and about everyone else at the time were oblivious to underlying financial and economic fragilities. With this in mind, I will touch upon what I believe are sources of potential vulnerability. In particular, my focus is on potentially unstable Credit and financial flows – the “financial sphere”.

First of all, Credit financing asset speculation is inherently unstable. Broker call loans and various leveraged structures proved catastrophic in the 1929 crash and subsequent financial meltdown. During booms, speculative leveraging engenders their own self-reinforcing liquidity abundance. But as we saw firsthand during the 2008/09 fiasco, the cycle’s vicious downside, with the forced unwind of speculative leverage, pressures market liquidity and asset prices in a self-reinforcing market crash. Contemporary central banking has regressed to little more than a scheme intent upon bolstering securities and asset prices.

It is my view that the current amount of global speculative leverage across securities and asset markets is surely unprecedented – stocks, bonds, EM, real estate, collectables, etc. The global leveraged speculating community has grown significantly since the ’08 crisis, while there has been a proliferation of instruments, vehicles and funds that boost returns through the use of embedded leverage. Anecdotes suggest global “carry trade” speculative leverage has inflated to unprecedented extremes, certainly bolstered by central bank currency/liquidity manipulation (the U.S., Japan and China at the top of the list). And I worry that booming markets for ETFs and derivatives (of all stripes) ensure the utilization of massive amounts of leverage (along with trend-reinforcing “dynamic trading” hedging strategies).

At the same time, record margin debt and booming “repo” markets suggest speculative leverage from traditional sources remains as prominent as ever. What are the ramifications for system stability from record quantities of stocks and bonds at record high prices underpinned by record amounts of speculative leverage?

Sheila Bair penned an interesting op-ed in Friday’s Wall Street Journal: “The Federal Reserve’s Risky Reverse Repurchase Scheme.” I appreciate the analysis and particularly the notion of a “scheme.” I actually believe that there is a critically important evolution that occurs during protracted Credit and speculative cycles. In simple terms, over time runaway financial and economic booms transforms from a Bubble dynamic to one more akin to a sophisticated financial scheme.

Importantly, mounting financial and economic fragility fosters progressive government intrusion throughout the markets and real economy. Resulting market instability and poor economic performance then provoke only more meddlesome government “activism.” As we’ve witnessed over the past six years, massive fiscal spending has bolstered the economy and inflated corporate profits. Meanwhile, central bank interest-rate manipulation, market intervention and massive “money” printing incited risk-taking and incentivized speculative leveraging. If the great American economist Hyman Minky were alive today, he would undoubtedly label this one of history’s most outrageous episodes of “Ponzi Finance.”

It’s certainly no coincidence that we’ve been witnessing a proliferation of financial jerry-rigging. The loosest financial conditions imaginable have spurred record stock buybacks that have bolstered equities prices, while goosing earnings-per-share (EPS). Other popular methods of financial engineering include “tax inversions,” master limited partnership and various other tax avoidance schemes that work to inflate equity market valuation. Government and central bank largesse has also incited a historic M&A boom that will leave a legacy of problem debt.

It’s surprising that there has not been more concern regarding conspicuous excess throughout the corporate debt market. Corporate borrowings are notoriously cyclical and potentially disruptive. One can look back to the late-eighties corporate debt boom and resulting early-nineties bust. Then there were late-nineties excesses that left a legacy of problematic telecom debt, along with a severe tightening of Credit conditions. Yet those excesses were left in a trail of dust by the 2006/07 corporate lending fiasco that played prominently in the subsequent financial crisis.

So let’s take a brief look under the hood of today’s corporate debt boom (beyond record issuance of bonds – risky and otherwise). From the Fed’s Z.1 “flow of funds” report we see that non-financial corporate borrowings increased at a seasonally-adjusted and annualized rate (SAAR) $873bn during Q1, up sharply from 2013 Q4 and at a pace surpassing even 2007’s record $862 growth in corporate debt. It is worth noting that the two-year 2012-2013 corporate debt expansion of $1.45 TN surpassed the $1.42 Trillion gain from 2006-2007. And while we’re at it, the 1998-1999 lending boom saw corporate debt increase $801bn and the 1987-1988 Bubble posted growth of $395bn. Some would argue that the 9% (or so) pace of corporate debt growth over the past nine quarters remains below 2007’s 13.6%, 1998’s 10.8% and 1987’s 10.4%. I would counter that today’s record low corporate borrowing costs work to somewhat temper overall growth in corporate Credit. Excesses – including issuance and mispricing – are greater than ever.

The cyclical boom and bust dynamic saw Credit expansion slow rapidly during the early nineties, with corporate debt actually contracting 2.3% in 1991 (and growing only 0.8% in ’02). Booming corporate debt growth was cut in half by 2001, and then expanded only 1.3% in 2002 and 2.0% in 2003. Corporate borrowings were also cut in half in 2008, before contracting 3.1% in 2009 (expanding only 1.7% in 2010). Importantly, corporate debt is prone to cyclicality and instability.

Returning to “financial sphere” analysis, I discern latent fragility. Sure, Q1 total non-financial sector Credit expanded SAAR $2.113 TN (up from 2013’s $1.812 TN), surpassing my $2.0 TN bogey for Credit sufficient to drive a maladjusted economic structure. But the federal (SAAR $874bn) and corporate (SAAR $873bn) sectors accounted for the vast majority of system Credit expansion. And I believe both Credit booms have been heavily impacted by central bank QE liquidity injections. After all, Fed holdings expanded SAAR $911bn during Q1, after surging $1.086 TN in 2013. Importantly, we’re now only a few months away from the end of QE.

July 25 – Financial Times (Vivianne Rodrigues and Michael Mackenzie): “Junk bonds are on track for their worst monthly return in nearly a year, with investors fretting the era of easy US central bank money is at an end and calling time on a bull run for one of the market’s riskier asset classes. Years of quantitative easing by the Federal Reserve have driven investors into bonds, real estate and equities, sparking concerns of looming asset price bubbles. Junk-rated debt, in particular, has attracted record inflows and generated robust returns for investors prepared to bet on bonds sold by companies with the lowest credit ratings.”

July 25 – Wall Street Journal (Katy Burne and Chris Dieterich): “Investors are selling junk bonds at the fastest pace in more than a year, as fresh interest-rate fears and geopolitical turmoil amplify valuation concerns following a long rally. Prices on bonds issued by lower-rated U.S. companies tumbled to a three-month low this week… Investors yanked $2.38 billion from mutual funds and exchange-traded funds dedicated to junk bonds in the week ended Wednesday, the largest weekly withdrawal since June last year, said… Lipper. That came on the heels of $1.68 billion that poured out the week before. Companies have taken note, with some borrowers delaying scheduled debt sales and others canceling planned deals. New issuance is on track for its slowest month since February, according to… Dealogic.”

I suspect that the end of QE could very well send shudders throughout the corporate debt marketplace, and I would furthermore expect the initial tightening of financial conditions to manifest with the marginal “junk” borrowers. Especially after hundreds of billions have flooded into high-yielding vehicles (certainly including the ETF complex), an abrupt reversal of flows would spell Credit tightening trouble. Further, any meaningful deterioration in corporate Credit Availability would have negative ramifications for an overextended stock market Bubble. As I have written previously, with QE winding down the securities markets are increasingly vulnerable to a destabilizing bout of “risk off.” It wouldn’t require a major de-risking/de-leveraging episode to dramatically alter the marketplace liquidity backdrop.

There is another element of “financial sphere” analysis that I believe could play a major role in unappreciated latent fragilities: Integral to the “global government finance Bubble” thesis is that excesses today encompass the world and virtually all asset classes. While not readily apparent, I believe there are various international financial flows that today stoke asset inflation and Bubbles – flows that could prove especially destabilizing in the event of globalized financial tumult. Myriad flows originating from the likes Japan, China, overheated EM Credit systems and elsewhere unobtrusively inject liquidity and drive price gains throughout our stocks, bonds, real estate and the real U.S. economy more generally.

July 16 Wall Street Journal (Min Zeng) “China Plays a Big Role as U.S. Treasury Yields Fall – Record Chinese Purchases of Treasurys Help Explain U.S. Bond Rally.” “Investors wrestling with the mysterious U.S. bond rally of 2014 got a clue about where to look: China. The Chinese government has increased its buying of U.S. Treasurys this year at the fastest pace since records began more than three decades ago… The purchases help explain Treasurys’ unexpectedly strong rally this year… The world’s most-populous nation boosted its official holdings of Treasury debt maturing in more than a year by $107.21 billion in the first five months of 2014… “

July 9 – Los Angeles Times (Tim Logan): “A record amount of foreign money is flowing into the U.S. housing market… Overseas buyers and new immigrants accounted for $92 billion worth of home purchases in the U.S. in the 12 months ended in March… That’s up 35% from the year before, and the most ever. Nearly one-fourth of those purchases came from Chinese buyers. And the place they’re looking most is Southern California… The report highlights the growing effect of global capital on some local housing markets. The $92 billion amounts to 7% of all money spent on homes in the U.S. during those 12 months, and nearly half of it was concentrated in a handful of cities, including Los Angeles.”

Perhaps it’s coincidence that the ECB is commencing a major new liquidity operation just as the Fed’s QE winds down. Clearly, the “Draghi plan” to bolster fragile European peripheral debt markets should be viewed as a sophisticated financial scheme. Thus far, the Bank of Japan (BOJ) shows no indication that its “money” printing scheme is ending anytime soon. And despite all the talk that the Chinese were serious about financial and economic reform, they apparently took one alarming look at rapidly unfolding systemic fragilities and opted to let their historic Bubble run. The Chinese Bubble is a government-dictated financial scheme of epic proportions.

So it’s become an equally fascinating and alarming global dynamic: a multifaceted global scheme to support massive amounts of debt, inflated securities markets and a grossly maladjusted global economic structure. Worse yet, it’s a global scheme held together by various governments that are increasingly engaged in heated geopolitical strife. In the end, “Ponzi Finance” financial schemes boil down to games of confidence.

So I’ll attempt the briefest responses to the above noted key questions: What is the nucleus of the underlying Credit expansion? Answer: Non-productive government debt, speculative leverage and borrowings to support financial engineering. Whose balance sheets/liabilities are growing? Answer: The Fed’s and Treasury’s, along with corporate America. What is the nature of prevailing financial flows? Answer: Financial speculation – chasing yields and inflating securities prices. How stable are the underlying Credit and flow dynamics? Answer: I believe highly unstable and susceptible to changing market perceptions and faltering confidence. What is the role of policymaking and government market intervention? Answer: Profound impact on all markets and the real economy. Are there major market misperceptions and resulting mispricings? Answer: Confidence in both ongoing liquidity abundance and the power of central banks has fostered profound systemic mispricing throughout securities and asset markets on a global basis. Is the backdrop consistent with a momentous financial scheme? Absolutely.

About the Author:  Doug Noland has been the Senior Portfolio Manager of the Federated Prudent Bear Fund and Federated Prudent Global Income Fund since December 2008. Prior to joining Federated, Mr. Noland was employed with David Tice & Assoc., Inc. where he served as an Assistant Portfolio Manager and strategist of Prudent Bear Funds, Inc. Prudent Bear Fund and Prudent Global Income Fund from January 1999. From 1990 through 1998, Mr. Noland worked as a trader, portfolio manager and analyst for short-biased hedge funds including G. W. Ringoen & Associates from January 1990 to September 1996, Fleckenstein Capital from September 1996 to March 1997 and East Shore Partners, Inc. from October 1997 to December 1998. He earned a B.S. in Accounting and Finance from the University of Oregon and a M.B.A. from Indiana University. This post originally appeared on the economics website “The Prudent Bear” and is published here with permission.

Busses Offer Far Better Mass Transit Solution Than Light Rail

Los Angeles transit officials are eagerly contemplating the opportunity to spend money converting the Orange bus-rapid transit line into a light-rail line. To promote this idea, they are letting people know that light rail will be faster, more comfortable, and operate more frequently (so riders will be less likely to have to stand) than buses.

20140813_OTooleThese lanes are exclusively dedicated to buses, but transit agency officials say they need to replace
them with light rail because there is no room to run more than one bus every eight minutes.

Of course, all of these things are wrong. The current bus line averages 26 mph, about 4 mph faster than the average light-rail line. Buses can be just as comfortable as light rail, and when vehicles are full, a higher percentage of bus riders get to sit down (about two-thirds as opposed to less than half). As for frequencies, the current schedule of the Orange line calls for one bus every eight minutes at rush hour. Since the road is closed to all other traffic, somehow I think they could squeeze a few more in if they wanted to.

That the line is a bus line at all is due to a curious law passed in 1991 forbidding the use of rail in the corridor, which had been used by Pacific Electric streetcars until 1952. So Metro built an exclusive bus corridor at a cost of $18 million a mile–$22 million in today’s money. That law was repealed a few weeks ago, allowing L.A. Metro officials to think about spending more money in the corridor.

Years ago, a researcher named Jonathan Richmond interviewed Los Angeles public officials and discovered a disconnect between their views of light rail and reality. The interviews would go something like this:

“Why do you support light rail?”

“Because it is so fast, people are sure to want to ride it.”

“You know it will only go 22 miles per hour.”

“Really? I thought it would be faster than that.”

“Yes, and many light-rail lines are even slower than that. So, now why do you support light rail?”

“Because it is so fast.”

The same disconnect continues today. After a collision between a bus and a car at an intersection, officials slowed down the buses, and one state senator warned that the bus line was “unsafe at any speed.” But trains will be able to go faster because being hit by a 300,000-pound train is so much safer than being hit by a 50,000-pound bus.

“With as many as 40,000 new jobs expected” in the area, officials say, “a light-rail system that could handle up to 60,000 riders a day is needed.” Because a bus line couldn’t possibly move that many people per day, could it?

Buses, in fact, have a clear capacity advantage over light rail. For example, Metro could rebuild platforms at each station to handle four buses at a time. Each bus could stop at each station for up to a minute unloading and loading passengers. Then the line could move four buses per minute, each capable of hold 100 people, for a total of 24,000 people per hour. By comparison, three-car light-rail trains, each car hold 150 passengers, can safely operate no more frequently than every three minutes, thus moving about 9,000 people per hour.

Moreover, buses have at least two other huge advantages over rail. First, without reducing the number of other buses, express buses could be added that skip some of the stops along the route. Because light-rail lines have no passing tracks, they have no options for express rail.

Second, when reaching the end of the exclusive bus lanes, the buses can continue on city streets, reaching more neighborhoods and job centers. Trains have to stop when the reach the end of rails, forcing people to transfer.

Los Angeles’ fixation with rail reminds me of Cordelia Chase, the Valley girl who was Buffy’s in-school nemesis in Buffy the Vampire Slayer. In an early episode, we overhear Cordelia tell her friends, “When I go shopping, I have to have the most expensive thing. Not because it’s expensive, but because it costs more.”

This attitude has many causes, but it is reinforced by the fact that spending more money creates more opportunities for contractors to earn profits and generates more political favors. But spending more on rail also means spending less on something else. Since rail has no inherent advantage over bus, and many disadvantages, a decision to convert the Orange line to light rail would reveal a callous disregard for both the facts and for taxpayers’ interests.

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About the Author:  Randal O’Toole is an American public policy analyst. The majority of O’Toole’s work has focused on private land rights, particularly against public land use regulations and light rail. Since 1995, he has been associated with the Cato Institute as an adjunct scholar and frequent anti-light rail campaigner. O’Toole was the McCluskey Visiting Fellowship for Conservation at Yale University in 1998, and has served as a visiting scholar at the University of California, Berkeley and Utah State University. O’Toole studied economics at the University of Oregon. This post was originally published on O’Toole’s blog, The Antiplanner, and appears here with permission.

One Size Fits All: The War on Excellence in Public Education

Women’s garments labeled one size fits all, generally a dress or blouse, bear more resemblance to a tent on slender women than to a stylish frock. It’s an illustration that we are all not the same, but different and have different needs. The same principle applies to education.

Prior to the unionization of the teaching profession and the imposition of a standard left-leaning single curriculum for all students in the mid-1960’s, public schools offered several programs of instruction: vocational, general studies and college-prep. The latter track was further divided into honors classes for the most gifted students and regular classes for average students.

Students were separated by interest and academic rank. The system worked well for decades to prepare students for their chosen career path, be it an auto mechanic, secretary or physician. In big cities such as New York, there were also public high schools that offered unique curricula in science and fine arts such as the Bronx High School of Science (whose graduates include seven Nobel Laureates and six Pulitzer winners).

Similar schools included the High School for Mathematics, Science and Engineering at City College, Staten Island Technical High School of American Studies at Lehman College, the High School of Music and Art and the Performing Arts as well as nationally ranked academic institutions such as Stuyvesant High School.

These institutions accounted for the phenomenal success of the baby-boom generation, the last to reap the benefits of an education system that was unrivaled in the world. Sadly, public education in America has retreated from that position ever since.

The breadth and depth of the curriculum at these schools and the amount of work expected of its students in those days bear little resemblance to the watered down multicultural, politically correct curriculum at most public high schools today. This has resulted in an uneducated student population whose mediocre scores on international assessments of academic achievement are a global embarrassment and a worrisome barometer of the nation’s future.

In their despair at this massive decline in standards, parents, educators and private entrepreneurs have developed alternative institutions such as charter schools, online academies and home schools which have proven highly successful in reversing the downward decline in the state-controlled system.

An example of this success is the recent graduate in California, Hannah Ling of Irvine, who took all of her courses online and got the state’s top score plus a full scholarship to study engineering at UC Berkeley.. Home schooled graduates generally score twenty to forty percentage points higher than their public school peers. [1] A higher percentage of charter school graduates enter colleges than those of public schools. The lesson to be learned is that a good education produces good results. A glance at an 1895 eighth grade final exam proves the point. [2]

One size does not fit all in public education. Teaching geared to the average or slowest students in the class harms the brightest, severely limiting their achievement. The best hope to restore America’s former level of academic excellence must be to adopt the techniques provided in the programs offered by the charter and home schools, the specialized high schools like those in New York City and Catholic schools that have made them so successful.


Most importantly, there must be no mistake about the motivation behind the war on excellence. It is pure unadulterated envy. With Common Core, the president’s signature education program, it is envy writ large. It is part of Obama’s efforts to debase American excellence that, sadly, appear to be bearing fruit.

War demands an appropriate response. It is essential to understand the psychology of Common Core and to mount an effective response. With the vast amount of funding available to public schools, more must be demanded.

There was a time when excellence was the gold standard. Those days must be restored for our country’s children to have any hope for a bright future. To do that, however, we must first win the war.

About the Author: R. Claire Friend, MD, is the Assistant Professor, Department of Psychiatry and Human Behavior, UC Irvine Medical Center, and the editor of the UC Irvine Quarterly Journal of Psychiatry. She is a retired psychiatrist and frequent commentator on the psychological dimensions of education and social welfare policies.


1. http://www.hslda.org/docs/study/ray2009/2009_ray_studyfinal.pdf

2.  http://www.rootsweb.ancestry.com/~kssvgs/school/8th_exam_exp.html

The Case for Adjustable Defined Benefits

Notwithstanding the fact that “adjustable defined benefits” might constitute an oxymoron, as a concept it represents the only way that defined benefit plans can be sustained. Rather than throwing new employees into individual 401K plans, while they effectively subsidize legacy defined benefits for veteran employees and retirees, why not adjust defined benefits down to a financially sustainable level and let everyone participate?

Let’s set aside for a moment the debate over whether or not defined benefit plans are just fine the way they are, and can survive with merely incremental refinements – eliminating spiking, raising contributions a bit, bumping the retirement age a few years. Those solutions buy time, but unless the investment market roars for another 30 years, they will not solve the problem. And in the context of equitable policy, that debate is moot, because if these plans are just fine, than nobody should object to reforms that will make benefits adjustable if and when they are no longer fine.

Three good examples of how adjustable defined benefits can be implemented are the proposed “Government Employee Pension Reform Act of 2012,” an California citizen’s initiative proposed by pension reformer Dan Pellissier that failed to qualify for the ballot, the City of San Jose’s “Measure B, Public Employee Pension Plan Amendments,” passed overwhelmingly by voters in 2011 and currently deadlocked by union court challenges, and the “Fifth Amended Plan for the Adjustment of Debts of the City of Detroit,” submitted to the court on July 25, 2014.

Here are summaries of what these plans do:

California’s proposed 2012 initiative, the Government Employee Pension Reform Act of 2012, would have allowed emergency changes – adjustments – to pension benefits if the pension system was deemed to be less than 80% funded. It would limit employer contributions to 6.0% of payroll for non-safety and 9.0% for safety, then add an additional employer contribution (approx. another 6.0%) to match what an employer would be required to contribute to social security. It then would have required employees to either contribute through withholding the balance of necessary funding required to maintain pension fund solvency, or participate in a new benefit plan as defined for new hires if they didn’t want to increase their pension contributions.

San Jose’s 2011 Measure B would gradually increase current employee pension contributions to 16% of pay, and offer “Voluntary election plan” (VEP) for current employees who don’t want to pay 16% for their pension. This plan limits – adjusts – an employee’s pension accrual for future years of service to 2.0% of final compensation times years worked and gradually raises age of retirement eligibility to 57 for safety and 62 for non-safety personnel. Measure B also revised the defined benefits for new employees to cap city contribution to 50% of plan cost or 9%, whichever is less, raised the retirement age to 60 for safety and 65 for non-safety personnel, and capped pension benefits at 65% of final compensation. It then authorized the city to suspend cost of living adjustments if the city declares a “fiscal emergency.”

Detroit’s proposed solution to their pension challenges takes place against a dire backdrop of economic and demographic implosions decades in the making and unlikely to ever confront a major California city. But the “triggers” they built into their revived plan, which retains defined benefits, provide useful ideas for Californians. Reviewing the “New GRS Active Pension Plan – Material Terms” (above link, page 58-59, item 12), the plan calls for implementing “risk shifting levers” at any time the funding level goes below 100%. They include, in order of application, and for as long as necessary, (1) no COLAs will be paid, (2) employee contributions will increase by 1% to 5% of base compensation, (3) most recently awarded COLAs will be rescinded, and (4) the benefit accrual rate will be decreased from 1.5% to 1%.

To reiterate: If defenders of California’s 83 public employee defined benefit systems are confident that incremental reforms as previously noted are sufficient to guarantee the financial solvency of these plans, then they should make no objection to permitting more drastic means – that effectively make defined benefits adjustable – should incremental reforms be insufficient.

Saving the defined benefit by introducing flexibility to the formulas accomplishes important goals. It protects taxpayers. It allows new employees to also have a defined benefit plan. It ensures veteran employees and retirees that the plan will never collapse completely in a financial downturn, leaving them with nothing. As an element of retirement security, a defined benefit system, because it pools the ongoing investments of thousands of participants, provides insurance against market downturns, as well as against unanticipated individual longevity. Anyone relying on an individual 401K must live with the dismal hope there will not be a severe bear market during their retirement, and that they die before they run out of money. The most compelling reason to advocate individual 401K plans for government workers is to protect the taxpayer. Making defined benefit plans modest and adjustable solves that problem in a more elegant way, but it may be naive to hope stakeholders can negotiate the necessary adjustment triggers in good faith, and implement them with integrity in the long run.

The best retirement security plan of all, implemented already for federal employees, and originally advocated by Gov. Brown before he settled for the decidedly incremental AB 340, is the “three legged stool.” That is (1) a modest – and adjustable – defined benefit, (2) a contributory 401K, and (3) Social Security. Requiring high income government workers participate in Social Security, because of its progressive benefit formulas that penalize higher income workers vs. lower income participants, would go a long way towards further stabilizing that system.

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Ed Ring is the executive director of the California Policy Center.

Land Use Facts vs. Land Use Ideology

Editor’s Note:  The median price of a home in San Francisco has just topped $1.0 million. The median price for homes throughout California, measured at $466,000 in June 2014, edges close to a half-million. Nobody, apart from the very wealthy, can really afford homes at these prices. Yet these outrageous prices are entirely the result of restrictive land use policies, relentlessly promoted by ideologues and exploited by vested interests who benefit from artificial scarcity. Some of the articles where we have already covered this are “California’s Green Bantustans,” as well as “Anti-Sprawl Policies Threaten America’s Future.” This new article by Randal O’Toole expands on the topic with a list of reasons the arguments of the high-density advocates are not supported by facts and research. O’Toole doesn’t differentiate between “smart-growth,” which invariably advocates high-density, and “new urbanism,” a movement that had its origins in a desire to restore aesthetic quality to urban architecture and was co-opted by the smart growth crowd, but that’s splitting hairs. If you want to know why California’s finest are migrating to more affordable pastures, read on.

Debates over smart growth–sometimes known as new urbanism, compact cities, or sustainable urban planning, but always meaning higher urban densities and a higher share of people in multifamily housing–boil down to factual questions. But smart-growth supporters keep trying to twist the arguments into ideological issues.

20140721_OToole-1The choice should be the consumers, not the “planners.” A suburban home…

For example, in response to my Minneapolis Star Tribune article about future housing demand, Thomas Fisher, the dean of the College of Design at the University of Minnesota, writes, “O’Toole, like many conservatives, equates low-density development with personal freedom.” In fact, I equate personal freedom with personal freedom.

20140721_OToole-2…or a “smart growth,” high density neighborhood. 

Fisher adds, “we [meaning government] should promote density where it makes sense and prohibit it where it doesn’t”; in other words, restrict personal freedom whenever planners’ ideas of what “makes sense” differ from yours. Why? As long as people pay the costs of their choices, they should be allowed to choose high or low densities without interference from planners like Fisher.

Another writer who makes this ideological is Daily Caller contributor Matt Lewis, who believesthat conservatives should endorse new urbanism. His weird logic is conservatives want people to love their country, high-density neighborhoods are prettier than low-density suburbs, and people who don’t have pretty places to live will stop loving their country. Nevermind that more than a century of suburbanization hasn’t caused people to stop loving their country; the truth is there are many beautiful suburbs and many ugly new urban developments.

Lewis adds, “Nobody I know is suggesting that big government–or the U.N.!–ought to mandate or impose these sorts of development policies.” He apparently doesn’t know many urban planners, and certainly none in Denver, Portland, San Francisco, Seattle, the Twin Cities, or other metropolitan areas where big government in the form of regional planning agencies (though not the U.N.) are doing just that. If new urbanism were simply a matter of personal choice, no one would criticize it.

The real issues are factual, not ideological.

Fact #1: Contrary to University of Utah planning professor Arthur Nelson, most people everywhere prefer low-density housing as soon as they have transport that is faster than walking. While a minority does prefer higher densities, the market will provide both as long as there is demand for them.

Fact #2: Contrary to Matt Lewis, American suburbanization did not result from a “post-World War II push for sprawl” coming from “the tax code, zoning, a federally financed highway system, and so on.” Suburbanization began before the Civil War when steam trains could move people faster than walking speed. Most American families abandoned transit and bought cars long before interstate highways–which, by the way, more than paid for themselves with the gas taxes collected from the people who drove on them. Nor did the tax code promote sprawl: Australians build bigger houses with higher homeownership ratesin suburbs just as dispersed as America’s without a mortgage interest deduction.

Fact #3: Contrary to Thomas Fisher, low-density housing costs less, not more, than high-density. Without urban-growth boundaries or other artificial restraints, there is almost no urban area in America short of land for housing. Multifamily housing costs more to build, per square foot, than single-family, and compact development is expensive because the planners tend to locate it in areas with the highest land prices.

The relative prices I gave in my article–$375,000 for a 1,400-square-foot home in a New Urban neighborhood vs. $295,000 for a 2,400-square-foot home on a large suburban lot–are typical for many smart-growth cities: compare these eastside Portland condos with these single-family homes in a nearby Portland suburb.

Fact #4: Contrary to Fisher, the so-called costs of sprawl are nowhere near as high as the costs of density. Rutgers University’s Costs of Sprawl 2000 estimates that urban services to low-density development cost about $11,000 more per house than services to high-density development. This is trivial compared with the tens to hundreds of thousands of dollarsadded to home prices in regions whose policies promote compact development.

Fact #5: Contrary to University of Minnesota planning professor Richard Bolan, the best way to reduce externalities such as pollution and greenhouse gases is to treat the source, not try to change people’s lifestyles. For example, since 1970, pollution controls reduced total air pollution from cars by more than 80 percent, while efforts to entice people out of their cars and onto transit reduced pollution by 0 percent.

Fact #6: Contrary to Lewis, suburbs are not sterile, boring places. Suburbanites have astrong sense of community and are actually more likely to engage in community affairs than city dwellers.

Fact #7: Smart growth doesn’t even work. It doesn’t reduce driving: After taking self-selection into account, its effects on driving are “too small to be useful.” It doesn’t save money or energy: multifamily housing not only costs more, it uses more energy per square foot than single-family, while transit costs more and uses as much or more energy per passenger mile as driving. When planners say smart growth saves energy, what they mean is you’ll live in a smaller house and have less mobility.

Fact #8: If we end all subsidies and land-use regulation, I’ll happily accept whatever housing and transport outcomes result from people expressing their personal preferences. Too many planners want to control population densities and transport choices through prescriptive land-use regulation and huge subsidies to their preferred forms of transportation and housing.

These planners think only government can know what is truly right for other people. Even if you believe that, government failure is worse than market failure and results in subsidies to special interest groups for projects that produce negligible social or environmental benefits.

If urban planners have a role to play, it is to ensure people pay the costs of their choices. Instead, it is planners, rather than economists such as myself, who have become ideological, insisting density is the solution to all problems despite the preferences of 80 percent of Americans for low-density lifestyles.

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About the Author:  Randal O’Toole is an American public policy analyst. The majority of O’Toole’s work has focused on private land rights, particularly against public land use regulations and light rail. Since 1995, he has been associated with the Cato Institute as an adjunct scholar and frequent anti-light rail campaigner. O’Toole was the McCluskey Visiting Fellowship for Conservation at Yale University in 1998, and has served as a visiting scholar at the University of California, Berkeley and Utah State University. O’Toole studied economics at the University of Oregon. This post was originally published on O’Toole’s blog, The Antiplanner, and appears here with permission.

Unaffordable California – It Doesn’t Have To Be This Way

July 2014 Update:  Here’s a documented comparison of California taxes and economic climate with the rest of the states. The news is bad, and getting worse. But it doesn’t have to be this way! The state and local government policies that created an unaffordable California can be reversed:

PERSONAL INCOME TAX:  Prior to Prop 30 passing in Nov. 2012, CA already had the 3rd worst state income tax rate in the nation. Our 9.3% tax bracket started at $48,942 for people filing as individuals. 10.3% started at $1 million. Now our retroactive (to 1/1/2012) “millionaires’ tax” rate is 13.3% – including capital gains (CA total CG rate now the 2nd highest in the world!). 10+% taxes now start at $250K. CA now has by far the nation’s highest state income tax rate. We are 21% higher than 2nd place Hawaii, 34% higher than Oregon, 47.8% higher than the next 2 states, and a heck of a lot higher than all the rest – including 7 states with zero state income tax. CA is so bad, we also have the 2nd highest state income tax bracket. AND the 3rd. Plus the 5th and 7th.
http://taxfoundation.org/sites/taxfoundation.org/files/docs/ff2013.pdf, Ref. Table 12


SALES TAX:  CA has the highest state sales tax rate in the nation. 7.5% (does not include local sales taxes).

GAS TAX:  CA has the nation’s highest gas tax at 71.3 cents/gallon (April 2014). National average is 49.9 cents. Yet CA has the 4th worst highways.
(CA also has the nation’s 3rd highest diesel tax – 76.2 cents/gallon. National average 54.8 cents)

PROPERTY TAX:  California in 2010 ranked 19th highest in per capita property taxes (including commercial) – the only major tax where we are not in the worst ten states. But the median CA property tax per owner-occupied home was the 10th highest in the nation in 2009.
http://www.taxfoundation.org/taxdata/show/1913.html (2009 latest year available)

“IMPACT FEES” ON HOME SALES:  Average 2012 CA impact fee for single-family residence was $31,100, 90% higher than next worst state. 265% higher than jurisdictions that levy such fees (many governments east of the Sierras do not). For apartments, fee averaged $18,800, 290% above average outside state. The fee is part of the purchase price, so buyer pays an annual property tax on the fee!

“CAP AND TRADE” TAX:  CA has now instituted the highest “cap and trade” tax in the nation – indeed, the ONLY such U.S. tax. One study estimates the annual cost at $3,857 per household by 2020. Even proponents concede that it will have zero impact on global warming.

SMALL BUSINESS TAX:  California has a nasty anti-small business $800 minimum corporate income tax, even if no profit is earned, and even for many nonprofits. Next highest state is Oregon at $150. A few others under $100, with most at zero.

California small businesses failed in 2011 at a rate 69% higher than the national average — the worst state in the nation.
http://money.cnn.com/2011/05/19/smallbusiness/small_business_state_failure_rates/index.htm (based on Dunn & Bradstreet study)

CORPORATE INCOME TAX:  CA corporate income tax rate (8.84%) is the highest west of the Mississippi (our economic competitors) except for Alaska.
Ref. Table #1 – we are 5th highest in nation in per capita corporate tax collections.

BUSINESS TAX CLIMATE:  California’s 2013 “business tax climate” ranks 3rd worst in the nation – behind New Jersey and anchor-clanker New York state. In addition, CA has a lock on the worst rank in the Small Business Tax Index – a whopping 8.3% worse than the 2nd worst state.

LEGAL ENVIRONMENT:  The American Tort Reform Association ranks CA the “worst judicial hellhole” in U.S. for 2nd year in a row – most anti-business. The U.S. Chamber of Commerce ranks CA higher – “only” the 4th worst state (unfortunately, sliding from 7th worst in 2008).

FINES AND FEES:  CA tickets are incredibly high. Red-light camera ticket $490. Next highest state is $250. Most are around $100.

CA needlessly licenses more occupations than any state – 177. Second worst state is Connecticut at 155. The average for the states is 92. But CA is “only” the 2nd worst licensing state for low income occupations.

CA has the 3rd highest state workers compensation rates, up from 5th in 2010. CA had a 3.4% rate increase in 2013.

OVERALL TAXES:  Tax Foundation study ranks CA as the 4th worst taxed state. But if counting ONLY in-state and local taxes, we are arguably the 2nd highest.

UNEMPLOYMENT:  CA is has the 5th worst state unemployment rate (May, 2014) – 7.6%.  National unemployment rate 6.3%.  National unemployment rate not including CA is 6.1%, making the CA unemployment rate 24.1% higher than the average of the other 49 states (sadly, one of the better performances we’ve managed in several years – we were at 4.8% in Nov. 2006 vs. national 4.6%).

Using the average 2013 U-6 measure of unemployment (includes involuntary part-time workers), CA is the 2nd worst (after Nevada) at 16.7% vs. national 13.4%.  National U-6 not including CA is 13.0%, making CA’s U-6 29.0% higher than the average of the other 49 states.

EDUCATION:  CA public school teachers the 4th highest paid in the nation. CA students rank 48th in math achievement, 49th in reading.
http://www.lao.ca.gov/reports/2011/calfacts/calfacts_010511.aspx, page 36

California, a destitute state, still gives away community college education at fire sale prices. Our community college tuition is the lowest in the nation. How low? Nationwide, the average community college tuition is more than double our California community colleges.

This ridiculously low tuition devalues education to students – often resulting in a 25+% drop rate for class completion. In addition, up to 2/3 of California CC students pay no net tuition at all!

Complaints about increased UC student fees too often ignore one crucial point — all poor and many middle class students don’t pay the “fees” (our state’s euphemism for tuition). There are no fees for most California families with under $80K income.

WELFARE AND POVERTY:  1 in 5 in Los Angeles County receiving public aid.

California’s real poverty rate (the new census bureau standard adjusted for cost-of-living) is by far the worst in the nation at 23.8%. We are 48.8% higher than the average for the other 49 states. Indeed, the CA poverty rate is 20.2% higher than 2nd place Nevada.
http://www.census.gov/prod/2013pubs/p60-247.pdf, page 13

California has 12% of the nation’s population, but 33% of the country’s TANF (“Temporary” Assistance for Needy Families) welfare recipients – more than the next 7 states combined. Unlike other states, this “temporary” assistance becomes much more permanent in CA.

California ranks 48th worst for credit card debt and 49th worst for percentage of home ownership.

GOVERNMENT INSOLVENCY:  California now has the 2nd lowest bond rating of any state – Basket case Illinois recently beat us out for the lowest spot. We didn’t improve our rating – Illinois just got worse.

Average California firefighter paid 60% more than ff’s in other 49 states. CA cops paid 56% more.

HOUSING COSTS:  Of 100 U.S. real estate markets, CA contains by far the least affordable middle class housing market (San Francisco). PLUS the 2nd, 3rd, 5th, 6th and 7th. San Diego is #5 (w/homes avg. 1,056 sq. ft.) http://riderrants.blogspot.com/2013/10/the-us-least-affordable-housing-market

TRANSPORTATION COSTS:  CA has 2nd highest annual cost for owning a car – $3,966. $765 higher than the national average.

WATER & ELECTRICITY COSTS:  California residential electricity costs an average of 33.7% more per kWh than the national average. CA commercial rates are 27.0% higher. For industrial use, CA electricity is 54.2% higher than the national average (March 2014). NOTE: SDG&E is even higher than the CA average! http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_06_a

A 2011 survey of home water bills for the 20 largest U.S. cities found that for 200 gallons a day usage, San Diego was the highest cost. At 400 gal/day, San Diego was third highest.

BUSINESS FLIGHT:  In 2012, our supply of California businesses shrunk 5.2%. In ONE year. NOTE: That’s a NET figure – 5.2% fewer businesses in CA in 2012 than were here in 2011. Indeed, in 2012, CA lost businesses at a 67.7% higher rate than the 2nd worst state!

Top U.S. CEO’s surveyed rank California “the worst state in which to do business” for the 10th straight year (May, 2014). 24/7 Wall St. ranks CA the “worst run state” for 3rd year.

From 2007 through 2010, 10,763 industrial facilities were built or expanded across the country — but only 176 of those were in CA. So with roughly 12% of the nation’s population, CA got 1.6% of the built or expanded industrial facilities. Stated differently, adjusted for population, the other 49 states averaged 8.4 times more manufacturing growth than did California.
(California Manufacturers and Technology Association podcast)

OUT-MIGRATION:  California is now ranked as the worst state to retire in. We “beat” them all, NY, RI, IL, NJ, etc.

The median Texas household income is 18.1% less than CA. But adjusted for COL, CA median household income is 16.1% less than TX.

Consider California’s net domestic migration (migration between states). From 2003 through 2012, California lost a NET 1.43 million people. Net departures slowed in 2008 only because people couldn’t sell their homes. But more people still leave each year — in 2011 and again in 2012, we lost about 100,000 net people to domestic out-migration. Again, note that this is NET loss.

They are primarily the young, the educated, the productive, the ambitious, the wealthy – and retirees seeking to make their nest-eggs provide more bang for the buck.

Richard Rider is the chairman of San Diego Tax Fighters, a grassroots pro-taxpayer group. Rider successfully sued the county of San Diego (Rider vs. County of San Diego) to force a rollback of an illegal 1/2-cent jails sales tax, a precedent that saved California taxpayers over 14 billion dollars, including $3.5 billion for San Diego taxpayers. He has written ballot arguments against dozens of county and state tax increase initiatives and in 2009 was named the Howard Jarvis Taxpayers Association’s “California Tax Fighter of the Year.” Rider updates this compilation of statistics on California every month; they are updated here quarterly.

Arrogance of the Political Elite Costs You at the Pump

It’s election season and finally there’s a bit of good news for California politicians seeking reelection. A recent Field poll shows that, for the first time in 7 years, there are more California voters that think they are financially better off than those who believe they are worse off.

However, for the political elite, that is the end of the good news. The poll also reveals that more than half of voters, 53%, see the state being in economic bad times while only 25% see these as good times. And to top it off, there are more Californians who believe the state is headed in the wrong direction as opposed to those who think the state is on the right track.

If politicians believe they can weather what they hope is a passing public relations storm, it is time to key the chorus of the Bachman Turner Overdrive song, “You Ain’t Seen Nothin’ Yet.”

California has changed a great deal in the last 50 years, but there is still one constant that the state is famous for – the California Car Culture. But now, lurking just around the corner are carbon emission fees to be charged to oil companies as part of the state’s cap-and-trade program. The cost to consumers will be huge and painful. These fees are expected to add at least 15 cents to the cost of a gallon of gas in the short term and nearly as much as $2 per gallon over the next five years. Even powerful Democratic Senator Darrel Steinberg has suggested the increase could be 40 cents a gallon, which is why he has suggested charging a smaller amount directly to consumers, rather than to the oil companies.

Compounding the pain inflicted by California’s regulatory overreach, it looks like Washington wants higher gas taxes, too. In what is being billed as a bipartisan proposal, Sens. Chris Murphy (D-Conn.) and Bob Corker (R-Tenn) are promoting a 12 cent increase in the federal gas tax that currently sits at 18.4 cents a gallon.

To the well off driving luxury cars, the price of gas is meaningless. If you’re paying over $400 for a bottle of your favorite Cognac, then $5 per gallon gas isn’t even going to raise your eyebrows. Moreover, many of the political elite – usually among the wealthy themselves – will be thrilled if the high cost of fuel drives average folks to mass transit. To their way of thinking, these changes will improve the environment and provide the additional benefit of opening up the roads for those who can afford high priced luxury and exotic automobiles. Obviously, they have no intention of joining the great unwashed who will now be forced to ride the bus or the train.

For average working folks however, more increases in the cost of gas will have a devastating financial impact. Wealthy environmental do-gooders who favor imposing a low-calorie diet on others may get their way as more and more families will be forced to choose between enough gasoline to get to work and a full grocery cart.

Working Californians struggling to support their families will not take kindly to having the cost of their commute artificially inflated by the political class. Their anger will not be dissipated by having those on the left wagging their fingers at them while saying they should move closer to work or find a job nearer to home or take the bus. Easy for the political elites to say when jobs are scarce and the cost of housing is tops in the nation.

But is the potential for a tsunami political backlash waking up our elected leaders? We hope so. Last month, 16 Democratic Assembly members, who are in touch with their constituents’problems, sent a letter to California Air Resources Board chairwoman Mary Nichols, urging a delay in the implementation of the state’s cap-and-trade program. (To their credit, the Republicans have always been skeptical of the program). Seeking relief for their constituents, the Democrats wrote,” many of the areas we represent are still struggling with double digit unemployment.” In fact, these lawmakers concerns are shared throughout the state. Unemployment remains high with several million Californians unemployed or underemployed and adding to the cost of energy and fuel will do nothing to help the state out of this economic hole.

What California could use right now is a bipartisan effort in Sacramento. Sensible Democrats and Republicans should take immediate action to lift the state’s boot from the necks of working people, and the businesses that employ them.

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About the Author: Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

No Asset Bubble?

Earlier in the week BlackRock’s Larry Fink commented on CNBC: “A Bubble is predicated on leverage.” Fink was implying that he didn’t see the type of leverage that had fueled the previous Bubble.

As part of my Bubble analysis framework, I have posited that the more conspicuous a Bubble the less likely it is to be systemic. The “tech” Bubble was conspicuous, though gross excesses impacted only a relatively narrow segment of asset prices and a subsection of the real economy.

I received a lot of pushback to my mortgage finance Bubble thesis during that Bubble period. The conventional view held that excesses were not a major issue, especially when compared to the Internet stocks and all the nonsense illuminated with the technology Bubble collapse. The Fed’s unwillingness to move beyond baby-step rate increases (to aggressively tighten Credit) played prominently in Bubble Dynamics. Today, conventional thinking sees a system that has been working successfully through a multi-year deleveraging process. Leverage and speculative excess are believed to be nothing on the order of those that gave rise to the (“100-year flood”) “Lehman crisis.”

As an analyst of Bubbles, I’ve definitely got my work cut out for me. I have seen overwhelming evidence in support of my “Granddaddy of all Bubbles” – global government finance Bubble – thesis. Yet the Bubble is so comprehensive – so systemic – that the greatest financial Bubble in human history somehow goes largely unappreciated – hence unchecked.

Understanding this era’s Credit Bubble (as opposed to the causes of the Great Depression) will prove the ultimate “Holy Grail of Economics.” The past 25 years have been unique in financial history. Indeed, the world is trapped in a perilous experiment with unfettered finance – with no limits on either the quantity or quality of Credit created. Closely associated with this trial in unchecked electronic finance (“money” and Credit) has been runaway experimentations in “activist” monetary management. Just as crucial is the experiment in unconventional economic structure – including the deindustrialization of the U.S. economy, with the corresponding unprecedented expansion of industrial capacity throughout China and Asia. This has engendered a period of unmatched global economic and financial imbalances – best illustrated by the massive and unrelenting U.S. Current Account Deficits and the accumulation of U.S. IOU’s around the globe.

The amazing thing to me is that the world has been subjected to more than 25 years of brutal serial boom and bust cycles (going back to 1987 – although there’s a strong case to start at 1971) – yet there has been no effort to reform either a patently flawed global financial “system” or a reckless policymaking doctrine. Instead, global central bankers have turned only more “activist,” drifting further into the bizarre (that passes for “enlightened”). The world’s leading central banks have resorted to rank inflationism, massive “money” printing operations specifically to inflate global securities markets. And the resulting raging “bull” markets ensure bullishness and a positive spin on just about everything. The sophisticated market operators play the speculative Bubble for all its worth, while the unsuspecting plow their savings into stock and bond Bubbles.

Credit is inherently unstable. Marketable debt instruments exacerbate instability. A financial system where Credit expansion is dominated by marketable debt (in contrast to “staid” bank loans) is highly unstable – I would argue unwieldy, whimsical and prone to manipulation. And a monetary policy regime that specifically nurtures and backstops a system dominated by marketable securities and associated speculation is playing with fire. Importantly, the more deeply central bankers intervene and manipulate such a system and the longer it is allowed to inflate – the more impossible for these central planners to extricate themselves from the financial scheme.

I’m fond of a relatively straightforward analysis that does a decent job of illuminating the state of ongoing U.S. (marketable securities) Bubbles. From the Fed’s Z.1 “flow of funds” data, I tally Total Marketable Debt Securities (TMDS) that includes outstanding Treasury securities (not the larger Federal liabilities number), outstanding Agency Securities (MBS & debt), corporate bonds and municipal debt securities.

My calculation of TMDS began the 1990’s at $6.28 TN, or an already elevated 114% of GDP. Led by explosive growth in GSE and corporate borrowings, TMDS ended the nineties at $13.59 TN, for almost 120% growth. Over this period, GSE securities increased $2.65 TN, or 209%, to 3.916 TN. Corporate bonds jumped 185% to $4.564 TN. It is worth noting that total Business borrowings expanded 9.2% in 1997, 11.5% in 1998 and 10.4% in 1999, excess that set the stage for the inevitable bursting of the “tech” Bubble.

The Fed’s aggressive post-tech Bubble reflation ensured already dangerous excess was inflated to incredible new extremes. On the back of a doubling of mortgage borrowings, TMDS expanded 102% in the period 2000 through 2007 to $27.50 TN. Over the mortgage finance Bubble period, Agency Securities jumped 89% to $7.40 TN. Corporate bonds surged 154% to $11.577 TN. Municipal bonds rose 135% to $3.425 TN.

This unprecedented Credit expansion fueled various inflationary manifestations, including surging asset prices, spending, corporate profits, investment, GDP and trade/Current Account Deficits. After beginning the nineties at $6.227 TN, the value of the U.S. equities market surged 409% to end the decade at $19.401 TN. As a percentage of GDP, the nineties saw TMDS jump from 114% to 147%. Spurred by crazy technology stock speculation, Total Securities – TMDS plus Equities – jumped from 183% of GDP to end 1999 at 356%. Although Total Securities to GDP retreated to 284% by 2002, mortgage finance Bubble excesses quickly reflated the Bubble. Total Securities ended 2007 at a then record 378% of GDP.

A “funny” thing happened during the post-mortgage Bubble’s so-called “deleveraging” period. Since the end of 2008, total TMDS has jumped $8.348 TN, or 29%, to a record $37.542 TN. As a percentage of GDP, TMDS ended Q1 2014 at a record 220%. Even more importantly from a Bubble analysis perspective, in 21 quarters Total Securities (debt & equities) inflated $27.2 TN, or 61%, to end March 2014 at a record $72.039 TN. To put this in context, Total Securities began 1990 at $10.0 TN, ended 1999 at $33.0 TN and closed 2007 at a then record $53.01 TN. Amazingly, Total Securities as a percent of GDP ended Q1 at 421%. For comparison, Total Securities to GDP began the nineties at 183%, ended Bubbly 1999 at 356% before peaking at 378% in a more Bubbly 2007. No Bubble today? “Valuations in historical range”?

Let’s return to “A Bubble is predicated on leverage.” Yes, Total Household Liabilities declined $715bn from the 2008 high-water mark (much of this from defaults). Yet over this period federal liabilities increased almost $10.0 TN. Corporate borrowings were up more than $2.3 TN. On a system-wide basis, our system is inarguably more leveraged today than ever.

Many contend there is significantly less speculative leverage these days compared to the heyday (“still dancing”) 2007 period. I’m not convinced. Perhaps there’s less leverage concentrated in high-yielding asset- and mortgage-backed securities. However, from today’s vantage point, there appears to be unprecedented “carry trade” leverage on a globalized basis. I’ve conjectured that the “yen carry trade” – using the proceeds from selling (or borrowing in) a devaluing yen to speculate in higher-yielding securities elsewhere – could be one of history’s biggest leveraged bets. Various comments also suggest that there is enormous leverage employed in myriad Treasury/Agency yield curve trades. I suspect as well that the amount of embedded leverage in various securities and derivative trades in higher-yielding corporate debt is likely unprecedented.

When it comes to leverage, the Federal Reserve’s balance sheet is conspicuous. Fed Assets will end the year near $4.5TN, with Federal Reserve Credit having expanded about $3.6 TN, or 400%, in six years. Few, however, appreciate the ramifications from this historic monetary inflation from the guardian of the world’s reserve currency. I find it astonishing that conventional thinking dismisses the market impact from this unprecedented inflation of central bank Credit.

Over the years, I have argued that “money” is integral to major Bubbles. A Bubble financed by junk debt won’t inflate too far before the holders of this debt begin to question the rationale for holding rapidly expanding debt of suspect quality. In contrast, a Bubble fueled by “money” – a perceived safe and liquid store of nominal value – can inflate for years. The insatiable demand enjoyed by issuers of “money” allows protracted excesses and maladjustment to impart deep structural impairment (financial and economic).

I’m convinced history will look back and view 2012 as a seminal year in global finance. Draghi’s “do whatever it takes,” the Fed’s open-ended QE, and the Bank of Japan’s Hail Mary quantitative easing will be seen as a fiasco in concerted global monetary management. The Fed’s QE3 will be viewed as an absolute debacle. After all, QE3 incited an unwieldy “Terminal Phase” of speculative Bubble excesses throughout U.S. equities and corporate debt securities, along with global securities markets more generally. It unleashed major distortions throughout all markets, including sovereign debt.

A quick one-word refresher on “Terminal Phases:” Precarious. Their inherent danger arises from egregious late-cycle speculative excess and attendant maladjustment coupled with timid policymakers. Over recent years I have repeatedly invoked “Terminal Phase” in my analyses of a progressively riskier Chinese Bubble backdrop impervious to hesitant policy “tinkering.”

Here at home, we’re beginning to hear the apt phrase “The Fed is behind the curve.” Traditionally, falling “behind the curve” indicated that the central bank had been too slow to tighten policy in the face of mounting inflationary pressures. “Behind the curve” dictated that more aggressive tightening measures were required to rein in excesses. These days, “behind the curve” is applicable to an inflationary Bubble that has taken deep root in stock and bond markets. With the Yellen Fed seen essentially promising to avoid even a little baby-step 25 bps rate bump for another year, highly speculative Bubble markets can blithely disregard poor economic performance, a rapidly deteriorating geopolitical backdrop and the approaching end to QE. Worse yet, market participants are emboldened that “behind the curve” and the resulting dangerous market Bubbles preclude the Fed from anything but the most timid policy responses. A dangerous market view holds that, after instigating inflating securities markets as a direct monetary policy tool to stimulate the economy, the Fed would not in any way tolerate a problematic market downturn.

Ref. June 26 – Bloomberg (Steve Matthews and Jeff Kearns): “Federal Reserve Bank of St. Louis President James Bullard predicted the central bank will raise interest rates starting in the first quarter of 2015, sooner than most of his colleagues think, as unemployment falls and inflation quickens. Asked about his forecast for the timing of the first interest-rate increase since 2006, he said: ‘I’ve left mine at the end of the first quarter of next year.’ ‘The Fed is closer to its goal than many people appreciate,’ Bullard said… ‘We’re really pretty close to normal…’ If his forecasts bear out, ‘you’re basically going to be right at target on both dimensions possibly later this year… That’s shocking, and I don’t think markets, and I’m not sure policy makers, have really digested that that’s where we are.’”

The same day Bullard was talking hawk-like, Federal Reserve Bank of Richmond President Jeffrey Lacker was also making comments that should have the markets on edge. Countering uber-dove Yellen, Lacker stated that the recent jump in inflation was not entirely “noise.” Interestingly, he suggested that the Fed follow closely the FOMC’s 2011 exit strategy. “It’s not obvious to me a larger balance sheet should change any of our exit principles. I still think we should, as our exit principles say, be exiting from mortgage backed securities as soon as we can…” And following the lead of Kansas City Fed head Esther George, Lacker believes the Fed should allow its balance sheet to begin shrinking by ending the reinvestment of interest and maturity proceeds. Bullard also said the Fed should consider ending reinvestment.

Market ambivalence notwithstanding, I’m sticking with my analysis that the Fed can’t inflate its balance sheet from $900bn to $4.5 TN – and then end this massive monetary inflation without consequences. Things get even more interesting when talk returns to the Fed’s 2011 “exit strategy” road map. Regrettably, instead of exiting the Fed doubled-down – literally. And Dr. Bernanke may now say (while earning $250k) that the Fed’s balance sheet doesn’t have to shrink even “a dime.” Yellen and Dudley likely agree. But there’s now a more hawkish contingent that has other things in mind, and I don’t believe they will be willing to simply fall in line behind Yellen as officials did behind Greenspan and Bernanke.

Actually, I believe the so-called “hawks” (i.e. responsible central bankers) are gearing up to try to accomplish something that might these days appear radical: normalize monetary policy. Read “Systematic Monetary Policy and Communication” presented this week by Charles Plosser. Read Esther George’s “The Path to Normalization.” Re-read Richard Fisher. While you’re at it, read John Taylor’s op-ed from Friday’s WSJ: “The Fed Needs to Return to Monetary Rules.” I’m with Taylor (and Plosser!) on having and following rules. I’m also with Bullard: “I don’t think markets… have really digested… where we’re at.”

About the Author:  Doug Noland has been the Senior Portfolio Manager of the Federated Prudent Bear Fund and Federated Prudent Global Income Fund since December 2008. Prior to joining Federated, Mr. Noland was employed with David Tice & Assoc., Inc. where he served as an Assistant Portfolio Manager and strategist of Prudent Bear Funds, Inc. Prudent Bear Fund and Prudent Global Income Fund from January 1999. From 1990 through 1998, Mr. Noland worked as a trader, portfolio manager and analyst for short-biased hedge funds including G. W. Ringoen & Associates from January 1990 to September 1996, Fleckenstein Capital from September 1996 to March 1997 and East Shore Partners, Inc. from October 1997 to December 1998. He earned a B.S. in Accounting and Finance from the University of Oregon and a M.B.A. from Indiana University. This post originally appeared on the economics website “The Prudent Bear” and is published here with permission.

Systemic Market Risk is Worse Now Than in 2008

Since the crash of 2008, huge attention has been paid by regulators to systemic risk, the risk that some event will cause the crash of the entire banking system, not just of an individual bank. Tens of thousands of pages of financial regulations have been written, and almost as many thousands of speeches have been bloviated, about how we now understand the dangers of “too big to fail” and therefore a crash such as occurred in 2008 can never happen again.

Needless to say this is nonsense; systemic risk is worse now than it was in 2008. What’s more, the next crash will almost certainly be considerably nastier than the last one.

The main issue addressed by legislation has been “too big to fail,” the idea that some banks are so large that their failure would cause a catastrophic economic collapse and hence they must be propped up by taxpayers. It will not surprise you to learn that I don’t regard this as the central problem.

Most of the risks in the banking system today are present in a wide range of institutions, all of which are highly interconnected and getting more so. Hence a failure in a medium-sized institution, if sufficiently connected to the system as a whole, could well have systemic implications. At the same time, pretty well all banks use similar (and spurious) risk-management systems, while leverage—both open and more dangerously hidden—is high throughout the system. Foolish monetary policy is foolish for all, and if a technological disaster occurs, it is likely to affect software used by a substantial faction of the banking system as a whole. There are a number of good reasons to break up the banking behemoths, but breaking them up on its own would not solve the systemic risk problem.

Systemic risk has been exacerbated by modern finance for a number of reasons. The system’s interconnectedness is one such reason, because of the cat’s cradle of derivatives contracts totaling some $710 trillion nominal amount (per BIS figures for December 2013) that stretch between different institutions worldwide.

Some of these contracts such as the $584 trillion of interest-rate swaps are not especially risky (except to the extent that traders have been gambling egregiously on the market’s direction). However, other derivatives, such as the $21 trillion of credit-default swaps (CDS) and options thereon, have potential risk almost as great as their nominal amount. What’s more, there are $25 trillion of “unallocated” contracts. My sleep is highly troubled by the thought of 150% of U.S. Gross Domestic Product (GDP) in contracts which the regulators can’t define.

The problem is made worse by the illiquidity of many of these instruments. Any kind of exotic derivative with a long-term maturity is likely to trade very seldom indeed once the initial flush of creation has worn off. These risks have been alleviated by trading standard contracts on exchanges. But even if banks’ risk management were good, failure of a major counterparty or, heaven help us, of an exchange, would cause systemic havoc because of its interconnectedness.

Another systemic risk worsened by modern finance is that of inadequate risk management. This has in no way been improved by the 2008 crash. More than three years after the crash (and nearly two years after Kevin Dowd and I had anatomized its risk management failures in “Alchemists of Loss”), J.P. Morgan was still using a variation on Value-at-Risk to manage its index CDS positions in the London Whale disaster. Morgan survived that one, but there seems no reason from a risk-management perspective why the Whale’s loss should not have been $100 billion just as easily as $2 billion—which Morgan would not have survived. Regulators have done nothing to solve this problem. Indeed, the new Basel III rules continue to allow the largest banks to design their own risk-management systems, surely a recipe for disaster.

You may feel that risk management, at least, is a problem exacerbated by the size of the too-big-to-fail banks. However, this is not entirely so. Each bank will commit its own trading disasters, so that a reversion to smaller banks would equally revert to smaller but more frequent trading disasters, surely an improvement (and the London Whale’s successors would be less likely to get megalomania and attempt to control an entire market). On the other hand, if the market as a whole does things not contemplated by the risk-management system—Goldman Sachs’ David Viniar’s “25-standard deviation moves, several days in a row” as in 2007—then since all banks use risk-management systems with similar flaws, they are all likely to break down at once, producing systemic collapse. As I shall explain below, I expect the next market collapse to take place in pretty well all assets simultaneously, with nowhere to hide. Hence a collapse in the global banking system’s risk management, affecting most assets, will cause losses to pretty well all significant banks. No amount of regulation will sort that one out.

Modern finance has also made systemic risk worse through its incomprehensibility, opacity and speed. Neither the traders nor the “quants” designing new second- and third-order derivative contracts have any idea how those contracts would behave in a crisis, because they have existed through at most one crisis, and their behavior is both leveraged to and separated from the behavior of the underlying asset or pool of assets. Banks do not know their counterparties’ risks, so cannot assess the solidity of the institution with which they are dealing. And in “fast-trading” areas, computers carry out trading algorithms at blistering speed, thus producing unexpected “flash crashes” in which liquidity disappears and prices jump uncontrollably.

The opacity of banks’ operations is made worse by “mark-to-market” accounting, which foolishly causes banks to report large profits as their operations deteriorate, the credit quality of their liabilities deteriorates and their value of those liabilities declines. This makes the banks’ actual operating results in a downturn wholly incomprehensible to investors.

The leverage problem has not gone away, in spite of all the attempts since 2008 to control it. Furthermore, much of the financial system’s risk has been sidelined into non-bank institutions such as money-market funds, securitization vehicles, asset backed commercial paper vehicles and, especially, mortgage REITs, which have grown enormously since 2008. These vehicles are less regulated than banks themselves, and where the regulators have tried to control them, they have got it wrong. For example, huge efforts have been made, backed by the banking lobby, to mess up the money market fund industry, which has only ever had one loss, and that for less than 1% of the value of the fund. Conversely, the gigantic interest-rate risks of the mortgage REITs, which buy long-term mortgages and finance themselves in the repurchase market, are quite uncontrolled and a major danger to the system.

Let us not forget the role of technology, a substantial and growing contributor to systemic risk. The large banks these days develop very little software of their own, relying instead on packages both large and small from outside suppliers. The “Heartbleed” bug of April 2014 showed that even tiny programs such OpenSSL, universally used, can be attacked in ways very difficult to defend against, and that bring vulnerability to the bank’s entire system. A malicious hacker somewhere in the vast and expanding Russo-Chinese sphere of influence, or even a domestic teenager, could at any time produce a bug that slipped through the protective systems common to most banks, damaging or even bringing down the system as a whole.

However, the greatest contributor to systemic risk, and the reason why it is worse today than in 2008, is monetary policy. It had been over-expansive since 1995, causing a mortgage finance boom in 2002-06 which was anomalous in that less prosperous areas and poorer people received more new mortgage finance than the rich ones. However, its encouragement to leverage has never been so great as in the period since 2009. Consequently, asset prices have risen worldwide and leverage both open and, more importantly, hidden has correspondingly increased.

In general, very low interest rates encourage risk-taking. Monetary policy makers fantasize that this will produce more entrepreneurs in garages. Actually, banks won’t lend to entrepreneurs, so it simply produces more fast-buck artists in sharp suits. The result is more risk. When monetary policy is so extreme for so long, it results in more systemic risk. It’s as simple as that.

Precisely what form the crash will take, and when it will come, is still not clear. It’s possible that it will be highly inflationary. If the $2.7 trillion of excess reserves in the U.S. banking system starts getting lent out, the inflationary kick will be very rapid indeed. However it’s also possible the mountain of malinvestment resulting from the last five years’ foolish monetary policy will collapse of its own weight without inflation taking off. Either way, the banking system crash that accompanies the downturn will be more unpleasant than the last one, because the asset price decline that causes it will not simply be confined to housing, but will be more or less universal.

After that, systemic risk may be very much reduced—mostly because we won’t have much of a banking system left.

About the Author:  Martin Hutchinson is the author of “Great Conservatives” (Academica Press, 2005) which examines the British governments of 1783-1830. He was formerly Business and Economics Editor at United Press International. Martin’s weekly column, The Bear’s Lair, is based on the rationale that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. This article originally appeared on the economics website “The Prudent Bear” and is republished here with permission.

How to Create Affordable Abundance in California

California has one of the highest costs of living in the United States. California also is one of the most inhospitable places to run a business in the United States. And despite being blessed with abundant energy and an innovative tradition that ought to render the supply of all basic resources abundant and cheap, California has artificially created shortages of energy, land and water, and a crumbling, inadequate transportation and public utility infrastructure.

The reason for these policy failures is because the people who run California are the public sector unions who control the machinery of government, the career aspirations of government bureaucrats, the electoral fate of politicians, and the regulatory environment of the business community. To make it work, these unions have exempted government workers, along with compliant corporations and those who are wealthy enough to be indifferent, from the hardships their policies have created for everyone else.

Here’s just a taste of what California’s middle class, too rich to qualify for government handouts and too poor to be indifferent, has to endure compared to the rest of the United States:


It’s not hard to estimate how these premiums, 13% for gasoline, 42% for electricity, and 72% for homes, translate into the necessity to work and earn tens of thousands of dollars more each year in order to live in California instead of almost anywhere else in America. As for the tax and regulatory environment, respected tax fighter Richard Rider maintains a well-researched list of tax and business statistics entitled “Unaffordable California,” updated here quarterly. The substance of that report is this: Californians pay higher taxes and endure more restrictions on business than anywhere else in America. Read the details. It is as mesmerizing as it is disgraceful.

There is a simple and effective solution to ending California’s war on the private sector middle class by public sector unions and their corporate cronies. But first it is important to point out another depredation, one that rivals the unaffordable cost-of-living, wreaked onto California’s beleaguered private sector middle class by public sector unions and their financial cronies.

The following graph, courtesy of Charles Hugh Smith (ref. “The Generational Short, part 2“) shows everything you need to know about saving and investing in the 21st century:



Careful review of the above graph will indicate that the top of the vertical green line to the far right represents today’s market attainment. A market that, in the case of the DJIA, has whipsawed between 6,000 and 16,000 in less than ten years. You don’t have to be a Ph.D economist to recognize we’re contending with rather unsettling volatility these days. If you were to posit that right now we’re seeing another run up of bubble assets – both for equities and real estate – you’d be in good company. And it doesn’t take much more than horse sense to know that going out and earning a “risk-free” 7.5% per year (more significantly, 4.5% after inflation), average, for the next 30 years, is a fool’s errand.

Yet that is precisely what unionized public employees get “guaranteed” by their pension funds, give or take a half-point. And the fools who guarantee this 7.5% are the taxpayers who themselves are forced to risk their own retirement savings in a market that is at a historic high, in an era of unprecedented levels of debt as a percentage of GDP, that displays volatility sufficient – at any moment – to wipe out an individual’s savings at the same time as professional traders profit on the swings.

And herein lies the solution. Because the seismic outrage that any financially literate taxpayer may feel at being so dispossessed, so insecure despite making utterly responsible financial decisions, is not shared by the 25% or more of the population who live in a government worker’s household. It is not cruel or spiteful, but rather to salvage our social contract, to require government workers live by the same rules as the citizens they serve.

When the people who operate the machinery of government earn comparable compensation, endure the same risks, face the same hard decisions, and live with the same levels of financial insecurity as the rest of the population, they will adopt entirely new attitudes towards legislation affecting the cost of living, the business climate, the tax burden, and the profound public policy challenges of retirement security. Unlike today, their political incentives will be to make common cause with the people they serve.

Instead, their unions broker deals with politicians they elect. They use environmental laws to fight infrastructure investment in order to pay themselves instead. They pour money into pension funds and bond underwriting firms, making government the biggest partner of Wall Street – their proverbial demon. They block development of land, energy, water and transportation assets in order to assist their corporate cronies who control existing supplies to profit from the resulting scarcity and lack of competition. This contrived scarcity also creates the asset bubbles that inflate the tax base and nominally preserve pension fund solvency.

If public sector unions were outlawed, public sector workers would join with private citizens to forge a new political identity freed from vested interests and privilege. They would support policies designed to break up monopolistic entities, creating competition and lowering the cost of living. Public sector workers would make less, but they would also pay less to live, and the savings could be invested in infrastructure upgrades especially for water and transportation. These investments, along with revitalized land and energy development, would render the basic necessities of living abundant and cheap, instead of scarce and expensive. This California renaissance requires only one thing – the abolition of public sector unions.

*   *   *

Ed Ring is the executive director of the California Policy Center.

Is Inequality Caused by Capitalism or Statism?

The French economist Thomas Piketty has achieved worldwide fame by promoting a thesis that capitalism is the cause of growing economic inequality. Unfortunately, he is partially right. However, the important distinction missed by Piketty and all of his supporters is that state capitalism, not free market capitalism, has reigned supreme in recent decades in the world’s leading democracies. It is this misguided attempt to wed the power of the state to the private ownership of capital that has led to the mushrooming of economic inequality. If the public cannot be made aware of the distinction, we risk abandoning the only system capable of creating real improvements for the vast majority of people.

In his book entitled ‘Capital in the 21st Century’, Piketty, like Karl Marx in ‘Das Kapital,’ places the hinge of economic tension at the supposed opposition between the competing interest of labor and capital. He believes that “capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.” However, this can only become true if free markets become controlled, or distorted, by the establishment of monopolies, be they private or state owned.

In the early twentieth century, U.S. Governments were alert to the destruction of free markets by monopolistic cartels and enacted strong anti-trust laws to curb their power. The United States thereafter achieved strong economic results in the first three decades of the 20th Century. In contrast, the socialist governments of post WWII Britain used public funds to establish state owned monopolies, similar to those existing in the Soviet Union. This resulted in dramatic economic declines, that continued into the 1980s when the U.K. was rescued by the free market policies of Margaret Thatcher. Her central strategy was to restore individual freedom by breaking state owned monopolies and reducing the coercive control of trade unions. Her actions unleashed a resurgence of prosperity in Britain that was imitated in many other countries. Her policies were adopted with particular enthusiasm by countries, like Poland, which had only recently shaken off the yoke of Soviet Communism. Poland is now one of the strongest economies in Europe.

History provides ample evidence that when allowed to function properly free market capitalism generates massive national prosperity with high employment, a strong currency and rising standards of living. It is only when the state manipulates and over regulates free markets that capitalism fails. However, capitalism usually takes the blame for the failures of statism.

Piketty asserts that capitalism is “inherently unstable because it concentrates wealth and income progressively over time, leaving behind an impoverished majority. …” He proscribes even an international wealth tax and higher income taxes, above 80 percent, to redistribute rather than to invest savings. This would essentially create a state monopoly on wealth. But again, history tends to demonstrate that state monopolies create poverty for all but the politically connected elite.

Even the Soviet Union, a military superpower, was brought to its economic knees by state monopolies. Communist Party Secretaries, Andrapov and Gorbachev, were forced to the recognition that free markets should be introduced within Russia. This led to ‘Perestroika’ and ‘Glasnost’ and the freeing of markets in Russia.

By concluding that capitalism, even if it is confined to just a few countries, will lead to increasing poverty among the masses around the world, many cynical observers may conclude that Piketty is laying out a carefully planned case towards global socialism along the lines first attempted by the Bolshevik Commintern. Some conclude that such a move could be spearheaded by international institutions like the UN and IMF.

To achieve inherently unpopular global power, national elites must cooperate to bring about such levels of economic chaos and human suffering that people, despairing of ineffective democracy, will look for strong, global government as a welcome solution. To achieve this end the economic problems and human suffering must be extreme and seemingly beyond solution by any national government. By continuing to debase and destroy fiat currencies while preventing the markets from healing themselves, central banks around the world are doing their part to create these conditions.

However, those who look towards strong global government must realize that likely it will lead to a world of extreme global inequality in which any effective opposition will be impossible. This is the fascistic face behind the cuddly and concerned image that has made Piketty the economic North Star of a new generation. These faulty bearings must be corrected or the world’s poor will suffer far more than they need to.

About the Author: John Browne is Senior Economic Consultant for Euro Pacific Capital Inc., a broker-dealer based in Westport, Connecticut. Mr. Browne is a distinguished former member of Britain’s Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. A graduate of the Royal Military Academy Sandhurst and the Harvard Business School. In addition to careers in British politics and the military, he has worked with such firms as Morgan Stanley, Barclays Bank and Citigroup. He is a frequent guest on CNBC’s Kudlow & Co. and a former contributing editor and columnist of NewsMax Media’s Financial Intelligence Report and Moneynews.com. This article originally appeared in the Euro Pacific Weekly Digest and is republished here with permission.

The Generational Short, Part Two: Who Will Boomers Sell Their Stocks To?

Those who see the current era as the New Normal also have one logical action: sell now at the top and wait for the smoke to clear in 2016.

In “The Generational Short, Part One,” I addressed how generational changes in values could affect the stock market. That values change over time is common sense, and so is the idea that values drive choices about purchases, debt and investments that ultimately influence stock valuations.

The implicit conclusion: the Baby Boomers won’t have anyone to sell their stocks, real estate and bonds to. Correspondent Eric A. demolished the fantasy that Gen X will have the income and assets to buy the Boomers’ stocks held in IRAs, local government and union pension funds and 401K accounts in Generation X: An Inconvenient Era (May 23, 2013).

The idea that Gen-Y will have the wealth (not to mention the desire) to buy the Boomers’ stock market portfolios at nosebleed valuations poses a peculiar conundrum: the only way Gen-Y will have the wealth to buy Baby Boomers’ assets is if the Boomers sell their assets and pass the wealth along to Gen-Y.

So if both Gen-X and Gen-Y are out as buyers, who’s left to buy the tens of trillions of dollars of Boomer assets at bubblicious prices? Given that other nations face the same demographic dilemma, the answer appears to be: no one.

Let’s move on to the question of whether the current valuations are an aberration or the New Normal. This matters, because if the period from 1994 to 2014 is a one-off aberration, that means stock valuations will eventually revert to historical levels far below current valuations.

Here is a chart of the Dow Jones Industrial Average (DJIA) from 1955 to the present. Does the current era of bubbles and crashes look remotely normal, compared to the decades prior to 1994?


If this is the New Normal, then what that means is a bubble and crash every 7+ years is now the expected cycle. Here is an annual chart of the DJIA (courtesy of Harun I.; comments by CHS) that shows the megaphone pattern that’s been traced out in the New Normal era of huge bubbles and equally monumental crashes:


If this is indeed the New Normal, wouldn’t it make rather obvious sense to sell at the top (i.e. now) and wait for the New Normal crash and bottom around 2016?What evidence is there that this latest and greatest bubble is sustainable?

Next, let’s look at the fundamental relationship of stocks to the nation’s gross domestic product (GDP), a broad measure of the economy. Current sky-high stock valuations are not just aberrations in terms of previous stock prices–they’re aberrations in terms of stocks’ valuations compared to the nation’s entire economy.


Doesn’t it boil down to this? If we can’t come up with a viable cohort who can afford (and is willing to place that generational bet) to buy Baby Boomer assets at current bubble-level prices, then it follows that as the first Boomers start selling their assets, prices will fall as there is nobody left to buy them, at least at these valuations.

Those who see the current era as an aberration have one logical action: sell now and get out while the gettings good.

Those who see the current era as the New Normal also have one logical action: sell now at the top and wait for the smoke to clear in 2016.

Now that it’s evident that central banks have been buying stocks to prop up the bubble-level valuations (“Cluster Of Central Banks” Have Secretly Invested $29 Trillion In The Market — Zero Hedge), some may assume the central banks will buy another $29 trillion in stocks from the Boomers–or what the heck, make it $50 trillion or $100 trillion–there’s no limit, right?

How safe is that bet, i.e. that central banks will be able to buy most of global stock market without any consequences or blowback?

It might be safer to hope the Martian Central Bank prints a few trillion quatloos and shows up to save the bubble-era Boomer portfolios from self-destruction.

About the Author: Charles Hugh Smith as a writer and financial commentator living in Hawaii. His blog, Of Two Minds.com, is ranked #7 in CNBC’s top alternative financial sites, and is republished on numerous popular sites such as Zero Hedge, Financial Sense, and David Stockman’s Contra Corner. Smith is frequently interviewed by alternative media personalities such as Max Keiser, and is a contributing writer on PeakProsperity.com. This article originally appeared on Smith’s blog, and is republished here with permission.

The Generational Short, Part One: How Generational Changes in Values Could Affect the Market

If Gen-Y cannot afford to buy Boomers’ houses at bubble-level prices, then what will keep housing prices at these elevated levels?

Last month the Brookings Institution published a study by scholars Morley Winograd and Dr. Michael Hais on changing generational values: “How Millennials Could Upend Wall Street and Corporate America.” The gist of the report is that Gen-Y (Millennials) view money, prestige, adversarial confrontation and managerial methods differently from the Baby Boom and Gen-X generations, and that this set of values will change Corporate America, the economy and the culture as Boomers exit managerial positions and their peak earning/spending years.

Though we have to be careful in characterizing tens of millions of individuals as all reflecting one set of generational values, the basic idea is simply one of context: people who grow up in a specific milieu are naturally prone to sharing broadly similar perceptions and values.

The Brookings authors claim that Millennials do not favor the adversarial style of the Boomers (competition and confrontation as means of advancing one’s cause/position) nor do they place great value on luxury goods as evidence of exclusivity. They actively distrust/loathe the banking sector and are financially conservative, preferring cash to investing in Wall Street.

Asked to choose their ideal (corporate/state) job, their choices reflect preferences for a mix of security, idealism and technology. The big flaw in this career questionnaire (as far as I can discern) is that it did not offer the alternatives of self-employment/ entrepreneurship. Anecdotally, it seems clear that there is a strong entrepreneurial drive in Gen-Y, for example, What I’ve learned in my first year as a college dropout.

One factor the report did not address fully is real estate/housing, which depends on bank-issued debt (mortgages) and the belief that a lifetime of paying a mortgage will magically result in financial security, based on the greater fool notion that someone in the future will be willing to pay more for an asset that hasn’t changed either qualitatively or quantitatively (other than needing more maintenance as it ages).

This raises two issues: if Gen-Y cannot afford to buy Boomers’ houses at bubble-level prices, then what will keep housing prices at these elevated levels? Answer: nothing.Without strong demand for housing at sky-high prices, valuations will drop to whatever level demand can support. That level can be far lower than conventional housing analysts believe possible because they are still extrapolating Baby Boomer preferences and earnings into a future which will be quite different from the housing bubble decades.

The second issue is a question: how much of the Boomers’ housing wealth will trickle down to Gen-Y when they actually need housing, i.e. when they’re starting families?

The answer may well be: very little. If Gen-Y is unwilling or unable to take on enormous mortgages to buy bubble-priced housing, we can project a housing market in which Boomers are unloading millions of primary homes as they seek to downsize/raise cash for retirement but there aren’t enough Gen-Y buyers willing or able to buy these millions of homes at bubble valuations.

In this scenario, home prices must decline to align with Gen-Y’s salaries (i.e. their ability to qualify for huge mortgages) and their willingness to shoulder bank-based debt.

If Gen-Y essentially opts out of the belief that financial security depends on buying a house with a large mortgage, then the U.S. housing market will have no sustainable foundation for price appreciation. Housing could easily decline by 50% in highly inflated markets.

The same dynamic will shred stock market valuations. If Gen-Y opts out of supporting the banks and Wall Street, the demand for Wall Street’s products will plummet, bringing stocks back down to historical levels–once again, perhaps 50% of the current bubble valuations.

The funny thing about core values is that they are resistant to arguments such as “you should get a mortgage and invest all your money in Wall Street.” Once people opt out of the fantasy that buying a house and entrusting one’s capital with Wall Street leads to guaranteed financial security, no amount of cajoling or propaganda will change their values-based decisions.

For example, those who have decided to eschew debt will never take on debt, even if the banks (or the banks’ pusher, the government) offer debt at 0% interest. Those who have lost trust in Wall Street or actively hate it and everything it stands for (neofeudalism, unbridled greed, the corruption and collusion of the revolving door between the state and Wall Street, etc.) will never change their minds and hand their money to Wall Street to play with.

If the primary assets held by Boomers (houses and stocks) both decline for these fundamental reasons, there may be relatively little wealth left to pass on to Gen-Y. There is a peculiar irony in this: if Gen-Y avoids bank debt/mortgages, buying conspicuous consumption luxury goods on credit and investing in Wall Street’s scams and skims, this generational lack of demand for housing, stocks and luxury goods will effectively crash the sky-high valuations of these assets.

That will reduce the value of whatever generational wealth the Boomers have left to pass on. Since many Boomer households are currently paying for three generations–soaring college costs for their Gen-Y offspring, care for their elderly Silent Generation parents and their own expenses–how much wealth they will have left once Gen-Y is dominant is an open question.

These factors suggest a generational bet against banks, Wall Street, housing and luxury retail stocks. I am not recommending such a bet, mind you; it’s just one potentially interesting speculative consequence of the changing of the generational guard.

About the Author: Charles Hugh Smith as a writer and financial commentator living in Hawaii. His blog, Of Two Minds.com, is ranked #7 in CNBC’s top alternative financial sites, and is republished on numerous popular sites such as Zero Hedge, Financial Sense, and David Stockman’s Contra Corner. Smith is frequently interviewed by alternative media personalities such as Max Keiser, and is a contributing writer on PeakProsperity.com. This article originally appeared on Smith’s blog, and is republished here with permission.

America's New Industrial Boomtowns

David Peebles works in a glass tower across from Houston’s Galleria mall, a cathedral of consumption, but his attention is focused on the city’s highly industrialized ship channel 30 miles away. “Houston is the Chicago of this era,” says Peebles, who runs the Texas office of Odebrecht, a $45 billion engineering firm based in Brazil. “In the sixties you had to go to Chicago, Cleveland and Detroit. Now Houston is the place for new industry.”

With upward of $35 billion of new refineries, chemical plants and factories planned through 2015 for Houston and the surrounding Gulf Coast, companies like Odebrecht, which runs chemical plants and is working on a new freeway in the area, have converged on the nation’s oil and gas capital. They are part of the reason why the Texas metropolis ranks first on our list of the best large cities for manufacturing.

Houston, with 255,000 manufacturing jobs, is not yet the country’s largest industrial center; it still lags behind the longtime leaders Los Angeles, with 360,000 manufacturing jobs, and Chicago, home to 314,000. But it is clearly on a stronger trajectory. Since 2008, Houston’s manufacturing workforce has expanded 5% while Los Angeles has lost 13% of its industrial jobs and Chicago’s factory workforce has shrunk 11%.

20140623_KotkinHouston is poised to overtake Los Angeles as the largest industrial center in the U.S.

Why Manufacturing Matters

Whether America is on the path to a sustainable industrial expansion or is just seeing a weak bounce back has been widely debated, but the recent numbers are impressive. Since 2010 the U.S. has added 647,000 manufacturing jobs. New energy finds have led to the construction and expansion of pipelines and refineries, and has sparked foreign industrial investment reflecting electricity costs that are now well below those in Europe or East Asia. Besides Houston, also ranking high on our big cities list are two other energy towns, No. 5 Oklahoma City and No. 10 Ft. Worth, Texas. Our mid-sized cities list is led by Lafayette, La., with nearby Baton Rouge in 11th place.

Evangelists of the “information economy” may think that industrial jobs are passé, as epitomized by a recent Slate article that recommended that working-class people from places like Detroit should move to areas like Silicon Valley or Boston where they can make money cutting the hair and walking the dogs of high-tech magnates. But the notion that U.S. manufacturing is doomed, and that the jobs are of lower quality than those in high-tech centers, is largely bogus; even in Silicon Valley the majority of new projected jobs are expected to pay under $50,000 annually. In contrast manufacturers pay above-average wages, in some cases due to unionization, but in many others because of the increasing sophisticated skills required by today’s factories.

Although we will likely never see a boom in factory employment on the scale experienced in the last century, the demand for blue-collar skills is projected to increase in future years. Among all professions for non-college graduates, manufacturing skills are most in demand, according to a study by Express Employment Professionals. By 2020, according to BCG and the Bureau of Labor Statistics, the nation could face a shortfall of around 875,000 machinists, welders, industrial-machinery operators, and other highly skilled manufacturing professionals.

Southern Comfort

Our research suggests that much of this growth will be in metro areas in the South and the Great Plains that are known for friendly business climates. New industrial investment is tending to go to places that are largely non-union, and feature lower taxes and light regulation. Epitomizing this trend is the No. 2 city on our large metro area list, Nashville-Murfreesboro-Franklin, Tenn., where manufacturing employment is up 6% since 2008. Nashville has become a hotbed for foreign investment in manufacturing, with the expansion of the Nissan facilities in nearby Smyrna, as well as a host of suppliers.

This is occurring, in part, because some large companies are shifting production to America from China in response to rising Chinese wages as well as sometimes unpredictable business conditions there.

Investment inflows, both from overseas and domestic companies, have boosted other standout southern industrial hubs, as well as the smaller metro areas on our mid-sized city list, notably Mobile, Ala. (third place), with its expanding industrially oriented port, and No. 14 Charleston-North Charleston-Summerville, S.C., which has been a beneficiary of major new foreign investment as well as the expanded presence of U.S. aerospace giant Boeing. The South also is home to our No. 1 small manufacturing city, Florence-Muscle Shoals, Ala.

The Resurgence of the Rust Belt

The progress is not confined to the Sun Belt. The resurgence of the U.S. auto industry has revived the economy of Warren-Troy-Farmington Hills, Mich., also known as “automation alley.” The home to many parts suppliers, engineering and tech support for the car industry, this area has enjoyed an impressive 12.7 percent growth in manufacturing jobs since 2008, placing it third on our big cities list.

Detroit, the center of the auto industry, ranks a respectable 16th on our big city list, but the big improvements in the Rust Belt are occurring in mid-sized cities such as Lansing-East Lansing, Mich. (eighth), Grand Rapids (ninth) and Ft. Wayne, Ind. (10th).

But arguably the strongest Rust Belt recovery has occurred in Elkhart-Goshen, Ind., third on our small cities list. Since 2008 Elkhart’s industrial employment — much of it in the recreational vehicle industry — has expanded 30%, one of the most dramatic employment turnarounds of any place in America. Unemployment has fallen to 5% from a recession high of 20.2%.

Western Exposure

The South and the Great Lakes may be America’s industrial heartland, but there are several strong pockets in the West. One region that is doing particularly well is the Pacific Northwest, led by Seattle-Bellevue-Everett, which has experienced 11% manufacturing employment growth since 2010.

Boeing is key here, but the Pacific Northwest’s industrial expansion has also been fueled by low electricity rates, largely due to the area’s strength in hydroelectricity. Portland-Vancouver-Hillsboro OR-WA (11th) is usually associated more with hipsters, but manufacturing growth has taken off, particularly with the expansion of Intel’s large semiconductor facility in suburban Hillsboro.

Another Western industrial hotspot is Utah, a state with low energy costs and business friendly regulation. Salt Lake City, 12th on our large metro area list, has enjoyed a 5.7% increase in industrial jobs since 2010. Growth has been even stronger in two other Utah cities, Provo -Orem and Ogden-Clearfield, which rank fifth and seventh, respectively, on our mid-sized cities list.

One surprising place where manufacturing is making a mild comeback is in the Bay Area, which for years has exported high-tech manufacturing jobs to places like Utah as well as the rest of the world. Despite ultra-expensive electricity, high labor costs and some of the world’s most demanding environmental laws, San Jose (13th on our big metros list) San Francisco-San Mateo-Redwood (15th) have posted solid industrial growth after years of decline. Yet both remain below their 2008 levels, and may find new growth difficult once the current tech bubble collapses.


Two of the worst performers on this list are the big metro areas that have for decades been the country’s largest industrial hubs, Los Angeles-Long Beach-Glendale (55th) and Chicago-Joliet-Naperville (56th). It appears they lack the cost competitiveness and specialized focus of America’s ascendant industrial regions.

Another clear loser is the Northeast, which accounts for seven of the eight lowest ranked big metro areas. Since 2008, Philadelphia (62nd) has lost 21% of its once-large industrial job base, while New York City, which has been losing industrial jobs for decades, ranks 45th. Here, too, high costs and regulation are a factor, as well as the loss of industrial know-how resulting from long-term erosion of their manufacturing bases.

Of course, some information age enthusiasts may argue that losing such jobs is something of a badge of honor, since “smart” regions do not focus on the gritty business of making things. Yet if you look across the country, you can see that many of the strongest local economies, from Houston and Nashville to Seattle, have taken part in the U.S. industrial resurgence. It seems this is one party more worth joining than avoiding.

View the Best Cities for Manufacturing Jobs 2014 List

Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA. This article first appeared at Forbes.com and is republished with permission from the author.

The Divided States of America

A war against the financially privileged 1%. 47% of our fellow citizens on food stamps. 92 million of them out of work. [1] A real unemployment rate nearing 20%. [2] Have-nots protesting in city parks against Wall Street fat cats or in city streets for supersized wages to serve dollar burgers and tacos. The land of proverbial equal opportunity has never been more un-equal in its 250-year history.

Public schools turn out increasingly un-educated and un-qualified high school graduates. More than 60% are functionally illiterate and require one to two years of remediation before they can do college-level work. 40% drop out of high school. Most never get a GED. Fifteen-year old American students now consistently receive among the lowest scores in the world on global tests in math, science and reading.

In five short years, America’s first African American President, relying on divisive rhetoric and reinforcing failed policies that create dependency, has shepherded his country into a cavernous ditch from which many see no escape. How he transformed Hope into Hopelessness and how we can get out of this mess is what will be explored in this essay. A word of warning: by its conclusion, the reader may end up even more depressed.

Un-equal is the normal state in nature and life. Predators in the wild hunt down and devour weaker prey. Industrialized, scientifically advanced Western nations have higher standards of living than those in the third world. Some countries are blessed with vast supplies of oil, coal, gold and other natural resources. Others must import even basic foodstuffs.

Talent and brains, like natural resources, are unequally distributed. Out of hundreds of thousands of scientists and scholars, a handful of Nobel Laureates are chosen.  Out of millions of bright young inventors, there is only one Mark Zuckerberg, Jeff Bezos, Bill Gates and Elon Musk.

Are these examples of unfairness or of reality? Should we protest the unfairness of life to our children or encourage them to emulate the work ethic of those who have achieved great success? The President undermines America with his divisive rhetoric and does its citizens great harm. He would do better to reaffirm traditional American values and virtues instead of poisoning the unity that defines us.

It is an inescapable truth. Life is inherently unfair. Fate deals everyone a different hand. Children whose surname is Astor, Vanderbilt, Rockefeller or Kennedy are born with silver spoons in their mouths. They have glamorous lives and better opportunities in life than most folks. Is it unfair that some have more luck than others? Unlike most countries, success is not the exclusive property of wealthy aristocrats in America. Hard work can open doors for even the poorest among us as it did for President Abraham Lincoln, Justice Clarence Thomas, Oprah Winfrey and Sam Walton.

America has always been the land of Rags to Riches. Why doesn’t the Commander-in-Chief extol factual history, not invent a distorted, divisive narrative? To what ideological purpose does he blindly pursue this destructive course? Horatio Alger’s stories extolling hard work and virtue would serve the country better.

The Constitution guarantees equal opportunity to every American citizen. It cannot guarantee equal outcomes. This can be favorably influenced by environmental factors but to a large extent is determined by the cultural values of hard work, education, and family values.

Asians and Ashkenazi Jews are two groups that have been uniquely blessed by their ancient cultures that, with ingrained social behaviors that venerate education and scholarship. Both have strong ties to traditional family values, marriage and religion and the lowest rates of drug addiction, promiscuity and illegitimacy.

Social behavior can even impact intelligence. Illegitimacy is associated with increased risk factors such as drug abuse and sexually transmitted diseases that negatively affect brain development in the unborn. It is also associated with a higher rate of prematurity, toxic organic brain damage, low birth weight, failure to thrive and frequent illness. It is clinically possible to demonstrate a lower IQ in such an infant at routine 9-month and 18-month wellness checks. Because this finding reflects impaired infant brain development, it is unlikely to be corrected in adolescence or adulthood.

Rather than pillory the  1%,  President Obama should direct his criticism at his Democrat colleagues. They instituted the policies of the Great Society that have corrupted American culture and created this rampant inequality. He should encourage a return to the traditional American values of faith and family espoused by the successful, promote their work ethic and instill the need for continence and temperance.

Hard work and virtue are the keys to success. There are no shortcuts. As steward of this great nation, President Obama needs to put aside his inflammatory partisan rhetoric. The country needs a healing message of unity. Our survival depends on it.

About the Author: R. Claire Friend, MD, is the Assistant Professor, Department of Psychiatry and Human Behavior, UC Irvine Medical Center, and the editor of the UC Irvine Quarterly Journal of Psychiatry. She is a retired psychiatrist and frequent commentator on the psychological dimensions of education and social welfare policies.


1. http://www.bls.gov/news.release/empsit.nr0.htm
2. http://www.shadowstats.com/alternate_data/unemployment-charts

Piketty's Envy Problem

Editor’s Note:  While Thomas Piketty’s new book “Capital in the 21st Century” appears destined to be the 700 page book that will occupy a prestigious spot, usually unread, on every ardent leftist’s bookshelf, this 1,960 word essay by investment expert and financial commentator Peter Schiff should be required reading – especially by leftists. Because it reminds us of a simple truth that cannot be derided or diminished, that despite rising inequality of wealth, the lower economic strata of humanity have never had it so good. Not even close. And the corollary to returns on capital that Piketty neglects to emphasize are the innovations that invested capital have enabled. These innovations have elevated the standard of living, for everyone in the world, in absolute terms. As Schiff puts it, “flipping burgers in a McDonald’s is no walk in the park, but it is far better than being a galley slave.”

It would be interesting to read more from Schiff on Piketty’s core premise, that returns on capital consistently exceed rates of economic growth. Really? Because if so, what rate is sustainable in the U.S., where total debt has now climbed to $59 trillion, 347% of GDP, well higher than the previous record set in 1929? What reliable, “risk-free” rate of return on invested capital is prudent and achievable, when GDP in the U.S. has just logged a negative quarterly performance? Perhaps Thomas Piketty may want to sit down with the biggest holders of “capital” in the United States, the public employee pension fund managers, whose optimistic prognostications necessarily concur with Piketty’s core premise. How would Piketty view these government workers, collectively the nation’s biggest shareholders, arguably the biggest “owners of capital” in the world? Does Piketty advocate taxing private workers more, every time returns on government worker pension funds fail to greatly exceed the rate of economic growth?

There can be little doubt that Thomas Piketty’s new book Capital in the 21st Century has struck a nerve globally. In fact, the Piketty phenomenon (the economic equivalent to Beatlemania) has in some ways become a bigger story than the ideas themselves. However, the book’s popularity is not at all surprising when you consider that its central premise: how radical wealth redistribution will create a better society, has always had its enthusiastic champions (many of whom instigated revolts and revolutions). What is surprising, however, is that the absurd ideas contained in the book could captivate so many supposedly intelligent people.

Prior to the 20th Century, the urge to redistribute was held in check only by the unassailable power of the ruling classes, and to a lesser extent by moral and practical reservations against theft. Karl Marx did an end-run around the moral objections by asserting that the rich became so only through theft, and that the elimination of private property held the key to economic growth. But the dismal results of the 20th Century’s communist revolutions took the wind out of the sails of the redistributionists. After such a drubbing, bold new ideas were needed to rescue the cause. Piketty’s 700 pages have apparently filled that void.

Any modern political pollster will tell you that the battle of ideas is won or lost in the first 15 seconds. Piketty’s primary achievement lies not in the heft of his book, or in his analysis of centuries of income data (which has shown signs of fraying), but in conjuring a seductively simple and emotionally satisfying idea: that the rich got that way because the return on invested capital (r) is generally two to three percentage points higher annually than economic growth (g). Therefore, people with money to invest (the wealthy) will always get richer, at a faster pace, than everyone else. Free markets, therefore, are a one-way road towards ever-greater inequality.

Since Pitketty sees wealth in terms of zero sum gains (someone gets rich by making another poor) he believes that the suffering of the masses will increase until this cycle is broken by either: 1) wealth destruction that occurs during war or depression (which makes the wealthy poorer) or 2) wealth re-distribution achieved through income, wealth, or property taxes. And although Piketty seems to admire the results achieved by war and depression, he does not advocate them as matters of policy. This leaves taxes, which he believes should be raised high enough to prevent both high incomes and the potential for inherited wealth.

Before proceeding to dismantle the core of his thesis, one must marvel at the absurdity of his premise. In the book, he states “For those who work for a living, the level of inequality in the United States is probably higher than in any other society at any time in the past, anywhere in the world.” Given that equality is his yardstick for economic success, this means that he believes that America is likely the worst place for a non-rich person to ever have been born. That’s a very big statement. And it is true in a very limited and superficial sense. For instance, according to Forbes, Bill Gates is $78 billion richer than the poorest American. Finding another instance of that much monetary disparity may be difficult. But wealth is measured far more effectively in other ways, living standards in particular.

For instance, the wealthiest Roman is widely believed to have been Crassus, a first century BC landowner. At a time when a loaf of bread sold for ½ of a sestertius, Crassus had an estimated net worth of 200 million sestertii, or about 400 million loaves of bread. Today, in the U.S., where a loaf of bread costs about $3, Bill Gates could buy about 25 billion of them. So when measured in terms of bread, Gates is richer. But that’s about the only category where that is true.

Crassus lived in a palace that would have been beyond comprehension for most Romans. He had as much exotic food and fine wines as he could stuff into his body, he had hot baths every day, and had his own staff of servants, bearers, cooks, performers, masseurs, entertainers, and musicians. His children had private tutors. If it got too hot, he was carried in a private coach to his beach homes and had his servants fan him 24 hours a day. In contrast, the poorest Romans, if they were not chained to an oar or fighting wild beasts in the arena, were likely toiling in the fields eating nothing but bread, if they were lucky. Unlike Crassus, they had no access to a varied diet, health care, education, entertainment, or indoor plumbing.

In contrast, look at how Bill Gates lives in comparison to the poorest Americans. The commodes used by both are remarkably similar, and both enjoy hot and cold running water. Gates certainly has access to better food and better health care, but Americans do not die of hunger or drop dead in the streets from disease, and they certainly have more to eat than just bread. For entertainment, Bill Gates likely turns on the TV and sees the same shows that even the poorest Americans watch, and when it gets hot he turns on the air conditioning, something that many poor Americans can also do. Certainly flipping burgers in a McDonald’s is no walk in the park, but it is far better than being a galley slave. The same disparity can be made throughout history, from Kublai Khan, to Louis XIV. Monarchs and nobility achieved unimagined wealth while surrounded by abject poverty. The same thing happens today in places like North Korea, where Kim Jong-un lives in splendor while his citizens literally starve to death.

Unemployment, infirmity or disabilities are not death sentences in America as they were in many other places throughout history. In fact, it’s very possible here to earn more by not working. Yet Piketty would have us believe that the inequality in the U.S. now is worse than in any other place, at any other time. If you can swallow that, I guess you are open to anything else he has to serve.

All economists, regardless of their political orientation, acknowledge that improving productive capital is essential for economic growth. We are only as good as the tools we have. Food, clothing and shelter are so much more plentiful now than they were 200 years ago because modern capital equipment makes the processes of farming, manufacturing, and building so much more efficient and productive (despite government regulations and taxes that undermine those efficiencies). Piketty tries to show that he has moved past Marx by acknowledging the failures of state-planned economies.

But he believes that the state should place upper limits on the amount of wealth the capitalists are allowed to retain from the fruits of their efforts. To do this, he imagines income tax rates that would approach 80% on incomes over $500,000 or so, combined with an annual 10% tax on existing wealth (in all its forms: land, housing, art, intellectual property, etc.). To be effective, he argues that these confiscatory taxes should be imposed globally so that wealthy people could not shift assets around the world to avoid taxes. He admits that these transferences may not actually increase tax revenues, which could be used, supposedly, to help the lives of the poor. Instead he claims the point is simply to prevent rich people from staying that way or getting that way in the first place.

Since it would be naive to assume that the wealthy would continue to work and invest at their usual pace once they crossed over Piketty’s income and wealth thresholds, he clearly believes that the economy would not suffer from their disengagement. Given the effort it takes to earn money and the value everyone places on their limited leisure time, it is likely that many entrepreneurs will simply decide that 100% effort for a 20% return is no longer worth it. Does Piketty really believe that the economy would be helped if the Steve Jobses and Bill Gateses of the world simply decided to stop working once they earned a half a million dollars?

Because he sees inherited wealth as the original economic sin, he also advocates tax policies that will put an end to it. What will this accomplish? By barring the possibility of passing on money or property to children, successful people will be much more inclined to spend on luxury services (travel and entertainment) than to save or plan for the future. While most modern economists believe that savings detract from an economy by reducing current spending, it is actually the seed capital that funds future economic growth. In addition, businesses managed for the long haul tend to offer incremental value to society. Bringing children into the family business also creates value, not just for shareholders but for customers. But Piketty would prefer that business owners pull the plug on their own companies long before they reach their potential value and before they can bring their children into the business. How exactly does this benefit society?

If income and wealth are capped, people with capital and incomes above the threshold will have no incentive to invest or make loans. After all, why take the risks when almost all the rewards would go to taxes? This means that there will be less capital available to lend to businesses and individuals. This will cause interest rates to rise, thereby dampening economic growth. Wealth taxes would exert similar upward pressure on interest rates by cutting down on the pool of capital that is available to be lent. Wealthy people will know that any unspent wealth will be taxed at 10% annually, so only investments that are likely to earn more than 10%, by a margin wide enough to compensate for the risk, would be considered. That’s a high threshold.

The primary flaw in his arguments are not moral, or even computational, but logical. He notes that the return of capital is greater than economic growth, but he fails to consider how capital itself “returns” benefits for all. For instance, it’s easy to see that Steve Jobs made billions by developing and selling Apple products. All you need to do is look at his bank account. But it’s much harder, if not impossible, to measure the much greater benefit that everyone else received from his ideas. It only comes out if you ask the right questions. For instance, how much would someone need to pay you to voluntarily give up the Internet for a year? It’s likely that most Americans would pick a number north of $10,000. This for a service that most people pay less than $80 per month (sometimes it’s free with a cup of coffee). This differential is the “dark matter” that Piketty fails to see, because he doesn’t even bother to look.

Somehow in his decades of research, Piketty overlooks the fact that the industrial revolution reduced the consequences of inequality. Peasants, who had been locked into subsistence farming for centuries, found themselves with stunningly improved economic prospects in just a few generations. So, whereas feudal society was divided into a few people who were stunningly rich and the masses who were miserably poor, capitalism created the middle class for the first time in history and allowed for the possibility of real economic mobility. As a by-product, some of the more successful entrepreneurs generated the largest fortunes ever measured. But for Piketty it’s only the extremes that matter. That’s because he, and his adherents, are more driven by envy than by a desire for success. But in the real world, where envy is inedible, living standards are the only things that matter.

About the Author:  Peter Schiff is president and chief global strategist of Euro Pacific Capital Inc., a broker-dealer based in Westport, Connecticut. Schiff frequently appears as a guest on CNBC, Fox News, and Bloomberg Television and is often quoted in major financial publications and is a frequent guest on internet radio as well as host of the podcast Wall Street Unspun. This article originally appeared in the Euro Pacific Weekly Digest and is republished here with permission.

"Permissionless Innovation" Key to Economic Growth

Whatever your views on the role of government, one thing is clear: There will be no way to pay for it if the economy doesn’t grow. And I’m not talking by a measly percentage point or two. If we can’t find our way back to 5 percent annual economic growth or above soon, America’s accumulated federal and state debts will propel us down the same downward spiral as Detroit, Stockton, and Greece.

So how do we reach that kind of growth? Innovate!

Few sectors of our economy remain as vibrant as the convergence of consumer electronics and telecommunications. Freed from the shackles of government-sanctioned monopoly 30 years ago and fueled by Moore’s Law advances and Silicon Valley entrepreneurship, an explosion of innovation is powering growth that is rare in other sectors of our economy.

Yet, it could come crashing down, if we follow the lead of Europe and buy into the Precautionary Principle, “the idea that new innovations should in some way be curtailed or disallowed until their developers can prove that they will not cause any harms to either individuals, groups, specific entities, cultural norms, business models, or other types of traditions.” That’s the explanation provided by Adam Thierer, Senior Research Fellow at the Mercatus Center at George Mason University and author of Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom.

The Precautionary Principle has inserted itself deftly in Europe, where public intellectuals like Thomas Piketty are praised for wanting to sacrifice progress and growth on the altar of equality. That stands in bold contrast to America’s tradition of rewarding what Thierer calls “permissionless innovation.” For public policy, this leads to a simple prescription. As he argues, “Unless a compelling case can be made that a new invention will bring serious harm to society, innovation should be allowed to continue unabated. If problems develop they can be addressed after the fact.”

The problem with the precautionary principle is that it operates under an assumption of clairvoyance as to what problems may arise in the future, while paying little heed to the risks of the failure to innovate. As Thierer notes, succumbing to the European disease can only lead to European results.

To underscore his point, consider the “natural experiment” that has been playing out on both sides of the Atlantic. “American companies are household names across the globe—Google, Facebook, Microsoft, Yahoo, Apple,” notes Thierer. “Ask anybody if they can name any European tech innovators over the last decade.”

If you’re hearing crickets, you’re not alone.

Policy had to have something to do with that.

Gary Shapiro, president of the Consumer Electronics Association, understands. He’s been on the front lines protecting innovators from stifling regulations for over 30 years, cutting his teeth on the seminal Sony Betamax Supreme Court Case. Shapiro calls the five-to-four decision in favor of permitting the sale of Video Cassette Recorders the “Magna Carta” of the consumer electronics industry, “because it allowed so many other technologies from the iPod to the internet itself to personal video recording technology, even copying machine technology, to prosper.” Contrary to the dire predictions of Jack Valenti, then-president of the Motion Picture Association of America, the VCR did not kill the movie industry.

Rather, it helped break the major studios’ grip over much of Hollywood’s value chain. As a result, Americans now enjoy more movies distributed via more technologies than ever before.

Shapiro argues that some of our biggest problems, from agriculture to health care to water resource management, will be solved thanks to the innovation spurred by unfettered access to telecommunications, computation, and consumer electronics. “We are in an incredible time in history where anyone in the world with a broadband connection and a computer, for a few thousand dollars, can start a business with worldwide implications.” But, he cautions, there are a lot of ways governments can screw it up.

Shapiro’s biggest peeve is the turmoil inflicted by patent trolls on the economy. He blames outdated patent laws. Patent trolls are individuals or businesses that file spurious patents on ordinary business systems, in to force those who want to use the patented goods to buy them out. A recent study by two Boston University legal scholars estimates that so called “non-practicing entities” are inflicting $29 billion a year in losses across the economy. Other scholars have criticized that estimate as too high, but if the real number were even half that, it would suggest a genuine problem in need of fixing.

Here’s how the scam works. Trolls send out thousands of “extortion letters” to businesses large and small accusing them of infringing obscure, invalid, or questionable patents that the trolls bought up seeking quickie settlements. “I can’t think of another business issue that has had such a pervasive deleterious effect on national productivity and cost,” Shapiro fumes. “It’s a legalized mafia.”

He may have to fume a little longer. The House overwhelming passed bipartisan reform legislation endorsed by President Obama titled the Innovation Act to address these issues, but the bill died in the Senate at the hands of Majority Leader Harry Reid. Apparently, the “loser-pays” provision was considered too big a threat to their business model by trial lawyers and their lobbyists. Shapiro issued a press release calling it “a sad day for American innovators, businesses and consumers.” Guess he’ll have to roll up his sleeves and go back to work.

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About the Author:  In the 35 years since Bill Frezza graduated from MIT with degrees in electrical engineering and biology he has been a scientist, an engineer, a product manager, a salesman, a consultant, an entrepreneur, an author, a technology evangelist, and a venture capitalist. His early career on high-tech’s bleeding edge included the development of first generation electronic newspapers, home banking, home shopping, cable modems, multi-user videogames, wireless LANs, and wireless email, all of which became a success – for someone else a decade later. His 15 years as a venture capital investor working with early stage telecom, semiconductor, and biotech startups taught him humbleness, risk aversion, and the ability to identify ten fatal flaws out of five in any startup business plan. Frezza is a frequent guest on CNBC, FOX, and CBN News where he is challenged to reduce complex economic and policy issues into thirty second sound bites. More writing by Frezza can be found at BillFrezza.com. This article originally appeared in Forbes and appears here with permission from the author. 

Reversing American Decline

Across broad ideological lines, Americans now foresee a dismal, downwardly mobile future for the country’s middle and working classes. While previous generations generally did far better than their predecessors, those in the current one, outside the very rich, are locked in a struggle to carve out the economic opportunities and access to property that had become accepted norms here over the past century.


This deep-seated social change raises a profound dilemma for business: Either the private sector must find a way to boost economic opportunity, or political pressure seems likely to impose policies that will order redistribution from above. It is doubtful the majority of Americans will continue to support an economic system that seems to benefit only a relative few. Looking at our unequal landscape, one journalist recently asked: “Are the bread riots finally coming?”

By 2020, according to the Economic Policy Institute, almost 30% of American workers are expected to hold low-wage jobs, with earnings that would put them below the poverty line to support a family of four. The combination of high debt and low wages has some projections suggesting millennials may have to work until their early 70s.

But our new pessimism and widening class divide stems not only from the concentration of wealth and power, but from the persistence of weak economic growth.

Neo-populist groups on the left and the right have risen to employ political pressure to try and assure a decent quality of life. Ideologically robust liberals, like New York Mayor Bill de Blasio, have emerged as national symbols of a movement in which cities have pushed strong moves like a $15 minimum wage (Seattle) and benefits for workers. Ironically, these are often the same places where wealth is most intensely concentrated and where the middle class has shrunk as a newly dominant, Obama-aligned Clerisy of public employee unions, government officials, academics and artists has gained the preponderance of political power.

The same sense of limited opportunity that drives the new progressives also motivates the popularity of libertarian and Tea Party activism on the right. Instead of state intervention, these groups have been attracted to the notion that removing barriers to economic growth will increase social mobility more effectively than redistribution by political fiat.

But these economic arguments that could generate more widespread support have been married with increasingly unpopular, often backward-looking social agendas that have allowed the Clerisy to portray them as fringe movements.

This has allowed Obama, de Blasio and others shape a new conversation centered on inequality, rather than growth. Oddly enough, it’s a model that relies on Europe’s example even as the continent’s own economic prospects appear dismal, and mainstream political parties there are registering their lowest levels of popular support in decades.

Though it can help some in the short run, there is little reason to think that more redistribution by the state would improve material conditions over the long term for our working and middle classes, let alone expand them. Rather, it might end up expanding our underclass of technological obsolete and economically superfluous dependents. The 50-year War on Poverty, for example, has achieved few gains since the 1960s despite fortunes spent. Instead, the only significant gains in poverty reduction, at least among those working, have come when both the economy and the job market expand, as they did during the Reagan and Clinton eras.

Clearly, as both those Presidents recognized, the best antidote to poverty remains a robust job market.

Yet even this progress has not helped the poorest of the poor, many of whom are marginally, if at all, connected to the workplace. Since 1980, the percentage of people living in “deep poverty”-with an income 50% below the official poverty line — has expanded dramatically. Despite now spending $750 billion annually on welfare programs, up 30% since 2008, a record 46 million Americans were in poverty in 2012.

It is possible that, as Franklin Roosevelt warned, a system of unearned payments, no matter how well intended, can serve as “a narcotic, a subtle destroyer of the human spirit” and reduce incentives for recipients to better their own lives.

The activist welfare-based philosophy, following the European model, would likely include not only historically poor populations, but part-time workers, perpetual students, and service employees living hand to mouth, who can make ends meet largely only if taxpayers underwrite their housing, transportation and other necessities. This trend towards an expansive welfare regime could be bolstered by our falling rates of labor participation — now at its lowest level in at least 25 years, and showing no signs of an immediate turnaround.

And the European model shows little evidence of the benefits of redistribution given the persistently high rates of unemployment, particularly among the young, across most of the EU; indeed much of the continent’s youth are widely described as a “lost generation.” Pervasive inequality and limited social mobility have been well-documented in larger European countries, including France, which has one of the world’s most evolved welfare states. It is even true in Scandinavia, often held up as the ultimate exemplar of egalitarianism, but where the gap between the wealthy and other classes have increased in Sweden four times more rapidly than in the United States over the past 15 years.

To be sure, progressive, or even ostensibly socialist approaches can ameliorate the worst impact of economic decline on lower-income people. But under left-wing governments — Socialists in France, New Labour in Britain and the Obama Administration in the U.S. — class chasms have increased markedly under leaders who insist their policies will reduce inequality. Much the same has occurred in countries with more conservative approaches.

In the absence of a focus on growing economies more rapidly and broadly, both political philosophies fall short.

But maintaining the prospect of upward mobility is central to the very idea of America. For generations, the surplus working class populations of the world have flocked here in search of opportunities unavailable in their home countries. In contrast, there remain few places for America’s aspirational classes to go.

Fortunately, the capitalist system, particularly under democratic control, allows for the possibility of reform. Take Great Britain, the homeland of the industrial revolution. In response to mass poverty and serious public health challenges during the 19th century, social reform movements led by the clergy and a rising professional class organized to address the most obvious defects caused by economic change. It is one of history’s great ironies that at the very time that Karl Marx was composing Das Kapital in the library at the British museum, life was rapidly improving for the British working class. Far from having “exhausted its resources” and precipitating all-out class war, the inequality so evident in mid-19th Century Britain began to narrow through natural economic forces and the growing power of working-class organizations. The working-class revolution in Britain, which Friedrich Engels insisted “must come,” never did.

Similarly, the Depression, brought on by what Keynes called “a crisis of abundance,” was addressed more by measures to spur mass demand than relying on redistribution. The New Deal, and then the Second World War, expanded government support for public works, education and housing, as well as infrastructure and research and development. Programs enacted then and after the war also encouraged widespread property ownership.

This state expansion was generally aimed at increasing economic opportunity-for example, by developing technologies that could stimulate new industrial sectors, new firms, and create new wealth. Today’s, on the other hand, is simply transferring income from one group to another.

Whatever criticisms can be made of mid-century America, during this period the nation transformed what had been a strongly unequal country into one where the blessings of prosperity were more broadly shared. In the 1950s, the bottom 90% held two-thirds of the wealth here. Today they barely claim half.

Sparking beneficial economic growth requires a shift in priorities, and thus presents a challenge to the new class order dominated by Wall Street, the tech oligarchy and their partners in the Clerisy. It is not enough merely to blame the so-called 1%, but to shift the benefits of growth away from the current hegemons, notably in the very narrow finance and high-tech sectors, and towards those involved in a broad array of productive enterprise.

The American economy’s capacity for renewal remains much greater than widely believed. Rather than a permanent condition of slow growth, the United States could be on the cusp of another period of broad-based expansion, spurred in part by its rapidly growing natural gas and oil production — a once-in-a-lifetime opportunity as cheap and abundant natural gas is luring investment from manufacturers from Europe and Asia, and providing good-paying American jobs.

This, along with growth in manufacturing, could spark better times for the middle class, as would the re-igniting of single-family home construction.

If America really wants to confront its growing class divide, it needs to spark such broad-based economic growth, rather than simply feathering the nests of the already rich, privileged and well-connected.

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About the Author:  Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA. This story originally appeared at New York Daily News and is republished here with permission.

California Lawmakers Gone Wild

In January, California governor Jerry Brown, responding to one of the worst droughts in the state’s history, declared a state of emergency. The state legislature, though, didn’t get around to passing an emergency drought-relief bill until the end of February. But California’s lower house, the state assembly, did find time to pass a bill in January sponsored by Assemblyman Rob Bonta, an Alameda Democrat, directing the Department of Corrections to provide condoms to prison inmates. A virtually identical bill passed the state senate last year, which Brown vetoed. The governor apparently thought it logically perverse to provide free condoms to inmates when sex between prisoners remains a felony under state law.



Bonta’s efforts are characteristic of today’s hyperactive California legislature, which has developed a bad habit of passing laws (and lots of them) that ignore the state’s crises and sometimes make them worse—or even cause problems in the first place. Other early 2014 legislation was just as ridiculous as Bonta’s bill. With no rain in sight, and a state economy struggling with high unemployment and entrenched poverty, lawmakers passed one measure that required chefs and bartenders to wear gloves and another that regulated the appearance of toy guns. State Senator Mark Leno and Assemblywoman Nancy Skinner, Democrats both, are coauthoring a bill to demand mandatory “kill switches” on all smartphones sold in the state.

Last year, as public pension costs continued to grow, putting increased pressure on California localities, legislators seemed more interested in passing a bill—eventually signed by Brown—that allowed self-identified transgendered students in public schools to choose which bathroom they prefer to use. Brown also put his signature on laws allowing nurse practitioners, physician assistants, and midwives to terminate first-trimester pregnancies; making it illegal for homeowners confronting mountain lions in their backyards to shoot the ferocious animals; and saying that kids can legally have more than two parents. And that’s just a few of many questionable new measures.

California’s legislature wasn’t always so loopy—in fact, a few decades back, many considered it one of the most professional and forward-looking lawmaking bodies in the nation. Its decline has been a principal cause of the problems besetting the Golden State.

California lawmakers once worked hard to attract business and encourage development. Throughout the 1960s, the legislature—a politically diverse bicameral system of 40 upper-house senators and 80 lower-house assembly members—pursued a pro-growth agenda, building a vast new infrastructure for a rapidly growing state (it became America’s most populous in 1963) and ensuring inexpensive but high-quality primary and secondary education for millions. Partnering with flexible governors such as Democrat Edmund G. “Pat” Brown and Republican Ronald Reagan, state lawmakers managed to do this while also fostering a first-class public workforce, balancing budgets, and keeping taxes moderate. New industries—from the wineries of Napa Valley to the high-tech innovators of Silicon Valley—expanded ex nihilo into global prominence. The legislature was widely viewed as one of America’s most serious political bodies.

If the state’s good governance, however, had created unmatched prosperity, its success also misled a majority of Californians into thinking that their newfound bounty was a birthright rather than the dividend of a rare partnership between gifted leaders in private industry and skilled public servants. Even as the state grew, energized by eager new immigrants, it shorted the very investments that had once made it great—a complex system of water storage and transference, a model freeway system, a blue-chip tripartite educational system, and encouragement of the oil, natural-gas, timber, and hydroelectric industries—and began to impose regulations and higher taxes on the private sector. The thinking was that wealth was now so assured that Californians needed no longer to create it. So a flurry of regulations and higher taxes followed, designed to consume and redistribute prior riches, while nurturing the dream of a return to a preindustrial paradise—as if nature alone, not California’s visionaries, had made the state so livable and affluent.

By the 1970s, the state legislature reflected California’s new collective mentality and thus became increasingly dominated by the Democratic Party. For most of that time, no credible opposition existed to check ideological excess. Indulgence became more rule than exception—and that certainly remains the case today. Busy enacting countless new laws—some 800 passed in 2013 and took effect this year—the liberal legislature has lost sight of at least one fundamental law: that of supply and demand. Lawmakers seem determined to do permanent harm to the Golden State economy. California’s unemployment rate is currently the fifth-highest in the United States—hovering around 8.5 percent, versus 7 percent nationally—but in September 2013, Governor Brown signed legislation that will eventually make its minimum wage one of the nation’s highest. It will rise incrementally to $10 an hour by January 2016. The measure’s backers didn’t explain how employers would suddenly decide to hire more workers at higher wages.

Geologists believe that California’s vast Monterey Shale formation may contain as much as 15 billion barrels of recoverable oil and could create nearly 2 million new jobs. Almost anywhere else, such bounty would be considered a godsend; in California, the legislature views it as an opportunity to take a public stand against carbon fuels. The state produces only one-sixth of the natural gas it consumes and less than 40 percent of its gasoline (it purchases the most gasoline in the nation). Yet in 2014, the legislature made hydraulic fracturing—or fracking—far more difficult to undertake.

In 2012, Democratic supermajorities in the state senate and the assembly—and, to be fair, a majority of voters—approved a sales-tax increase along with a steep hike in the income tax on top earners, giving California the highest aggregate tax rates in the nation at precisely the moment that federal income-tax and capital-gains-tax cuts expired. California now draws about half of its revenue from income taxes—and half of that money comes from roughly 150,000 top earners. Each top-bracket Californian pays the equivalent in taxes of 250 other state residents combined. The loss of even a few hundred of these taxpayers to other states each year can drastically affect the state budget.

In California, it has become a truism that the more the legislature raises a tax, the more likely that the service for which the tax is levied will get worse. Californians pay the highest gasoline taxes in the nation, for instance, yet the state’s roads and highways, which that tax is supposed to pay for, usually rate among the worst—47th in a recent Reason Foundation survey. In 2007, the Federal Highway Administration rated only 28 percent of California highways in “good” condition. The legislature allowed the state’s ancient coastal and inland highways—the 101 and the 99—to deteriorate for 30 years before winning voter approval for a $19.9 billion highway bond in 2006 to finance deferred maintenance and some new capacity along those vital routes and others. It is now pushing high-speed rail, a multibillion-dollar boondoggle, the first leg of which, currently tied up in court, will carry few passengers between Fresno and little-visited Corcoran.

California’s budget is heavily weighed down by its out-of-control pension system (see “The Pension Fund That Ate California,” Winter 2013). Unfunded pension liabilities now top $154 billion, according to official state estimates—and some independent analyses put the liability as high as $500 billion. The combination of politically powerful public-employee unions, nearly 60,000 government workers making more than $100,000 per year, and lavish retirements based on such high compensation, have nearly bankrupted the state. Yet reform is difficult when the public-employee unions are among the largest contributors to Democrats in the legislature.

Just how many Californians are leaving the state remains hard to know, given the difficulty of obtaining accurate (and often embarrassing) data. But some estimates put the exodus at nearly a quarter-million a year, or roughly 5,000 people a week. These fed-up expatriates usually cite California’s high taxes, poor state services and infrastructure, and higher-than-average unemployment rate, among other problems. Many are headed for low- or no-income tax states of the South and Southwest, such as Arizona, Nevada, Texas, Utah, and Florida. In terms of demography, the people most opposed to the Democratic-controlled California legislature’s policies are leaving.

Its mishandling of California’s complex water politics exemplifies the legislature’s fecklessness and political hypocrisy. As the state’s population surged throughout the twentieth century, newcomers brought with them an insatiable demand for water—setting up a fateful and recurring conflict between California’s inland farmers and its coastal environmentalists (see “California’s Water Wars,” Summer 2011).

The precarious political balance between California’s wet and dry regions was—and is—highly susceptible to drought. Last year was the driest on record. If drought conditions persist in the Sierra Nevada Mountains and in the agriculturally rich western end of the Central Valley, there will be little, if any, contracted canal-water deliveries available for farmers in 2014—a historic first. Westside farmers are gambling by drilling deeper wells in hopes that such expensive pumping of brackish water from a shrinking aquifer might at least save a percentage of their planted acreage. With the drought cutting further into water deliveries, older nut orchards are already being uprooted and row cropland idled. More than 200,000 acres will immediately go out of production.

Far more irrigated acreage will be destroyed if the drought persists and state and federal environmental policies don’t change. Though the legislature agreed to fund more water-storage and recycling efforts, lawmakers continue to allow controversial water releases from near-dry reservoirs aimed at promoting salmon runs in the San Joaquin River. The five-year-long diversion of contracted northern California irrigation water into the San Francisco Bay Delta continues as well, on the unproved theory that such infusions might improve the habitat of the supposedly declining population of delta smelt, a short-lived three-inch fish. Even in a state of emergency, Governor Brown has not halted the irrigation-water diversions.

Oddly, Hetch Hetchy reservoir in the Sierra Nevada Mountains, which discharges freshwater into huge aqueducts to provide distant San Francisco’s residential water use, has never had any of its flows diverted to the San Joaquin River (which the aqueducts cross) to foster salmon runs or save delta baitfish. Apparently, only farmers, not Bay Area residents whose representatives vote to restore fish populations, are to do without contracted water. In fact, growers believe that in total, over 4 million acre-feet—enough to supply more than 4 million families with their water needs or irrigate over 1 million acres of farmland—have been annually diverted from contracted irrigation.

Nowhere has the state legislature done more damage than in its response to illegal immigration, which has wrought havoc with the state’s finances and politics. To the degree that legislators discuss illegal immigration, it is either to facilitate the arrival of Mexican and Latin American nationals or to make illegal aliens exempt from any laws predicated on being an American citizen. California has the largest number of illegal aliens in the nation; yet the legislature saw fit to extend driver’s licenses to them while making it more difficult for state authorities to transfer arrestees to federal immigration authorities. Stranger still, the legislature passed a bill allowing illegals to practice law in California. Such steps won’t reduce the number of illegals, needless to say.

The problem is not just that California hosts four in ten of the country’s estimated 11 million illegal aliens. Rather, it’s that Spanish-speaking immigrants, largely without high school diplomas, have arrived in numbers large enough to discourage assimilation in a multicultural climate of their hosts, who no longer embrace the ideal of the melting pot. The result is a growing underclass, whose presence is evident in an array of state statistics, from soaring penal-system costs to dismal school test scores.

Half of all students enrolled in the state’s public schools are Latino, many of them children of illegal immigrants. Forty percent of California’s primary school students do not speak English as their first language—a fact rarely mentioned, yet critical for understanding the precipitous drop in school outcomes over the last few decades. The Los Angeles Unified School District faces minority dropout rates approaching 60 percent. California public school students test near the bottom nationally in math and science. The state’s four-year high school graduation rate is 32nd among 53 states, territories, and the District of Columbia. Well over half of incoming freshmen to the California State University system require remediation in math and science. Instead of addressing the calamitous effects that illegal immigration has had on public education, the legislature would rather blame the 35-year-old Proposition 13, which limited state property taxes, for reducing the revenue available to schools.

Massive illegal immigration has done more than damage California’s public schools. Illegals, counted in census tallies, have helped give California the highest poverty rate in the nation—nearly 24 percent. And the fact that American-born children of illegals are entitled to welfare benefits probably helps explain why California is now home to one in three of the nation’s welfare recipients. The cost of Medi-Cal and other social services for the indigent has skyrocketed, draining money from the state budget for, among other things, infrastructure spending. Yet the California legislature either apparently sees no connection between these crises and illegal immigration or finds recognition of such cause and effect politically dangerous.

This year, Latinos will surpass non-Hispanic whites as the state’s largest racial or ethnic group. About 39 percent of the state’s residents are of Latino heritage. What the implications of that oft-cited statistic are no one quite knows, given increasing rates of intermarriage and integration in the second and third generations. But the influx of millions of indigent foreign nationals into California has transformed the statistical profile of “Latinos” and served as justification for state-mandated affirmative-action adjustments for those having little in common with the impoverished new arrivals from central Mexico. If it is politically incorrect to tie massive illegal immigration to the soaring costs of education, law enforcement, health, and welfare systems, it is absolutely forbidden to suggest that the state’s middle- and upper-middle-class Latino population—many with third- and fourth-generation roots in the state—benefit from diversity and affirmative-action programs, regardless of their own class, income level, education, or exact ancestry.


What explains the legislature’s transformation into the dysfunctional body it is today? Some argue that California’s population is now so vast that it is almost impossible for state legislators to gain adequate knowledge about the people and landscapes they ostensibly serve. There is some truth to this. In the 1960s, the 40 state senators on average represented one-third of a million constituents; today, each senatorial district on average is home to 1 million residents. More important, legislative districts have been so gerrymandered that Sacramento is now more or less assured a permanent liberal Democratic majority and an increasingly powerless Republican minority. Not a single seat in the senate, assembly, and congressional races changed party hands in California’s 2004 election. In the 2012 general election, just three of 34 incumbent Democrats lost their races—to other Democrats, thanks to the state’s new top-two primary system.

Term limits—amended in 2012 to allow 12 consecutive years of service in either the assembly or senate—may also partially be to blame. Sacramento has few experienced legislators. Most lawmakers spend their brief time in office planning for their post officia careers, either by courting lobbyists, making deals with the governor to secure lucrative sinecures as administrative grandees on well-paid state commissions and boards, or eyeing another elective office. Corruption is a problem, too. Currently, Democratic state senator Roderick Wright is on paid leave—rather than being expelled—from the legislature after being convicted by a Los Angeles jury of eight felonies related to campaign fraud. Democratic state senator Rod Calderon also went on paid leave to face more than 20 felony counts of bribery, money laundering, and fraud. The most recent example is also the most shocking: Democratic state senator and gun-control advocate Leland Yee was indicted in March for conspiring to commit wire fraud and traffic weapons.

But a more far-reaching explanation for the legislature’s behavior is that the state became both fabulously wealthy—California is home to more billionaires than any other state—and very poor. Those in between are either marginalized politically or, as we’ve seen, moving out. California today is largely a cartographical abstraction. Two profoundly different cultures and landscapes have evolved over the last half-century and now seem arbitrarily lumped together.

An overclass—much of it living in the state’s most heavily populated corridor, within 50 miles of the coast from Berkeley to San Diego—is doing quite well economically, despite the state legislature’s incompetence and job-shrinking policies. Globalization and California’s 600-mile window on the rising Asian nations across the Pacific have allowed Menlo Park and San Diego to develop stronger ties with the Chinese and Japanese economies than with Stockton or Tulare—just three hours away, in the state’s interior. Many of California’s most affluent residents, at least so far, tend to shrug off high taxes, viewing income redistribution through taxation as a sort of psychological penance for their super-wealth. Residents of La Jolla, Santa Monica, and Palo Alto can afford the private schools that are sprouting up in the manner of Southern academies following the court-ordered forced busing of the 1970s. They seek class homogeneity in their gated enclaves, and they don’t worry about the high power bills of the poor residing in the frequently sweltering interior—much less the effect of illegal immigration on medical and social services in that region. They care far more about the environment and gay marriage and other progressive causes than about mundane concerns such as fuel and farm exports and middle-class jobs. They form a cash-laden constituency with enormous pull in the state legislature.

The majority of California’s vast farming acreage and the state’s oil, timber, and water resources are found in the less populous southern and central interiors and in the Sierra foothills. The farms and firms that produce or extract food, lumber, minerals, and fuel are regulated and taxed by legislators who either do not know of the sources of their state’s vast natural wealth or, if they do, assume that these natural riches appear spontaneously. Ironically, many of the predominantly Hispanic poor who live in these parts of the state support logging and fracking and natural-gas power plants, which might lower their electricity bills—currently the highest in the country. Yet the legislative districts representing these areas tend to vote not for candidates with pro-growth views but for liberal-left politicians who mirror the values—and support the agendas—of coastal elites’ ultraprogressive social and environmental agendas.

At first glance, this alliance seems completely at odds with the pocketbook interests of non-coastal workers. But the coastal overclass makes an unspoken political bargain with the representatives of the Hispanic poor: in return for Hispanic support for green legislation, more gun control, or transgendered restrooms, coastal liberals will push de facto state amnesties, the Dream Act, higher taxes on small businesses and the upper middle class, expanded government, and more social services. The poor of my Central Valley town, Selma ($16,000 per-capita income and 15 percent unemployment), might want fracking jobs—but not enough to vote for a Republican who would support, say, trimming Medicaid or reducing benefits to illegals. The aspirational, work-oriented middle class winds up politically orphaned and without a voice in Sacramento.

Bringing sanity back to the California legislature appears hopeless under present conditions—but some of those conditions could change soon.

If the drought persists, water rationing won’t be far behind, and well-heeled residents of the mostly waterless California coast will be forced to choose between their green obsessions and practical policy fixes. The drought would also slash state revenues by idling hundreds of thousands of acres of farmland, while causing the price of fresh fruits and vegetables to spike. That development alone would turn public attention to the several million acre-feet that Bay Area and Los Angeles legislators have squandered by privileging fish over people. Alternatively, if Southern California Edison or Pacific Gas and Electric hike their rates much more, popular demand will likely grow for tapping the state’s vast natural-gas reservoirs. Any outbreak of populism from the California interior would disrupt the fragile elite-poor coalition, especially if impoverished Californians sense that the wealthy are pushing self-serving policies, while quietly separating themselves from the poor, whom they champion in public but avoid in their private lives.

A substantial reduction in illegal immigration could, over time, spur a change of political attitudes among California’s Hispanics, which in turn could shape the future course of the legislature. Without massive influxes of poor Mexican and Latin American nationals, the natural forces of assimilation, integration, and intermarriage would in two generations transform California’s Latino community. With fewer illegal immigrants, a growing Latino middle class would gradually begin to see itself as more diverse and less politically predictable—as individuals defining themselves more in terms of economic interests than of tribal solidarity. Take away the illegal-immigration issue, and most Latinos in central California are more interested in expanding employment in agriculture, logging, gas and oil, and construction than they are in regulating bartenders’ gloves and toy guns. Hispanic support for progressives could dry up if Sacramento’s high-tax, big-government policies wind up smothering economic opportunity for middle-class Latinos.

A 2013 Hoover Institution–sponsored Golden State poll of 1,000 state residents offers some hope that Californians are tiring of the legislature’s neglect of existential crises in favor of pet issues. Only one in seven Californians polled was “very confident” about affording higher taxes. And a majority cited shoring up the economy, expanding jobs, and balancing the state budget as the government’s key priorities. The least important issues? Global warming, gun control, and high-speed rail. Further, a 2014 Golden State poll suggested that the legislature’s core constituencies—youth, Latinos, and liberals—are growing unhappy with the agendas of their favored legislators. For example, 76 percent of young Californians (aged 18 to 29), as well as 81 percent of Latinos and 79 percent of those identified as Democrats felt that they were now either worse off or no better off financially than in the past. Asians, a strong Democratic constituency and currently overrepresented at elite California campuses, grew irate at the legislature’s plan to put a referendum on the ballot to bring back racial preferences in college admissions and hiring.

In sum, the now-dysfunctional California legislature grew out of a destructive political alliance between the state’s poor interior and its rich coastal corridor, while the once-robust middle class either fled or declined into irrelevance. The odd power-coupling will end only when coastal elites begin to suffer the consequences of their progressive utopianism, or when the border closes and Latinos become politically indistinguishable from other Americans tired of subsidizing the pipe dreams of the rich and a welfare state that institutionalizes poverty. In other words, California’s hope lies in a middle-class resurgence.

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About the Author:  Victor Davis Hanson is a contributing editor of City Journal and a senior fellow at the Hoover Institution at Stanford University. This article originally appeared in in the Spring 2014 edition of City Journal and is republished here with permission.

Mileage Tax Would Put Big Brother in Your Back Seat

California is known as the world capital of the car culture. The automobile played a central role in creating the California Dream, giving people the freedom to travel, to live where they choose and to experience the exhilaration of the open road.

Now, if Senator Mark DeSaulnier gets his way, you’ll have to pay a new tax for every mile you drive. His Senate Bill 1077 would begin with a “pilot program” in one unfortunate yet-to-be-determined city where motorists would pay taxes based on the miles driven. Eventually, the Democrat from Concord hopes to impose his mileage tax on all of us.

Just as many Americans are expressing concerns about government surveillance programs that intrude on their privacy (think red light cameras and the NSA), the mileage tax would give state transportation bureaucrats access to data on where you go.

Sen. DeSaulnier contends that the state needs the data to calculate your taxes but will keep the information safe. However, in the last year California state agencies, including the departments of Public Health and Social Services, were responsible for data breaches that compromised the personal information of thousands of Californians.

Also, while SB 1077 is obviously a tax increase, DeSaulnier and his tax-raising buddies are trying to say it is a “fee” and not a tax. They know if they get away with calling it a “fee” they can pass it with a simple majority vote and increase it anytime they wish, all without needing to comply with Proposition 13’s requirement that higher state taxes receive a two-thirds vote of the Legislature.

This mileage tax will fall especially hard on those who live in suburbs or exurbs and have to commute long distances to work and it will discourage people from taking vacations. Instead of feeling free to explore, Californians will have to take a government meter with them, dinging them with more taxes every mile they travel.

State policies have become increasingly hostile to drivers over the years and the mileage tax would just make things worse. California has the highest gas taxes in the nation and gas prices are second only to Hawaii which, given its location in the middle of the ocean, makes fuel transportation expenses unavoidably high. California, sitting on huge oil reserves, can’t claim that excuse.

And even with ridiculously high taxes on gas that are supposed to be dedicated to roads, a Reason Foundation study ranks our state 47th out of 50 (with 50 being worst) for worst roads in the nation. This is because Sacramento politicians have continually raided gas tax funds to spend on unrelated pet projects.

Free and fast movement of goods and people facilitates economic growth. High taxes and congested roads only harm our economy and frustrate hard working citizens who simply want to get where they need to go. Sacramento must stop its bait and switch tactics with the gas tax and make better use of the considerable funds already provided. DeSaulnier’s proposal is just another tax increase and it takes us in the wrong direction.

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Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

California's Green Bantustans

One of the core barriers to economic prosperity in California is the price of housing. But it doesn’t have to be this way. Policies designed to stifle the ability to develop land are based on flawed premises. These policies prevail because they are backed by environmentalists, and, most importantly, because they have played into the agenda of crony capitalists, Wall Street financiers, and public sector unions. But while the elites have benefit, ordinary working families have been condemned to pay extreme prices in mortgages, property taxes, or rents, to live in confined, unhealthy, ultra high-density neighborhoods. It is reminiscent of apartheid South Africa, but instead of racial superiority as the supposed moral justification, environmentalism is the religion of the day. The result is identical.

Earlier this month an economist writing for the American Enterprise Institute, Mark J. Perry, published a chart proving that over the past four years, more new homes were built in one city, Houston Texas, than in the entire state of California. We republished Perry’s article earlier this week, “California vs. Texas in one chart.” The population of greater Houston is 6.3 million people. The population of California is 38.4 million people. California, with six times as many people as Houston, built fewer homes.

And when there’s a shortage, prices rise. The median home price in Houston is $184,000. The median price of a home in Los Angeles is $530,000, nearly three times as much as a home in Houston. The median price of a home in San Francisco is $843,000, nearly five times as much as home in Houston. What is the reason for this? There may be a shortage of homes, but there is no shortage of land in California, a state of 163,000 square miles containing vast expanses of open space. What happened?

You can argue that San Francisco and Los Angeles are hemmed in by ocean and mountains, respectively, but that really doesn’t answer the question. In most cases, these cities can expand along endless freeway corridors to the north, south, and east, if not west, and new urban centers can arise along these corridors to attract jobs. But they don’t, and the reason for this are the so-called “smart growth” policies. In an interesting report entitled “America’s Emerging Housing Crisis,” Joel Kotkin calls this policy “urban containment.” And along with urban containment, comes downsizing. From another critic of smart growth/urban containment, economist Thomas Sowell, here’s a description of what downsizing means in the San Francisco Bay Area suburb Palo Alto:

“The house is for sale at $1,498,000. It is a 1,010 square foot bungalow with two bedrooms, one bath and a garage. Although the announcement does not mention it, this bungalow is located near a commuter railroad line, with trains passing regularly throughout the day. The second house has 1,200 square feet and was listed for $1.3 million. Intense competition for the house drove the sale price to $1.7 million. The third, with 1,292 square feet (120 square meters) and built in 1895 is on the market for $2.3 million.”

And as Sowell points out, there are vast rolling foothills immediately west of Palo Alto that are completely empty – the beneficiaries of urban containment.

The reason for all of this ostensibly is to preserve open space. This is a worthy goal when kept in perspective. But in California, NO open space is considered immediately acceptable for development. There are hundreds of square miles of rolling foothills on the east slopes of the Mt. Hamilton range that are virtually empty. With reasonable freeway improvements, residents there could commute to points throughout the Silicon Valley in 30-60 minutes. But entrepreneurs have spent millions of dollars and decades of efforts to develop this land, and there is always a reason their projects are held up.

The misanthropic cruelty of these polices can be illustrated by the following two photographs. The first one is from Soweto, a notorious shantytown that was once one of the most chilling warehouses for human beings in the world, during the era of apartheid in South Africa. The second one is from a suburb in North Sacramento. The scale is identical. Needless to say, the quality of the homes in Sacramento is better, but isn’t it telling that the environmentally enlightened planners in this California city didn’t think a homeowner needed any more dirt to call their own than the Afrikaners deigned to allocate to the oppressed blacks of South Africa?

The Racist Bantustan


Soweto, South Africa  –  40′ x 80′ lots, single family dwellings

When you view these two studies in urban containment, consider what a person who wants to install a toilet, or add a window, or remodel their kitchen may have to go through, today in South Africa, vs. today in Sacramento. Rest assured the ability to improve one’s circumstances in Soweto would be a lot easier than in Sacramento. In Sacramento, just acquiring the permits would probably cost more time and money than doing the entire job in Soweto. And the price of these lovely, environmentally correct, smart-growth havens in Sacramento? According to Zillow, they are currently selling for right around $250,000, more than five times the median household income in that city.

The Environmentalist Bantustan


Sacramento, California  –  40′ x 80′ lots, single family dwellings

When you increase supply you lower prices, and homes are no exception. The idea that there isn’t enough land in California to develop abundant and competitively priced housing is preposterous. According to the American Farmland Trust, of California’s 163,000 square miles, there are 25,000 square miles of grazing land and 42,000 square miles of agricultural land; of that, 14,000 square miles are prime agricultural land. Think about this. You could put 10 million new residents into homes, four per household, on half-acre lots, and you would only consume 1,953 square miles. If you built those homes on the best prime agricultural land California’s got, you would only use up 14% of it. If you scattered those homes among all of California’s farmland and grazing land – which is far more likely – you would only use up 3% of it. Three percent loss of agricultural land, to allow ten million people to live on half-acre lots!

And what of these lots in North Sacramento? What of these homes that cost a quarter-million each, five times the median household income? They sit thirteen per acre. Not even enough room in the yard for a trampoline.

There is a reason to belabor these points, this simple algebra. Because the notion that we have to engage in urban containment is a cruel, entirely unfounded, self-serving lie. You may examine this question of development in any context you wish, and the lie remains intact. If there is an energy shortage, then develop California’s shale reserves. If fracking shale is unacceptable, then drill for natural gas in the Santa Barbara channel. If all fossil fuel is unacceptable, then build nuclear power stations in the geologically stable areas in California’s interior. If there is a water shortage, than build high dams. If high dams are forbidden, then develop aquifer storage to collect runoff. Or desalinate seawater off the Southern California coast. Or recycle sewage. Or let rice farmers sell their allotments. There are answers to every question.

Environmentalists generate an avalanche of studies, however, that in effect demonize all development, everywhere. The values of environmentalism are important, but if it weren’t for the trillions to be made by trial lawyers, academic careerists, government bureaucrats and their union patrons, crony green capitalist oligarchs, and government pension fund managers and their partners in the hedge funds whose portfolio asset appreciation depends on artificially elevated prices, environmentalism would be reined in. If it weren’t for opportunists following this trillion dollar opportunity, environmentalist values would be kept in their proper perspective.

The Californians who are hurt by urban containment are not the wealthy elites who find it comforting to believe and lucrative to propagate the enabling big lie. The victims are the underprivileged, the immigrants, the minority communities, retirees who collect Social Security, low wage earners and the disappearing middle class. Anyone who aspires to improve their circumstances can move to Houston and buy a home with relative ease, but in California, they have to struggle for shelter, endlessly, needlessly – contained and allegedly environmentally correct.

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Ed Ring is the executive director of the California Policy Center

America's Emerging Housing Crisis

From the earliest settlement of the country, Americans have looked at their homes and apartments as critical elements of their own aspirations for a better life. In good times, when construction is strong, the opportunities for better, more spacious and congenial housing—whether for buyers or renters—tends to increase. But in harsher conditions, when there has been less new construction, people have been forced to accept overcrowded, overpriced and less desirable accommodations.

Today, more than any time, arguably, since the Great Depression, the prospects for improved housing outcomes are dimming for both the American middle and working classes. Not only is ownership dropping to twenty-year lows, there is a growing gap between the amount of new housing being built and the growth of demand.

Our still-youthful demographics are catching up with us. After a recession generated drought, household formation is again on the rise, notes a recent study by the Harvard Joint Center for Housing Studies. In some markets, there isn’t an adequate supply of affordable housing for the working and middle classes. Overall, according to the research firm Zelman and Associates, the country is building barely one-third the number needed to meet the growth in households. Overall inventories of homes for sale are at the lowest level in eight years.

The groups most likely to be hurt by the shortfall in housing include young families, the poor and renters. These groups include a disproportionate share of minorities, who are more likely to have lower incomes than the population in general. This situation is particularly dire in those parts of the country, such as California, that have imposed strong restrictions on home construction. California’s elaborate regulatory framework and high fees imposed on both single- and multi-family housing have made much of the state prohibitively expensive. Not surprisingly, the state leads the nation in people who spend above 30 percent, as well as above 50 percent, of their income on rent.

Sadly, the nascent recovery in housing could make this situation even more dire. California housing prices are already climbing far faster than the national average, despite little in the way of income growth. This situation could also affect the market for residential housing in other parts of the country, where supply and demand are increasingly out of whack.

Ultimately, we need to develop a sense of urgency about the growing problem of providing adequate shelter. As a people we have done this many times — with the Homestead Act, and again, after the Second World War, with the creation of affordable “start-up” middle- and working class housing in places like Levittown (Long Island), Lakewood (Los Angeles), the Woodlands (Houston) and smaller subdivisions, as well as large scale cooperative apartment development in places like New York. Government policy should look at opportunities to create housing attractive to young families, which includes some intelligent planning around open space, parks and schools. It is important to ensure that a sufficient supply of affordable housing is allowed throughout metropolitan areas, for all income groups.

Nothing speaks to the nature of the American future more than housing. If we fail to adequately house the current and future generations, we will be shortchanging our people, and creating the basis for growing impoverishment and poor social outcomes across the country.

The preceding is the executive summary from a new report, America’s Emerging Housing Crisis, published by National Community Renaissance, and authored by Joel Kotkin and Wendell Cox.


National Housing Crisis – Report (Download: 3.8 MB)
National Housing Crisis – Supplement (Download: 5.6 MB)

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About the Authors:

Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.

Wendell Cox is principal of Demographia, an international public policy and demographics firm. He is co-author of the “Demographia International Housing Affordability Survey” and author of “Demographia World Urban Areas” and “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.” He was appointed to three terms on the Los Angeles County Transportation Commission, where he served with the leading city and county leadership as the only non-elected member.

California vs. Texas in one chart

As can be seen on the following chart, during the period from January 2011 to March 2014, there have been slightly more single-family housing starts in Houston (95,037) than in California for the entire state (94,993). In this single chart, we can understand the dynamism of the booming, expanding Texas economy and housing market compared to the stagnation of the California economy and the housing market there for new construction. The chart displays 1-unit housing starts for the entire state of California and the Houston metro area annually from 2011-2013 and year-to-date through March for 2014.

 Housing Starts Authorized by Building Permits
1 Unit Structures, California vs. Houston, 2011-2014

In a recent column (“The High Cost of Liberalism“), economist Thomas Sowell offered some insights into the housing market in California that would help explain why fewer homes are being built in the entire Golden State than in one major city in Texas:

“Liberals advocate many wonderful things. In fact, I suspect that most conservatives would prefer to live in the kind of world envisioned by liberals, rather than in the kind of world envisioned by conservatives. Unfortunately, the only kind of world that any of us can live in is the world that actually exists. Trying to live in the kind of world that liberals envision has costs that will not go away just because these costs are often ignored by liberals.

One of those costs appeared in an announcement of a house for sale in Palo Alto, the community adjacent to Stanford University. The house is for sale at $1,498,000. It is a 1,010 square foot bungalow with two bedrooms, one bath and a garage. This house is not an aberration, and its price is not out of line with other housing prices in Palo Alto. Even a vacant lot in Palo Alto costs more than a spacious middle-class home costs in most of the rest of the country.

How does this tie in with liberalism?

In this part of California, liberalism reigns supreme and “open space” is virtually a religion. What that lovely phrase means is that there are vast amounts of empty land where the law forbids anybody from building anything. Anyone who has taken Economics 1 knows that preventing the supply from rising to meet the demand means that prices are going to rise. Housing is no exception.

There are people who claim that astronomical housing prices in places like Palo Alto and San Francisco are due to a scarcity of land. But there is enough vacant land (“open space”) on the other side of the 280 Freeway that goes past Palo Alto to build another Palo Alto or two — except for laws and policies that make that impossible.

As in San Francisco and other parts of the country where housing prices skyrocketed after building homes was prohibited or severely restricted, this began in Palo Alto in the 1970s. Housing prices in Palo Alto nearly quadrupled during that decade. This was not due to expensive new houses being built, because not a single new house was built in Palo Alto in the 1970s. The same old houses simply shot up in price. That is part of the unacknowledged cost of “open space,” and just part of the high cost of liberalism.”

The religion of “open space” in California probably helps explain why there’s more new construction of single-family homes in Houston than in the entire state of California. And those “open space”-driven housing restrictions in California help explain the high cost of housing there relative to Houston. During the month of March, the median sales price of homes sold in California at $376,000 was almost exactly double the median sales price of homes sold in Houston at $189,000. The median sales price in the SF Bay area in March was $579,000, more than three times the median sales price in Houston. And those huge differences in housing prices probably help explain why firms like Toyota and Occidental Petroleum are moving from California to Texas, joining other firms including Industrial Brush, General Motors, DHF Technical Products and Sony Pictures that have relocated operations this year to Utah, Michigan, New Mexico and British Columbia respectively. Expect more out-migration of people, jobs, businesses and one-way U-Haul trucks from California in the future….

Dr. Mark J. Perry is a full professor of economics at the Flint campus of The University of Michigan, where he has taught undergraduate and graduate courses in economics and finance since 1996. Starting in the fall of 2009, Perry has also held a joint appointment as a scholar at the American Enterprise Institute. This post originally appeared on the website of the American Enterprise Institute and is republished here with permission from the author.

Charter Schools: Reinventing Public Education

The destiny of a nation lies in the education of its youth. Both Jesus and Hitler understood that society is shaped by its children, for better or worse. In this country, the commitment of public education to social indoctrination of our youth instead of education has helped determine the downward trajectory of the American Republic.

The idea for charter schools began as a proposal by a professor named Ray Budde to a group of his academic colleagues. [1] Restructure education by establishing independent programs within public schools that are developed by teachers. The 1974 paper drew little interest until the publication of A Nation at Risk. The government report described the failure of public education to teach and the decline in academic competence of students as a national security threat.

Al Shanker, president of the American Federation of Teachers, endorsed the idea at a national meeting in 1988, and expanded it to the creation of independent schools within the public school building. Three years later, Minnesota passed the first state charter school law. California followed suit. Today, 42 states and the District of Columbia have charter school laws.

There was no federal support for charter schools until President Clinton amended the Elementary and Secondary Education Act in 1992. It provided for the development of charter schools with federal grants to fund them. President Bush signaled his support in the No Child Left Behind legislation. Nevertheless, opposition by local school districts and unions has severely restricted the establishment of countless charter schools nationwide. Their antipathy represents the biggest obstacle to continuing expansion of the charter network.

The creation of autonomous schools, independent of rules, regulations and union dogma remains an inspired idea, as freedom always is. Initially housed within the walls of a traditional public school, charter schools now occupy their own space, often in a trailer, vacant building or rented store front. In just over two decades, the handful of tiny schools started by teachers, parents and concerned citizens has grown into a network of 6,400 schools nationwide that serves 2.57 million students and has waiting lists of more than one million additional applicants. [2]

Early critics feared charter schools would siphon off the highest performing students and much-needed funds. In reality, a majority of students are the poor, low performing minority students whose parents view charter schools as a chance for success. As with Catholic schools, this group has benefited the most from the charter programs.

After Hurricane Katrina leveled New Orleans, its public schools were turned over to the Recovery School District. Seven thousand teachers and administrative employees were fired and replaced by a new cadre of teachers and staff. The citywide system of low-performing public schools was replaced by a network of charter schools, many of them operated by private Charter Management Organizations. This fall 100% of the city’s school age children attended charter schools. The sixty-five percent below-state-academic-test-scores rate has declined to seven per cent. Nineteen of the city’s schools now rank among the top twenty schools in the state. [3]

Last year, seven charter schools were recognized for Title I Academic Achievement. Sixty-five charters were California Distinguished Schools. Eight of the nation’s top twenty and 29 of the nation’s top one hundred charter schools are in California. 33 of the country’s top 100 schools in the nation are charter schools, with Oxford Academy in Cypress ranked as the tenth best school in the United States.

New York City’s charter schools rank among the best. Graduates of the Young Women’s Leadership Academy network of charter academies have a 300% greater chance of finishing college than their public school counterparts. More than 5500 poor minority girls who graduated from the schools have enrolled in college compared to the nationwide rate of only 8%.

Students enrolled in TYWLA East Harlem have consistently received the highest scores on the New York State Regents Exam. Mayor Bill De Blasio created a firestorm of protest when he attempted to trim the system of 154 schools his predecessor Michael Bloomberg had successfully built during his tenure.

Three decades ago, the National Commission on Excellence in Education warned that “a rising tide of mediocrity” in America’s schools was eroding our economy and society. [4] Charter schools have proven to be a means to stem that tide. It is worth a closer look at the phenomenon to understand the reasons for its success and the threat charter schools represent to political bureaucrats and teachers’ unions.

The process of separation-individuation represents a milestone in human psychological development. From a dynamic perspective, charter schools are the organizational equivalent. Separated from their parent organizations, the schools become autonomous structures. Liberated from the collective, each school is free to develop its own individual identity unlike the traditional system of identical clones.

Each charter school is a unique system in which the teachers and principals are free to design the curriculum and daily lesson plans. It is the freedom the teachers are given to be innovative and creative that accounts for much of their extraordinary success. The process is very similar to that psychosocial development of children in a family. Those who leave home tend to become successful adults.

Opponents of charter schools maintain that they siphon off the top-performing students and essential financial resources, that the schools are racially and ethnically imbalanced. The data from countless studies contradict those claims.

The majority of students who enroll in charter schools are among the lowest performers in their public schools and more than two-thirds qualify for free or low-cost lunches. The schools typically receive only 60% of the funds allotted per pupil and sometimes have to make up the difference in costs out of pocket. Virtual schools offer online classes that have lowered the costs without compromising their effectiveness. Student demographics are similar to those of traditional public schools.

The 2014 Center for Research on Education Outcomes study on charter schools was analyzed by the RAND Corporation, a think tank whose employees donate almost exclusively to Democrat candidates. It found that students in New York who remain in charter schools through 8th grade score 30 points higher in math than their traditional public school counterparts, a finding that was repeated across the country but buried in the report.

The CREDO study on LAUSD found that 48% of the students in Los Angeles charter schools scored significantly higher in reading than their counterparts in traditional public schools and 44% higher in math. The charter students gained, on average, one full year of progress as a result of the substantial number of days added to their school year and more rigorous curriculum. The results were similar to those of Catholic schools. Liberal politics similarly biases a number of the unfavorable published studies of charter schools and conceals their highly successful record nationwide. It also accounts for much of the public opposition to them.

The application process itself is deliberately made arduous. Each school must submit a detailed proposal which includes five-year financial projection, cost analysis, governance code, disciplinary guidelines and grievance protocols among a list of other requirements. The application for Coney Island Prep’s charter totaled 1800 pages! [5]

The proposal must be approved by an authorizing agency. In California, the local school district grants the charter. Its denial can be appealed to the state. Opposition from the teachers’ unions, anti-charter activist groups and school superintendents has stifled many fine prospective charter schools. Orange County is ranked among the most hostile to charter schools.

Of the 1043 charter schools in California, 130 are in San Diego County, 60 in Santa Clara County but only 27 in Orange County, known to be hostile to them. Although federal legislation supports their creation and ballot Proposition 39 specifically endorsed an equal share of resources budgeted for education, union opposition has successfully thwarted both.

7% of charter school teachers are unionized. The loss in annual dues revenue is a threat to union power and the reason for the strong opposition. The California Teachers Union spent $26 Million to defeat Proposition 38, the school voucher initiative. It also reassigned reformist principal Frank Wells to an empty office where he sat with nothing to do and collected $600 per day. He was punished refusing to abandon the successful changes he implemented at Locke High School in Watts that turned the failing school into a success.

States enact their own charter laws, designate the authorizing agency that grants the charters and establishes the standards for their governance and accountability. In California, local school boards authorize charters. In the event the application is denied, the decision can be appealed to the State Board of Education.

Charters are generally granted for five years. Accountability is assessed regularly by Adequate Yearly Progress and other measures, not unlike the mandatory assessments of hospital performance by the Joint Commission on Hospital Accreditation. Schools are examined for financial deficiencies, academic performance, mismanagement and governance.

Not all charter schools are successful. The closure rate is between 15-17%, most often because of inadequate finances or mismanagement, rarely for substandard academic performance. For-profit management companies such as KIPP, Alliance, Aspire and Summit operate among the most financially sound, highest performing schools in California and nationwide.

Wherever charter schools have been established, whether in Canada, Chile, England, New Zealand Sweden or the United States, they have a proven track record of success. This record represents a threat to the system of public schools, the security of the entrenched bureaucracy and the power of the teachers unions with their multi-billion dollar annual war chest.

The David versus Goliath struggle is a battle well worth the effort. The continuing pitiful performance of American students in international academic assessments bears witness to the failure of an incompetent and corrupt education system that needs to be overhauled, if not completely scrapped. The fact that neighborhood public schools have responded to charter schools with improvements in curriculum and test scores is hopeful. The same is true for the sponsorship of several charter schools in Houston by the local teachers union.

These developments suggest that charter schools directly and indirectly improve student outcomes. In a nation that has plummeted from the top to the bottom in academic performance, charter schools offer a valuable tool to reverse the trend and the seemingly inevitable failure of the precious legacy that our Founding Fathers left us.

About the Author: R. Claire Friend, MD, is the Assistant Professor, Department of Psychiatry and Human Behavior, UC Irvine Medical Center, and the editor of the UC Irvine Quarterly Journal of Psychiatry. She is a retired psychiatrist and frequent commentator on the psychological dimensions of education and social welfare policies.


1.  http://www.nytimes.com/2005/06/21/national/21budde.html?_r=0

2.  http://www.publiccharters.org/wp-content/uploads/2014/05/NAPCS-2014-Wait-List-Report.pdf

3.  http://www.csmonitor.com/USA/2014/0301/New-Orleans-goes-all-in-on-charter-schools.-Is-it-showing-the-way

4.  http://en.wikipedia.org/wiki/National_Commission_on_Excellence_in_Education

5.  http://schoolsofthought.blogs.cnn.com/2011/12/15/charter-schools-wave-of-the-future/