Tidbits Quotations
To Accompany the April 10, 2012 edition of Tidbits
Bob Jensen at Trinity University

The mirror doesn't lie. It just does not tell enough.
Bob Jensen

Sometimes you have to go to the United Kingdom to find items that are politically incorrect for the major U.S. TV networks and progressive newspapers that are highly biased when it comes to crime reporting ---

We should wait for a safer way to get at this gas --- this is not a long term efficient solution and may do irreparable damage
Hydraulic Fracturing Concerns --- http://en.wikipedia.org/wiki/Fracking
Thank you Dan Gheorghe Somnea for the heads up.

Who says bipartisanship is dead in Washington? House Republicans played the dastardly trick of putting President Obama's budget proposal to a floor vote on Wednesday, and the verdict was a unanimous defeat—414-0. Fifteen Democrats did the White House the favor of not voting on the measure that would raise taxes by $1.9 trillion.
"Calling the Budget Roll House votes reveal who's serious about fiscal reform," The Wall Street Journal, March 29, 2012 ---

Ronald Coase (Nobel Laureate)  --- http://en.wikipedia.org/wiki/Ronald_Coase

"How China Made Its Great Leap Forward:  Some observers praise its 'state-led capitalism.' But the truth is that leaders, starting with Deng Xiaoping, loosened Beijing's control," by Ronald Coase and Ning Wang, The Wall Street Journal, April 6, 2012 ---

China's post-Mao market transformation is one of the most dramatic and momentous events of our time. It has lifted hundreds of millions out of extreme poverty, freed one fifth of humanity from ideological radicalism, revived one of the oldest civilizations, and inspired all of us to explore the benevolence of the market.

Yet capitalism as currently practiced in China suffers a severe failing: the lack of a marketplace for ideas. China's market transformation flourished at the ground level without much help from Beijing—contrary to its leadership's claims. But the free flow of ideas has faltered. Until that changes, China will never reach its full potential.

At Mao Zedong's death in 1976, few, if any, could have foreseen that China, then one of the poorest and most isolated countries in the world, would become a dynamic market economy in just three decades. An added surprise is that all this happened under the auspices of the Chinese Communist Party, which was committed along the way to modernizing socialism.

When China started reforming and opening up, it had little knowledge of the market economy. Mao's grandiose but disastrous policies had gravely impoverished the country materially and intellectually. China had been isolated from the West and cut off from its own traditions. With no blueprint, it had no choice but to work within the ruins of socialism, through tinkering and improvisation. This experimental approach was helped along the way by the resuscitation of the Confucian tradition of "seeking truth from facts."

China's road to capitalism was forged by two movements. One was orchestrated by Beijing; its self-proclaimed goal being to turn China into a "modern, powerful socialist country." The other, more important, one was the gross product of what we like to call "marginal revolutions." It involved a concatenation of grass-roots movements and local initiatives.

While the state-led reform focused on enhancing the incentives of state-owned enterprises, the marginal revolutions brought private entrepreneurship and market forces back to China. Private farming, for example, was secretly engaged in by starving peasants when it was still banned by Beijing. Rural industrialization was spearheaded by township and village enterprises that operated outside state control. Private sectors emerged in cities when self-employment was allowed to cope with rising unemployment. Foreign direct investment and labor markets were first confined to Special Economic Zones.

All these marginal forces had been either harshly oppressed or heavily regulated during Mao's era. Fortunately, post-Mao Chinese leaders—most notably Deng Xiaoping—embraced change. Mao's failure taught them to stay away from ideological hubris and re-embrace pragmatism. Under their leadership, Beijing admitted its lack of experience in reform. Local initiatives were first allowed, and later encouraged, to play a leading role in market-oriented experiments.

Inadvertently, this process led to the relatively thriving market we see in China today. When Beijing still preached socialism, local authorities explored new, market-oriented approaches to revive local economies. While Beijing held tight to political power, it was no longer a central planner. As provinces, cities and counties all competed for economic development, China became a giant laboratory of regional competition.

China's leaders have never given up on socialism, which in their minds calls for public ownership to ensure shared prosperity (even though state-owned enterprises have exacerbated inequality and corrupted politics). They insist on keeping key sectors—including banking, energy, communication and education—under state monopoly. As a result, many characterize the Chinese economy as "state-led capitalism." But it was really the marginal revolutions and regional competition that ushered in China's economic rise.

In the years to come, China will continue to forge its own path, but it needs to address its lack of a marketplace for ideas if it hopes to continue to prosper. An unrestricted flow of ideas is a precondition for the growth of knowledge, the most critical factor in any innovative and sustainable economy. "Made in China" is now found everywhere in the world. But few Western consumers remember any Chinese brand names. The British Industrial Revolution two centuries ago introduced many new products and created new industries. China's industrial revolution is far less innovative.

The active exchange of thoughts and information also offers an indispensable foundation for social harmony. It is not a panacea; nothing can free us once and for all from ignorance and falsehood. But the free flow of ideas engenders repeated criticism and continuous improvement. It also cultivates respect and tolerance, which are effective antidotes to the bigotry and false doctrines that can threaten the foundation of any society.

Continued in article

The China Dream:  Rise of the Billionaire Tiger Women from Poverty
"Tigress Tycoons," by Amy Chua, Newsweek Magazine Cover Story, March 12, 2012, pp. 30-39 ---

Like a relentless overachiever, China is eagerly collecting superlatives. It�s the world�s fastest-growing major economy. It boasts the world�s biggest hydropower plant, shopping mall, and crocodile farm (home to 100,000 snapping beasts). It�s building the world�s largest airport (the size of Bermuda). And it now has more self-made female billionaires than any other country in the world.

This is not only because China has more females than any other nation. Many of these extraordinary women rose from nothing, despite living in a traditionally patriarchal society. They are a beguiling advertisement for the New China�bold, entrepreneurial, and tradition-breaking.

Four standouts among China�s intriguing new superwomen are Zhang Xin, the factory worker turned glamorous real-estate billionaire, with 3 million followers on Weibo (China�s Twitter); talk-show mogul Yang Lan, a blend of Audrey Hepburn and Oprah Winfrey; restaurant tycoon Zhang Lan, who as a girl slept between a pigsty and a chicken coop; and Peggy Yu Yu, cofounder and CEO of one of China�s biggest online retailers. None of these women inherited her money, and unlike many of the richest Chinese who are reluctant to draw public scrutiny to their path to wealth, they are proud to tell their stories.

How did these women make it to the top in the wild, wild East? Did they pay a price, either in their family or their professional lives? What was it that distinguished them from their famously hardworking compatriots? As I set out to explore these questions, my interest was partly personal. All four of my subjects lived for extended periods in the West. As a Chinese-American, and now the infamous Tiger Mom, I was curious: how �Chinese� were these new Chinese tigresses?

It turns out that each of these women, in her own way, is a dynamic combination of East and West. Perhaps this is one secret to their breathtaking success.

Zhang Xin is a rags-to-riches tale right out of Dickens. She was born in Beijing in 1965. The next year Mao launched the Cultural Revolution, and millions, including intellectuals and party dissidents, were purged or forcibly relocated to primitive rural areas. Children were encouraged to turn in their parents and teachers as counterrevolutionaries. Returning to Beijing in 1972, Zhang remembers sleeping on office desks, using books for pillows. At 14 she left for Hong Kong with her mother, and for five years she worked in a factory by day, attending school at night.

�I was a miserable kid,� she told me. With her chic cropped leather jacket and infectious laughter, the cofounder of the $4.6 billion Soho China real-estate empire is today an odd combination of measured calculation and warm spontaneity. �My mother drove me in school so hard. That generation didn�t know how to express love.

�But it wasn�t just me. It was all of China. I don�t think anybody was happy. If you look at photos from those days, no one is smiling.� She mentioned the contemporary artist Zhang Xiaogang, who paints �cold, emotionless� faces. �That�s exactly how we all grew up.�

. . .

But the four women I interviewed are a new breed. Progressive, worldly, and open to the media, they are in many ways not representative of China, past or present. Perhaps they are merely the lucky winners of the 1990s free-for-all in China, a window that may already be closing. Or perhaps they are the forerunners of a China still to come, in which paths to success are far more open. Each has found a way to dynamically fuse East and West, to staggering commercial success. It may still be a long way off, but if China can achieve a similar alchemy�melding its tremendous economic potential and traditional values with Western innovation, the rule of law, and individual liberties�it would be a land of opportunity tough to beat.


Jensen Comment
Many of us were weaned on the famous Coase Theorem on economic efficiency with externality constraints ---

We should wait for a safer way to get at this gas --- this is not a long term efficient solution
Hydraulic Fracturing Concerns --- http://en.wikipedia.org/wiki/Fracking
Thank you Dan Gheorghe Somnea for the heads up.

Bob Jensen on the American Dream versus the China Dream ---


April 6, 2012 message from Roger Collins

Guardian (UK paper) journalist reviews children's movie, with a dose of Political Economy thrown in...

A sample paragraph..

Unfortunately, capitalism's boast – that it accords with human nature – is actually capitalism's problem: that it rewards the most rapacious aspects of human nature, at the expense of the natural world more generally. Most of capitalism's critics understand this, and find it mightily frustrating that the right carries on regardless with the pillaging.

The real problem, however, is that as an alternative to capitalism, socialism is a turkey, far more concerned with equality of distribution of the spoils (or, at the very least, equality of opportunity to have a go at grabbing some) than it is with tackling human dependence on wealth. One could even argue that socialism is even more perverse than capitalism, nothing more or less than its dark and negative mirror. After all, it focuses as obsessively on lack of money, and denial of access to resources, as the system it opposes does on accumulation of money, and access to resources. Capitalism accentuates the positive – wealth. Socialism accentuates the negative – poverty. The supposedly opposing ideologies are merely opposite sides of the same coin. It's because wealth itself confers power that Marxism's logical, unpalatable, unworkable "solution" is redistribution by force – revolution.

More at ..





Politically correct note.. "Leprosy support groups have successfully campaigned for the removal of a gag in upcoming Aardman Animations film The Pirates! in which a victim of the disease loses a limb as a result of his condition......The scene depicts the Hugh Grant-voiced Pirate Captain storming a ship in search of booty, only to be informed by one of its occupants: "Afraid we don't have any gold, old man, this is a leper boat. See …" The speaker's arm then drops off."

Roger Collins
TRU School of Business & Economics



Among the 46% (some say 49.5%) of taxpayers not paying any taxes, is it mostly the outliers (extremely rich and extremely poor) who pay no income taxes?

Well, only in part. Most (89%) of those so-called "taxpayers" making less than $20,000 pay no taxes. A few like college students who are still claimed as dependents on the tax returns of their parents may pay a slight amount of income tax on part-time earnings.

Most of those making more than $100,000 pay some income taxes. Bloomberg reports that 98% of those that pay no income taxes have less than $100,000 in earnings. Most are availing themselves of recent tax breaks such as energy credits, tax breaks from employer contributions to medical insurance, increased tax breaks for dependents, and deferred tax breaks such as breaks professors get for employer contributions to TIAA-CREF.

Watch the April 3, 2012 Bloomberg Video ---

Also see
"Growing Unequal? Income Distribution and Poverty in OECD Countries," OECD ---
What is happening in the United States as well as other OECD countries is a dramatic shift in the age distribution. For example, consider what has happend in the United States:

Child poverty – that is, children in a household with less than half the median income – has fallen since 1985, from 25% to 20% but poverty rates among the elderly increased from 20 to 23%. Both of these trends are in the opposite direction to those of the other countries in the OECD.

Also see
"Comparing the top and the bottom income earners: Distribution of income and taxes in the United States," by Govind S. Iyera, Peggy Jimeneza, and Philip M.J. Reckers, Journal of Accounting and Public Policy, March–April 2012, Pages 226–234 ---
Thank you Steve Sutton for the heads up.

Why, according to the OECD, is the US system so progressive? Not because the rich face unusually high average tax rates, but because middle-income US households face unusually low tax rates--an important point which de Rugy mentions and Chait ignores.
Note that the Excel file includes payroll taxes as well as income taxes ---
(Here are the IRS data, excel file.)
"U.S. Taxes Really Are Unusually Progressive," by Clive Crook, The Atlantic, February 10, 2012 ---

If you ask me, Jonathan Chait, a writer I respect, has made an ass of himself in a fight he picked with Veronique de Rugy over taxes and progressivity. She offended him by saying that America's income taxes are more progressive than those of other rich countries. Chait assailed her "completely idiotic" reasoning, called her an "inequality denier", "a ubiquitous right-wing misinformation recirculator" and asked if it was really any wonder he cast insults now and then at such "lesser lights of the intellectual world". (Paul Krugman said he sympathises. With Chait, obviously. The only danger here is in being too forgiving, Krugman advises. Chait may think the de Rugys of this world are only lazy and incompetent, but we know them to be liars as well.)

Just one problem. On the topic in question, De Rugy is right and Chait is wrong.

Income taxes in America are more progressive than in other rich countries--according to an authoritiative official study which, to my knowledge, has not been contradicted. The OECD's report "Growing Unequal", on poverty and inequality in industrial countries, includes a table that provides two measures of income tax progressivity in 2005. This is evidently the source of de Rugy's numbers. Here they are in an excel file. According to one measure, America's income taxes were the most progressive of the 24 countries in the sample, except for Ireland. According to the other, they were the most progressive full stop. (A more recent OECD report, "Divided We Stand", uses different data, a smaller sample of countries and a different measure of progressivity: the results are similar.)

Before you ask, this ranking takes account of employee-side payroll tax as well as the federal income tax.

Chait first objected to de Rugy's claim about progressivity because he thought she was inferring it from the fact that the US collects the biggest share of income taxes--45 percent of the total, col B1 in the table--from the top income decile. That would be a false inference, as Chait says, because it could be true of a country with a very unequal income distribution even if its taxes were not especially progressive. But look at the table. There was no need for de Rugy to draw any such inference, let alone try to mislead readers. All she needed to do--and all, I'm sure, she did--was glance over to the last column, which actually gives the measure of progressivity, showing the US to have the highest score.

The measure of progressivity is hard to explain, so I can see why de Rugy quoted the tax share instead. But she could have chosen a much more dramatic number if she was seeking merely to bamboozle her readers. Exclude payroll tax, and the top 1 percent of taxpayers, not the top 10 percent, have lately accounted for nearly 40 percent of income tax receipts, the top 5 percent for nearly 60 percent, and the top decile for roughly 70 percent. (Here are the IRS data, excel file.)

For the reason I just gave, this does not prove that the US tax system is more progressive than anybody else's--but it surely has some relevance to the question, "Are the rich paying their fair share of income tax?" If this isn't fair, what would be?

When Chait, with all the authority of a leading light of the intellectual world, says "Rich Americans pay a bigger share of the tax burden because they earn a bigger share of the income, not because the U.S. tax code is more progressive," he is making the same kind of sloppy bias-driven error he falsely accuses de Rugy of making. (I'll refrain from wondering whether he made the mistake deliberately.) According to the OECD, rich Americans bear a bigger share of the tax burden because they earn a bigger share of the income and because the US income tax system is more progressive.

There's a lot more to say on this subject.

Is measuring progressivity straightforward? No. It's difficult, because the underlying data are very complicated and hard to compare across countries. Another problem: expressing progressivity across the whole income range as a single number, so that one can say A is more or less progressive than B, can be misleading. Unfortunately, we all want to be able to say, A is more or less progressive than B.

Why, according to the OECD, is the US system so progressive? Not because the rich face unusually high average tax rates, but because middle-income US households face unusually low tax rates--an important point which de Rugy mentions and Chait ignores.

How does the picture change if you take indirect taxation into account? That would make the US system look even more progressive, because the US doesn't rely on a flat consumption tax like most other governments.

Continued in article

Most developed nations, other than the U.S., provide relief on double taxation
"Corporate Dividend and Capital Gains Taxation: A Comparison of the United States to Other Developed Nations," by Ernst & Young (Drs. Robert Carroll and Gerald Prante), February 2012 ---

Jensen Comment
Of course the wealthy are taking advantages of enormous loopholes that Congress built in primarily for them. The top 5% of the wealthy pay 50% of the income tax collections but would pay a whole lot more without their friends in Congress. And fortunately for the wealthy, taking away the most popular loopholes would badly hurt both the poor and the middle class. For example, taking away tax exempt interest breaks on municipal bonds would greatly raise the cost of capital for schools, towns, counties, and states selling bonds. And eliminating interest deductions on mortgages would be a fatal blow to a sick real estate market and destroy construction jobs and jobs in factories making home building and repair materials. Thus many of the tax loopholes taken advantage of by high rollers are pretty well set in concrete.

Case Studies in Gaming the Income Tax Laws ---

End of the Cuban Dream
Trying to Inspire Ambition Among People Used to Free Housing and Medical Care Plus Almost Free Food, Transportation and Everything Else
"On the road towards capitalism: Change is coming to Cuba at last. The United States could do far more to encourage it," The Economist, March 24, 2012 ---

IN 1998 Pope John Paul II visited Cuba, prompting outsiders to await a political opening of the kind that brought down communism in his native Poland. Sadly, even two decades after the fall of the Berlin Wall, Cuba remains one of the handful of countries around the world where communism lives on. Illness forced Fidel Castro to step down in 2006, but his slightly younger brother, Raúl, is in charge, flanked by a cohort of elderly Stalinists. When Pope Benedict XVI visits the island next week, expectations will be more muted.

Yet a momentous change has begun in Cuba in the meantime. The country has started on the road towards capitalism; and that will have big implications for the United States and the rest of Latin America.

The journey, as our special report this week explains, will be painfully slow. No active dissent from one-party rule is allowed: dozens of opponents of the regime have been arrested ahead of the pope’s visit. Sceptics will note that Fidel Castro opened up the island’s economy a little in the early 1990s, after the collapse of the Soviet Union and the withdrawal of its subsidies, only to stop when he found a new benefactor in Venezuela’s Hugo Chávez.

But this time seems different. Raúl Castro, though no democrat, is clearly a more practical man than his brother. He recognises that time is running out for his island. The population is shrinking and ageing, the economy is hopelessly unproductive and the state can no longer pay for the paternalist social services of which Cuba was once proud. Meanwhile, Mr Chávez’s health and his hold on power are uncertain.

The changes Raúl Castro has introduced are almost certainly irreversible. Much of Cuban farming is, in effect, being privatised. In all, around a third of the country’s workforce is due to transfer by 2015 to an incipient private sector. As well as employing others, Cubans can now buy and sell houses and cars, even as the number of mobile phones and computers on the island is rising fast. This looks like a turning point similar to Deng Xiaoping’s revolution in China.

No man is an island

Reform is moving slowly partly because Mr Castro is ambivalent. He insists, as Deng did, that his aim is to sustain, not dismantle, the Communist Party’s control. There are also obstacles to reform. Bureaucrats fear losing power and perks; ordinary people fear rising prices. Popular opposition forced Mr Castro to drop a proposal to scrap the ration books that give all Cubans some subsidised food.

But going too slowly is now as dangerous for the Castros as going too fast. Cubans are unhappy. Their schools and hospitals are not as good as they were. Inequalities of income now exist alongside those of power. There is much resentment of the opportunities afforded to insiders and denied to everyone else. Having raised Cubans’ hopes of change, Raúl Castro urgently needs to create some winners from the reforms—and that means pushing ahead. Small businesses must be allowed to become medium and large ones. Foreign investment should be welcomed. And the ration books should go, with subsidies targeted at the poor.

The other reason for urgency is that the Castros have failed to groom a successor. When Fidel, who is 85, dies, change will doubtless accelerate, but the regime will not fall apart: Raúl is the important one now. Yet whoever takes over from him—and a partial handover may start as soon as 2013—will not have the brothers’ revolutionary credentials. Cubans will judge their next leader strictly on his or her present performance. The longer Raúl tarries over placing the economy on a sustainable footing, the greater the risk that a post-Castro leadership will be swept away on a tide of popular anger.

Time for America to get over its 50-year tantrum

Few will mourn this regime. But there are several reasons for all sides to prefer an orderly transition to capitalism and democracy in Cuba. The sudden collapse of communism risks civil war, or at least the danger that Cuba’s formidable security and intelligence agencies will become hired guns at the service of drug trafficking and organised crime. The presence of 1.2m Cuban-Americans in south Florida makes it likely that the United States would get dragged into any conflict.

Continued in article

The American Dream ---

Who says bipartisanship is dead in Washington?
House Republicans played the dastardly trick of putting President Obama's budget proposal to a floor vote on Wednesday, and the verdict was a unanimous defeat—414-0. Fifteen Democrats did the White House the favor of not voting on the measure that would raise taxes by $1.9 trillion.

"Calling the Budget Roll House votes reveal who's serious about fiscal reform," The Wall Street Journal, March 29, 2012 ---

What do Spain, Ireland, Greece, and California have in common when their borrowing costs are soaring?
What keeps U.S. borrowing costs from soaring?

Spain, Ireland, Greece, and California cannot buy back their own bonds to keep borrowing costs low. For example, Spain and Ireland cannot just print Euros. And California cannot solve its problem by simply printing U.S. dollars. On the other hand, the U.S, Fed is now buying back over 60% of its own treasury bonds, thereby resorting to the Zimbabwe solution of printing greenbacks to ease borrowing and tax increases solutions.

"Spain, Portugal auction bonds," Irish Times, April 4, 2012 ---

Jensen Comment
There's a bright side to the U.S. deficit problem. Rather than borrow so much from the Middle East and China, the Fed is now buying up 61% of the Treasury bonds --- which is tantamount to printing over $2 trillion greenbacks in a Zimbabwe solution to lowering the deficit. I'll bet Canada never thought of that solution to not having to reduce spending so much.

If we would just print a few trillion more greenbacks we might yet achieve a balanced budget in the United States.


While the bipartisan U.S. Congress voted down President Obama's proposed budget Canada seems to be finding its way to recovery
"Canada Beats America:  And we don't mean in hockey. Try taxes, spending and energy," The Wall Street Journal, April 3, 2012 ---
. http://online.wsj.com/article/SB10001424052702303816504577319743650637600.html#mod=djemEditorialPage_t

Not too many years ago, Americans could get away with cracking jokes about spendthrift Canada, its weak dollar and the long wait for MRIs. These days, the joke is on Americans, as Canada's government has cleaned up its fiscal mess and focused on private economic growth.

The governing Conservative Party took another step forward last week with a pledge to balance the budget by 2015 without raising taxes. That's a year later than Prime Minister Stephen Harper pledged on the stump in 2011, but it sure beats America's four consecutive years of deficits of $1.3 trillion. Canada's federal debt as a share of GDP is forecast to fall to 28.5% in 2016–17 from 33.8%. Add in state debt and that number is closer to 66%, but the trend is in the right direction, while America's is heading toward 70% and rising.

Canada's progress isn't a political accident. Our northern neighbor has been liberalizing since the mid-1990s, under politicians of the right and left, and through better policies it dodged the government-supercharged housing boom and bust that sent the U.S. into recession.

Provincial governments led the intellectual way. Alberta's Ralph Klein in the 1990s cut taxes, slimmed government and created a stable investment climate. Saskatchewan's socialists, British Columbia and Ontario reformed too. The Harper government took power in 2006 and started to cut taxes, trim government employment and clinch free-trade deals. Canada's corporate tax rate is now 15%, compared with America's 35%.

Finance Minister Jim Flaherty explained that policies to "raise taxes, increase government spending, and shun new trading opportunities" would "kill jobs, impose crushing deficits, and cripple our economy." He will not be President Obama's next Treasury secretary.

Overall federal spending will continue to rise, but at a slower pace. Most notably, the budget proposes to raise the eligibility age to 67 from 65 for Old Age Security, starting in 2023, and it will also allow retirees to voluntarily defer benefits if they want to receive a higher payout later. A later retirement age, phased in over time, is precisely the kind of reform that the U.S. needs for Social Security and Medicare.

The budget also treats Canada's energy resources as national assets to be exploited—with as few delays as possible. Thus the budget proposes to eliminate overlapping federal and provincial environmental reviews for major projects. It proposes firm review timelines, including for projects that are already underway, such as the Northern Gateway pipeline from northern Alberta to the Pacific coast. Mr. Flaherty's catch phrase is "one project, one review." Contrast this with the multiple reviews that have stymied the Keystone XL pipeline from Canada and North Dakota's Bakken Shale to the Gulf Coast.

As America's recent performance proves, the wealth of a nation isn't guaranteed. Canada shows how mistakes can be reversed with sound policies.

Jensen Comment
I might add that I'm suspicious of the Keystone XL pipeline. Why does such an expensive pipeline for gooey tar have to be sent all the way to Texas for refining. Why can't oil tar refineries be built in southern Alberta or northern Montana or North Dakota? Shipping refined fuel is much cheaper and safer than shipping gooey tar through a pipeline. Dah?

Nepotism and Insider Trading in Washington DC

Congress is our only native criminal class.
Mark Twain --- http://en.wikipedia.org/wiki/Mark_Twain

We hang the petty thieves and appoint the great ones to public office.
Attributed to Aesop

Crescent Dunes Solar Energy Project --- http://en.wikipedia.org/wiki/Crescent_Dunes_Solar_Energy_Project

Under a power purchase agreement (PPA) between SolarReserve and NV Energy, all power generated by the Crescent Dunes project in the next 20 years will be sold to Nevada Power Company for $0.135 per kilowatt-hour.[3] In late September, Tonopah received a $737 million loan guarantee from the U.S. Department of Energy (DOE).[

Nepotism in Washington DC

Pacific Corporate Group --- http://www.pcgfunds.com/
Financial Report --- http://www.pcgfunds.com/PDF/GIPS_PCG_Core%20Performance_Composite__123106_D&T.pdf

Ron Pelosi --- http://en.wikipedia.org/wiki/Ron_Pelosi

"$737 million in green-tech loan to company connected to Pelosi family?"

Tonapa Solar Home --- http://www.tonopahsolar.com/

The Tonopah Solar company in Harry Reid's Nevada received a $737 million loan from the Department of Energy.

* The project will produce a 110 megawatt power system and employ 45 permanent workers.

* That's only costing us $16 million per job.
One of the investment partners in this endeavor is Pacific Corporate Group (PCG).

* The PCG executive director is Ron Pelosi, who is the brother-in-law of Nancy Pelosi.

Nancy Pelosi Alleged Insider Trading--- http://en.wikipedia.org/wiki/Nancy_Pelosi#Allegations_of_insider_trading

In November 2011, 60 Minutes alleged that Pelosi and several other member of Congress had used information they gleaned from closed sessions to make money on the stock market. The program cited Pelosi's purchases of Visa stock while a bill that would limit credit card fees was in the House. Pelosi denied the allegations and called the report "a right-wing smear.

The Wonk (Professor) Who Slays Washington

Insider trading is an asymmetry of information between a buyer and a seller where one party can exploit relevant information that is withheld from the other party to the trade. It typically refers to a situation where only one party has access to secret information while the other party has access to only information released to the public. Financial markets and real estate markets are usually very efficient in that public information is impounded pricing the instant information is made public. Markets are highly inefficient if traders are allowed to trade on private information, which is why the SEC and Justice Department track corporate insider trades very closely in an attempt to punish those that violate the law. For example, the former wife of a partner in the auditing firm Deloitte & Touche was recently sentenced to 11 months exploiting inside information extracted from him about her husband's clients. He apparently did was not aware she was using this inside information illegally. In another recent case, hedge fund manager Raj Rajaratnam was sentenced to 11 years for insider trading.

Even more commonly traders who are damaged by insiders typically win enormous lawsuits later on for themselves and their attorneys, including enormous punitive damages. You can read more about insider trading at

Corporate executives like Bill Gates often announce future buying and selling of shares of their companies years in advance to avoid even a hint of scandal about exploiting current insider information that arises in the meantime. More resources of the SEC are spent in tracking possible insider information trades than any other activity of the SEC. Efforts are made to track trades of executive family and friends and whistle blowing is generously rewarded.

Trading on insider information is against U.S. law for every segment of society except for one privileged segment that legally exploits investors for personal gains by trading on insider information. What is that privileged segment of U.S. society legally trades on inside information for personal gains?

Congress is our only native criminal class.
Mark Twain --- http://en.wikipedia.org/wiki/Mark_Twain

We hang the petty thieves and appoint the great ones to public office.
Attributed to Aesop

Answer (Please share this with your students):
Over the years I've been a loyal viewer of the top news show on television --- CBS Sixty Minutes
On November 13, 2011 the show entitled "Insider" is the most depressing segment I've ever watched on television ---
Also see http://financeprofessorblog.blogspot.com/2011/11/congress-trading-stock-on-inside.html

Jensen Comment



"CONGRESS THE CORRUPT," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants, January 9, 2012 ---

The Christmas and New Year’s break allows university faculty not only to enjoy family and friends, but also it supplies a moment to do some nontechnical reading.  After all, we don’t need that much time to look over our teaching notes.  Faculty need something constructive to do during the three or four weeks we have off, and catching up on our reading fits in marvelously.

We read two interesting books during this break.  The first is Throw Them All Out by Peter Schweizer The subtitle tells it all: “How politicians and their friends get rich off insider stock tips, land deals, and cronyism that would send the rest of us to prison.”  For example, the author discusses how Speaker Nancy Pelossi (Democrat) and her husband garnered Visa IPO shares in 2008 after intimating that she would introduce legislation which would prove very costly to Visa.  Of course, Pelosi backed off her threat once she and her husband received those IPO shares.  Schweizer also gives the example of Speaker Dennis Hastert (Republican), who used his knowledge of a proposed interchange for Interstate 88 to buy acreage on the cheap and sell it for its new market value.  Hastert realized millions in profits.

Worse, the ethics rules of the House and the Senate allow these things to occur.  In some twisted logic, Congress permits its members to engage in insider trading and land deals and regulatory intimidation.  It has legalized what is criminal for the rest of us.

We also read China in Ten Words by Yu HuaThe text is part autobiographical, part historical, and part social commentary.  Mr. Hua describes China in ten chapters, each titled with a single word.  The words he chooses are people, leader, reading, writing, Lu Xun, revolution, disparity, grassroots, copycat, and bamboozle.  With these words, he describes the incredible social and economic changes in China during his life-time, starting with the Cultural Revolution from 1966 until late 1970s, which was followed by the economic revolution to the present.

The description records incredible changes in China, such as the nation’s becoming the second largest economic power in the world.  It also traces the failings of this transformation, such as ranking about 100th in the world in per capita income.  The contradiction between these two measures foreshadows social conflict that must be dealt with sooner or later.

What proved serendipitous, even ironic, in this reading is to note the connection between the books.  In certain ways the two countries show similar contradictions and shortcomings.  Yu Hua discusses “today’s large-scale, multifarious corruption” in China; but the U.S. Congress engages in similar dishonesty.

Continued in article

Bob Jensen's Fraud Updates ---

Selling the debt in the left pocket to the right pocket:  The Fed is all smoke and mirrors

"Fed Is Buying 61 Percent of U.S. Government Debt," by Bob Adelmann, The New American, March 29, 2012

In his attempt to explode the myth that there is unlimited demand for U.S. government debt, former Treasury official Lawrence Goodman explained that there is high perceived demand because the Federal Reserve is doing most of the buying.

Wrote Goodman,

Last year the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis.

This not only creates the false impression of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.

What about Japan and China? Aren’t they the major purchasers of U.S. debt? Not any more, notes Goodman. Foreign purchases of U.S. debt dropped to less than 2 percent  of GDP (Gross Domestic Product) from almost 6 percent just three years ago. And private sector investors — banks, money market and bond mutual funds, individuals and corporations — have cut their buying way back as well, to less than 1 percent of GDP, down from 6 percent. This serves to hide the fact that the government can’t find outside buyers willing to accept rates of return that are below the inflation rate (“negative interest”) given the precarious financial condition of the government. It also hides the impact of $1.3 trillion deficits from the public who would likely get much more concerned if real, true market rates of interest were being demanded for purchasing U.S. debt, as such higher rates would increase the deficit even further. Finally it takes pressure off Congress to “do something” because there is no public clamor over the matter, at least for the moment. 

One of those promoting the myth that buyers of U.S. debt must exist because interest rates are so low is none other than one of those recently seated at the Federal Reserve’s Open Market Committee table, Alan BlinderNow a professor of economics at Princeton University, Blinder was vice chairman of the Fed in the mid-nineties and should know all about the Fed’s manipulations and machinations in the money markets. Apparently not. 

On January 19 Blinder wrote in the Wall Street Journal that

Strange as it may seem with trillion-dollar-plus deficits, the U.S. government doesn’t have a short-run borrowing problem at all. On the contrary, investors all over the world are clamoring to lend us money at negative real interest rates.

In purchasing power terms, they are paying the U.S. government to borrow their money!

Blinder repeated the error in front of the Senate Banking Committee just one week later: "In fact, world financial markets are eager to lend the United States government vast amounts at negative real interest rates. That means that, in purchasing power terms, they are paying us to borrow their money!"

Aggressive promotion of a myth never makes it a fact. All it does is hide, for a period, the reality that the world isn’t willing to lend to the United States at negative interest rates. This places the burden on the Fed to make the myth appear real by expanding its own balance sheet and gobbling up U.S. debt. 

There are going to be consequences. As Goodman put it,

The failure by officials to normalize conditions in the U.S. Treasury market and curtail ballooning deficits puts the U.S. economy and markets at risk for a sharp correction…. [Emphasis added.]

In other words, budget deficits often take years to build or reduce, while financial markets react rapidly and often unexpectedly to deficit spending and debt.

The recent release by the Congressional Budget Office (CBO) of future inflation expectations provides little assurance either as it mimics the line that inflation will stay low for the foreseeable future: "In CBO’s forecast, the price index for personal consumption expenditures increases by just 1.2 percent in 2012 and 1.3 percent in 2013."

With the Fed continuing to buy U.S. government debt, which keeps interest rates artificially low, when will reality set in? Amity Shlaes has the answer. Writing in Bloomberg last week, Shlaes explains:

The thing about [price] inflation is that it comes out of nowhere and hits you….

[It] has happened to us before. In World War I … the CPI [Consumer Price Index] went from 1 percent for 1915 to 7 percent in 1916 and 17 percent in 1917….

In 1945, all seemed well. Inflation was at 2 percent, at least officially. Within two years that level hit 14 percent.

All appeared calm in 1972, too, before inflation jumped to 11 percent by 1974 and stayed high for the rest of the decade….

One thing is clear: pretty soon, we’ll all be in deep water.

Doug Casey agrees: “Don’t think there are no consequences to our unwise fiscal and monetary course; a potentially ugly tipping point is more likely than not at some point.”

Continued in article

The Zimbabwe School of Economics:  In effect printing $2 trillion
"The High Cost of the Fed's Cheap Money Encouraging consumption at the expense of saving inhibits long-term economic growth," by Andy Laperriere, The Wall Street Journal, March 5, 2012 ---

During the past three years, the Federal Reserve has tripled the size of its balance sheet—in effect printing $2 trillion—something it had never done in its nearly 100-year history. The Fed has lowered short-term interest rates to zero and signaled that it will keep them at that level for years. Inflation-adjusted short-term rates, or real rates, have been in the minus 2% range during the past couple of years for the first time since the 1970s.

The unfortunate fact is, as Milton Friedman famously observed, there is no free lunch. After the Fed's loose monetary policy helped spur the boom-bust in

Artificially reducing Treasury yields provides a near-term benefit as federal borrowing costs are lower, but this unusually low cost of borrowing is enabling Congress and the president to run an unsustainable fiscal policy that could eventually lead to an economic calamity. Governments like Greece and Italy benefited from artificially low rates for years, and those low rates undoubtedly played a key role in those governments not confronting their serious fiscal imbalances.

Low rates have helped those who have been able to borrow or refinance their debts at lower rates, especially homeowners. But this has come at a high cost to savers. Zero rates are a major problem for any saver, but it is especially difficult for those in or near retirement. Government bonds are investments that now offer return-free risk.

The Fed is hoping the lack of return in certificates of deposit and bonds (or more accurately, negative returns, adjusted for inflation) will prompt investors to take on more risk by investing in stocks, high-yield corporate bonds and other investments. This is pushing people who have a low risk tolerance to take on more risk than may be advisable.

Moreover, QE and ZIRP are specifically designed to discourage saving and encourage people to consume more now to boost near-term gross domestic product. But saving is deferred consumption—people save to earn a return so that they may consume more in the future (say, for retirement or a major purchase). Scores of economists have testified before Congress for decades that Americans don't save enough and that this inhibits long-term economic growth. Prosperity does not come from spending; it comes from work, saving and investment.

Defenders of QE and ZIRP would say that rather than borrowing economic growth from the future, these policies merely smooth the economic cycle and reduce the economic dislocation associated with deep recessions or weak recoveries. Of course, that was the rationale for the exceptionally low rates during the 2002-2004 period, which, like today, were specifically aimed at depressing saving and encouraging consumption. Rather than smooth the economic cycle, that strategy helped create an historic boom-bust.

Some say we must encourage higher consumption because it accounts for more than 70% of GDP, and the recovery is too fragile to risk allowing a rise in the savings rate. But the recession was officially over two years ago. For at least the past decade, monetary policy has consistently punished prudent savers.

Worse, the Fed is promising to keep these policies in place for years to come. When do we ever get to the point where we allow interest rates to return to some kind of natural equilibrium and allow the economy to gradually rebalance in a way that would boost long-term economic growth?

There is no doubt the Fed is doing what it believes is best. But in addition to the risk of inflation inherent in QE and ZIRP, which Chairman Ben Bernanke has said he is 100% confident he can prevent, Fed officials are dismissive of the notion that there are significant costs or trade-offs associated with the policy they are pursuing.

This is disconcerting. Is there really no chance, zero chance, the Fed will be late to pick up signs of inflation? What accounts for such confidence—given that the Fed dismissed criticisms from 2002-2004 that its policies would distort economic decisions and cause hard-to-predict imbalances, that it was oblivious to the housing collapse well into 2007, and that to this day many Fed officials refuse to accept that monetary policy played any role in creating the housing bubble?

During the bubble, Fed officials argued they couldn't spot bubbles in advance, but that an aggressive monetary policy response could limit the downside impact if a bubble were to burst. As it turns out, the dislocation from the housing bust and the financial crisis have been far more costly than almost anyone imagined. Shouldn't that cause policy makers inside and outside of the Fed to ask hard questions as it pursues its unprecedented campaign of quantitative easing and zero rates?housing, it's remarkable how little attention has been devoted to exploring the costs of Fed policy.

A few critics of quantitative easing (QE) and the zero interest rate (ZIRP) have correctly pointed out that these policies weaken the dollar and thereby reduce the purchasing power of American paychecks. They increase the risk of future inflation, obscure the true cost of the unsustainable fiscal policy the federal government is running, and transfer wealth from savers to debtors.

But QE and ZIRP also reduce long-term economic growth by punishing savers, reducing saving and investment over the long run. They encourage the misallocation of resources that at a minimum is preventing the natural rebalancing of our economy and could sow the seeds of another painful boom-bust.

One intended effect of a loose monetary policy is a weaker dollar, which can help gross domestic product by boosting exports. But a weaker dollar also raises import prices (such as oil prices) for American consumers. For the average American family, this adverse impact has likely outweighed any positive impact from QE and ZIRP.

The cost of a weaker dollar for most people is not offset by temporarily higher stock prices for two reasons. First, most Americans don't own much stock. Second, stock prices are not going to be higher 10 years from now because of the Fed's policies, so the effect is to bring forward equity returns, not increase long-term returns.

Bob Jensen's threads on the pros and cons of the bailout as it evolved ---



The video is a anti-Bernanke musical performance by the Dean of Columbia Business School ---
Ben Bernanke (Chairman of the Federal Reserve and a great friend of big banks) --- http://en.wikipedia.org/wiki/Ben_Bernanke
R. Glenn Hubbard (Dean of the Columbia Business School) ---

Trying to Tax Away Inequality is Naive and Dysfunctional
"Lead Essay:: What to Do about Inequality," by  David B. Grusky, Boston Review, March/April 2012 ---

Jensen Comment
This does not mean that increasing taxes at all levels (including the rich) is not a bad idea to a point that brings more fairness into the tax code and raises some revenue for deficit reduction. Taxpayers at all levels of wealth and income are probably getting too much of a break with a tax code that is absurdly complex and literally being written by too many lobbyists.

Case Studies in Gaming the Income Tax Laws ---

"Why Some Multinationals Pay Such Low Taxes," by Justin Fox, Harvard Business Review Blog, March 26, 2012 --- Click Here

The American Dream ---

To help explain what is really going on with mortgage refinancings and foreclosures I wrote a teaching case:
A Teaching Case:  Professor Tall vs. Professor Short vs. Freddie Mac

"Federal Budgets and Class Warfare:  I support letting the Bush tax cuts expire. But the Obama plan isn't a serious strategy," by Michael R. Bloomberg, The Wall Street Journal, March 28, 2012 ---

A cardinal rule of American campaigns is that candidates must appeal to the party base during primary elections and then move to the center to win moderates and independents in November. This year, on the issues of taxes and spending, that shift can't come soon enough—and not just for the Republican nominee.

Over the past year, as the candidates jockeying for the Republican nomination raced to the right, the Obama campaign has sought to re-energize its base by tacking left. The president not only embraced the frustration expressed by Occupy Wall Street protesters—which was real—but he adopted their economic populism.

Central to fixing the country's problems, he has argued, is making the wealthiest Americans pay their "fair share," even though the top 5% already pay 59% of all federal income taxes, while 42% (actually 49.5%) of filers have no federal income tax bill at all (or got a check from the government via the earned-income tax credit). Warren Buffett's secretary became the public symbol of this strategy, even appearing at the president's State of the Union address. (Mr. Buffett, of course, did exactly what lower capital gains taxes are designed to encourage: He invested!)

I don't believe in class warfare, and not because I don't want to pay more in taxes. I think the Bush tax cuts should expire for all Americans—you, me, everyone—as part of a long-term plan to rein in the deficit. We are all in this together. Pitting one group against another not only divides us in counterproductive ways but offers one group the false promise of something for nothing.

That's exactly what got our country into this mess in the first place. Mortgages were approved with no money down for borrowers with no income and no assets. Meanwhile, the federal government was running up huge deficits during a period of economic growth and telling the American people not to worry about the bill. Even today, four years later, none of the major candidates for president has developed a plan for paying the bill. Instead, all are still offering something for nothing.

The president asserts that 98% of Americans do not need to pay more in taxes, that we just need those earning more than $1 million to pay a minimum of 30% in federal income taxes. But according to Congress's Joint Committee on Taxation, this plan would generate only $1.1 billion in revenue for the coming fiscal year. To put that in perspective, the federal government this year is spending $1.2 trillion more than it is taking in.

Whether you support it or not, the president's tax plan is a political strategy, not an economic one. It will have virtually no bearing on the federal deficit or our ability to finance current spending levels.

The Republican presidential candidates have unveiled tax plans that are just as divorced from reality. They say they'll make the Bush tax cuts permanent while also eliminating the deficit. If you believe that, I've got a bridge to sell you. Republicans who emphasize economic freedom would have a lot more credibility if they'd stop promising a free lunch. Any candidate who says we can cut taxes and balance the budget is either delusional or dissembling.

Both parties' candidates are also promising major reductions in spending. But there's one small catch: They don't have the courage to tell the public which programs they'll cut, and how they'll reduce entitlement spending, to balance the budget.

This is a problem not just for voters but for businesses. Nearly every CEO and business leader I speak with says virtually the same thing: They are hesitant to make major investment decisions until they know how Washington intends to grapple with its huge deficits. That uncertainty is a major drag on job creation because the price of uncertainty for business is paralysis. Companies with healthy balance sheets that could be creating jobs are sitting on the sidelines, waiting to see if the federal government will begin increasing market stability by reducing long-term deficits.

If the federal government passed a real deficit-reduction plan, business leaders would respond as they did in the 1990s, when President Clinton and Congress adopted a long-term deficit-reduction plan that gave businesses more certainty about the market. A serious deficit-reduction plan that both increases revenues and reduces expenditures would be the most effective economic stimulus plan Washington could adopt.

As the two parties sketch out their general-election campaign platforms, both should commit to a reasonable and responsible goal—closing the deficit in 10 years. Even given Washington's current dysfunction, this can be achieved through a simple two-step process: The president can declare that he will allow the Bush tax cuts to expire for all income levels, and Congress can take an up-or-down vote on the Simpson-Bowles deficit-reduction plan, as a bipartisan group of House centrists will propose this week. That plan calls for $4 trillion in savings by capping discretionary spending, slowing the growth of entitlement costs including Social Security, and raising revenue through tax reform.

I believe there is enough support in both parties and both houses to pass Simpson-Bowles. And the American people deserve to know, before the November election, where their representatives—and the candidates for president—stand on it.

The era of something for nothing must end if we are to get our country back on track. The nominee who is more willing to tell that truth to the American people will win the election.

Mr. Bloomberg is mayor of New York City.

"The Real Causes of Income Inequality: Any analysis of taxes paid in high tax-and-spend countries shows that the U.S. has the most progressive income tax system in the world," by Phil Gramm and Steve McMillan, The Wall Street Journal, April 5, 2012 ---

In the stagnant days of the Carter administration, when inflation was approaching 13.5% and interest rates were peaking at 21.5%, income was more evenly distributed than in any period in 20th-century America. Since the days of that equality in misery, the measured income of the top 1% of income tax filers has risen over three and a half times as fast as the income of the population as a whole.

This growth in income inequality is largely the result of three dynamics:

1) Changes in the way Americans pay taxes and manage their investments, which were a direct result of reductions in marginal tax rates.

2) A dynamic shift in the labor-capital ratio, resulting from the adoption of market-based economies around the world.

3) The flourishing of economic freedom and technological advances in the Reagan era, which were the product of lower tax rates, a reduced regulatory burden, and an improved business climate. These changes have not only raised the measured income of the top 1%, they benefited the nation and the world.

While income distribution has become a source of protest and political debate, any analysis of taxes paid in high tax-and-spend countries shows that the U.S. has the most progressive income tax system in the world. An inconvenient truth for the advocates of higher taxes on America's rich is that big governments in developed countries are funded not by taxing the rich more than the U.S. does, but by taxing everybody else more.

In 1986, before the top marginal tax rate was reduced to 28% from 50%, half of all businesses in America were organized as C-Corps and taxed as corporations. By 2007, only 21% of businesses in America were taxed as corporations and 79% were organized as pass-through entities, with four million S-Corps and three million partnerships filing taxes as individuals. By reducing personal tax rates below the level of the corporate rate, the Tax Reform Act of 1986 dramatically influenced how entrepreneurs structure businesses.

This has had a profound effect on what is now measured as the income of the top 1%, since a significant amount of what is now declared as personal income is actually income from businesses that are now taxed as individuals.

In 1986, just 5.6% of the income of top 1% filers came from business organizations filing as Sub-chapter S-Corps and partnerships. By 2007, almost 19% of income declared on tax returns filed by the top 1% came from business income. A significant amount of income that critics claim is going to John Q. Astor actually is being earned by Joe E. Brown & Sons hardware store.

The reported income of the top 1% also significantly increased as tax rates on capital gains were lowered, first under President Bill Clinton and then under President George W. Bush. At a top tax rate of 28%, realized capital gains were 2.5% of GDP and made up 17.7% of the income of top 1% filers. As the top tax rate fell to 20% in 1997 and 15% in 2003, realized capital gains rose to 4.6% and then to 5% of GDP. The percentage of the income of top 1% filers coming from capital gains grew to 26% in the 1997-2002 period and 28.1% during 2003-07.

By reducing the penalty for transferring capital from one investment to another, these lower tax rates increased the mobility of capital. High-income taxpayers sold more assets, declared more income, and paid more taxes.

Similarly, when the tax rate on dividends fell to 15% in 2003, dividend income for the top 1% grew 178% by 2007 to make up 5.6% of the income of these filers. In 2007, immediately prior to the recession, capital gains and dividend income combined was equal to the amount of salary, bonus and exercised stock options earned by the average top 1% filer.

Lower tax rates made dividend-paying stocks more attractive to high-income investors and made dividend payouts more attractive for companies that would have previously retained those earnings or bought back their stock. Capital trapped in companies with below-market rates of return was redeployed and the entire economy benefited.

All of this has had a huge impact on the measured income of the top 1% and the growth in income inequality. This impact can be estimated by examining what would have happened to the income of the top 1% if tax rates had not been lowered and these economic transformations had not occurred.

If the share of income coming from businesses, capital gains and dividends had remained at the levels before the tax rate changes of 1986, 1997 and 2003 respectively, the income of top 1% filers would have been 31% lower in 2007. The growth in income since 1979 for top 1% filers would have been only 2.5 times as large as the income growth of all taxpayers—not 3.6 times as large.

More businesses would have remained C-Corps and been taxed as corporations, fewer assets would have been sold and thus fewer capital gains would have been declared, and fewer dividends would have been paid. All of this would have lowered the income declared by the top 1%. Economic growth would have been lower and aggregate measured income of all taxpayers would have fallen, but the distribution of income would have been flatter.

The growing participation of China, India, Brazil, Russia and Turkey in the world economy has also affected income inequality. The vast expansion of labor engaged in world commerce has raised the return on capital and reduced the relative return on labor. The share of income flowing to capital—both traditional and human capital such as education and training—has risen.

In relative terms, the return to unskilled labor has fallen. Short of a crippling reversal in world trade, which would reduce the value of both labor and capital, this effect will dominate world markets for the foreseeable future. Since high-income Americans own more capital and have higher levels of education and training, their incomes have grown faster than everyone else's.

The flowering of talent from the expanded freedom and technological progress ushered in by the Reagan era has also played a role. Inequality is a natural result of the expansion of liberty and the development of new technology and new products. Henry Ford, Andrew Carnegie, Sam Walton and Bill Gates caused the income distribution to become more uneven, but they enriched the world.

To vilify success and the rewards it garners is an assault not just on capitalism but on liberty itself. As Will and Ariel Durant observed in "The Lessons of History" (1968), "freedom and equality are sworn and everlasting enemies, and when one prevails the other dies . . . to check the growth of inequality, liberty must be sacrificed."

Nowhere is the political debate over income inequality more detached from reality than the call for the top 1% of American income earners to pay their "fair share." The Organization for Economic Cooperation and Development (OECD) data on the ratio of the share of income taxes paid by the richest taxpayers relative to their share of income show that the U.S. has the world's most progressive tax burden.

The top 10% of earners in the U.S. pay 35% more of the income tax burden than in Sweden and 22% more than in France. These figures—from the 2008 OECD publication "Growing Unequal?"—include all household taxes imposed on income at the federal, state and local level, including social insurance taxes.

In an eternal irony unique to large welfare states, it is the expansion of government in the name of the poor and middle class that always costs poor and middle-class families the most. When the U.S. collects 16.1% of GDP in income taxes, the top 10% of taxpayers pay 7.3% and the other 90% pick up 8.9%.

In France, however, they collect 24.3% of GDP in income taxes with the top 10% paying 6.8% and the rest paying a whopping 17.5% of GDP. Sweden collects its 28.5% of GDP through income taxes by tapping the top 10% for 7.6%, but the other 90% get hit for a back-breaking 20.9% of GDP.

If the U.S. spent and taxed like France and Sweden, it would hardly affect the top 10%, who would pay about what they pay now, but the bottom 90% would see their taxes double.

Since OECD members have significantly higher consumption taxes on average than the U.S., the total tax burden of bigger government is even more heavily borne by lower-income citizens in developed nations than these numbers suggest.

The real and alarming message in these OECD numbers is that there appear to be limits in the real world to how much tax blood can be extracted from rich turnips. With much higher marginal income-tax rates, countries that are clearly willing to soak the rich have proven to be incapable of doing so.

Continued in article

"Clock Ticks on U.S.'s Fiscal Time Bomb," by David Wessel, The Wall Street Journal, March 28, 2012 ---

Pundits and pollsters speculate hourly on the outcome of the next Republican presidential primary. Business executives and investors increasingly focus on whether Congress and the president will defuse the fiscal time bomb they have built—or whether they will be so paralyzed that the bomb will go off at year-end.

Without congressional action before Dec. 31, here's what happens:

A payroll-tax holiday ends, which means a tax increase for workers of as much as 2% of wages.

Income-tax rates revert to pre-George W. Bush levels, rising not only for the rich but for nearly all taxpayers.

Across-the-board cuts in domestic and, particularly, defense spending are triggered.

The federal debt bumps up against the legal ceiling, at some point yet to be determined, reviving confidence-rattling headlines about a potential U.S. default.

That's just a partial list. Federal Reserve Chairman Ben Bernanke calls this "a massive fiscal cliff." Abrupt tax increases and spending cuts, which together would equal roughly 3.5% of the nation's gross domestic product, would devastate an economy not fully recovered from a deep recession.

No one in Washington wants that. The rule of thumb is that if no one in Congress or the White House wants something, politicians will find a way to prevent it. But these days, well, you never know. There are three possible outcomes:

Scenario One: The grand compromise.

One reason this is politically tough is that there is no pain-free deficit cure. With a lid on annually appropriated spending, most Republicans' answer to long-term deficits is to cut future benefits from what they would otherwise be. The Democrats' answer is to cut benefits and raise taxes. Resolving that disagreement is key.

If Mitt Romney or another Republican wins the White House, congressional Republicans won't flinch on taxes in a lame-duck session. And if Barack Obama is re-elected and Republicans lose some seats in the House? Would an emboldened Mr. Obama and chastened Republicans cut a deal? Possible, but unlikely.

Just in case, though, the deficit-reduction lobby and sympathetic members of Congress are drafting plans. To make a point, a small bipartisan bunch is putting one tax-hike-and-spending-cut plan to a vote in the House this week.

Odds: 25%.

Scenario Two: A standoff.

If neither side wins big in November, Congress may be unable to pass legislation that defuses the time bomb—unless a measure hitches a ride to must-pass legislation to, say, lift the federal debt ceiling or avert a government shutdown.

If lawmakers can't agree, then taxes will go up and spending will be cut across the board. Then Congress and the president (the re-elected one or a new one) would negotiate from a new starting point, softening the blow retroactively. This has been done before, but it's unsettling and messy, and adds to already more-than-ample uncertainty.

Odds: 25%.


Scenario Three: Kick the can down the road.

Faced with unappealing alternatives, Congress is always tempted to look for a way out. The obvious one: Suspend the tax increases and across-the-board spending cuts for a time, declaring they would endanger the economy and national security. Promise—really, truly—to fix the deficit later. No one will advocate for this in advance, but at year-end, particularly if the economy isn't doing well, a six- or nine-month delay will be appealing.

To save face, this probably would be paired with another legislated commitment to deal with the deficit later. That may be expedient, but it won't help rebuild public trust. After all, Congress set these Dec. 31 deadlines last August to try to force its own hand.

Odds: 50%.


All these odds will change before year-end.

It matters who wins in November, and how decisively. A sweep by either party lifts the odds that its approach will prevail and reduces the odds of gridlock.

Continued in article

"Four Numbers Add Up to an American Debt Disaster," by Caroline Baum, Bloomberg, March 28, 2012 ---

Consider the following numbers: 2.2, 62.8, 454, 5.9. Drawing a blank? Not to worry. They don’t mean much on their own.

Now consider them in context:

1) 2.2 percent is the average interest rate on the U.S. Treasury’s marketable and non-marketable debt (February data).

2) 62.8 months is the average maturity of the Treasury’s marketable debt (fourth quarter 2011).

3) $454 billion is the interest expense on publicly held debt in fiscal 2011, which ended Sept. 30.

4) $5.9 trillion is the amount of debt coming due in the next five years.

For the moment, Nos. 1 and 2 are helping No. 3 and creating a big problem for No. 4. Unless Treasury does something about No. 2, Nos. 1 and 3 will become liabilities while No. 4 has the potential to provoke a crisis.

In plain English, the Treasury’s reliance on short-term financing serves a dual purpose, neither of which is beneficial in the long run. First, it helps conceal the depth of the nation’s structural imbalances: the difference between what it spends and what it collects in taxes. Second, it puts the U.S. in the precarious position of having to roll over 71 percent of its privately held marketable debt in the next five years -- probably at higher interest rates. First Among Equals

And that’s a problem. The U.S. is more dependent on short- term funding than many of Europe’s highly indebted countries, including Greece, Spain and Portugal, according to Lawrence Goodman, president of the Center for Financial Stability, a non- partisan New York think tank focusing on financial markets.

The U.S. may have had a lot more debt in relation to the size of its economy following World War II, but the structure was much more favorable, with 41 percent maturing in less than five years, 31 percent in five-to-10 years and 21 percent in 10 years or more, according to CFS data. Today, only 10 percent of the public debt matures outside of a decade.

Based on the current structure, a one percentage-point increase in the average interest rate will add $88 billion to the Treasury’s interest payments this year alone, Goodman says. If market interest rates were to return to more normal levels, well, you do the math.

Some economists have cited the Treasury’s ability to borrow all it wants at 2 percent as an argument for more fiscal stimulus. Why not, as long as it’s cheap?

Goodman says the size of the deficit (8.2 percent of gross domestic product) or the debt (67.7 percent of GDP) is only part of the problem. The bigger threat is rollover risk: “the same thing that got countries from Portugal to Argentina to Greece into trouble,” he says. “It’s the repayment of principal that often provides the catalyst for a market event or a crisis.”

The U.S. is unlikely to go from all-you-want-at-2-percent to basket-case overnight. That said, policy makers would be wise to view recent market volatility as a taste of things to come.

Talking to Goodman, I was reminded of the Treasury’s standard sales pitch before quarterly refunding operations during periods of rising yields. Some undersecretary for domestic finance would be dispatched to tell us that Treasury expected to have no trouble selling its debt.

I had an equally standard response: At what price?

That seems particularly relevant today. The Federal Reserve purchased 61 percent of the net Treasury issuance last year, according to the bank’s quarterly flow-of-funds report. That’s masking the decline in demand from everyone else, including banks, mutual funds, corporations and individuals, Goodman says.

Of course, Fed Chairman Ben Bernanke might look at the same numbers and see them as a sign of success. His stated goal in buying bonds is to lower Treasury yields and push investors into riskier assets.

Free to Borrow

Then there’s the distortion in the relative value of stocks versus bonds to worry about. Using the 10-year cyclically adjusted price-earnings ratio and the inverse of the 10-year Treasury yield, Goodman says the relationship hasn’t been this out of whack since 1962.

Continued in article

Video on the History of Debt
"Debt: The First 5,000 Years," by Paul Kedrosky , Kedrosky.com, September 10, 2011 --- Click Here

Bob Jensen's threads on entitlements and debt ---

"A Far-Off Island Where the American Dream Curdles," by Janet Maslin, The New York Times, March 25, 2012 --- 

The American Dream ---

From The Wall Street Journal Accounting Weekly Review on March 30, 2012

Tax Breaks Exceed $1 Trillion: Report
by: John D. McKinnon
Mar 24, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com WSJ Video

TOPICS: Tax Laws, Tax Reform, Taxation

SUMMARY: The article reports on a "...new report by the non-partisan Congressional Research Service [which] underscores how far-reaching..." are many of the most costly tax provisions in the U.S. tax code. As highlighted in the related video, these items are likely to become a focused issue in this election year. "House Republicans proposed in their new budget this week to reduce or eliminate an unspecified array of tax breaks in order to offset the costs of lowering top tax rates for both corporations and individuals to 25% from the current 35%." President Obama proposed reducing the top corporate tax rate only, from 35% to 28%, with corresponding proposals to eliminate certain corporate tax breaks, such as deductibility of the cost of corporate jets and tax treatment of foreign earnings.

CLASSROOM APPLICATION: The article is useful to summarize the types of items considered to be "tax breaks," and the current, election-year proposals to simplify the U.S. tax code.

1. (Introductory) Who produced the report on which this article is based? How do you think the information was obtained?

2. (Introductory) Why is this report useful in considering ways to overhaul the U.S. tax code?

3. (Advanced) What kinds of items are characterized as "tax breaks" in the document on which this article reports?

4. (Advanced) Specifically describe the tax treatment of each of the items listed in the graphic entitled "Popular Provisions." Who benefits from each of these items?

5. (Advanced) Based on your answer to question 2, explain why "House Republicans dismissed the report's significance saying it only confirms that overhauling the tax code will be politically challenging."

Reviewed By: Judy Beckman, University of Rhode Island


"Tax Breaks Exceed $1 Trillion: Report," by: John D. McKinnon, The Wall Street Journal, March 24, 2012 ---

A congressional report detailing the value of major tax breaks shows they amount to more than $1 trillion a year—roughly the size of the annual federal budget deficit—and benefit wide swaths of the population.

The figures could be useful to lawmakers of both parties and President Barack Obama, who are looking for ways to shrink future deficits and offset the anticipated cost of overhauling the much-criticized U.S. tax code, an effort likely to include tax-rate cuts. Both parties are looking to trim or eliminate tax breaks to achieve those goals.

Mr. Obama has suggested eliminating breaks for corporate jets and oil and gas companies to reduce deficits. He also has raised the possibility of reducing tax breaks for U.S. multinationals that ship jobs overseas, as a way to offset the cost of lowering the corporate tax rate to 28% from the current 35%. Research Report


House Republicans proposed in their new budget this week to reduce or eliminate an unspecified array of tax breaks in order to offset the costs of lowering top tax rates for both corporations and individuals to 25% from the current 35%.

The new report, by the nonpartisan Congressional Research Service, underscores how far-reaching many of the tax breaks are, which makes changing them a politically daunting task.

They include the exclusion from taxable income for employer-provided health insurance, the biggest break, at $164.2 billion a year in 2014; the exclusion for employer-provided pensions, the second-biggest, at $162.7 billion; and the exclusions for Medicare and Social Security benefits.

Other big breaks include the mortgage-interest deduction, third-largest; taxing capital-gains income at lower rates than other income; the earned-income credit for the working poor; and deductions for state and local taxes.

The report, citing political opposition, technical challenges and other reasons, said that "it may prove difficult to gain more than $100 billion to $150 billion in additional tax revenues" by eliminating tax breaks. That likely would leave little for reducing tax rates, perhaps only enough for one or two percentage points in the top individual rate, while maintaining the same level of revenue, the report said.

Continued in article

Jensen Comment
I'm suspicious that this greatly underestimates the so-called "tax breaks" by not mentioning exclusions from revenue. For example, hundreds of billions of interest  revenue from municipal bonds are excluded from taxable revenue (federal). Many types of life insurance payments are tax exempt. Clerics get some generous exemptions for housing allowances. And there are capital gains exemptions in Roth IRAs and scores of other exclusions.

The SEC is doing a big favor for tort lawyers

The SEC prides itself on ensuring that U.S. markets are transparent, but in ruling out arbitration it has said no without any explanation. The matter deserves a fair hearing.
"The Alternative to Shareholder Class Actions:  The SEC blocks arbitration without any explanation," by Hal Scott and Leslie Silverman, The Wall Street Journal, April 1, 2012 ---

Last month, the Securities and Exchange Commission rejected attempts by the Carlyle Group, and proposals by stockholders of Pfizer and Gannett, to mandate arbitration rather than litigation in disputes between investors and management. The SEC gave no explanation for its action on Carlyle (related to an upcoming public offering), and it said opaquely the Pfizer and Gannett proposals might violate the securities laws.

Arbitration has opponents inside the agency, of course, and among plaintiffs lawyers. They claim stockholders will receive less for management wrongdoing, and that this will lead to less deterrence of such wrongdoing. But this argument ignores some important facts. And it does not address the problem identified by the Committee on Capital Markets Regulation—that securities class-action litigation may be the most burdensome feature of U.S. capital markets.

From 2000 through 2011, the total value of all U.S. securities class-action settlements was approximately $64.4 billion, according to NERA Economic Consulting. These settlements do little to accomplish the class action's traditional goals of compensation and deterrence.

Unlike mass tort litigation, securities class actions involve stockholders who are often both plaintiffs and investors in the defendant corporation. The suits are invariably settled before trial, generally for pennies on the dollar. Small investors recover so little they often do not bother to file for their money: 40%-60% of settlement funds generally go unclaimed, according to research prepared for the Committee on Capital Markets. Regardless, plaintiffs attorneys take up to 35% of the total settlement.

The lawsuits do little to deter wrongdoing. The stockholders funding a settlement generally have no knowledge of management misdeeds—they simply held the wrong stock at the wrong time. Managements—the actual wrongdoers and proper objects of deterrence—rarely pay a dime, as the corporation's directors' and officers' insurance picks up the settlement cost.

Real deterrence comes from whistleblowers and the media, whose reports of fraud send share prices plunging. Deterrence also comes from the strongest public-enforcement system in the world—administered by the Department of Justice, the SEC and the state officials.

Securities class actions undercut the competitiveness of the U.S. capital markets. Plaintiffs attorneys have demonstrated a clear tendency to target the largest public companies, and because insurance firms will not provide settlement coverage over a few hundred million dollars, public companies face substantial risk. Further, foreign corporations are reluctant to list and trade here, while private U.S. corporations have grown wary of going public.

In 2011, 7% of U.S. companies that did go public did so abroad. They were no doubt motivated in part by the litigiousness they can avoid under the Supreme Court's decision in Morrison v. National Australia Bank (2010), which does not permit securities claims by private plaintiffs for shares purchased or sold on a foreign exchange. Historically, it was almost unheard of for American companies to go public outside the U.S.

It does not have to be this way. Companies and their stockholders have recently begun exploring mechanisms by which disputes must be settled in individual, private arbitration, taking advantage of the lower costs and quicker results such arbitration affords. They are following the national policy in favor of arbitration embodied in the Federal Arbitration Act of 1925 and confirmed by the Supreme Court in AT&T Mobility v. Concepcion (2011), which struck down a California anti-arbitration law. Other important Supreme Court cases include Rodriguez de Quijas v. Shearson American Express (1989), which held that arbitration does not violate federal securities laws that prohibit waivers of substantive rights guaranteed by law, such as anti-fraud provisions.

Despite arbitration's endorsement by Congress and the Supreme Court, the SEC has rebuffed efforts to substitute arbitration for securities class actions. So in the recent cases cited above, investors—prospective, in the case of Carlyle, and existing, in the case of Pfizer and Gannett—were deprived of the opportunity to decide upon the dispute-resolution procedure they preferred.

The SEC prides itself on ensuring that U.S. markets are transparent, but in ruling out arbitration it has said no without any explanation. The matter deserves a fair hearing.

Continued in article

Jensen Comment
Mary Shapiro's SEC repeatedly brings down tiny and insignificant punishments on wrongdoers. My guess is that she fears arbitrators will be too tough on wrongdoers that have a lot of clout with her bosses in Congress.

South Carolina Governor to be Indicted Not Indicted for Tax Fraud

"Haley indictment imminent? Stay tuned…," Palmetto Public Record, March 29, 2012 ---

Two well-placed legal experts have independently told Palmetto Public Record they expect the U.S. Department of Justice to issue an indictment against South Carolina Gov. Nikki Haley on charges of tax fraud as early as this week.

A highly ranked federal official has also privately confirmed rumblings of an investigation and possible indictment of the governor, though the official was not aware of the specific timeframe.

Yesterday, Palmetto Public Record exclusively reported that the Internal Revenue Service has been investigating since March of 2011 the Sikh worship center run by Gov. Haley’s father. At least five lawsuits have been filed against the Sikh Society of South Carolina since 2010, alleging that the group bilked contractors out of nearly $130,000 for the construction of a new temple.

Gov. Haley is reported to have managed the temple’s finances as late as 2003, and our sources believe any indictment would center on what happened to the missing money.

Palmetto Public Record will post a story later this afternoon detailing the temple’s shady finances and the governor’s possible involvement. Stay tuned…

Tax Prof Paul Caron later amended his blog with the following links on April 1, 2012 --- http://taxprof.typepad.com/

Following up on Friday's post, Report: DOJ to Indict SC Gov. Nikki Haley on Tax Fraud Charges:  Governor Haley's office obtained this letter from the IRS.

The Palmetto Public Record, the source of the original story, issued this curious response:

We're glad the IRS stated today that they apparently found nothing untoward regarding the temple's finances, and we're glad (as Haley spokesman Rob Godfrey says) the lengthy chapter regarding Gov. Haley's involvement seems to be closed. Since no normal person would have been able to get the IRS to send them such a letter within a day of these questions hitting the blogosphere, and since the IRS certainly didn't answer our phone calls, the only way to get an answer to our questions was by taking them to the public. ... [T]he IRS certainly sent Gov. Haley's chief of staff a letter quickly regarding a situation from which she claims to be so distant. ...

As journalists, all we can do is ask questions, and tell you what we see and hear. We're glad the latest IRS letter answers some of our questions, but it definitely doesn't answer all of them -- and it may create a few more once the chips are finished falling. Until these questions (and many other outstanding ethics questions regarding the way the governor's office operates) are answered, you can bet we'll continue to ask them.

Jensen Comment
It would seem that the Palmetto Public Record violated journalism ethics by not verifying rumors before making headlines about them.

Bob Jensen's Fraud Updates are at

I don't think this is an April Fools Joke
"The Countdown is Over. We’re #1 (in terms of high corporate tax rates): How the U.S. Has Fallen Behind by Standing Still on Corporate Taxes," by Scott A. Hodge, The Tax Foundation, April 1, 2012 ---

Roth IRA --- http://en.wikipedia.org/wiki/Roth_IRA

Jensen Warning
Deborah Jacobs may have overstated the case for a Roth IRA. Ordinary folks should not choose a Roth IRA without expert tax advice.

Remarkably, despite warnings of future large revenue losses, Congress has put no cap on the amount that can accumulate in a Roth IRA. Still, the Yelp shares in Levchin’s Roth do raise a legal issue. Tax rules bar you from investing your IRA or Roth IRA in a business you control—such a “prohibited transaction” can render the IRA immediately taxable and ­possibly subject to penalties.
Deborah L. Jacobs (see below)

"How Facebook Billionaires Dodge Mega-Millions In Taxes," by Deborah L. Jacobs, Forbes, March 20, 2012 ---

In 2010 Max R. Levchin, chairman of social review site Yelp, sold 3.1 million shares of Yelp held in his Roth individual retirement account. Most of the $10.1 million he received was profit. But Levchin, a 36-year-old serial entrepreneur who started PayPal with ­billionaire Peter Thiel in 1998, won’t ever have to pay a penny of income tax on those gains. That’s because all earnings in a Roth IRA are tax free so long as its owner waits until age 59 1/2 to take money out.

Moreover, Securities & Exchange Commission filings show Levchin still has 3.9 million shares of Yelp, now trading near $22, in his Roth. So it appears his tax-free “retirement” kitty is worth at least $95 million—and maybe a lot more. We don’t know, for example, if Levchin’s Roth owned stock in social app company Slide, which he started in 2004 and sold to Google for $182 million in 2010. If Levchin doesn’t spend his mega-Roth in retirement, he can leave it to his kids or grandkids, who can, under current law, stretch out income-tax-free growth and withdrawals for decades.

Levchin isn’t the only tech titan who’s got a shrewd tax advisor. Buried in recent SEC filings for Facebook, Zynga and LinkedIn are other examples of legal moves the ultrarich use to shield big dollars from the ­taxman. These techniques are available to the merely well-off, too, but they produce the most dramatic savings when executed early in a hot company’s—or hot entrepreneur’s—life.

How early? Facebook billionaire cofounders Mark Zuckerberg and Dustin Moskovitz are both 27, unmarried and have no children we know of. Yet back in 2008 they both set up grantor retained annuity trusts (GRATs) that we estimate will allow them to transfer a total of at least $185 million of wealth to future offspring or others, gift tax free. That compares to a supposed gift-tax exemption of just $1 million in 2008 and $5.12 million today.

Both the Obama Administration and congressional Democrats have proposed new limits on GRATs. Meanwhile, you may want to copy the social tech wizards, if you have high-growth investments to shelter.


Remarkably, despite warnings of future large revenue losses, Congress has put no cap on the amount that can accumulate in a Roth IRA. Still, the Yelp shares in Levchin’s Roth do raise a legal issue. Tax rules bar you from investing your IRA or Roth IRA in a business you control—such a “prohibited transaction” can render the IRA immediately taxable and ­possibly subject to penalties.

It’s clear that if you own a small business, your IRA or Roth IRA can’t invest in it. But what if you are chairman or CEO of a private firm with many investors and buy its shares for your Roth? SEC filings show that in 2001, while CEO of ­PayPal, tech investor Thiel bought 1.7 million shares of that company for 30 cents a share through his Roth. In 2002 eBay bought out PayPal for $19 a share—an apparent $31.5 million tax-free profit for Thiel. It also appears from a letter we discovered in a federal court case that some of Thiel’s early investment in Facebook was also through his Roth IRA. He now sits on Facebook’s board.

Is this kosher? FORBES has been told reward-seeking informants are filing claims with the IRS Whistleblower Office, flagging such transactions as improper. But IRA expert Noel Ice says it’s a gray area, with little IRS or court guidance. Buying closely held stock for an IRA is probably okay, he says, so long as the IRA’s owner doesn’t have—when all his investments are combined—voting control of that company. Levchin, Thiel and the IRS wouldn’t comment.

The lesson for ordinary folks? Put investments with the highest growth potential in your Roth. Note: If you do want to put nonpublicly traded stock in an IRA or a Roth IRA, you’ll generally need to use a special custodian who handles “self-directed” IRAs. (The big brokers, banks and mutual fund companies that hold most IRAs generally limit investments to publicly traded stock, bonds, mutual funds and bank CDs.) Levchin and Thiel have used San Francisco-based Pensco Trust Co. to hold their Roth IRAs.

The Facebook GRATs

Thanks to a 2000 Tax Court decision ­involving a member of the billionaire Walton clan, which founded Wal-Mart, it’s now possible to transfer large amounts of wealth to heirs gift tax free using a grantor retained annuity trust. The person who wants to transfer wealth (the grantor) puts shares into the ­irrevocable trust and retains the right to ­receive an annual payment back from the trust for a period of time—say, 2 to 15 years. If the grantor survives that period, any property left in the trust when the annual payments end passes to family members.

The key is this: In calculating how much value will be left at the end—and thus how big a gift the grantor is making—the IRS doesn’t look at the performance of the actual stock in the trust. Instead, it assumes the trust assets are earning a paltry government-determined interest rate. With a zeroed-out, or “Walton” GRAT, the grantor receives an annuity that leaves nothing for heirs—if assets grow only at the IRS’ lowly interest rate. If they grow faster, the excess goes to heirs gift tax free. (If assets don’t grow, the grantor is no worse off, because the annuity can be paid by returning some shares each year to the grantor.)

Continued in article

Case Studies in Gaming the Income Tax Laws ---

A Historic and Dysfunctional Alternative to Expensive Malpractice Claims

"Violent Crimes in China’s Hospitals Spread Happiness," by Adam Minter, Bloomberg, March 29, 2012 ---

Last Friday afternoon, Wang Hao, a young internist at the First Affiliated Hospital of Harbin Medical University in northeast China, was brutally murdered by a disgruntled patient. It was a spectacular crime, but it was not an unusual one: Violence against doctors, including murder, is commonplace and reportedly increasing. In 2006, the last year for which detailed records on patient-doctor violence was reported publicly (including violence perpetrated by patient family members and friends), the Chinese Ministry of Health stated that 5,519 medical personnel had been “injured” in disputes -- a substantial increase over previous years. And on March 29, the China Daily cited an “official source” who said that in 2010, 17,000 violent incidents took place, affecting roughly 70 percent of all public hospitals in China.

Why so much violence against one of the caring professions? Chinese media, and microblogs, are filled with theories.

In 2007, Xinhua, the state-owned news agency, explained it as a function of “patients' families and friends [becoming] more likely to use violence to vent their rage over hospital errors.” There’s some truth to that. China lacks a credible and independent medical malpractice system to determine compensation for medical errors. But that’s just the beginning. The more critical issue relates to the comically low compensation medical professionals receive (the starting salary for a doctor is around $500 per month). To supplement their income, they legally receive commissions on prescriptions and medical services. On Thursday, Shanghai media reported that the city’s doctors also commonly notify funeral homes of impending patient deaths in exchange for kickbacks.

Chinese patients often enter a hospital prepared to pay bribes for the care that they need. I’ve personally witnessed a “tip” handed to a doctor in advance of a surgical procedure at a top Shanghai hospital. They can also be tricked into undergoing unnecessary but revenue-generating procedures. Three years ago, for instance, at another Shanghai hospital, I was told I should get a CT scan so as to better understand the causes of a sinus infection, and then asked to purchase a Percocet prescription to manage my pain. I didn’t need either. Combine this norm, however, with crowded waiting rooms, high and expensive hurdles to see specialists, and a pointed lack of means to civilly contest malpractice and one can see why resentment against the Chinese medical profession has boiled for decades.

Last Friday’s murder, even in the context of other Chinese patient-doctor murders, doesn’t reveal much about the scale of patient bitterness in China. That proof is provided by an astonishing online poll posted by People’s Daily, the official mouthpiece of the Chinese Communist Party, a few hours after news of the murder went viral in China. The now deleted survey (posted as an attachment to this article) asked readers to express their feelings about Wang Hao’s murder by clicking on emoticons symbolizing feelings ranging from anger (a red fuming face) to happiness (a yellow smiley face). Shockingly, of the first 6,161 readers to respond to the poll, 4,018 --- 65 percent -- chose happiness. Anger came in a distant second with 14 percent. The third choice, sadness (a teary, yellow face) received 6.8 percent.

Continued in article

Jensen Question
What do extreme alternatives of violence versus multi-million dollar malpractice recovery claims have in common?

Both can lead to physicians and hospitals refusing high risk medical services. For example, when Romney Care was implemented in Massachusetts it made obstetrics unprofitable to hospitals having to bear enormous expenses of obstetrics malpractice insurance. It's common for courts to pass on costly judgments in sympathy for parents who had a defective baby even though the hospitals and doctors did nothing wrong. As a result of not being able to cover expenses of malpractice insurance and lawsuit risks, quite a few hospitals in Massachusetts closed down their obstetrics services. They would probably do the same under risk of being damaged by disgruntled Chinese parents.

"How California's Colleges Indoctrinate Students: A new report on the UC system documents the plague of politicized classrooms. The problem is national in scope," by Peter Berkowitz at Stanford University, The Wall Street Journal, March 30, 2012 ---

The politicization of higher education by activist professors and compliant university administrators deprives students of the opportunity to acquire knowledge and refine their minds. It also erodes the nation's civic cohesion and its ability to preserve the institutions that undergird democracy in America.

So argues "A Crisis of Competence: The Corrupting Effect of Political Activism in the University of California," a new report by the California Association of Scholars, a division of the National Association of Scholars (NAS). The report is addressed to the Regents of the University of California, which has ultimate responsibility for governing the UC system, but the pathologies it diagnoses prevail throughout the country.

The analysis begins from a nonpolitical fact: Numerous studies of both the UC system and of higher education nationwide demonstrate that students who graduate from college are increasingly ignorant of history and literature. They are unfamiliar with the principles of American constitutional government. And they are bereft of the skills necessary to comprehend serious books and effectively marshal evidence and argument in written work.

This decline in the quality of education coincides with a profound transformation of the college curriculum. None of the nine general campuses in the UC system requires students to study the history and institutions of the United States. None requires students to study Western civilization, and on seven of the nine UC campuses, including Berkeley, a survey course in Western civilization is not even offered. In several English departments one can graduate without taking a course in Shakespeare. In many political science departments majors need not take a course in American politics.

Moreover, the evidence suggests that the hollowing of the curriculum stems from too many professors' preference for promoting a partisan political agenda.

National studies by Stanley Rothman in 1999, and by Neil Gross and Solon Simmons in 2007, have shown that universities' leftward tilt has become severe. And a 2005 study by Daniel Klein and Andrew Western in Academic Questions (a NAS publication) shows this is certainly true in California. For example, Democrats outnumbered Republicans four to one on University of California, Berkeley, professional school faculties; in the social sciences the ratio was approximately 21 to one.

The same 2005 study revealed that the Berkeley sociology department faculty was home to 17 Democrats and no Republicans. The political science department included 28 Democrats and two Republicans. The English department had 29 Democrats and one Republican; and the history department had 31 Democrats and one Republican.

While political affiliation alone need not carry classroom implications, the overwhelmingly left-leaning faculty openly declare the inculcation of progressive political ideas their pedagogical priority. As "A Crisis of Competence" notes, "a recent study by UCLA's prestigious Higher Education Research Institute found that more faculty now believe that they should teach their students to be agents of social change than believe that it is important to teach them the classics of Western civilization."

Some university programs tout their political presuppositions and objectives openly. The mission statements of the Women's Studies program at UCLA prejudges the issues by declaring that it proceeds from "the perspectives of those whose participation has been traditionally distorted, omitted, neglected, or denied." And the Critical Race Studies program at the UCLA School of law announces that its aim is to "transform racial justice advocacy."

Even the august American Association of University Professors—which in 1915 and 1940 published classic statements explaining that the aim of academic freedom was not to indoctrinate but to equip students to think for themselves—has sided with the politicized professoriate.

In 1915, the AAUP affirmed that in teaching controversial subjects a professor should "set forth justly without suppression or innuendo the divergent opinions of other investigators; he should cause his students to become familiar with the best published expressions of the great historic types of doctrine upon the questions at issue."

However, in recent statements on academic freedom in 2007 and 2011, the AAUP has undermined its almost century-old strictures against proselytizing. Its new position is that restricting professors to the use of relevant materials and obliging them to provide a reasonably comprehensive treatment of the subject represent unworkable requirements because relevance and comprehensiveness can themselves be controversial.

On the boundaries, they can be—like anything else. However, it is wrong to dismiss professors' duty to avoid introducing into classroom discussion opinions extraneous to the subject and to provide a well-rounded treatment of the matter under consideration. That opens the classroom to whatever professors wish to talk about. And in all too many cases what they wish to talk about in the classroom is the need to transform America in a progressive direction. Last year the leadership of AAUP officially endorsed the Occupy Wall Street movement.

Excluding from the curriculum those ideas that depart from the progressive agenda implicitly teaches students that conservative ideas are contemptible and unworthy of discussion. This exclusion, the California report points out, also harms progressives for the reason John Stuart Mill elaborated in his famous 1859 essay, "On Liberty": "He who knows only his own side of the case, knows little of that."

The removal of partisan advocacy from the classroom would have long-term political benefits. Liberal education equips students with intellectual skills valued by the marketplace. It prepares citizens to discharge civic responsibilities in an informed and deliberate manner. It fosters a common culture by revealing that much serious disagreement between progressives and conservatives revolves around differing interpretations of how to fulfill America's promise of individual freedom and equality.

It is certainly true that not all progressive professors intrude their politics into the classroom, but a culture of politicization has developed on campus in which department chairs and deans treat its occurrence as routine. "UC administrators," the California report sadly concludes, "far from performing their role as the university's quality control mechanism, now routinely function as the enablers, protectors, and even apologists for the politicized university and its degraded scholarly and educational standards."

In California, this is more than a failure of their duty as educators. It is also a violation of the law. Article IX, Section 9, of the California state constitution provides that "The university shall be entirely independent of all political or sectarian influence and kept free therefrom."

Continued in article

The report can be downloaded from

Jensen Comment
Partisanship in the classroom  is contrary to AAUP policy, especially in courses where politics is not part of the curriculum plan for those courses. However, that policy is mostly unenforced by the liberal AAUP leadership,

Professor Berkowitz fails to mention one of the main reasons why many left-leaning and right-leaning professors try to either leave partisanship politics out of the classroom. Partisanship indoctrination can be hazardous to teaching evaluations. For anecdotal evidence of this read some of the caustic comments sometimes found at the RateMyProfessor teaching evaluation site ---

At the above site I looked up some professors that I know have a reputation for injecting partisanship in their courses. Most of them paid a price for this by having caustic RateMyProfessor comments from some students turned off by this type of indoctrination in courses. Militant feminists also pay somewhat of a price for similar reasons.

Bob Jensen's threads on liberal bias in academe ---


"Looking for Solutions in a Rapidly Changing Health Care Environment," Knowledge@wharton, University of Pennsylvania, March 28, 2012 ---

While the U.S. health care system is not yet on life support, it remains a fragmented and unwieldy structure whose rising costs bear little relation to improvements in access or quality. This is despite the introduction of patient management programs, some restructuring of insurance models and efforts to adjust incentives for decision making all across the care continuum.

But during the keynote presentations and panel discussions at Wharton's 18th Annual Health Care Business Conference titled, "Innovation in a Changing Health Care Environment," the emphasis was on solutions. Participants analyzed some of the ways that individual companies are digging deep into the system to come up with approaches that rely on new technology, new business models and new marketing strategies.

Two keynote speeches served as thematic bookends to the day's discussions. The morning kickoff keynote by Glenn D. Steele Jr., president and CEO of Geisinger Health System, defined the scope of the problem in dollars and disease. Steele focused on the inverse relationship between cost and quality, citing several studies that found that more than 50% of health care spending in the U.S. is wasted or actually harmful. The conference ended with a keynote by Robert Pearl, president and CEO of The Permanente Medical Group, who stated that the survival of the U.S. depends on reining in health care costs. He challenged the audience to save the country from economic collapse by redesigning how health care is delivered and paid for.

Overall, conference presenters provided a ground-level view of what some of the problems, and solutions, look like in this transformative time.

Strategizing for Survival

The cost of health care is directly related to our larger national economic health, as noted by Pearl. "Our problems go back 40 years.... Costs have been rising 7% to 8% a year; health care is 18% of GDP this year, and it is set to double again, to 36% of GDP, by 2030.... That leaves no money for education, infrastructure, police and fire." The current players, he added, are strategizing for survival today because the trajectory is unsustainable, and change will come. "Currently, we are fragmented, piecemeal, paper-based and leaderless."

According to David Jones, Jr., chairman and managing director of Chrysalis Ventures, a private equity and venture capital firm, the days for tinkering around the edges are gone. "The provider side re-engineering is doomed to failure because of a fundamental governance problem. You heard in the keynote this morning that 40% to 50% of the money spent is useless or actually harmful to outcomes. All of the change initiatives are focused on solving it in an incremental way."

Jones described that as a "pants-on-fire problem.... I don't think there is a possibility in the world that a bunch of ungovernable non-profits with no motivation to change quickly will go after that problem. I think the solution ultimately -- like the Greek [economic bail-out] solution or the GM solution -- is that you must have restructuring in the traditional financial sense. Everyone talks about hospitals going bankrupt because of politics. That is nonsense. Bankruptcy is a restructuring, and the system is going to change dramatically."

This urgency, and a new economy driven by information technology, have created an environment in which change is happening no matter what laws are passed or what the courts uphold or overturn, conference participants stated.

"Good regulations, bad regulations: Change has thrown the pickup sticks into the air, and they will come down in other ways," Jones said. "The iPhones have taken over the world. More than 80% of doctors use an iPhone or a smartphone. You can't wall off change. The health plans are changing fast. As a venture capitalist, that is exciting stuff."

Aetna CEO Mark Bertolini told the conference that his firm is evolving into a health technology company with a big insurance vehicle attached. Bertolini discussed Aetna's competitors' similar investments in electronic health record software that is transforming the nature of the health insurance industry. "UnitedHealth recently announced its Optum healthcare cloud which is meant to be a collaboration platform. It's not Epic, it's not Cerner, it's not McKesson [referring to some of the dominant electronic health record software companies]. It's got a lot of resources behind it; it's got a lot of cash flow, and I think it's worth watching."

Jones of Chrysalis also referred to insurance company investments in software that are changing the way patients are cared for. As an example, he cited Humana's platform called Vitality, an incentive system to encourage individuals to make good choices about eating, exercising and other health issues. While the problems remain, solutions are starting to emerge either through creative new business models, technological advances or creative patient engagement initiatives, he said.

Recovering Costs

According to Jones, Congress did not offer true health reform with the passage of the Patient Protection and Affordable Care Act, but instead offered health insurance reform that will address how consumers pay for health care. "Health insurance is a dysfunctional, shrinking market on the private side. Plans aren't changing voluntarily; they are changing because their old business model was crushed and destroyed. We are getting rid of the chokehold that insurance brokers have on health care. An 8% to 12% commission goes to Joe Box-of-Donuts," he said, referring to the fact that health insurance brokers get a commission that is built into the cost of the price of health insurance. The regional health insurance exchanges (HIEs) that have been established under the Affordable Care Act eliminate health insurance brokers -- and their commissions - and allow patients to buy insurance directly from a pool of health plans, Jones added. "The health exchanges will drive out that cost and will focus on brand value."

By eliminating the insurance brokers -- the middle men in the system -- patients will focus on the value of the insurance product and choose a tool that works for their situation out of a menu of options offered through a health insurance exchange, Jones said. As direct consumers of health insurance, he added, patients will be required to ascend a learning curve about their options.

According to John Keith, a principal at Deloitte, "No matter how exchanges evolve, when consumers start looking at their local networks and what they are getting for their dollar, there will be chaos for a few years. There will be a period of adjustment as people realize they are responsible for those costs, and that will drive change down the road."

Providers and suppliers will compete for business in this new paradigm, where cost and quality are expected to be in alignment, said Keith. "This is truly an opportunity for real change. ACOs (Accountable Care Organizations) aren't anything new," Keith added, referring to the outcomes-based payment system being piloted by Medicare as mandated in the Patient Protection and Affordable Care Act. "Bundled payment systems have been around since DRGs (Diagnosis Related Groups), and there have been lots of revolutions, like HMOs (Health Maintenance Organizations). They all resulted in very minimal change. Fee for service abhorred information, but economic duress is causing price pressure, and it opens the door to an industry focused on value, and demands collaborative tools. We're going from a feudal system to a Renaissance."

Response to Consumers

Consumers as patients are still at the nexus of change, either as they gravitate toward providers who are convenient and effective, or as they learn to manage the health dollars that are spent, if not directly out of pocket, then on their behalf either by an employer or a government program, conference participants suggested. "People will behave like they do in normal consumer markets," said Ashish Kaura, a partner at Booz & Company. "What are the cornerstones of the consumer markets? Three things: One is value in product design, which is standardization and driven by what most people need. Two is simplicity: It must be easy to navigate to get the information you need. You don't want to spend five hours on the phone. Three is trust: The biggest value for payers today is trust."

Permanente's Pearl also noted the influence of consumers on the direction of health care. Consumer demands will need to drive innovation, since the current uncertainty in the regulatory and financial environment has many investors waiting on the sidelines for a clear signal, he said. "Find a single business able to achieve success if R&D and finance are fighting each other."

According to David Kirchoff, president and CEO of Weight Watchers, products like Weight Watchers' online tracking system -- which engages patients in their ongoing care -- have succeeded because they work: Patients use them, they get results and tackling obesity bends the cost curve down in a host of related diseases, especially diabetes.

"The challenges of obesity are complicated to solve," he added. "People have difficult choices surrounded by a sea of temptations. What's at stake? The future of the health care system. There is a strong link between obesity and diabetes. If you have a BMI (Body Mass Index) over 30, you are 500% more likely to have diabetes." Today, 10% of Americans have diabetes, he says. "By 2050, it is expected to be one-third. This is not a vanity [issue]. This is a health condition that is a function of the choices we make in our daily lives."

Ultimately, providers and suppliers -- the pharmaceutical and medical device companies -- will be required to prove their value in the marketplace or face extinction, according to conference panelists. Payment systems continue to move at accelerated speed toward a value-based model with payment for quality and outcomes, and move away from a fee-based system that simply pays for individual services or products for which there is no proof of efficacy. Due to this proof-of-concept stringency, the pharmaceutical sector is financially riskier than it used to be, but there is still opportunity. That means bio-pharmaceutical investors are keeping their wallets buttoned until later in the clinical trial process, panelists said during a discussion about the risks of biopharma investment.

Luke Duster, a principal at Capital Royalty, a private equity firm providing royalty-based financing to health care companies, reported that "last year, there were $90 billion in royalties [paid to biopharma investors]. There are late stage investment opportunities, but smaller companies are starved for cash flow because there is less investment in early stage. We are still raising capital, but only raising one-third as much as [we did] at the peak. Only the strongest are surviving."

Duster said he sees more cooperation between the FDA and industry to move products through the pipeline. He identified drugs with companion diagnostics as a growth area. Companion diagnostics represent an opportunity in that market segment because the diagnostic test identifies genetic markers and so takes the guesswork out of whether the drug will be effective in a particular patient with an identifiable genetic mutation. This assures outcomes and, by extension, guarantees the value of the product to the payer. In companion diagnostics, a genetic test is developed to identify whether a patient has a particular marker that indicates a specific drug will work in that patient -- thus the name "companion diagnostic" -- because the diagnostic is tied directly to the efficacy of one particular pharmaceutical product.

As to the role the FDA is playing in creating a risk-averse pharmaceutical sector, Ronald W. Lennox, a partner with CHL Medical Partners, a venture capital firm that focuses on seed and early-stage companies in the medical sector, said it is the FDA's own aversion to clinical risk that is trickling down to investors. "FDA approvals ought to be a balance of risk and benefit. If one million people benefit from a drug, how many shouldn't? Are we willing to risk one adverse event? We are tilting toward no adverse events at all, with little regard to patients who will benefit. Partly it is because of the litigious U.S. population and partly because we have trials on a small population and we try to extrapolate from 2,000 clinical trial patients to millions of patients. That is hard to do."

Finding that Magic Mix of Providers

Panelists discussed the way that transformed payment models based on outcomes are half of a solution; it is incumbent on providers to transform what the payers are paying for. Moving from a fee for service system where a product or service is paid because it was delivered to an individual patient, to an outcomes-based value model -- where the payment is determined by overall performance delivered at a population level -- requires systems to generate the metrics to support reimbursement, panelists noted.

Emad Rizk, president of McKesson Health Solutions, talked about what that looks like from a provider's perspective. "Down here at the execution level, it is ugly. So let's just look at where delivery systems can go. Supposedly, you have managed populations, which means you have to have the data. You have to stratify; you have to put processes together to intervene, measure outcomes and then demonstrate those outcomes. Then you have to go show the payer that you did it.

Continued in article

Hi Zafar,

By now I'm used to your innuendos and  insults of my intelligence. My issue with medical malpractice lawyers has zero to do with political party affiliation. I have two issues with lawyers. One is political in the sense that they traditionally vote in laws favorable to themselves whenever they dominate state and federal legislatures --- which most of the time.

My second issue with medical malpractice lawyers is that they prefer to work on a contingency fee basis in the punitive damages legal lottery. These same lawyers then play to the sympathies of judges and/or juries to award multimillion dollar sympathy settlements even when the medical service providers did absolutely nothing wrong. This, in turn, unfairly damages their reputations and in some instances drives them out of the medical service business such as when obstetricians either quit altogether or drop obstetrics from their OB/GYN combined practices.If you want one absurd case with a lot of skin in the game (even the plaintiff's lawyer conceded the initial $60 million awarded for loose skin was absurd) go to

The above two issues is at the heart of my disagreement with lawyers.
Firstly, lawyer-legislators made the legal system so complicated that in order to file a malpractice claim into the legal system you need to employ a lawyer.

Secondly, the lawyers prefer to be paid on a contingency fee bases such that in states like Texas that took the punitive damage legal lottery out of malpractice lawsuits, the lawyers must now charge on an hourly basis rounded upward by the week.

Insert Figure 1

When the lawyers charge on an hourly basis instead of playing a legal lottery, this hurts poor people who cannot afford even a few hours of law firm time. Hence, when the punitive damage, contingency fee lottery was taken out of the equation by constitutional amendment in Texas, many poor people cannot afford to file medical malpractice lawsuits.

Here's where I differ from Jagdish

I differ from Jagdish on the basis of who determines the settlements. In Finland and other parts of Europe, professional medical boards determine the settlements rather than the legal system.

Jagdish wants to leave lawyers in the malpractice claims business either on a contingency fee or hourly fee basis. I want to cut lawyers and the legal system out of the claims filing process and have the medical system deal directly with malpractice claims, thereby making it possible for poor people to file claims even when the state or nation does not have a punitive damages legal lottery.

My model is the malpractice claims process that modifies the Canadian process

In both Texas and Canada the punitive damages are severely capped to a point that the punitive damages legal lottery is taken out of the equation. But both systems require even poor people to pay up front investigation costs and filing fees.

I think investigation and filing fees should be paid for by the medical system as a shared cost spread among all medical service billing fees (which in Canada ultimately spreads it among taxpayers). There should be no up front cost for filing a claim, although the system might impose penalties of some sort for claims found to be fraudulent or frivolous.

This is not entirely the way it works in Canada at the moment.


"Canadian Malpractice Insurance Takes Profit Out Of Coverage," by Jane Akre, Injury Board, July 28, 2009 ---
Click Here

The St. Petersburg Times takes a look at the cost of insurance in Canada for health care providers.

A neurosurgeon in Miami pays about $237,000 for medical malpractice insurance. The same professional in Toronto pays about $29,200, reports Susan Taylor Martin.

A Canadian orthopedic surgeon pays just over $10,000 for coverage that costs a Miami physician $140,000. An obstetrician in Canada pays $36,353 for insurance, while a Tampa Bay obstetrician pays $98,000 for medical malpractice insurance.

Why the difference?

In the U.S., private for-profit insurance companies extend medical malpractice coverage to doctors.

In Canada, physicians are covered through membership in a nonprofit. The Canadian Medical Protective Association offers substantially reduced fees for the same coverage, especially considering that their payout is limited by caps in Canada just as in some U.S. states.

In 1978, the Canadian Supreme Court limited pain and suffering awards to just over $300,000, circumventing the opportunity for a jury to decide on an award depending on the case before them.

Canadian Medical Protective Association

Here’s how it works.

Fees for membership vary depending on the region of the country in which the doctor works and their specialty. All neurosurgeons in Ontario will pay the same, for example. The number of claims they have faced for medical malpractice does not figure into their premium

"We don't adjust our fees based on individual experience; it's the experience of the group,'' says Dr. John Gray, the executive director, "That's what the mutual approach is all about, and it helps keep the fees down for everyone,” he tells the St. Petersburg Times.

If a doctor is sued, the group pays the claim and provides legal counsel.

In the U.S., the push has been on for limiting claims, no matter how egregious the medical malpractice. President Obama was booed in June when, before the American Medical Association, he said he would not limit a malpractice jury award.

"We got a crazy situation where Obama is talking about the cost of medicine but he said, 'I don't believe in caps,' " complains Dr. Dennis Agliano, past president of the Florida Medical Association. "If you don't have caps, the sky's the limit and there's no way to curtail those costs.''

But the importance of limiting jury awards may not play into the big picture on health care reform.

Malpractice lawsuits amount to less than one percent of both the Canadian and the U.S. healthcare system, meanwhile between 44,000 and 98,000 Americans die each year due to medical errors in hospitals alone, while 16 times as many suffer injuries without receiving any compensation, reports the group Americans for Insurance Reform.

Major Difference

In Canada, an injured patient is often required to pay for the initial investigation into his case. In the U.S. the contingency fee basis, usually in the range of 30 percent, allows the injured party to proceed without a financial downside.

In both the U.S. and Canada, the definition of medical negligence is that a duty of care was owed to the patient by the physician, there was a breach h of the standard of care and the patient suffered harm by the physician’s failure to meet that standard of care.

A bad outcome in itself is not the basis of a lawsuit.

The Canadian Medical Protective Association insures virtually all of the country’s 76,000 doctors, as opposed to the U.S. where private for-profit insurance companies cover physicians for medical malpractice.

In Canada, the median damaged paid in 2007 was $91,999 and judgments favored patients 25 times, doctors 70 times.

In the U.S., many physician groups are requiring patients to waive their rights to a jury trial, even though malpractice litigation accounts for just 0.6 percent of healthcare costs.

Public Citizen, the consumer group, charges that the facts don’t warrant the “politically charged hysteria surrounding medical malpractice litigation.”

For the third straight year, medical malpractice payments were at record lows finds the group in a study released this month. The decline, however, is likely due to fewer injured patients receiving compensation, not improved health safety.

2008 saw the lowest number of medical malpractice payments since the federal government’s National Practitioner Data Bank began compiling malpractice statistics. In 2008, payments were 30.7 percent lower than averages recorded in all previous years.

In the report titled, The 0.6 Percent Bogeyman, the nonprofit watchdog group states, “between three and seven Americans die from medical errors for every 1 who receives a payment for any type of malpractice claim.”

Public Citizen previously reported that about five percent of doctors are responsible for half of the medical malpractice in the U.S. that can result in permanent injury or death. #

Read more:

Bob Jensen's threads on health care ---


On November 22, 2009 CBS Sixty Minutes aired a video featuring experts (including physicians) explaining how the single largest drain on the Medicare insurance fund is keeping dying people hopelessly alive who could otherwise be allowed to die quicker and painlessly without artificially prolonging life on ICU machines.
"The Cost of Dying," CBS Sixty Minutes Video, November 22, 2009 ---

What is hypocritical is that most families only want to keep Granny alive only when Medicare will pay. The instant Granny's estate will have to bear the cost these hypocrites instantly agree to pull Granny off life support.

What is really sad is the way Republicans are standing in the way of making rational cost-benefit decisions about dying by exploiting the "Kill Granny" political strategy aimed at killing a government option in health care reform.
See the "Kill Granny" strategy at --- www.defendyourhealthcare.us



"Providential Design A study shows that Medicaid reform is working in Rhode Island," The Wall Street Journal, April 5, 2012 ---

In his parade of Republican horribles, President Obama poured special scorn this week on the idea of handing Medicaid to the states with a fixed annual federal payment. He says it wouldn't save money without hurting "poor children" and "middle-class families who have children with autism and Down's Syndrome." Someone needs to tell Mr. Obama about the results of Medicaid reform in Rhode Island.

The experiment dates to the final days of the Bush Administration, when Health and Human Services granted a Global Consumer Choice Waiver exempting Rhode Island from many of Medicaid's federal rules and mandates. The state used it to move to managed care from traditional fee for service, in return for accepting a spending cap over five years of $12.1 billion, including federal matching payments.

How's that working out? Well, a study released late last year by the Lewin Group, a consulting firm, found that the Ocean State's reform with a federal waiver has been "highly effective in controlling Medicaid costs" and improving "access to more appropriate services."

Rhode Island's Medicaid spending, which had been projected to reach $3.8 billion, came in at $2.7 billion for the 18 months following the introduction of the waiver, according to Rhode Island's Office of Health and Human Services. The state benefited in part from one-time stimulus money, but it also saved money from such reforms as better case management by private insurers and competitive bidding for health-care providers.

For example, Lewin examined the state's shift to home and community-based care from nursing homes for long-term care patients. Lewin found the reform helped save $35.7 million over three years, $15 million in 2010 alone.

The Lewin study also "found evidence of lower emergency room utilization and improved access to physician services" from "care management programs" for Medicaid patients with asthma, diabetes, heart problems and mental health disorders. Emergency room care is a major driver of Medicaid costs.

The total savings from all of Rhode Island's reforms were more than $55 million—a big deal in such a small state. According to an analysis by Gary Alexander, who ran the Medicaid program in Rhode Island when the federal waiver was granted and who now serves as the Secretary of Public Welfare in Pennsylvania, if these savings were extrapolated for all 50 states, they would exceed $200 billion in lower Medicaid costs over the next decade.

These findings contradict predictions from liberal critics like the Center on Budget and Policy Priorities, which in 2008 called the Rhode Island waiver a "radical" and "perilous" plan that would hurt the poor. On quality of care, Lewin found that the waiver ensures that "Medicaid members in Rhode Island receive the right services, at the right time, in the right setting." In other words, Down Syndrome children are not roaming the streets of Woonsocket.

Not every Rhode Island idea has worked, and critics say some reforms may not be applicable to larger, more diverse, and less population-dense states like Texas. Perhaps so. But that's why letting 50 states tailor their own service-delivery reforms is the best model for controlling a program that cost the feds and states a combined $404 billion in fiscal 2010. State experimentation is how welfare was reformed so successfully in the 1990s.

Our guess is that President Obama's real objection to Medicaid black grants is political. He doesn't want Washington to lose control. He and most Democrats want to use Medicaid to cover as many people as possible as a way to pave the road to single-payer national health care. It's no accident that ObamaCare was written to add about 15 million more people to the Medicaid rolls, most of whom will be middle-income earners.

The nation's governors are looking at this imminent new burden in horror, and more than half of them have signed a letter pleading with the Obama Administration to give them less Medicaid money in exchange for fewer rules and mandates. Medicaid now costs the states $159 billion a year. Without reform the federal cost will double to $587 billion in 2021 from $274 billion last year, according to the Congressional Budget Office.

If the Obama Administration won't grant more waivers, then Republicans ought to investigate the Rhode Island results and educate the voters during this election campaign.



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Enron --- http://www.trinity.edu/rjensen/FraudEnron.htm

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Shielding Against Validity Challenges in Plato's Cave ---

·     With a Rejoinder from the 2010 Senior Editor of The Accounting Review (TAR), Steven J. Kachelmeier

·     With Replies in Appendix 4 to Professor Kachemeier by Professors Jagdish Gangolly and Paul Williams

·     With Added Conjectures in Appendix 1 as to Why the Profession of Accountancy Ignores TAR

·     With Suggestions in Appendix 2 for Incorporating Accounting Research into Undergraduate Accounting Courses

Shielding Against Validity Challenges in Plato's Cave  --- http://www.trinity.edu/rjensen/TheoryTAR.htm
By Bob Jensen

What went wrong in accounting/accountics research?  ---

The Sad State of Accountancy Doctoral Programs That Do Not Appeal to Most Accountants ---


Bob Jensen's threads on accounting theory ---

Tom Lehrer on Mathematical Models and Statistics ---

Systemic problems of accountancy (especially the vegetable nutrition paradox) that probably will never be solved ---

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