With 50 experiments going on at once, the federal government should have an excellent source of case data to see what works and what doesn’t. Why, then, does the federal government much more closely resemble the California model then the Texas model?

We know there are distinct differences between the federal and state governments. The feds are to secure the borders and oversee national defense. The feds haven’t secured the borders. Just ask Arizona, which is home to the city with the second highest volume of kidnappings in the world: Phoenix. How does that happen in America? Arizona had to pass state legislation to enforce federal immigration laws already on the book, which apparently is highly controversial. The feds are working to appeal the law before it’s scheduled to take effect July 29th. Said Justice Department lawyers:

“In our constitutional system, the power to regulate immigration is exclusively vested in the federal government. The immigration framework set forth by Congress and administered by federal agencies reflects a careful and considered balance of national law enforcement, foreign relations, and humanitarian concerns — concerns that belong to the nation as a whole, not a single state.”

Except that they haven’t enforced the national laws and Arizona is paying for it. At this point, I’m just bracing for Washington to declare open commerce of drug wars across the border as an “economic stimulus” for the southwest. When it comes to drug wars and kidnappings, this aggression will not stand, dude.

Other differences between the federal and state governments is that the feds have taken it upon themselves to institute and run national social insurance programs like Medicare, Social Security, and FDIC. They control the US dollar, monetary policy, and thus interest rates (the Federal Reserve isn’t technically a government entity, but for all intents and purposes, it is…other then having elected officials and that whole transparency thing). But in essence, the feds are still a government instituting laws on a sovereign land. For some head-scratching reason they aspire toward the California model which is festering in bankruptcy, rooted in high taxes, regulation, and entitlements.

All I’m saying is why not be more like the Lone Star State? So far, Texas has managed to skirt through the financial collapse and recession rather swimmingly. The Texas unemployment rate has been at or below the national rate for 42 consecutive months. In June, unemployment clocked in at 8.2%, compared to California’s rate of 12.3%, and a national rate of 9.5%.

Chief Executive magazine’s 2010 survey of the best places to conduct business called California “the Venezuela of North America”, ranking it last. Guess who came in at number one? Texas.

I think we can all agree that Texas’ performance relative to demographically similar California probably has something to do with friendly tax policy. Texas has no personal state income tax, no personal capital gains tax, and no corporate income tax. California on the other hand, is, well, Venezuela. For the last twenty years, California’s oppressive tax burdens have consistently ranked among the top 10 highest in the country.

Source: newgeography.com

Texans are smart. They understand that inflation parties eventually end and instituted sound lending practices. They didn’t trust Fannie, Freddie, and the Federal Reserve to set long-run interest rates and assume everything would be peachy. Texas proved to have an understanding of bubbles, over-heated markets, risk, herd behavior, contagion, moral hazard, the global financial system, sustainability, fundamentals, and common sense.

Now let’s take a look at unions. In my opinion, unions are generally a negative because they inflate labor costs and make the United States far less competitive. It’s one thing to institute a minimum wage and child labor laws (which in a modern, free, and democratic society like ours, doesn’t make sense in many ways), but it’s entirely another thing to impose the benefit packages, above-market salaries, and legacy costs on companies that unions so often do. The percent of Texas’ labor force represented by unions is only 6.2%. Contrast that to California which has 18.3%.

When it comes to government revenue (receipts and fees), the practice of taxing income can create great fluctuations. In California’s case, they experienced a 20% upswing in annual revenues through fiscal 2000, which quickly turned into a 17% drop in 2002. This volatility makes it much more difficult to balance a budget. This time frame was during the slight contraction of the economy following the dot.com bust and post-9/11. Now that we’re in the worst economic period since the Great Depression, what type of revenue swings will be in store for The Golden State? Texas, on the other hand, get’s the lion’s share of its revenues through taxing sales. This inevitably distorts the economy less and allows for more flexibility. As far as a model for the federal government, this would support a Fair Tax-type movement on a national scale. Other benefits to scrapping the 67,000 page tax code would be getting rid of the many special favors and handouts it creates. This breeds the lobbyist and toxic culture in DC. If we moved to a Fair Tax, not only would each and everyone of us get back hours and days of our lives doing taxes every year (or the accountant’s lives), there would be no more lobbying community in Washington. Thinking about the creative energy lost every year in this country due to becoming compliant with our tax code is astonishing.

Lastly, the Texas economy is very diverse. The government plays a role in this diversity. For one, the University of Texas at Austin is the fifth largest college in the country with enrollment of 51,032. This is a public institution which generates plenty of jobs. Texas benefits from flourishing professional fields such as accountancy, law, security services, and the oil and natural gas industry. The latter has to do with natural resources, but the presence of just about any other industry you can point to has to largely be contributed to Texas’ business-friendly practices. Businesses go to less taxed, less regulated places. The flocking of such businesses creates diversity, which in a recession, cannot be under-appreciated.

The government of Texas has striven to be a responsible steward of the economy. But they let the people manage it. As a result, Texans have a great economy and a balanced budget. They did not sink themselves through pensions and entitlements to the tune of California.

There’s really no question that in a state death match, California does not want to mess with Texas. The federal government should be implementing similar policies as the Texas experiment. That was one of the major advantages to federalism as our Founders saw it.

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Unfortunately for people who aren’t quite ready to kick the bucket, that tax comes back with a fury in 2011. As The Wall Street Journal reports:

“Not only will the top rate jump to 55%, but the exemption will shrink from $3.5 million per individual in 2009 to just $1 million in 2011, potentially affecting eight times as many taxpayers. The math is ugly: On a $5 million estate, the tax consequence of dying a minute after midnight on Jan. 1, 2011 rather than two minutes earlier could be more than $2 million; on a $15 million estate, the difference could be about $8 million.”

The article then quotes Eugene Sukup, the founder of Sukup Manufacturing, saying “You don’t know whether to commit suicide or just go on living and working.” Indeed, if one of the major reasons to accumulate wealth is to pass it on to one’s children, at this point, the rational thing to do would be to prematurely end one’s own life. What a perverse and disgusting incentive!

Well obviously Congress will get something done by the end of the year… right? Maybe not:

“Many Washington insiders are betting Congress won’t act this year because of an overflowing to-do list, the fall election and fewer than 40 working days left in 2010. At least one near-deal has failed the Senate this year.”

This could bring a wave of suicides and spawn a large increase in what some call “suicide tourism.” Basically, terminally ill people go to countries with right-to-die laws so they can end their own life. Switzerland even extends this offer to foreigners. And other than suicide, we may have more restless, spoiled heirs-to–be “quickening the process” to get their inheritance. Even without such awful incentives, that kind of thing happens from time to time (see here and here).

Either way, I had previously believed Congress’ incompetence could not get any worse. I was wrong.

Like the financial reform bill, the Affordable Care Act falls short of addressing systemic problems.

Insurance companies are not being greedy and evil. I’ve documented on many occasions that it is rational for insurance companies not to take on people who are likely to drain insurance pools. If insurance premiums are to remain reasonable for all other policy holders in the pool, those with pre-existing conditions can’t necessarily join the party. In addition, I’ve documented that health “insurance”, as we know it, really isn’t insurance at all. An insurance scheme, by definition, can only apply to a rare event. I don’t think a monthly prescription, and multiple trips to the doctor every year necessarily count as rare, unpredictable events. Click on the last link for greater insight into this matter.

Part of the health care reform bill passed in March addressed the issue of pre-existing conditions. The Affordable Care Act will force insurance companies to take on the same applicants they’re denying today, beginning in 2014. While it’s easy to see this as a win for humanity, not so fast. How will bringing in millions of the most expensive people into today’s insurance pools decrease health insurance costs? I thought the buzz word in this bill was affordable. Now, there will be monetary penalties beginning in 2014 for those that remain uninsured. The hope, by both health insurance lobbyists and the government, is that healthy, cheaper people will join the pool and help stabilize costs. Fines for the uninsured don’t ratchet up to meaningful levels until 2016. These menaces to society will pay the greater of $695 (up to $2,085 per household) or 2.5 percent of income. At this point, it will be increasingly more difficult for people to justify not obtaining health insurance.

I’m not suggesting the possession of health insurance is a “bad thing”. But the individual mandate is a paternal solution at the loss of more personal liberties. Beyond this, it may actually be rational for a healthy 25-year-old not to pay out $1,500/year in premiums. The expected value of health insurance may not be greater than the costs of insurance for a young person in tip top health.

The Affordable Care Act did not want to leave the pre-existing crowd hanging until 2014. With underemployment hovering around 18%, and many companies opting to contract work out to freelancers to save on labor costs (benefits, worker’s comp, etc.), more people are an accident away (or hereditary consequence) from bankruptcy. In the bill, a bridge for those with pre-existing conditions was instituted called the Pre-Existing Condition Insurance Plan (PCIP). PCIP is ran through both the state and federal governments. To find out how it works in your neck of the woods, click here, and then click on your state on the map. To qualify you must be a citizen or national of the United States or lawfully present in the U.S., have been uninsured for at least the last six months, and prove you have been denied by an insurance company due to a pre-existing condition.

While I’m happy that both the PCIP bridge and the eventual change in law will allow many to obtain health coverage, I don’t feel the Affordable Care Act meaningfully addresses any of the issues in our health care system. Namely, the multitude of reasons health care is unaffordable. SwiftEconomics.com has identified the problems, and offered many solutions which are littered throughout this column in links. To put it simply, very few market forces determine prices in our health care system. Prices which show up on a patient’s final bill have very little to do with the supply and demand for those supplies and procedures. They also have very little to do with what insurance companies reimburse for those services. One part of health care inflation has to do with arbitrary price setting. Prices of supplies and procedures in hospitals are almost exclusively determined by arbitrary groups. They’re set in a cat-and-mouse game between the hospital and insurance companies, where prices are raised on particular items or services in hopes of maximizing revenue within the structure of a negotiated contract. Then there is a disconnect between the prices of services and the contractually negotiated reimbursement rates between the hospital and insurance company. So you have actual costs of a service to the hospital. Then you have prices on a patients bill, inflated arbitrary figures for the most part which may or may not cover the cost of the service. Then you have prices for the insurance company, previously determined in negotiations.

Now think about what this system does to those that have no health “insurance”? They’re stuck with the arbitrary, inflated prices not driven by market forces. The prices don’t reflect reality. For patients with “insurance”, prices often don’t matter, in the sense that their marginal costs may be fixed. For example, they have a co-pay of $20 for a trip to the doctor, and everything beyond that is covered by insurance. Even if there is a larger fixed deductible, the logic holds. Say, though, there is a co-insurance rate on a patient’s policy. They will pay a percentage of total costs, which means they, too, are affected by the arbitrary prices, but still relatively insulated if their co-insurance rate is only 10-30%. While our “insurance” plans aren’t really insurance plans, costs spiraling out of control have strong-armed us into needing the pay-for-the-lion’s-share model.

Maybe today's youth will dream of becoming fake doctors on TV dramas.

We should take time to understand the variations of costs in our health care system. We have costs of services. These, typically neither the patient nor the hospital doctor shoulder the brunt of. Imagine going to a day spa where you receive a pedicure, manicure, mud bath, face mask, and deep tissue massage. What if your payment for these services only covered a fraction of the costs to provide the service? Well, said day spa would be going out of business in a hurry. Now suppose that you had day spa insurance, your services were priced at $250, and they cost the day spa $200 to provide. You covered a co-pay of $25, and your insurance paid a contractually agreed upon rate of $160 for the package. So you’ve contributed 10% of the total price for the trip to the day spa. This is quite a deal which would encourage you to return over and over again. The day spa collected a total of $185 for services rendered, that cost them $200 to provide, losing $15 for their trouble. Welcome to the reality of many services at a hospital. The facilities survive by making more exorbitant returns on other select services and procedures.

We also have costs of health insurance. Premiums go up as a result of general health care costs rising. More money leaves the pool every year, all else equal. As the country’s population increases and ages, individual health costs go up, increasing premiums. Remember that we’ll be ushering in millions of new people into the insurance pools as a result of the Affordable Health Care Act, presumably increasing costs for these pools beyond the additional rise in new premium income. And finally, health insurance markets must be freed to compete across state lines. By setting up health insurance oligopolies in every state, consumers are limited in their choices. A person living in Santa Barbara, California should be able to purchase insurance from Newport News, Va. Oligopolies aren’t known to lower prices. Real markets with competition and limited barriers to entry do.

So what is the answer to curbing health care costs at the patient bill level? It would be wise to do everything a government can to encourage the practice of medicine. Supply must not only keep up with demand for health care, but it must outpace it for prices to go down. This means any number of things; perhaps added protection for MD’s from lawsuits, less regulation to make it easier to start new clinics, and more freedom for doctors to run a practice how they see fit. For patient advocates, this seems like a scary prospect. But just as the restaurant that gives people food poisoning everyday, the medical practice which egregiously harms its patients on a regular basis will not be patronized. With the Internet, you’re not only relying on word of mouth to relay information but a running digital journal of people’s experiences in these offices, with these doctors.

The prices on patient bills must get closer to reflecting reality. That is, the costs of the supply or service at hand, as well as the overall demand for it. Having an insurance system which looks at a $150,000 patient bill, and reimburses $45,000 simply doesn’t make sense. Medicare and Medicaid set the example for reimbursement methodologies with many private insurance companies (payors). And as long as insurance companies only pay fractions of bills, hospitals will look to increase overall prices as much as contractually possible, or more so, to maximize revenue (further screwing the uninsured). Eventually the hospital will eclipse a price threshold and head to re-negotiate a new contract with the private payor. The process occurs over and over again. Hospitals truly need all the revenue they can get considering many services lose money. Not to mention if a facility wants to expand or open clinics to add beds and services for the increasing population.

Whole Foods CEO John Mackey

“The way it works at Whole Foods is we got rid of our cafeteria plan and we put everybody into one plan. The company pays 100% of the premiums for all full-time team members. They’re automatically enrolled and since that’s 87% of our team member base, that’s just about everybody. We also pay an increasing portion of the family premiums based on how long they have worked for the company, and we set up a high deductible. It’s not as high as it needs to be, but it was as high as we thought was politically possible within our team member base as a starting point, because they didn’t have any money in their PWAs [personal wellness accounts] or their health reimbursement accounts. So, we set it up with $1,000 deductible in medical costs and a $500 deductible for prescription drugs.

We also set a $3,500 maximum out-of-pocket expense, which includes the $1,500 in deductibles, plus another $2,000 that would go toward co-pays once the deductible was exceeded. We set the exact same plan up for our families as we did for individuals. As soon as you got to $3,500, the company would pick up 100% beyond that. And we funded these personal wellness accounts, which we call PWAs. Again, the IRS made that possible with their ruling, although they are technically called health reimbursement accounts (HRAs). The new health savings accounts, which passed in the new Bush Medicare monstrosity along with prescription drugs for seniors, well, the silver lining in that was the HSAs. But those weren’t available when we started our plan.

We give every one of our team members a MasterCard debit card and they can access their funds for the appropriate health and wellness expenses vis à vis that debit card. Their total service hours for the company determine how much money we deposit in their account. Here you can see it according to service hours, and 2,000 service hours represent about one year of employment if you work 40 hours a week. You can see that after two years you’re basically going to get $1,500 which will cover your entire deductible, and at 10,000 hours it goes up to $1,800.”

Plans of this nature force patients to be consumers and shop prices. By patients actually being aware of prices at the doctor’s office, and spending with discretion, doctors would have to compete with other doctors for their patients. Patients would ask if tests are necessary, or if there are cheaper alternatives. Competition is good. Patients shouldering more responsibility for their medical costs is imperative to lowering aggregate health care expenditures as a nation.

Finally, Medicare must be completely reconfigured. Proposals seem to indefinitely be on the table, generally including bumping the minimum age above 65, and reducing benefits over time. Quasi-fiscal conservative Congressman Paul Ryan has laid out one such plan in his “Roadmap” found here. Obviously as life expectancy and population continues to expand, social health insurance needs to be reeled in.

These issues would be a start to reforming health care. Unfortunately, none of them were addressed. Like the Wall Street reform bill passed yesterday which didn’t even mention Fannie Mae and Freddie Mac, government regulation strikes out again.

Indeed, when one thinks of nullification, a few things may come to mind: the nullification crisis of 1832, John Calhoun and slavery, Brown v. Board of Education as well as the struggle for civil rights in the 1960’s. While the nullification crisis of 1832 was a dispute over the “tariff of abomination,” the threat of nullification was also seen a preemptive measure in case the federal government ever tried to interfere with slavery. John Calhoun, who saw slavery as “instead of an evil, a good, a positive good,” was a major supporter of nullification and was instrumental in laying the intellectual groundwork for the secession that lead to the Civil War. There was talk of nullification for the Civil Rights Act of 1964. And actual attempts were made after the Supreme Court ruled on Brown v. Board of Education, which persuaded President Eisenhower to call in federal troops to escort the “Little Rock 9” to class in what was formerly an all-white school.  Nullification, as with interposition and secession, has without question been used to deny civil rights to minorities in this country.

It’s thereby not surprising that Princeton professor Sean Wilentz refers to the doctrine of nullification as “the essence of anarchy” and “neo-Confederate dogma” while Chris Mathews described it as the “terms of Jim Crow.” A whole host of other bloggers and political commentators have referred to it as a “code word for racism.” Among most on the left, nullification, and states’ rights in general, are simply an affront to civil rights.

However, I find this to be a gross simplification of a general concept. As with people who think secession is an evil idea forever intertwined with slavery, while simultaneously having fully supported the rights of Eastern European countries to secede from the Soviet Union, examples are being used to define a theory. Furthermore, it is quite interesting that the same people who oppose nullification typically support civil disobedience, such as that practiced by Mohandas Ghandi and Martin Luther King.

The reason I find this interesting is that nullification and civil disobedience have similar intellectual foundation. After all, what is nullification other than an act of disobedience against what the state legislature finds to be an unjust law? And what is civil disobedience other than an act of disobedience by an individual against what he finds to be an unjust law? The hierarchy of government in the United States goes down from the federal level, to the state, then local governments and finally to individuals and non-governmental institutions. Any act of disobedience along the way should be seen as an act of political defiance.

Yet when we look at Martin Luther King Jr., it’s quite obvious he opposed nullification. In his famous I Have a Dream speech, he decried Alabama “…with its vicious racists, with its governor having his lips dripping with the words of ‘interposition’ and ‘nullification.’” But Martin Luther King Jr. supported the Henry David Thoreau/Mohamed Ghandi ideal of non-violent civil disobedience. He referred to the difference between civil disobedience and crime as “the willingness to accept the penalty for breaking the unjust law is what makes civil disobedience a moral act and not merely an act of lawbreaking.” Those penalties can be high as the Selma to Montgomery marchers found out when they crossed the Edmund Pettus Bridge.

Surely attempting to nullify a law can certainly have consequences for states as well. This is especially true given how much money the federal government takes and then divvies out the states and could presumably withhold. Such actions can have even lead to invasion, such as when the Soviet Union invaded Czechoslovakia (at that time, a state of the USSR) to halt liberalization efforts. While Martin Luther King Jr. was undoubtedly fighting a noble campaign to end the evils of Jim Crow, he missed the point here. Alabama’s governor’s goals were bad, but not necessarily the methods he used to push for those goals. After all, civil disobedience could be used by NAMBLA to defend pedophilia. That doesn’t change the ideal of civil disobedience, what Henry David Thoreau called “the true foundation of liberty.” And it’s simply undeniable that the basic premise behind nullification and civil disobedience are one and the same.

Consider the following hypothetical situation. Let’s say it was the federal government that had mandated segregation and not the states. Do you believe for one second that Martin Luther King Jr. would have opposed states nullifying that particular federal law? Martin Luther King Jr. was trying to crush segregation and I find it patently absurd that he would neglect a non-violent method of doing so if the situation had been as described. I would submit that it was racism that Martin Luther King Jr. opposed much more than any legal justification those racists put forth to maintain segregation. And for anyone who thinks such a scenario is unbelievable—because the federal government can be trusted on racial issues—allow me to enlighten you.

First of all, it’s important to note that it was not the slavery-defending John Calhoun who came up with the concept of nullification, but rather Thomas Jefferson and James Madison (two men who both opposed the institution). The two wrote the Kentucky Resolutions of 1798, which stated “that whensoever the general government assumes undelegated powers, its acts are unauthoritative, void, and of no force.” They wrote this in response to the freedom-hating Alien and Sedition Acts which made “writing, printing, uttering or publishing any false, scandalous and malicious writing or writings against the government of the United States” a crime punishable by up to five years in prison. This, of course, gutted the First Amendment of our Constitution.

As Thomas Woods, author of the new book Nullification, points out the north used nullification more often than the south in the antebellum period. One of their prime targets was the federal government’s fugitive slave clause, which required escaped slaves to be returned to the slave-owner they escaped from. Unfortunately, this was constitutional; however, it was enforced in a draconian way that trampled over state governments, especially after the Fugitive Slave Act of 1850. Wisconsin went the furthest, basically nullifying the entire act. (One handbill referred to it as “the Kidnapping Act of 1850.”) And just about every northern state nullified the act to one degree or another as evidenced by Texas’ Declaration of Succession in 1861, which said:

“The States of Maine, Vermont, New Hampshire, Connecticut, Rhode Island, Massachusetts, New York, Pennsylvania, Ohio, Wisconsin, Michigan and Iowa, by solemn legislative enactments, have deliberately, directly or indirectly violated the 3rd clause of the 2nd section of the 4th article [the fugitive slave clause] of the federal constitution.”

South Carolina protested about “…an increasing hostility on the part of the non-slaveholding States to the institution of slavery, has led to a disregard of their obligations [the Fugitive Slave Act].” Mississippi complained that “[The Union] has nullified the Fugitive Slave Law in almost every free State in the Union, and has utterly broken the compact which our fathers pledged their faith to maintain.” The union they refer to is the union of northern states, not the federal government, since the federal government was in charge of administering the Fugitive Slave Act. Indeed, abolitionist William Lloyd Garrison even recommended the north secede from the south so that the Fugitive Slave Act would be completely eliminated and slaves could escape to the north instead of having to make it all the way to Canada.

And the Fugitive Slave Act is just the beginning. Centralized states simply don’t have a good track record regarding racism. Some countries have enacted what could best be described as affirmative action for the majority. As Thomas Sowell points out in his book, Affirmative Action Around the World, in Malaysia, the majority Malays instituted preferential policies for themselves over the minority Chinese. The same was done in Sri Lanka in favor of the majority Sinhalese against the minority Tamils (and was one reason the country descended into civil war). Ira Katznelson even argues that this is what happened in the United States under the New Deal in his book, When Affirmative Action Was White.

And of course the trans-Atlantic slave trade was institutionalized by centralized European nation-states (as well as many other nation-states all over the world), which then brutalized many of the native populations. The U.S. government upheld Plessy v. Ferguson, which allowed for Jim Crow in the first place. Eugenics was state-sponsored in a large number of western nations, including the United States, and resulted in the forced sterilization of many minorities. In 1492, Queen Isabella and Ferdinand of Spain ordered the expulsion of every Jew from the country. And that was just one of a wide assortment of other anti-Semitic laws culminating in the Holocaust. Indeed, most genocides, from Rwanda and Sudan to Germany and the Ottoman Empire have been sanctioned by a powerful, centralized government. Needless to say, federal supremacy and the civil rights of minorities are not naturally in accord.

This is why some liberals such as Kirkpatrick Sale and Jeff Taylor support nullification. The Nation, known for its far left politics, accepts that:

“…states’ rights is a constitutional, not political, issue, and the idea of a balance of power between the federal and state governments is neither conservative nor liberal at heart. It pertains to the theoretical process and function of government, not to the substantive, individual acts of governance themselves.”

Indeed, it’s quite worth noting how some of the worst tyrants in history felt about states’ rights and nullification. Adolf Hitler’s thoughts on them were as follows:

“National Socialism must claim the right to impose its principles on the whole German nation, without regard to what were hitherto the confines of federal states… The National Socialist doctrine is not handmaid to the political interests of the single federal states. One day it must become teacher to the whole German nation. It must determine the life of the whole people and shape that life anew. For this reason we must imperatively demand the right to overstep boundaries that have been traced by a political development which we repudiate.”

In other words, federalism, states’ rights and any form of nullification are bad… if you’re a Nazi. A few others who have opposed federalism include Joseph Stalin, Vladimir Lenin, Pol Pot, Mao Zedong, Saddam Hussein, Benito Mussolini, Fidel Castro, Henry VIII, George III, King Leopold, Ivan the Terrible, Vlad the Impaler, Nero, Caligula, Napoleon Bonaparte, Idi Amin, Hirohito, Kim Il Sung, Kim Jung Il, and… need I really continue?

That may be a cheap shot, but still, nullification, aside by being used to defend runaway slaves and free speech, has been used to stop military conscription, tariffs and unlawful search and seizures. I would say those are civil rights-friendly policies. The nullification threats over conscription during the War of 1812 are very reminiscent of the civil disobedience over the military draft during the Vietnam War. And in both cases, they were effective. The federal government was unsuccessful in creating a draft for the War of 1812 and the draft was eventually abolished after furious protest and defiance in 1972.

Today, nullification is being used, in everything but name, on a whole host of matters from conservative issues such as gun rights, to liberal issues such as medical marijuana (California, effectively nullified the federal ban on it). Many states are considering challenging the porkfest of corporate welfare that is healthcare reform. The Real I.D. Act, which created a national ID card, was passed, but so many states have refused to implement it that the federal government has, at least for now, given up on it. There is quite a lot of nullification going on right now even as we debate whether or not it’s constitutional, racist or seditious.

Liberals, who are typically more likely to oppose federalism, should ask themselves whether or not nullification would allow states to defund the Iraq War, end the War on Drugs or eliminate the Patriot Act and the Military Commissions Act. The principle in and of itself can be used for good or bad, but centralized power tends to always be bad. As Tom Woods put it, “If you enter into a contract with somebody, never, ever would you say that the other party in the contract can exclusively interpret what it means… [when] the federal government has a monopoly on interpreting the Constitution… they’re going to interpret it in their own favor.” Given the horrific amount of damage a centralized government can do (according to R.J. Rummel, governments killed 262 million of their own citizens in the 20^th century alone), I think it’s safe to say we need every tool available to ward off unchecked government power.

A few days ago a friend of mine asked me what I would say in an open letter to a group of Independents if they asked me what I thought of the financial reform bill that is currently being considered in Washington. The following is my open letter response to those Independents:

Dear Friend,

Financial reform is needed very badly, but the financial reform bill that is being considered in Washington at the moment is not good. The current financial reform bill as proposed will not fix the financial systems of this country. Never, ever. To fix the financial systems of this country much more drastic changes need to be made than those that are being proposed.

Recently, I had an article published in Business Insider that explains how the Federal Reserve, Fannie Mae, and Freddie Mac mismanaged long-term interest rates for a period that goes all the way back to the early 1980s.

What the Federal Reserve did and what they allowed Fannie Mae and Freddie Mac to do over the past thirty years went against financial theory. What the Fed allowed was a setting of mortgage rates much, much higher than they should have been back in the early 1980s, which then led to a period where the people of the United States were able to live off newly created debt year after year as a result of the sanctioned refinancing, refinancing, and more refinancing of our American homes.

All the time that this was happening, Fannie Mae and Freddie Mac grew “fat” off of our debt. The more debt that Fannie and Freddie could create, the more money Fannie and Freddie made. Don’t fool yourself. Fannie Mae and Freddie Mac were Government Sponsored Enterprises (GSEs) and not true business enterprises. And as such, with the protective shield of the government implied behind them, the executives of those agencies managed to pay themselves grandly while building up the long-term debt of our country. In truth, Fannie Mae and Freddie Mac did not answer to the people of the United States; they answered to their stockholders. And it was solely because of that fact that we are living through the greatest recession since the Great Depression.

Yet, guess what? There is not a single thing in the current financial reform bill dealing with the issue of Fannie Mae, Freddie Mac, or even the Fed (at least in the proper way).

Now it is time to get blunt. The current Federal Reserve Chairman should resign his post, and so should the current Secretary of the Treasury. And along with that as a given, the Democrats and/or the Republicans need to replace both Chris Dodd and Barney Frank from their central positions as it relates to governmental finance. In fact, all the financial leadership positions in Congress need to be reconsidered.

Over the last thirty years the United States financial system failed the people of the United States of America and the world.

Historically speaking, if there is one thing we should never forget: it is that freedom, innovation, and business is what made the United States of America strong, and it will be freedom, innovation, and business in the United States that will continue to make the United States strong in the future.

Related to that philosophy, I was recently asked by another friend to comment on the recent G20 meetings. Now I would like to share with you my own “independent” reading of the world’s (G20) situation. Here is how I responded to my friend:

“Everyone at the G20 seems to want to get their debt spending down. I think that is a noble objective. I even think that our own Fed guys (Bernanke) and Treasury (Geithner) are working towards that same solution themselves. The trouble is: there is no reason for delay. The solution to the problem is already known. It is the establishment of a fixed, steady 4.0% long-term interest rate for the United States. If you did that, all the other currencies of the world would be able to set their debt currencies against that. And do you know what? A 4.0% long-term fixed rate in the United States is just about as low as you can go and still leave room to avoid both “inflationary” or “deflationary” spikes.

I’m beginning to think we have the wrong people going to the G20 meetings. Over time, and especially through this most recent crisis, I have come to realize how business represents the strength of the United States of America. The stronger our businesses are the stronger our country is. I have also come to understand that it’s in our form of freedom-loving government in the United States of America that business best prospers, which then led me to believe that businesses in the United States of America will always have an advantage over businesses coming from other governmental forms.

However, through my analysis, I have also come to realize that part of business as I define business (both in a macro and micro scale) is tied to finance (or economics) in some form or another. And having looked at it in that manner, I have also come to the conclusion that finance (economics) is in place to serve (rather than direct) business and thus the general welfare of the people.

Now considering contemporary times, based upon what the Fed did and allowed Fannie/Freddie to do, all I can say is this–finance did a very, very poor job of helping business and the people of the United States and the world these last thirty years. In fact, finance, by itself, nearly toppled all of the world’s economies and businesses in 2008, and I think we all know what that might have meant.

Change needs to take place! But the current financial reform bill does not change a thing. And for that reason, I believe the current Fed chairman and the current Secretary of the Treasury need to resign their positions. I also believe that both the Republican and Democratic parties need to quickly find new replacements for the likes of Barney Frank and Christopher Dodd.

The United States of America needs a “new world (globalnomic)” economist at the Fed. The United States of America needs a “new world (globalnomic)” economist at the Treasury. Our global community is advancing quickly, and it is important that the “greatest society of all the world’s great societies” grows at least as fast as those who count on us to lead.

Putting that in practical terms–the longer it takes us to make the necessary changes at the top so we can implement “real financial reform”, the longer all of those newly unemployed people we have in the United States are going to stay unemployed. And the longer it is going to take the world to work itself out of our current economic crisis.”

Note from SwiftEconomics.com founder, Ryan Swift:

If any of Jim’s proposals resonate with you, please contact me. Let’s work together to address the problems in our economic system. It is on us to create a sustainable and vibrant US economy. The powers at be have let us down. Based on their “solutions” to health care, mortgage debt/housing, public debt, and the financial system, I wouldn’t expect that to change.

Jim Boswell has an M.B.A. degree from The Wharton School (University of Pennsylvania), an M.P.A. from School of Public and Environmental Affairs (Indiana University), and a B.A. degree from Hanover College. His recently published book, Crush Depth Alert, Fourth Lloyd Productions, explains in detail with supporting exhibits, graphs, and tables the factors that led up to the recent financial crisis while offering solutions on how to move forward. This is a follow-up to an earlier BusinessInsider.com article (June 24, 2010) by Boswell called “How 25 Years of Mismanagement at Fannie and Freddie Caused The Financial Crisis”.

You can purchase Crush Depth Alert here.

Alas, all of our piggy, I mean, panda banks, are made in China now. Fill them with human capital.

While I don’t have a say in people’s health choices, I do have an interest. That is one symptom of socializing aspects of health care.

The HC Model for Personal Health takes the concept of “human capital”, and applies it to a system of debits and credits. The debits and credits are not applied to a financial account, but rather a theoretical health account. If human capital is the total summation of genetic gifts and shortcomings, as well as lifestyle, psychological, physical, and emotional decisions, your personal health depends on the net effect. Genetic gifts, or lack thereof, include one’s talent, intellect, and physical prowess or advantages. A person’s lifestyle and personal growth depend on their actions, education (formal, self-taught, and life experience), and dedication to honing skills. Your personal health account is essentially your wealth, in health terms. And as we all know, if you don’t have your health …

Everybody is born with a wide range of human capital. Some people are very dumb, others are geniuses. Some people have physical diseases, others have a full bill of health. Some people are in a family with positive influences and environment, others grow up in the equivalent of an insane asylum. Some people are very curious, others are self-absorbed and oblivious to the outside world. Some thrive in learning environments while others struggle with learning disorders. The amount of human capital you start with is very important, and it should effect your decision-making process throughout life i.e. if you’re running on empty, it’s probably not a good idea to empty your remaining funds.

Lance Armstrong has a freakishly high VO2 max (85 ml/kg/min), a great aid in winning 7 straight Tour de France’s. On the other hand, he also had testicular cancer. VO2 max is a substantial debit to Lance’s personal health account, while the genetic predisposition to testicular cancer, a substantial credit.

But you can acquire great human capital throughout your life as well, despite your starting point. If you simply tread water, as it were, you may pass a good chunk of society anyway.

When it comes to lifestyle choices, most choices are either a debit into the personal health account, or a credit out of the personal health account (some are arguably neutral in actual terms, but then there’s the issue of opportunity cost). If you go outside to smoke a cigarette, you’ve just swiped your bank card, crediting some human capital out of your account. If you go and exercise, you’ve just deposited human capital into your account.

While gossiping with your girlfriends about celebrity couples for an hour might be a utility-maximizing event, you’ve just swiped your card again.

Human capital is a testament that while we are all human, we are not all the same. We are not the same amount of “special” or “challenged”. We all deserve civility, kindness, and freedom, assuming we don’t stomp on other people’s rights, but there are winners and losers in the human race. If you die from a rare genetic condition at age 7, that is a losing proposition. If you have an IQ of 24, that, too, is a losing proposition, just not as severe. So, yes, there are ranges and magnitudes of winning and losing, and various perspectives on each. Most of us are not destined or entitled to either; we work our way toward one or the other, sometimes on a volatile roller coaster ride.

How about some more examples?

If you’re a girl and you decide to date a douchebag guy for 14 months, you’ve credited your account repeatedly. If you’re still a card-carrying, staunch supporter of either major political party, you are crediting your personal health account due to derangement. Certain choices hit diminishing marginal returns. Having one cup of coffee provides you with caffeine, which barring health issues, can be good for you in small doses. Java offers antioxidants and fights diabetes, Parkinson’s disease, colon cancer, and your risk of cavities. But if you have four cups of coffee each day, chances are you’re squandering net human capital; jittering I might add.

The HC Model allows one to look at their health from a complete perspective. We cannot compartmentalize the physical, emotional, spiritual, and psychological aspects of life. They all interact with and affect one another. It also requires us to take an honest look at ourselves. What are our gifts, talents, strengths, and shortcomings? What is our starting point? A human capital-driven life is contagious. When you spend time around people that take care of themselves, push themselves, and promote positivity, you’re compelled to do the same. When you’re around those that swipe their card all day, you’ll probably have a swipe-off. The HC Model promotes sustainability.

Just eat a balanced diet and fuel up after a workout. Complex protein, some fat, some carbs, omega-3, and lots of vitamin-rich foods. You got this.

What is so hard about eating a grilled chicken breast? Or some vegetable sausage? Or a turkey sandwich? How about some albacore tuna, or a plank of salmon? The veggies and hummus meal only takes you so far.

If you drink or do drugs, can you stick to one substance vice? Nothing better then meeting people who drink, smoke cigarettes, smoke pot, pop Vicodin or Percocet, and have “experimented” with hard core drugs. Let’s go ahead and minimize the vices in our life. These are often the same people who don’t exercise enough, don’t get enough nutrition, and are generally clueless in life due to their lack of self education, or otherwise. These are the folks who’s HC accounts have long been drained and are now running up debt to their elbows.

If you have an IQ of 180, smoking marijuana now and then isn’t a big deal (assuming of course you live in California and have obtained your medical marijuana card). If you have an IQ of 31, you really don’t have much brain power in the tank to surrender. Good decisions as it relates to human capital reserves are appreciated.

Why can’t we all get some exercise? Fit it into your week so your neighbor doesn’t have to pay for your triple bypass down the road. And instead of finding one thing, like the elliptical machine, and doing nothing but that one thing … can we get some variety and work some different muscle groups? Perhaps a little resistance training to go with your running, or yoga to go with your dancing, or core work to go with your golfing. Whatever you do, do more than one thing, and choose a lifestyle that you can sustain for more than a month. Before every decision, ask yourself “am I debiting or crediting my human capital account”

Note: I am aware this column got progressively more aggressive. But I strongly believe that if we implement the The Human Capital (HC) Model for Personal Health on a mass scale, this will be a much better country to live in. Happy saving.

The current financial crisis did not happen because investment companies were dealing in derivative products that no one understood (the simplistic general Democratic explanation), nor was it a result of an abnormal growth in homeownership rates in the United States (the simplistic general Republican explanation). The real reason for our current crisis is that our economic leaders allowed Fannie Mae and Freddie Mac to mismanage mortgage rates and thus mismanage a substantial portion of our “debt economy” for more than twenty-five years.

Here are the facts that back up this statement. Exhibit 1 shows a 12-month running average plot of Freddie Mac single family fixed rate mortgages against the 12-month running average of the CPI between 1972 and 2008 (nearly the full period of time mortgage-backed securities had been issued prior to the recent financial crisis).

Exhibit 1

Many readers might recall the periods of high inflation that resulted in the 1970s, which are clearly shown in the first quartile of the Exhibit. Many readers might also recall how Paul Volcker in his role of Fed Chairman raised the Federal Funds and Prime Rates significantly in the early 1980s, which curtailed inflationary rates from a 14% annual rate to a 4% annual rate in a short two-year period between the end of 1981 to the end of 1983. That significant drop in inflation can be seen about a third of the way from the y-axis in Exhibit 1.

What most readers (including most economists) do not know, however, is how long-term mortgage rates rose even higher than short-term rates during the early 1980s, and then how subsequently long-term rates have tracked with inflation over time. Both Exhibit 1 and Exhibit 2 can be used to see how they have tracked, and they have not tracked well. And that mistake of allowing mortgages rates to go to 18.0% in 1983, which was either ignored or conceded to by the Federal Reserve, allowed Fannie Mae and Freddie Mac to have unprecedented control of our economy for more than twenty-five years, which significantly led to our current economic crisis.

Exhibit 2

If there is anything we should learn from the past, it is that long-term rates should not be used to control inflation; unless of course, you believe current inflationary trends are expected to continue for the long-term also. Not only were long-term mortgage rates raised and mishandled in the early 1980s, it is also noteworthy that it took a lot longer than it should have to lower long-term rates. While it took less than two years to go from 14% to 4% inflation, it took more than ten-years to drop mortgages rates a similar ten percentage points from 18% to 8%.

For the last 27-years (almost the full time for a 30-year loan to mature), inflation as measured by the CPI has averaged 2.99%, yet only very recently have long-term rates begun to come into sync with long-term inflation. With mortgage-rates set so far above what they should have been set in 1983, Fannie Mae and Freddie Mac were allowed to establish a policy that slowly lowered mortgage rates year after year, in effect allowing us to enjoy one refinancing cycle after another so that their mortgage portfolios could grow and grow and grow.

Debt through refinancing meant nothing more than income to these Government Sponsored Enterprises. Not only did the GSEs have free reign on setting mortgage rate policy, they used that power to construct derivative (REMIC-type) products than enabled them to further outwit investors.

Hindsight you say? Considering technological productivity gains, the fall of the Berlin Wall, China-India-Brazil’s development, and globalization in general, how long should it have taken our esteemed economists to understand that inflationary trends could be somewhat tame over the long haul? If you look at Exhibit 1 again, you will see that we have been experiencing the benefits of these factors and low inflation ever since the late 1980s.

How did the GSEs get away with their strategy in light of oversight and investor supply and demand issues? There are two fundamental reasons why:

One, the Federal Reserve was asleep at the wheel. Even though we may revere our esteemed Reserve economists; the Federal Reserve never understood mortgage debt, nor did they ever question mortgage rate policy. Instead, the Fed simply received regular reports from Freddie Mac telling them what the current GSE mortgage rate policy was. The Fed either was ignorant or played ignorant while we added nearly $7.5 Trillion in “new mortgage debt” during the fifteen-year period between 1992 and 2007. Talk about Keynesian economics! Any Reserve Chairman of the Great Depression era would have been envious of what Alan Greenspan was allowed to get away with while collecting accolades—and that does not include the stimulus that was being added during his reign from our Government’s deficit spending and growth in our “national debt”.

Two, demand for Mortgage-Backed Securities, was always there. MBSs have always served as one of the best “risk free” hedges against inflation. An 18% MBS when compared against a 3% long-term inflationary perspective is an extremely attractive product, as is a 14% MBS, as is a 10% MBS. Need I go on? Anyway, what could be safer than investing in American housing? The stock market carries risk, does it not, or have we forgotten what happened in 2000-2001?

So for twenty-five years we Americans took advantage of mortgage rate mistakes made by the GSEs going back as far as the early 1980s to live off our houses and build up our debt to unreasonable levels, while the executives at the GSEs gloated over their growing MBS portfolios and their “well-deserved” bonuses. The money-making machines that the GSEs owned were the envy of Wall Street bankers, so they, too, joined into the game. After all, housing prices would never fall—another gross misconception made by our elite financial leaders.

The good news is this. We will recover from all of our blundering in housing finance, and some day real estate will again offer a means to slowly build equity. The bad news is that housing is not the only major financial problem that needs to be solved in the United States. We still have other big financial issues equally important facing us ahead, including fixing our “health care cost” systems (private, Medicare, Medicaid) and our social security systems. Solutions exist, as long as we understand and face up to our problems head-on. The question remains, however—is that something we are willing to do?

Jim Boswell (MBA, MPA, BA) directed the analytical risk monitoring activities of Ginnie Mae’s $500 billion portfolio of mortgage-backed securities for 12 years (1988-2000), including the period of the S&L crisis. His recent book, Crush Depth Alert, published by Fourth Lloyd Productions, explains in detail with supporting exhibits, graphs, and tables the factors that led up to the financial crisis while offering solutions on how to move forward.

You can purchase Crush Depth Alert here.

This article was first published on BusinessInsider.com.

With the yuan now set to appreciate, will US policymakers rue the day?

“Hey look, I know lot’s of folks in China. They think we are the dumbest son of a bitches in the world. They think our representatives don’t know what they’re doing. They laugh at us behind our back. They’re taking money out (of the US economy) and then they loan it to us.”

The Donald advocates a tariff on Chinese imports to raise revenue, decrease the trade deficit, and bring back manufacturing jobs to “places like North Carolina and Alabama”. China is not a free trade country. It is very hit and miss when it comes to American companies having success entering China’s marketplace. This would be an argument for Trump’s tariff. However, China still enjoys a steep absolute advantage in the manufacturing sector. In other words, they can produce more of a good at a lower absolute cost than America. Is this because their labor is inherently more efficient? No, but it is because they work longer, have fewer environmental and safety regulations, and don’t have the health care and pension costs of union-laden American counterparts.

The Chinese are expected to let the yuan rise 2-3%, and made the announcement right before the G20 meeting in Toronto this weekend where they were going to be on the hot seat. This move will minimize the scrutiny and perhaps even garner some praise in Canada. Will a 2-3% rise in the cost of Chinese goods really mean much to America in the way of job creation? It seems like a stretch to me. Your cheap Blu-Ray player from Wal-Mart will go from $89.99 to $92.69. I don’t see that bridging the gap between the real problem in US manufacturing, labor costs, and creating many jobs.

So it’s entirely possible that a higher yuan will create few jobs here (all of which would be very delayed) and in return we all pay more for Chinese goods. Sweet deal. More troubling is that China has kept the yuan pegged to the dollar by purchasing extraordinary amounts of US Treasuries, which finance the US government’s spending sprees. If the yuan ever truly floats, China won’t need to buy our debt in such great quantities. In order to spur demand for our debt we would have to raise interest rates on U.S. Treasuries. This would make it even more difficult to pay off the deficit and increase borrowing costs for credit-seeking Americans and businesses.

A burgeoning yuan on the global stage could eventually make the dollar lose value. This would jack up the price of imports from around the world, including oil.

So let’s all be careful of what we wish for when it comes to the yuan. And let it be known that Tim Geithner, in particular, has been pushing for this since he was the president of the New York Federal Reserve Bank.

Trump says the Chinese have been laughing at us behind our backs. Beyond the fact that’s exactly what it feels like everytime Geithner makes the sojourn East, let’s hope the joke’s not on America when it comes to the yuan.

Peter Schiff’s case centers around the print and spend mentality of the United States, and also Europe as they stave off bankruptcy of member countries. Saving and production, he says, will have to be done by somebody other than China eventually. The Chinese simply cannot prop up America and Europe forever as the chief global lender. Schiff also looks for a 1:1 relationship between the Dow and gold, as was hit in 1980 and 1929. With Europe’s stance of printing as many euros as necessary to prevent default of member nations, he says he may have to up his prediction to $10,000/oz. Either way, Schiff says to look for gold and the Dow to converge.

Another reason to be bullish on gold is that Central Banks are upping their reserves. In 2009, central banks were net buyers of gold for the first time since 1997. As currency (see USD and euro) becomes a less desirable reserve asset, gold looks shinier and shinier. It isn’t tied to government monetary and fiscal policy across the globe, and it has tangible value.

Russia has increased their gold reserves by 26.6 metric tonnes in the first quarter 2010, or about $1.2 billion at today’s price, according to World Gold Council data. Russia added 117.63 tonnes in 2009.

Kazakhstan bought 3.1 tonnes, or $137 million, of the precious metal in the first quarter.

The Philippines acquired 9.6 tonnes, or about $424 million, of gold this year.

India increased its reserves by 55% last November in a purchase from the International Monetary Fund, or 200 tonnes.

And then there’s China. It should come to little surprise that China is a stealth buyer of gold. Like Russia, they purchase the precious metal from their own mines, and don’t always report their reserve levels. The largest producer of the metal reported in April 2009 that it had increased it’s reserves by 76% since 2003, or 454 tonnes. Given their exposure to US Treasuries, this seems like a shrewd move.

The gold rushes by central banks probably signal more than just diversification and emotions. There might be some sound thinking here.

We’ve hit many nominal all-time highs for gold as of late, the most recent being today at $1,258.30/oz, which beat yesterday’s record closing high of $1,248.20. Keep in mind, though, once adjusted for inflation, the all-time high was set January 21, 1980 at $2,163.62/oz, in 2009 dollars. Sure enough, if you do the Peter Schiff math, this was the 1980 1:1 relationship with the Dow he speaks of (in nominal terms). Each converged around $825.00. In other words, we’re hitting nominal highs, but we’re not in unprecedented territory.

Whatever your feeling about gold, it’s performance stacks up favorably next to almost any asset. The following 5-year spot price chart beats stocks, real estate, and seems steadier moving forward given its reactionary logic to government policy.

Source: BullionVault.com

If you had moved your portfolio into gold in March 2008, upon the collapse of Bear Stearns, you would have enjoyed about a 28% gain during this financial crisis, recession, and economic turmoil. I choose this entry point not because it is an ideal price floor, it isn’t. Only because if you were completely clueless about the state of global finance and fiscal and monetary policy up to that point, you could have woken up then, and moved at least a portion of your assets into gold. For the last 5 years, the average annual return on gold is about 37%. As far as buy and holds are concerned, that’s a nice 5-year run.