Big hits on Fannie Mae and Freddie Mac yesterday show that the mortgage mess has gone too far, and full-scale panic has set in.

I suggest a mortgage "stand down" for at least a year or until some positive economic news comes out. All foreclosures would be stopped, banks would treat the properties as "non-performing" but not write them down (this is what happened in Japan in the 1990's).


People could stay in their homes as long as they maintained them, paid taxes and made an arrangement with the lender as to partial or even eventual payments.

The holders of the mortgaged-backed securities would see foregone income, but this is better than having their entire investment written off as is happening now.

One of the stories of our age has been that there was a cultural revolution which started during the Nixon era and reached its culmination with Reagan. I claim that this shift never took place and that the population has always been more progressive than the conservative history states. There are three parts to this view of history.

1. Conservative "values" became the majority viewpoint in the nation
2. Evangelical Christian views on social issues were made into policy
3. Libertarian style economic policies became the norm

The press and many politicians have certainly acted as if these were widely accepted ideas. Recently, as the age of Rove winds down, people have been discussing the fall in the power of the GOP and implicitly equating its political power with the conservative themes listed above.

I'm not going to detail all the studies about attitudes over the past 60 years, but just point out some examples of the disparity between what was enacted and what was claimed.

Let's start with the three most culturally defining "values" of the period: abortion, homosexual rights and evolution. The right (especially the religious, evangelical right) made these issues the cornerstone of their support for candidates. Looking at the statements made by politicians over the period it would seem that they did cause a shift in electoral preferences - more pols supporting the conservative positions were elected.

When we examine the actual course of legislation and court rulings, however, we find a much more mixed picture. Abortion rights have been slightly limited, but most of this has happened at the state level and many of the restrictions have been overturned by the courts. This pattern allows pols to say to the religious right: "I supported your demands, but it's not my fault that the legislation failed/was overturned."

With homosexual rights even the pretense of limiting rights has been a sham. There have been a few symbolic laws about marriage, but in general there has been a steady progression towards more civil rights for homosexuals during the entire period. Over the loud objections of the religious right we now even have gay marriage in a number of places. The politicians talked the talk, but didn't walk the walk.

Anti-evolution has fared even more poorly. Every attempt to make the teaching of biblical creation has been struck down by the courts. The misinformation has had an effect in the public sphere, however. Too many people now are confused about Darwinism and, as a consequence, are willing to support bogus treatments and ineffective public health policies. The results have been an avoidable increase in diseases such as TB and HIV as well as common childhood infections.

With economic policy, the situation looks different, after all this was the age of Milton Friedman and Alan Greenspan. They preached free markets, trickle-down economics and smaller government, but didn't actually support policies to put these ideas into force. What we had instead was a period of government growth, tax breaks for the wealthy with no claims about trickling anywhere, and market consolidation. In other words, the rise of traditional economic (or national) syndicalism. This is where government and industry work together against the interests of the workers, the general population and foreign competitors. It was the standard approach used in the 1920's in Germany to eliminate the power of the workers and in Italy under Mussolini for the same ends. At least these regimes didn't pretend to be promoting free market capitalism, but made the alliance between business and government an explicit goal.

What happened in all three cases was that the views of a vocal minority were misrepresented as those of the majority and then used as a cover to put policies into place that not only weren't those of the majority, but weren't those of the minority  either.

Throughout this period the majority of people have favored modestly regulated abortion, increased civil rights for homosexuals (although the specifics have changed over time) and regulation of markets. Furthermore most people want to see expanded government social services, especially with regard to health care and support for education.

The fact that the GOP is now losing control of legislatures does not indicate a change in people's attitudes, it indicates that the false promises of the conservative minority are no longer fooling people. There is a lesson to be learned from the past 60 years and it is one that needs to be relearned time and again.

It is that when the majority is silent or allows itself to be manipulated by a well-organized or well-funded minority things will turn out for the worst. Not only will the majority end up poorer, but the overall society will just be a less pleasant place. Suspicion, fear, anxiety all rise, the opportunities for the free expression of ideas declines and even the ability for entrepreneurship declines. Even the wealthy may end up worse off, very few people would claim that they came out ahead in Italy or Germany by the end of WWII.

Germany and Italy had their armed gangs of thugs to aid in the rise of totalitarianism, in the US we have only had a compliant press and some overzealous government officials. There have been no overt acts to close down publications as happened in the US in 1917, there have been no Palmer Raids and mass imprisonments either, yet the press has been complicit in promoting factual lies about events, misrepresenting public opinion, giving voice to extremists while claiming they represent the majority, and ignoring opposing voices.

Now that there is a willingness for people to see a change in majority party one needs to ask whether this will also lead to a change in real policies. So far it would seem not. There are signs that all viable candidates running for office are still pandering to the religious right, still supporting the privilege of corporations over workers, and still favoring tax policies which disproportionately aid the wealthy. Modest promises about health care and other social services may also turn out to be all talk and no walk.

The people need to make it clear that their desire for a more equitable society has not changed over the past 60 years and that they expect the new broom to do more than sweep the GOP out of power. The wealthy can outspend us, but they can't outvote us. Throwing a few incumbents out on their ears will be a message that many who get re-elected will understand regardless of how much money they raised.

The justification for enhanced security and the extra limits on civil liberties is not primarily to prevent physical attacks, but to defend our "way of life". As George Bush said, "they hate us for our freedoms".

One can debate the best methods to prevent physical attacks, but these are usually similar to defending against any form of lawlessness. Some combination of policing, intelligence gathering and observation. Any police official will explain that the goal of preventing, say, all armed robberies is impossible, the best one can do is to keep the level as low as possible. To expect otherwise in the case of politically motivated violence is unrealistic.

So to defend "our freedoms" the first thing that a society should do, one would think, was to maintain those freedoms that already exist. Otherwise the "terrorists have won". How has the record been in the US so far? I'll list just a handful of disturbing examples where the infringements on civil liberties have led us towards a society just like the ones we claim to oppose.

The main rule for a free society is that it be open and trusting. One always hears stories such as "when I was growing up we didn't even lock our front door". Has the incidence of housebreaking increased? No. What has happened is people no longer trust their neighbors.

We now have intrusive searches on airlines, trains and buses. Has the number of violent attacks on these services increased? No, yet every passenger is now viewed with suspicion, "if you see something, say something". Every forgotten briefcase by a harried businessman now becomes a potential terrorist threat. In the past 30 years there has been exactly one attack on the Long Island Railroad, by a paranoid schizophrenic. We lived with this risk of one incident out of millions of trips. The default was everyone was just trying to get where they were going, the same as you. Now everyone needs to be "watched".

When the British surveillance services were told to intercept mail of suspected German spies, they reacted with "gentleman don't read other people's mail". Now the government (and private companies) see nothing wrong with reading everybody's mail, and phone calls as well. The default is to suspect everyone, not to just leave people alone until there is some specific justification for action. This is the way East Germany worked, everyone was spied on, everyone had a file maintained by the STASI. Calumny, jealousy, revenge could lead to being reported and having your life turned upside down. Further since everyone knew that no one could be trusted, social interactions were all guarded and the cultural life of the state dried up.

Just two more, both currently in the news:

The willingness by congress to provide retroactive immunity to telecoms engaged in illegal spying is not just about the loss of privacy, but it sets a precedent for ex post facto legislation. When laws can be created retroactively then democracy is over. Tomorrow we will create a law that anyone buying a coffee at Starbucks last week is a support of state "terrorism" (by Juan Valdez) and subject to punishment. How can you have a free society where things get forbidden after they are done? Even adhering to the government's directives at this moment is no guarantee as the show trials in China under Mao and the USSR under Stalin have shown. You cannot change the rules of a game once it has started, but the US is trying.

Lastly there is the Supreme Court gun ruling. The key element in this is not the conclusion, but the premise. The majority thinks that vigilantism is an appropriate model for a civilized society. One needs a gun in the home to protect against everyone else, those who can't be trusted, those that need to be searched at airports, those that need to have their email read, those who might have done something wrong in the past when it seemed OK. An open society doesn't need self-protection, that's why we have a police force.

This ruling wasn't about guns, it was about trust. The terrorists have won, we have given up our freedoms and civil liberties and become as paranoid and autocratic as the states we claim to be defending against.

In a news story today several ISP's have agreed with the Attorney General of New York to filter content which promotes child "pornography". This is the first time that ISP's have agreed to censorship not forced upon them by an authoritarian regime.

There has been much criticism, for example, of Google for agreeing to filter search results to conform to Chinese demands, but the actual blocking of traffic is handled by the government-controlled network providers. Google doesn't filter content, it only makes it harder to find. This new agreement is something else.

Until now the telecom companies have always maintained that they are "common carriers". They provide the road and what sort of vehicle you drive or where you are going is of no concern to them. This kept them away from some very ticklish political situations. There was supposed to be a complete separation between content and delivery.

There have been other disquieting developments as well. It has been revealed that the telecom companies have been cooperating with the government in supplying copies of all traffic through their networks without explicit court orders to do so and without specific claims of criminal activity that needed to be monitored. In the US this is a violation of the fourth amendment to the constitution which bars "unreasonable" searches. Wholesale spying on citizens going about their business is a sign of a police state, not a liberal democracy.

The ISP's are also breaking with the common carrier model as they attempt to discriminate on the basis of the type of traffic. Attempts are underway to throttle traffic which competes with services that can generate added revenue for them. So Verizon, for example, can make downloading video unpleasant while also offering a cable TV service (over the same wires) which is not subject to such restrictions. Other tactics include charging an extra fee for allowing traffic through without throttling.

Now I'm not supporting child pornography which is already a crime in most countries, but having the carriers perform a police function. Firstly, the determination of what pornography is, is in this case, left to some self-appointed body which creates a list of sites to be banned. If the sites are engaged in illegal activity than prosecution is called for, not filtering. The excuse may be that many of these sites are in places in the world where law enforcement is weak or uncooperative and thus filtering is the only recourse.

This is not a valid argument even though it is appealing. Suppose next week the government decides that information from some disfavored political group should be banned. This is not far-fetched, many countries shut down media outlets which disagree with the government's position. In fact I would say that more countries impose restrictions than the reverse. The US has also had a history of doing this. During the WWI period several leftwing publications were banned from the US mails, effectively putting them out of business or at least stifling their voices.

Then there is the definition of "pornography". When the issue comes before courts there is seldom a consensus. "I know it when I see it" is not an objective standard. Even if the preponderance of material on a site may fall into this category, this does not mean that every item is pornographic. The ban is being applied indiscriminately. The alternative is equally questionable. Is there going to be a formal censor who decides on an item by item case what is permitted? We know how arbitrary that has been. "Banned in Boston" was a sure way to promote a book in the early part of the 20th Century. James Joyce and D.H. Lawrence also were subject to arbitrary censorship.

The power of the internet is that it is the first time in history that the public at large has been able to enter into the political discussion. This presents a threat to the status quo and those in power have been seeking ways to limit this power ever since its reach has become apparent. What starts off as a socially reasonable aim can quickly morph into outright censorship. The US and several west European countries are already tracking their populations at a level never seen before in democratic states. Adding in a bit of censorship to protect "children" is like the proverbial camel's nose in the tent.

I don't like to leave criticisms without making an alternative suggestion. So what should be done to control internet-based child pornography? It seems that other countries have already solved this problem as the recent raids in a number of them demonstrated. Those suspected of participating in criminal activity can be monitored using well-established procedures including authorized wiretaps and the like. There is no need to create a censorship precedent for this crime. Will some people get away with it? Yes, but how many people are getting away with illegal drug use? No society can have 100% enforcement of its laws. The best that can be expected is that most people will be disinclined to engage in criminal activity and that this will keep the rate low enough that enforcement can catch the bulk of those still engaging in such activity.

Abrogating civil liberties in the name of security is never a good course of action if democracy is to be maintained.

The foundational principal of the UN is that what occurs within a state is a "domestic" problem and not subject to international interference. This was, of course, the "dictator job protection" requirement demanded by some of the worst examples at the time.

Over the past twenty years we have seen numerous example of entire countries brought to ruin by insane leaders who have used this principal as a shield. There is a slight difference between the modern version and the earlier cases. Crazed dictators like Stalin or Hitler had extra-territorial ambitions which (theoretically) gave a justification for intervention by third parties. And they were doing their most harm before the lessons of WWII were formalized. Once the concepts of crimes against humanity, war crimes, and genocide were formalized the framework changed.

If we look at the scene now we see several examples of what can only be considered internal genocide. Two in the news at the moment are Zimbabwe and Burma, but there are other less prominent ones in the rest of Africa and in several former Soviet Republics.

I'd like to suggest designing a set of criteria that could be used to evaluate regimes in countries is such a way that when some threshold is reached the rulers must leave. I haven't worked out all the details yet, but some possibilities:

1. The regime holds power without the consent of the governed.
2. The proportion of the population in misery has increased to an "unacceptable" level.
3. The wealth of the nation is being siphoned off by the elite and moved elsewhere.
4. Minorities or certain ethnic groups are being mistreated.
5. A large number of internal refugees or displaced persons have been created.
6. A civil war or equivalent is underway or imminent.

The tricky part is defining just how much is "too much". For example, the level of misery in the US has increased over the past decade, but obviously not to the extend that has occurred in Zimbabwe. The actions of Milosevic satisfy criteria 4, but what about the mistreatment of Japanese-Americans during WWII? One was genocide and the other an abridgment of civil liberties. How do we quantify this?

Let's suppose we solve these issues, then what do I mean by "warfare"? Obviously the US invasion of Iraq, while it might meet some of the criteria listed above (genocide against the Kurds, for example), is not the way to improve things. "Warfare" has to mean something other than flattening a country. We don't want a repeat of the Vietnam era: "It became necessary to destroy the village in order to save it."

The international community has tried economic sanctions to force a regime change in the past, but the success rate is low. Baby Doc Duvalier left Haiti and enjoyed his ill-gotten gains in France (whether he is still wealthy is an open question). Charles Taylor bolted Liberia when things got too hot and was arrested when pressure on his protectors got too strong. There is a rumor that Saddam Hussein was offered $1 billion to leave (or that the offer was squelched by the Bush administration). Perhaps the "warfare" consists of making the ruling elite an "offer it can't refuse". In Zimbabwe and Burma it is clear that removal of, at most, a few 100 people would change the political dynamics of the situation. What is not clear is who would replace this group and how such a transition could be handled without creating civil strife. A place like Lebanon seems resistant to any sort of peaceful power sharing arrangement - the factional differences are just too great.

Bringing in an international oversight group to manage things during the transition is also fraught with problems. Most people would regard this as a form of neo-colonial interference and the external group would not have adequate knowledge of the local situation to deal effectively with conditions. In both Iraq and Afghanistan those brought in were exiles who had their own agendas or were mistrusted by locals, the results have not been good.

Humanitarian "Warfare" thus suffers from three difficulties. It is hard to define the criteria as to when action should be taken, it is hard to define a set of non-violent procedures to get dictators (and their flunkies) to leave, and it is hard to devise a transition process that won't make things worse. Even though these issues exist, I think discussing the removal of the "dictator protection" axiom from international relations is a worthwhile topic.

The US government (and many others) is divided up into three branches: executive, legislative and judicial. This was a bit of an innovation when it was created since previously the concept of government as separate from power groups was not as clear.

A traditional society had some version of a royal ruler who was assisted by courtiers and appointed ministers. Judges and the rest of the legal system was devoted to settling disputes between people, not matters of state. In addition there was frequently a strong religious sector with its own source of funds and hierarchy.

As time went on and the excesses of royalty become burdensome to the large landowners various types of legislative bodies were introduced, their ability to promote policies at variance to the will of the ruler was not assured.

The innovation in the US was to do away with royalty and to replace this executive function with an elected official. The judiciary was (eventually) given responsibility, not only for settling domestic issues, but oversight over the constitutionality of laws passed by the legislature. Laws required the agreement of the executive and legislative branches to be enacted (with rare exceptions).

The small permanent military presence that was the norm for most of the US history no longer exists. The military sector is now a continuing presence in the power structure. We in the west are used to thinking of other states as having the military as a quasi-independent force in society. For example Burma is run by the military. In China the military owns various industries outright. In Pakistan Musharraf retained his military position after he seized power in a coup. In Lebanon the military is being called in to stop fighting between armed factions since the "government" can't do the job.

I claim that the military is now the fourth branch of government in the US. The idea that it is part of the executive branch and is headed by civilians is just a technicality. It commands half the discretionary federal budget. It has a permanent hierarchy which remains in place regardless of which party is in power. It has members of the legislature who are its supporters and ensure that funded is maintained. It has the ability to determine which information about its operations are released to the public and even to congress and the judiciary. It has continuing relations with military contractors who supply lobbyists that work on promoting projects that will benefit both the military and the contractors, as well as sending military spending to the districts of cooperative legislators. It has a propaganda arm which supplies (mis)information to the press and the general public. It has over a dozen spy agencies which can manufacture intelligence information that suits the long term goals of the military.

There was no provision in the design of the government for a fourth power center and as a consequence the "checks and balances" that apply to the three branches of government don't operate on the military. It's like a cancer and appears to be unstoppable. It has already  sucked much of the money away from social services and infrastructure maintenance and is now going after political dissidents using the cover of domestic security.

As I've said before, the ability of spy agencies to uncover plots by unknown actors is extremely limited. That's why things like the London transit bombings can occur even with heightened surveillance. Agencies can't find small groups of first-time actors who are careful not to be obvious in their planning. What spy agencies can do is to track political groups which are not trying to be invisible. In fact most of them make a point of trying to get the public's attention, since their purpose to change the political dialog. When these groups start to be heard or are on the verge of getting their message out it is easy to round them up or prevent them from being heard.

We see this time and again as political rallies are broken up, especially when they coincide with events that will be covered in depth by the media. This happened at both the Democratic and Republican conventions during the last presidential cycle and in many less publicized cases since then. In a new twist people can be forced to turn over records of innocent activity (such as library or phone records) and even the fact that a subpoena was issued cannot be disclosed. This is the ultimate in an abridgment of civil liberties.

It just shows to what extent the military sector will go to keep its operation free of interference or oversight. Generally when the military gets this strong it either takes over the government explicitly (as in Pakistan or Burma) or permits a powerless government to exist as a "democratic" cover as in Lebanon.

One could argue that we have not reached this stage in the US, the president and his advisers forced a war with Iraq, not the military, but we really don't know. What would have happened if the military had really opposed the idea of invading Iraq? After all most of the top brass thought that the toppling of the regime would be quick and easy. This would also improve their image and give them further justification for future expansion. The few critics of the plan were removed from the chain of command or were in other branches such as the state department and were marginalized. So did the president order the war or was he allowed to do so?

If the existence of this fourth branch of government becomes widely understood what changes can be expected? There is little incentive for the existing military/industrial/congressional nexus that is profiting from the spending to push for change. The public is still in a state of heightened anxiety over an invisible threat which seems to exist without end and the worry about a decline in the standard of living as resources become scarce makes support of a muscular foreign policy popular even as people deny this is their preference.

As the limits on political activity increase the ability of the small group that wants to see change to get their message out will diminish further and only the road of militarism will be discussed. We have seen this path before, it occurred in Germany every few decades through much of the late 19th and early 20th Century. It occurred with many of the colonial powers in an earlier age. In every case the lot of the common man became worse as essential services were sacrificed to the god of war.

The US is already suffering from weakened social services, especially in health care, education and employment support. Recently we have seen key civil engineering infrastructure start to crumble and the government unable or unwilling to protect citizens from natural disasters. When the USSR became a hollow shell with an over-sized military it collapsed from within. Is this to be the fate of the US?

There has been a lot of discussion lately about moral hazard. This is the idea that if people get rescued when doing risky things they will be more inclined to do them in the future, as will others who see the results.

A good example is mountain climbing. Climbers know that they will be rescued and many thus engage in risky behavior. The US Parks service has tried to control this by requiring people to register before climbing and making unregistered climbs illegal. The penalty isn't specified on the web site. Imagine how much such risky behavior would decline if the penalty was that such climbers wouldn't be rescued if they got into trouble!

Moral hazard has become a popular topic in financial circles of late as financial firms get bailed out by central banks when their risky behavior goes wrong. The argument given to defend this rescue is that not doing so would drag others down as well.

I have two problems with the moral hazard argument when applied to businesses.

The first problem is that letting people fail now does not create a lesson for them in the future. When a child burns themselves on a hot stove they learn a lesson that they will remember. When a trader engages in some risky behavior, it is unlikely that this will be the same individual 30 years from now who repeats the activity. People learn from mistakes, institutions don't. Institutions "learn" by having rules and regulations created which incorporate the lessons from the past. This is the institutional memory. Those who are in favor of fewer regulations are not doing future generations any favors.

The second problem is that there is a separation between those taking the risk and those suffering the consequences. In the earliest days of capitalist enterprise owners bore all the risk of failure. Seventeenth and eighteenth Century English literature is filled with stories of men "ruined" when their business failed. To pay off their creditors they had to sell all their possessions and many times go into debtor's prison.

An innovation was the creation of the limited liability company where only the assets of the firm could be seized to pay debts, not those of the stockholders. This innovation made it much easier for owners to raise capital from others since the most they would risk was their original investment. At this point the first disconnect occurred. As time went on, it became apparent that most firms could not continue to be run by their founders or heirs. The enterprises became too big, or there were no suitable family members to take over. Companies brought in a new class of workers - professional managers. The disconnect was now complete.

Managers had no stake in the firm, they got their compensation for the job they did, not how well they did it. The problem with this model soon became apparent and a variety of techniques were devised to deal with this. The most common have been to tie (part) of the compensation to the company's performance. This is usually in the form of a performance bonus. Another popular technique is to award stock options to the managers under the theory that a successful firm will see its stock price go up and the managers will be able to cash in their options at a profit. It is also a low cost way for the firm since if the options aren't cashed in it costs the firm nothing.

Just as the firms saw the benefits of these new compensation schemes, so did the managers and they also saw the shortcomings. Tying options to stock price shifted the goals of managers from improving the behavior of the firm to manipulating the stock price. Lately this has gotten so out of hand that when the options fail to yield a profit the firms replace them with cheaper ones, so that even the indirect incentive to do well is removed. Salary compensation schemes have also been corrupted so that managers now get big payouts regardless of how the firm does. Wall Street calls these golden handshakes and golden parachutes.

There is one level of control available beyond compensation to control the risky behavior of managers, this is the possibility of criminal prosecution if their activity is not just risky, but illegal. This possibility has been effectively eliminated over the past several decades. The number of top managers who have been convicted of a crime and sent to prison is so small that it presents no deterrent. When illegal behavior is uncovered the firms usually pay a fine and promise not to repeat the behavior in the future. The managers suffer no consequences, in fact most don't even lose their jobs. The fine is paid by the stockholders, not the managers, as a subtraction from profits.

Now there are many investors these days who have lost large sums of money as the more risky financial schemes unwind. These people didn't devise the schemes, they just invested in them. Those who made the fees selling these instruments didn't take the risk, they had no incentive to behave prudently. This is as true for those buying structured investment vehicles as for poor, misinformed homeowners. This is another example of the separation of risk from reward. Moral hazard has no relevance.

If moral hazard is to mean anything then the separation between those taking the risks and those getting the rewards has to be removed. In addition law breaking has to be punished at the personal, not institutional level. Firms don't break laws, people do.

Lastly, the lessons learned from prior mistakes need to be codified in regulations. Moral hazard is eliminated by more regulation, not less. If a firm can't make a profit playing by the rules, then it shouldn't be in business. If it gets away with things then it forces other firms to break the rules as well in order to compete. This is not commerce it is corruption.

There has been a great deal of discussion about wealth in the past few years. There are two common themes. The increasing wealth of a society will aid all sectors and is the best way to eliminate poverty. The rise of wealth disparity in many developed countries is having negative effects on social cohesion and the ability of the society to remain democratic.

But, before one can discuss the effects of wealth one needs to decide what wealth really is. This brings up the issues of price and value. Price is the simplest concept to define, the price of something is what it costs at the moment when a transaction takes place. Many people find this definition unsatisfactory, however. We frequently hear that something is a "bargain" or overpriced. What is really meant is that the current price differs from what we feel a fair price should be. This gets us to value, a much trickier concept.

People have been trying since the invention of money to define value. For most of the period rare metals were given a value and then everything was priced in relation to this. This mindset still exists as the current gold rush indicates. Gold has risen in price because many people think it has some inherent value and is a safe investment. However, the real market for goal (aside from hoarding) is quite small. It consists mostly of electronics and medical applications and is about 12% of the total. Jewelery is by far the biggest use, but this is a form of hoarding. If people stopped being emotional about gold then demand would only be a tenth of the present amount and the price would drop accordingly. In other words, gold is valuable only because people say it is.

Before the industrial age much wealth was held in the form of land. The value of the land was proportional to its productivity. Farmland or forest could yield a certain amount of product which could be sold. The price of the land was a multiple of this. The seller expected to be paid for a certain number of years of future, foregone, revenue when the land was sold. These days this type of valuation is also found in the pricing of common stock. We hear about the price/earnings ratio and stocks which are selling at a low multiple are considered cheaper than those selling at a higher multiple (assuming the future earnings prospects for both firms are similarly stable). But the average P/E value changes with gross economic conditions, during periods of a downturn it tends to fall as prospects dim. So, once again, the yardstick of value turns out not to be a reliable measure.

In many industrialized countries we have seen a large rise in wealth disparity in the past 40 years. What forms has this wealth taken? The biggest growth in wealth has been in the rise in financial instruments held by the wealthy. If an individual owns shares in a company and the stock rises in price the person is said to have gotten wealthier. But, as I just mentioned, share prices depend upon expected future economic activity. So this is only paper wealth. There have been efforts to diversify and many wealthy people have bought multiple homes, antiques and art work, and other tokens of conspicuous consumption. Once again a value built upon expectations. There are now several multi-million dollar homes for sale in my area with no buyers. This is not related to the current mortgage mess, but to the fact that the pool of wealthy investors has shrunk (in the US) and international purchasers are looking elsewhere. How much is a $10 million home worth if there are no buyers?

More prudent wealthy individuals buy into commercial and rent producing real estate. As with land the price is related to the income stream generated. In an economic downturn tenants leave and the income stream declines. Wealth tied to the imputed value declines as well.

What this means is that those countries which have seen the greatest increase in "wealth" are now at the highest risk of a wealth collapse. This was first seen over a decade ago in Japan when the commercial real estate bubble popped. It is now being seen in the US, the UK and in several other countries whose economy is tied to finance (like Switzerland). The new measure of wealth is shifting towards vital commodities. The most dramatic rise has been in the oil states where the sharp rise in the price of oil has led to a wealth boom. States like Abu Dhabi and Dubai are using the new income stream in a building frenzy as well as buying up assets in other parts of the world. The foolish oil states are devoting too much of this current wealth to internal growth, while the most prudent are trying to diversify so that they will own income producing assets elsewhere that will allow them to maintain their wealth when the oil revenues decline. This won't work. The US has been able to maintain investments in the rest of world by the use of gunboat diplomacy, although this is changing in South America. Dubai can't do anything if in ten years the US decides to expropriate foreign owned assets as it did during WWII.

Where is this all leading? First it must be understood that the "stagnation" of the middle class in the developed world is going to become the norm. The middle class saw it standard of living increase after WWII for a number of reasons. The growth had been inhibited for over a decade by the depression and war. The burst of technological innovation led to higher productivity which enabled workers to generate more output for the same labor. This enabled them to bargain for a bigger share of the economic pie. Raw materials were at unnaturally low prices making profits higher in the developed countries and thus shifting the wealth from the weaker states to the stronger.

The natural standard of living of the working class is that which allows them to live and work. If they have "excess" wealth then prices will rise to absorb this. We have seen this at work in the US already. Non-discretionary items like housing, health care, child care and education have risen in price much faster than income and now take an unprecedented proportion of family spending. Efforts by the government to compensate by subsidizing the cost of these items are self-defeating. If the amount of college tuition grants goes up, then families are more able to afford the cost and the price will rise because of increased demand. In the end college will just be as unaffordable as before. The alternative is for governments to set prices or remove cost as a factor by nationalizing the service. This technique is in use in some Scandinavian countries and is being tried in parts of South America. It is not under consideration in the US or UK where privatization is the ruling philosophy.

As much of the paper wealth accumulation of the past several decades evaporates we can expect to see dramatic social dislocation. One possibility is for a country to sink into plutocracy where the wealthy take over the levers of power and keep their wealth maximized at the expense of the overall health of the nation. So far this type of behavior has been restricted to poor countries like Haiti and parts of Africa, but undemocratic trends in the US have increased dramatically in the past 40 years and what will happen next is an open question. Another possibility is that the country as a whole will lose its economic standing and become less wealthy overall. The wealthy who can move their assets abroad will do so, and leave as well and those who are left behind will just be poorer. The details differ, but this can be seen in the histories of many of the former colonial empires. Nobody regards Spain, Portugal or the Netherlands the same way now as they were during their heydays.

Can this happen to the US? Well for the time being, the plan is to use military superiority to prevent such a development. This option seems to become less effective as time goes on. The US failed in its objectives with Korea, Vietnam, and now Iraq. The rise of an Asian block which can trade internally also means that efforts to influence policies in China and India will not be as effective as they were in the days of the banana republics.

What the American public will do when it discovers that it is the former "world's only superpower" remains to be seen. So far the government and the media have conspired to prevent the information about the decline of stature and competitiveness from becoming widely known. People still think (incorrectly) that the US has the best health care, best educational system, best telecommunications infrastructure, and best mass transit system. Information about the level of social services provided elsewhere (especially in the EU) is not understood either. Perhaps the public is just being conditioned to accept second class status. Things were much worse during the depression and rather than public outrage their was mostly resigned acceptance.

There may be some shifting in the wealth inequality, but this will mostly be due to the decline in the price of the inflated assets I discussed above. Efforts to redistribute wealth will fail, the libertarian spokesmen for the wealthy have nothing to fear. There may also be some modest changes to regulations which control such markets and this will hold down future bubbles for a generation or so. Those who are intent on making money will just move their investments to where the action is. General Motors is now betting on growth in China, but why should the government there wish to allow GM to move the profits to the US? After awhile these foreign investments will be taken over by local enterprises - a trend which has already started.

Can anything be done to maintain the US type of lifestyle in the developed countries? I would say no, but the willingness of the government to totally destroy a society to get at its natural resources may forestall change, at least until the resources run out globally.

There are too many people, chasing after too few resources and there is a lack of effort to adapt to a sustainable level of consumption and population. If the transition is not planned, it will happen anyway, it just won't be pleasant and who the big losers will be can't be anticipated.

There is a neo-populist movement afoot in the US right how. No one is sure exactly what to call it. Analogies with the original Populist party break down over issues of tariffs and xenophobia. The later "Progressive" movement, which is credited with creating the first round of government regulatory agencies, doesn't fit well either. It didn't have the broad-based working class foundation that is meant when one talks about populism.

These days when critics accuse liberals of engaging in "class warfare" they mean the the working classes are looking to rein in the excesses of the super wealthy. Since this group is tiny, the appeal to defending the rights of Paris Hilton doesn't work well, so they try to include the top 20% as well.

I propose to separate the classes on a different basis than is usually the case. In my scheme there are only two classes: those who have to work for a living and those who don't. Those who work may have different levels of income and wealth, but if they lose their wages they will, eventually, starve.

The blue collar, white collar and professional sectors have more in common than they realize. That the wealthy can disguise this fact is one of the greatest triumphs of social misdirection of the modern age. In the middle of the 20th Century the local town doctor might live in a better home than his patients, but he was part of the community and adverse economic conditions affected him just as much. The same was true for the local banker.

Now we have large sectors of society who make money by dealing in intangibles. These may be financiers, or media people, or others engaged in marketing intellectual property. A dealer in derivatives does not have the same connection to his neighbors as did the town banker. He thus, mistakenly, thinks he has different interests.

What goals do the various strata of the working class have in common?
 
1. A clean environment
2. A safe local environment
3. Adequate health, education, and retirement services
4. A functioning democracy
5. A stable international political scene
6. The expectation that similar conditions will exist for their descendants

What does the non-working class want?

1. Adequate supplies of material goods of any sort
2. A stable and growing economic system
3. Permanent investment opportunities
4. Freedom to move capital internationally
5. Freedom to relocate when any locale becomes too risky
6. A political system designed to maintain their influence

Why do some in the working class fail to understand where their interests lie? There have been many attempts at formulating an explanation. All seem to have some partial insights. In no particular order: a belief that they will rise to the non-working class and thus they need to support those interests so that they will be in place when they "make it". A feeling of elitism or superiority. Distraction over "values" issues which blind them to the underlying real class concerns. Jingoism or xenophobia which fosters an "us versus them" mindset - another form of elitism. Insecurity or fear which leads to the aim of keeping those who might challenge their position from below being kept "in their place". This latter attitude may not be totally irrational. Many "populist" proposals these days aim at limiting the wealth accumulation of the upper segment of the working class.

The non-working class has every reason to oppose limits on their wealth accumulation since their continuing class membership depends upon the ability to make money from money and not labor. Anything which constrains this will lead to a permanent limit on future wealth growth. Unlike the working class there is nothing they can do to increase their income except have the rules altered. By definition they don't "work" so they can't increase their labor. (I realize that some of the non-working class "work", but they don't have to work to eat they do it for other reasons.)

Now why doesn't a stock trader earning $1 million a year see that his paying a higher fraction of his income is a "good thing"? Doesn't he want a clean and safe environment for himself and his family? Who does he think is going to pay for this? Why the tax resentment? Why does this segment exist only in those countries with a high level of wealth disparity?

As I stated above, I think the problem is one of a misunderstanding of where one's interests lie. In a country with a high degree of wealth disparity (like the US and UK) this imbalance allows too much power to reside in the hands of too few. This not only affects how elected representatives are selected, but also means that the information outlets are in the hands of the non-working classes. The misinformation barrage is thus unchallenged. Politicians who represent the working class don't get elected and voices from this class don't get heard in the press or on the air. With a continual program of class misidentification the working wealthy become blind to their real interests.

A member of the non-working class can leave his home country when things get too bad, but what happens to the financial analyst who thinks he is member of this same group. He is stuck in the muck just like his blue collar compatriots. As the problems of resource shortages spread even the options for relocation will diminish. Perhaps the 400 wealthy families in the US can relocate, but where will they go in 50 years when climate change affects the entire planet?

If you are making $1 million per year, be glad to pay 50 or 90% in taxes and realize that you are still ahead of 99.99% of the rest of the people on the planet. You can't eat gold and you can't buy protection during a revolution, just ask the French aristocracy of 1789. If you are among the most fortunate than you have an obligation to contribute more to society. When did greed replace community as one of the virtues?

The question is how to get people to understand where their interests lie in the face of a generation-long misinformation campaign. I don't have an answer, but perhaps the rise of alternate sources of information will provide the needed wedge. This needs to be defended as well. There are already steps being taken to limit the reach of dissident internet sites as well as to control access to the network itself. Don't expect the legal system to support the working classes. Judges and government workers suffer from the same misunderstanding about their class affiliation as do all the others.

One of the key axioms of the "Washington Consensus" is that international trade is good for both parties and is the only viable road to development in the third world. They have been promoting this vision, in one form or another, for 50 years.

There are many critics of this view who illustrate their objections with a large number of case studies. These generally fall into two categories. In the first are the examples of states which have been the object of much international advice and intervention and still haven't done well. Much of Africa falls into this category. The second are those states which have done well, but have ignored most of the policy prescriptions promoted by entities such as the World Bank and IMF. Examples include South Korea and China.

Many of the policies promoted are concerned with specific philosophical ideas, rather than being tailored to the individual situation. This includes allowing foreign investment in (or ownership of) local enterprises, reform of tax and tariff laws to be more favorable to businesses, and constraints on social spending and subsidization of emerging sectors. Many programs try to shift from local production aimed at making a state more-or-less self sufficient to one where products are aimed at the international market and the income received is then used to buy necessities that were previously sourced locally.

Examples of such export directed programs include the growing of cut flowers for the US and EU from, for example, Ethiopia and Columbia and salmon farming in Chile. This is not the same as the traditional export market where the state has some unique resource like Copper in Chile or Cocoa from Ivory Coast. Growing flowers for export means that some other agricultural product is displaced and makes the country less self-sufficient in the case of a natural disaster. The use of intellectual property laws has also made many of these countries dependent on the purchase of specialized seeds each season which can only be obtained by spending hard currency. It is clear that there may be benefits to both parties (Ricardo's claim), but that the benefits are not distributed equally.

It is not ethical to say that if I make a dollar and you make a dime the trade is worthwhile since we both gain. This is, however, how all international trade is viewed.

When criticizing the failures of expanded trade to improve the lot of underdeveloped countries the discussion gets mired down in the details of exactly where the failures are in each case. In one instance it might be corruption, in another a lack of education, in yet another poor government infrastructure and weak property laws. This makes generalizing and offering policy recommendations difficult.

I'd like to propose that critics and supporters of various trade philosophies examine a simpler model - the United States. National laws have ensured that artificial barriers to trade, such as tariffs, don't exist, yet the federalist state structure allows for much local control over policy. Some states have strong support for education, some weak. Some states have "right to work" laws which disfavor organized labor, some don't. Some states have extensive social programs, some don't. Some use high taxes to fund programs, both those for industry as well as for human services, some don't.

What they do have, in addition to no barriers on inter-state trade, are the lack of barriers on migration. If economic prospects are better in one area people are free to move there and try their luck. Lack of migration prospects between countries is often cited as a reason why development is hampered. The US allows a study of this assumption.

So, how have the states done over the past 200 years with open borders to trade and migration? Have one set of policies been generally more successful than another?

The evidence is pretty clear. States that have been unfriendly to organized labor, social spending and high taxes used for development have remained underdeveloped. Mississippi and Alabama were near the bottom 150 years ago and they still are, even as they have attracted firms which have left the traditional industrialized states as a way to escape unions. Poor levels of education have left them at a disadvantage in the new era of intellectual property. There is no "Mississippi Valley" to compete with Silicon Valley.

States that have consistently supported a tax policy coupled with investment in education, infrastructure and R&D have done well. This includes New York, New Jersey and Massachusetts. As manufacturing has left these states they have compensated by developing expertise in areas such as finance, media, publishing and advertising, medical research and higher education.

The states of the rust belt that held on to their industrial base too long and didn't make these sorts of investments, but allowed the big industrial firms to extract the profits rather than being required to return some of them in the form of high taxes are now suffering. They no longer have the revenue stream to fund new development and have fallen behind in education and infrastructure. California is also on the cusp of a disaster as a multi-decade policy of tax cutting has left it unable to cope with social transformation. The boost from the rise of computer industry is coming to an end as the industry matures and globalizes.

Economists and policy planners, as well as ideologues of all stripes, don't have to study Burundi to see how development policies play out. They can look to the US and eliminate a set of variables that have been hard to factor out in other cases.

I'll save them a bit of time. You get what you pay for. A coherent state public policy which supports education, good labor relations, investment in infrastructure, R&D and emerging technologies, all paid for by high, but progressive taxes, leads to better outcomes then low tax plutocracies.

Poor development outcomes internationally aren't the result of not knowing what policies to promote, but because the policies that are adopted favor plutocrats and wealthy first world investors.

The Basic role of government is to protect its citizens. What this means has changed over time, originally it was not more than protection from foreign marauders. Let's see how the administration brought in by the Gingrich "revolution" has done.

Failed to prevent 9/11 attacks even though it had explicit warnings and was tracking several of the key conspirators. Of course, no one can catch all such attacks, as the ones in Spain and London also showed, but it is one thing to be unaware of a plot and quite another to dismiss existing intelligence information.

It is now seven years later and Osama is still on the loose. The Al Qaeda network has not been smashed either. Isn't the <b>one</b> priority of the Bushies the war on "terror"? Isn't that what has been used to justify all sorts of draconian steps (see below)?

The anthrax attacks are still unsolved and since they aren't, it is always possible that the same person could strike again. Is the kind of protection our crack, internal, secret police forces provide?

There has been an increase in the number of cases of tainted foods, ranging from fresh vegetables to ground meat. There are an estimated 1.4 million cases of Salmonella food poisoning in the US each year; E. Coli affects about 25,000 people annually. Lax enforcement has led to a rise of cases and huge recalls. Several meat packing companies have been forced out of business after they had to recall <b>millions</b> of pounds of meat. Food inspection is no longer working. The staffs of the agencies have been gutted and much of the work of inspectors has been left to self enforcement by the firms.

The number of dangerous products has risen. Those getting the most publicity have been toys, but there have also been recalls in other areas such as fire retardant clothing and lead tainted serving dishes. The Product Safety Commission is down to half strength (and budget).

The number of dangerous drugs allowed onto the market by the FDA has grown significantly. The approval process is now funded by the drug companies themselves, which has led to conflicts of interest and hasty approval. Many widely prescribed drugs have had to be recalled after large number of users suffered ill effects. The living ones may get to sue, the dead ones don't have this option.

A notable number of mentally unstable people have gotten access to guns and gone on rampages. There have been more people killed in such incidents than from "terrorists" since 9/11. There have been no steps taken to keep guns out of the hands of such individuals. Even modest record keeping ideas have been thwarted. Just who is being protected, innocent bystanders or crazed gunmen?  

Almost 4000 soldiers have been killed and tens of thousands have been injured in the ongoing wars. Putting over a million soldiers in harms way is not protecting citizens, after all soldiers are people too. Starting unnecessary wars is not protecting the population. In fact the US now has fewer friends in the world than before. This puts all American travelers at increased risk. Even those who are fighting the wars are put at unnecessary risk since they are under armed and lacking protective equipment.

Unpreparedness of the levees in New Orleans led to the destruction of the city. After the storms, the government has failed to provide for the victims, and still fails to help restore the region. The collapse of the bridge over the Mississippi is only the most dramatic example of lax care of important civil engineering infrastructure. Road and rail accidents caused by improper maintenance are not connected in people's minds with this failure, but are directly related. We cannot stop mother nature, but we can take steps to minimize risk, especially when the dangers are well-known.

The gutting of the National Guard. When a national disaster such as Katrina does happen it is usually the National Guard that is among the first responders. This capability has been compromised since many of the units are now fighting overseas, and have shipped vital equipment abroad to support their mission. Perhaps the National Guard was created to defend against foreign invaders, but for a long time they have performed a key humanitarian function. No more.

Illegal use of harmful drugs and misuse of prescription pain killers has led to an explosion of the prison population, without having any noticeable impact on the size of the problem. Locking up 1% of the population is not protecting people, it is just creating a new, almost unemployable, permanent underclass which will continue to be a problem when they are released.

Lax regulation of the business sector has led to a succession of frauds which have cost billions in losses. Starting with Enron and Worldcom and extending up to the present banking and housing crises the foxes have been left in charge of the chicken coop. Not only have investors been duped, but as many as a million people may lose their homes. The SEC, Federal Reserve and Treasury department have abdicated their responsibilities. After the follies of the 1929 were revealed there were regulations put in place to prevent a repetition. Many have been ignored, and some specific legislation like the Glass-Steagall act (which prevents banks from owning investment firms) have been repealed. Oops.

Civil liberties have been abrogated which has led to thousands of people being arrested, imprisoned and/or deported without due process. Not one real "terrorist" case has resulted from this assault on our rights. Protecting civil rights was the basis for the creation of America. Abuse by the English led many to emigrate to the new world to begin with and continuing abuse of the colonies led to the establishment of these "United States". The argument that "I'm not doing anything wrong, so I don't need to worry" has proven to be false as the number of innocent people who have been arrested, rendered, or tortured continues to rise.

The right of workers to organize so as to be able to negotiate their working conditions has been gutted. The NLRB no longer supports the rights of workers to organize. The consequences are as would be expected - falling wages and the elimination of fringe benefits, for those still lucky enough to be employed.

The elimination of usury laws and the requirement that disputes with lenders be handled by mandatory arbitration means that borrowers are subject to excessive interest and fees and have little recourse even when fraud is involved. Arbitrators side with the creditors almost all the time, if they settled in favor of the borrowers too often they wouldn't be rehired for further cases. It may be mandatory, but it's not impartial. Bankruptcy laws have also been rewritten to favor the lenders. People who can no longer clear their debts are becoming indentured servants to the banks. The only difference between now and Dickens' time is that we don't toss debtors in to prison - we make them work to pay off the banks.

The weakening of the social safety net has meant that an increasing number of people are without health insurance, have lost welfare benefits (such as food stamps) or are unable to pay for housing. Rising fuel costs are also starting to reduce more people to poverty.

The rise of corruption as demonstrated by the links between government and business has led to compromised elections, government by lobbyist and the trashing of environmental policies. Not only are vast natural resources being turned over to private firms, but efforts to find new energy sources and improve efficiency have been blocked. If projections play out as believed we will be living in cold, dark homes further inland as rising sea levels destroy the coastline. Protection of our lives seems like it should be a fairly important responsibility.

The "war on terror" has refocused all activity away from the real risks that face society to a set of highly unlikely circumstances. Suppose we had a real insurgency in the US, such as happened in Northern Island "Troubles". During the peak year of 1972 there were an estimated 250 civilian deaths. In the US we have over 42,000 deaths and about three million injuries from automobiles each year. Which is more likely getting killed by a "terrorist" or in a car? Where is the enforcement money and effort going? Why?

To summarize:
Failure to protect against harmful foods, drugs, and consumer products.
Failure to protect against deranged people with guns
Failure to protect against unreasonable search and seizure
Failure to protect armed forces
Failure to protect against natural disasters and provide aid afterward
Failure to protect against failing infrastructure
Failure to protect the weakest against poverty and disease
Failure to protect against financial fraud and abuse
Failure to protect against crime funded by drug money
Failure to protect the rights of citizens to think and say what they wish
Failure to protect the democratic process
Failure to protect disaster caused by energy shortages and climate change

What have we gotten instead:
An all out effort to protect against a vague, highly unlikely threat caused by "terrorists".

The platform for the Democratic Party almost writes itself...