 
The Rise of the Insane State – What is Happening to the U.S. Economy?

Kenneth R. Szulczyk

The Rise of the Insane State – What is Happening to the U.S. Economy?

Copyright © 2009 by Kenneth R. Szulczyk

All rights reserved

Cover design by Kenneth R. Szulczyk

Published by Smashwords, ISBN: 9781466116344

Edition 6.0, December 2013

# Table of Contents

Forward

1. The Purpose of Government

Government Creates the Legal System

Economic Systems

Rapidly Expanding Government

The Optimal Size of Government

Conclusion

References

2. Crazy Laws

Above the Law

Corruption and Government

Dividing the People

Complicated U.S. Laws

Conclusion

References

3. Frivolous Lawsuits

Torts

Festering Growth of Attorneys

The Parasitic Class

Conclusion

References

4. Regulating Excessively

Parkinson's Laws

Government, Technology, and Urbanization

Problems of Regulations

Society's Costs of Regulations

Conclusion

References

5. Taxes Destroy Wealth

Taxes Alter Behavior

The Laffer Curve

Instability in State Government Financing

Property Taxes versus Income Taxes

Conclusion

References

6. Corrupt Police and Kangaroo Courts

The Race to Incarcerate

Administrating Justice

State Protection of Children

Conclusion

References

7. Eroding the Bill of Rights

Amendment I

Amendment II

Amendment III

Amendment IV

Amendment V

Amendment VI

Amendment VII

Amendment VIII

Amendment IX

Amendment X

Conclusion

References

8. Repeating History – The Roman Empire

The Roman Republic Rises

Birth of the Roman Empire

Roman Empire Begins Declining

Conclusion

References

9. The 2007 Great Recession versus the Great Depression

Prospering 1920s

The 1929 Stock Market Crash

The Banking System

Deflation

Farmers

Employment

Rising Taxes

Growing Government

Conclusion

References

10. Dissecting the 2008 Financial Crisis

Pushing for Homeownership

Mortgage Asset-Backed Securities

Collateralized Debt Obligations (CDOs)

Credit Default Swaps (CDS)

Conclusion

References

11. A Grim Future

Perpetual Bear Financial Markets

Fleeing Businesses

Excessively Enforcing the Laws

Growing Crime and Black Markets

Declining Civic Loyalty and Growing Political Corruption

Collapsing U.S. Dollar

Hyperinflation

Conclusion

References

# Forward

This book examines self-interest. Politicians, attorneys, bureaucrats, businessmen, and people do not look at government and think how to improve our laws, rules, and regulations. Instead, they analyze our legal system, devising and scheming how to benefit personally from the legal system.

Under a capitalistic system, profits drive self-interest. Thus, a person can use this simple rule to predict outcomes. A person just asks one question - how does one profit from this situation? On the other hand, government and public institutions rarely follow a profit motive. Whims, notions, beliefs, and prejudices guide their self-interest that constantly changes. If government evolves in a large controlling institution, it opens the doors to an insane asylum. Unfortunately, those doors flung violently opened in the 1990s in the United States as Americans witnessed the death of common sense. Hence, we arrive at the title of this book, "The Rise of the Insane State."

Ideas in this book are universal. As I travel more, I identify the same struggle between government and its people, which I find quite eerie. Although the names and places change, all governments behave similarly as all government officials control and dominate their people.

# 1. The Purpose of Government

"In this present crisis, government is not the solution to our problem, government is the problem..."

-Ronald Reagan

Since the dawn of civilization, humans gazed upward into the stars and heavens to search for the almighty God. God embodies the all-powerful being, who was the grand architect of the universe and created all life on Earth. From the heavens, God watches over his creation. Then men and women kneel down before God and whisper prayers. People believe God is listening. That God will intervene in their lives and answer their prayers with miracles.

Another powerful entity exists in society and lies at heart of our civilization. This entity has evolved into the second most influential force in nature. This should not surprise you because that entity is government. A government has immense power over its people. A government can imprison or execute its citizens, expropriate property, or send its army and navy to invade another country. A government intervenes in the daily lives of its citizens. It imposes laws, rules, and regulations over everyone in its domain while it collects taxes from its citizens. No other entity in our society has that power.

People place too much faith in their government. They ask government officials and politicians to save them, make our society better off, or correct an injustice. Unfortunately, our political leaders and government officials comply happily. Now, all levels of government in the United States meddle in all society's affairs. Our government shackled all our businesses, industries, and markets with numerous and confusing laws, regulations, and taxes.

The U.S. economy remains stuck and mired in a perpetual recession. Unemployment rate remains frozen at nearly 10%, and experts predicted a new recession in 2012. Many Americans believe capitalism failed them. Our political leaders remain in a state of denial as they keep fueling the size of our government. They refuse to reduce government spending in line with revenues, or reign in their crazy rules and regulations. They believe government must step in order to stop the economic decline.

Government cannot be a savior, and a government solution can never work. Only the American people can lift themselves out of this perpetual depression. However, Americans first need to remove the shackles of government control.

One premise you will get from this book that it is a terrible idea to keep expanding government. Government can do great things, but it can blunder badly too. Although a society needs a government, a large government creates many more problems than what it solves. Instead, government should encourage people to be entrepreneurs and work hard to lift themselves up. People should not depend on government for their livelihood and salvation.

We have an easy solution to our perpetual recession, and it entails two parts. First, keep the government's size the smallest as possible with limited power. An expanding government always creates more problems than what it solves. Each chapter in this book hones this simple fact. Second, religion is a critical component of society. Religions always impose constraints on human behavior. They become a source of values, morals, and ethics. Furthermore, many religions espouse hard work and family values. If 99% of the population followed a good religion, then society functions by itself without the guiding hand of government. People with strong pious values do not need government watching over them and meddling in their affairs. Thus, society runs itself.

## Government Creates the Legal System

Every society needs a government. Government establishes a legal system that glues society together. It influences how people work, save, and consume, and the level of freedom that people and businesses enjoy. The United States became the world's richest country because the founding fathers instituted a good legal structure that encouraged Americans to be independent, hard-working entrepreneurs. Our legal system allowed them to keep their fruits of labor. Consequently, free enterprise created America's immense wealth as the government stood on the sideline and let its citizens create and garner wealth.

A legal system is difficult to define. Best way in defining it is by comparing it to its opposite – chaos. Chaos prevents a society or an economy from forming. As people organize themselves, a legal system evolves that defines the rules, rights, and expectations of its citizens. Some entity elevates itself above its citizens, becoming the enforcer and protector of these rules, rights, and expectations. This enforcer and protector become the government. Government establishes the legal system and establishes the "rules of the game."

A government can create an excellent or a bad legal system. A good legal system helps citizens settle disputes, protects private property, and encourages citizens to interact harmoniously and peacefully. Furthermore, a good legal system encourages the growth and expansion of businesses. Thus, private enterprise increases a society's wealth. On the other hand, a bad legal system divides people, encourages rancor and hatred between groups, and creates overly complicated rules and laws. Hence, a bad legal system chokes and suffocates businesses, eventually annihilating society's wealth.

A legal system comprises the rules, practices, laws, regulations, customs, and habits of society. It always imposes limits and boundaries on human behavior but, at the same time, allow citizens to react together in predictable ways [1]. For example, zoning laws imposes limits on residential neighborhoods. One neighbor cannot build a factory in the center of a residential neighborhood. Hence, the residents of the neighborhood benefit. They do not worry about a factory's pollution, noise, and traffic. When a new person moves into the neighborhood, he or she expects no one will build a factory there. Although a legal system imposes limits on human behavior, a good legal system allows people to predict behavior and make future decisions.

Governments always change and tinker the laws, rules and regulations. When government changes the legal system, the change always creates winners and losers. Some citizens benefit while government penalizes the other citizens. For example, the government imposes a speed limit on drivers of cars and trucks. To the speeders, this law imposes a limit on their behavior. However, the roads become safer for other drivers and pedestrians as everyone drives at a lower speed. The trick is to change the law, so more people benefit than penalized. Therefore, a society grows and thrives if a government changes the laws and regulations prudently.

A good legal system requires equality, order, predictability, and stability.

**Equality:** Laws apply to everyone equally. If government granted a group preferential treatment, then the disadvantaged groups would view their government as capricious and corrupt. Furthermore, they could become bitter, lose faith in the legal system, and become criminals or violators. For example, if judges always ruled in favor of women for cases involving women versus men, then men would harbor acrid feelings against women and the court system. Current domestic violence and sexual harassment laws are dividing men and women in the United States. Equality has one necessary requirement – laws apply equally to the political leaders in government. Many members of Congress forget about this as they pass new laws exempting themselves [1].

**Order:** Legal system establishes order. Laws inform people how to interact with each other. Laws should be simple, clear, and comprehensible. Everyone with a shred of common sense could comply with them. Furthermore, government should keep the number of laws to a minimum. For example, the Ten Commandants are straightforward and concise. "Thou shall not steal," encompasses a wide variety of crimes. Stealing is stealing. It makes no difference whether a person steals someone's car or a person's identity to obtain credit. Unfortunately, the U.S. laws have become so complicated; the experts have trouble understanding them. If the experts cannot understand the laws, then how can Americans with no legal training understand them?

**Predictability:** Laws create predictability. When people know the laws and regulations, they can predict relationships and reduce their uncertainty. For example, if you agree to buy land, then you exchange cash for the deed. What would happen if you bought the land, where you exchanged cash for the deed, but the government did not transfer the title to your name? This example seems foolish, but this happens in Northern Mexico. Poorly defined property rights would hamper economic growth and development.

**Stability:** Legal system must be stable. For example, one morning after you awakened, the government changed all the laws and regulations. How would you know if you are complying with the new laws and regulations? Again, this example seems foolish, but the U.S. federal and state governments continually change the laws, rules, and regulations. Stability condition does not mean rules become rigid and fixed. As society changes, the rules and regulations for the legal system must keep pace with changes in society [2].

If laws create equality, order, predictability, and stability, then these laws are efficient. Examples of efficient laws include:

**Example 1:** A law forces everyone to drive on the same side of the road. Someone driving on the opposite side of the road could cause an accident, endangering the public.

**Example 2:** Laws protect people's private property. People work hard, so they can buy things with their salary. If a thief can steal a person's things with no legal consequences, then people have little incentive to work. Hard-working people would stop working and become thieves. Unfortunately, professionals within the U.S. legal system have become good at stealing legally from the people.

**Example 3:** Laws punish drunk drivers because alcohol impairs a person's ability to operate machinery properly. Thus, a drunk driver could injure, maim, or kill innocent bystanders while driving intoxicated.

Humans are opportunistic. Some must violate society's rules with the most severe violations being rape and murder. Therefore, a legal system must impose sanctions and punish violators [2]. Punishment informs people about the rules and regulations and encourages citizens to comply with the laws.

All legal systems have a severe flaw. They use a legal language that describes the circumstances and transactions of its citizens. As circumstances and society become more complicated, then the legal language becomes more complex, giving birth to new, more complicated rules, laws, and regulations [2]. Over time, a more complex legal system requires more bureaucrats and better-educated bureaucrats. Then government bureaucrats evolve into a dominant class in society. They can artificially expand their power and salaries by expanding the rules and regulations or create an overly complicated legal structure. This rising class of bureaucrats could aid the growth and intrusiveness of government, creating many problems for a society. Therefore, bureaucrats pursuing their self-interest can work against the economy, which destroys the people's incentive to create wealth.

## Economic Systems

Experts in economics and political science define two types of legal systems: socialism and capitalism. A socialistic government owns and controls all society's property, land, buildings, and machines. Socialistic governments do not use markets to direct economic activity. Instead, a central government committee determines production levels and prices, which they conveniently call "collective decision making." (They always think about the people). Then the state produces and distributes all goods and services to its citizens. Communism is the extreme form of socialism. Karl Marx believed society would evolve into its highest form – a society with no social classes or class struggles. However, the government must control all aspects of its citizens' lives and help in the transition towards this utopia. The Soviet Union adopted Communism while North Korea still uses Communism. Although the communists still control China and Cuba, the leaders are incorporating markets and private property into their societies.

_Laissez-faire_ capitalism is the opposite of communism. _Laissez_ _faire_ means let it be. People own all property, land, buildings, and machines, and then they produce and distribute goods and services to other citizens. Capitalism is synonymous with free markets because citizens use markets to transfer resources, goods, services, and property freely with little interference from government. Nevertheless, capitalism still needs a government! Government establishes the legal system or the "rules of the game."

Socialism has a problem - government wants everyone to be equal. The famous socialistic quote is, "From each according to his means, to each according to his needs." Unfortunately, this represents the antithesis of humankind's nature. Humans possess different talents, work ethics, and values. This inequality in human abilities always causes socialism to fail. For example, if a hard-working farmer produces 100 bushels of apples while a lazy one produces 20 bushels, then a socialistic government will take 40 bushels of apples away from the hard-working farmer and give it to the lazy one. Thus, each has 60 bushels of apples, and they become equal. Consequently, the hard-working farmer will start producing 20 bushels of apples, preventing the government's seizure of his apples and indirectly his hard work. Of course, the government bureaucrat will not give all 40 apples to the poor farmer. Bureaucrat must eat too, feeding off the hard working and industrious. Unfortunately, socialism tends to reduce everyone to the lowest common denominator. The slowest, laziest people set the standards in society.

A hard-working farmer under a capitalistic system could sell his excess supply of apples to the market, earning a profit. Hence, the farmer receives a reward for his hard work. Consequently, capitalism, hard work, and self-interest work together, creating a strong backbone for an economy.

The Soviet Union represents the premier example of communism. The Soviet state produced all the consumer goods and services for 70 years. Soviet people could buy two types of T.V. sets: color, and black and white, about five types of soda, several types of bread, and three car models: Lada, Moskvich, and Volga. Several Soviet products were okay while others had quality problems. For example, the color T.V. set could explode while the Moskvich was a junky car.

Many Soviet products were also in short supply, so not all citizens could buy and own cars. The Soviet system had a pecking order: Communist party members came first; academe and scientists were second while everyone else was last, although communism was supposed to erase social classes and make everyone equal.

The Soviet system did propel a backwards Russia into a world power during the 20th century. Nevertheless, it came at a great cost. During the 1980s, the Soviet economy stagnated, sending severe shortages throughout the economy. Consumers shopped in stores with bare shelves. However, the Soviet Union had a pecking order; communist party members shopped in their special stores filled with products and merchandise. Finally, the Soviet Union maintained a large prison system, the Gulag that the state filled with prisoners while Stalin executed millions of Soviet citizens through his purges.

The United States was a capitalistic country during the 19th century, and we became a world power at the beginning of the 20th century with a high standard of living. However, we lost our way. Federal, state, and local governments extensively use taxes, subsidies, price controls, and regulations to control our economy. For example, Americans can still own property in title only. If a homeowner builds a house, does he or she really own that house? Government at all levels imposes many conditions on the homeowners. They must apply for permits, adhere to building and zoning codes, and pay property taxes.

Some states have high property taxes, and the municipal government quickly forecloses on a homeowner's property for not paying them. Moreover, homeowners need permission from government to alter or change their property. If a homeowner builds on a wetland or endangers a species going extinct, then he or she can get into serious trouble with the U.S. government. Except for property taxes, we survived the 19th century without all these rules and regulations as we constructed our massive cities.

Federal, state, and local governments have assaulted private property rights for the last 40 years. As we progress toward the 21st century, our society has become more socialistic and highly regulated. Are we better off or has our society started crumbling?

China was a communistic country, where the government owned all the property. Since the 1970s, the Chinese government gradually opened their society to free markets, competition, and private ownership of property. They use free markets and capitalism to build up their wealth and create jobs. Their manufacturing industries are booming as they transformed large marshes into cities overnight. As Americans shop at a store, they are likely to buy a product produced from a Chinese corporation. Consequently, capitalism revived the Chinese dragon, and it continues propelling China into a world power. After the 2008 Financial Crisis, China keeps growing furiously and strongly while the United States and Europe continue sinking.

Capitalism is not a perfect system. However, it is the best system that man has given his nature. Only alternative to capitalism is a form of government control. Unfortunately, government cannot create wealth. Otherwise, the Soviet Union would have grown into the richest country in the world, and it would not have collapsed in 1991. Everyone heard the stories of Soviet people standing in lines for hours to receive their bread ration, or the Soviet state industries produced low-quality goods. Furthermore, the Chinese government moved away from communism because it failed, and unleashed the power of capitalism and free markets. Thus, the government cannot create wealth; only citizens and businesses through private markets can create wealth.

## Rapidly Expanding Government

The United States has two political parties: The Republicans and the Democrats. The Democrats believe in equality, opportunity to go to college, support a clean environment, and universal healthcare. Thus, by definition, the Democrats espouse a growing, expanding government because they support social programs that help the disadvantaged. On the other hand, the Republicans espouse a capitalistic system. In theory, they believe in a small, limited government with low tax rates, favorable regulations on business, and a strong national defense. The Republicans should contract the government and limit its size. However, both political parties expand the government, regardless of political philosophy.

Political parties strive for control over government. Then they use government as a vehicle to strengthen their political agendas, and further their self-interest. For example, George W. Bush, a Republican and the 43rd President of the United States, expanded the government during his two terms in office, even though he claimed he supported limited government. He founded the new Department of Homeland Security, entered into wars with Afghanistan and Iraq, and passed numerous controversial laws. One law, No Child Left Behind Act, allows the federal government to interfere with local school systems. President Bush also signed into law the Medicare Part D. The Federal government provides prescription-drug insurance for seniors as a method to buy votes from the senior citizens. Finally, President Bush nationalized corporations and banks that teetered on bankruptcy during the 2008 Financial Crisis. He transferred approximately $700 billion in taxpayer money to bail out the financial system, although many Americans opposed it. His predecessor, President Clinton, a Democrat, actually slowed the growth in government and generated budget surpluses during his last term in office.

The Republicans at the state and local levels of government are just as bad as the U.S. Presidents are. For example, Governor Rick Perry, a Republican, started the franchise tax in Texas. He invented an income tax on businesses without calling it an income tax; thus, circumventing the voter's right to vote and pass an income tax in Texas. Governor Mitt Romney, another Republican, passed a universal health care program in Massachusetts, which President Obama used to establish his new federal healthcare program.

Bureaucrats, politicians, and leaders are increasing the size, scope, and mission of government. U.S. federal, state, and local governments are passing laws at a furious rate that they have detonated a legal atomic bomb. More laws, rules, and regulations require more bureaucrats. Thus, government continually expands or creates new bureaucracies.

Government must pay for its army of bureaucrats and has three funding sources:

Government could collect taxes, fees, and fines. However, excessively high taxes, fees, and fines can stifle a market economy, depressing incomes and wealth. Unfortunately, the public does not like tax increases. Thus, politicians and bureaucrats resorted to numerous small taxes, fees, and fines, causing a painful death from a million paper cuts.

Government could borrow money. Borrowing money creates future tax liabilities because government must repay the money plus interest. When governments borrow money, they hope the economy grows, expanding the tax base. Then government repays the debt from collecting greater future tax revenue. This strategy could be disastrous if an economy begins contracting and stagnating. Some people believe the United States will enter an extended two-decade recession similarly to Japan's recession.

Government can print money. This option is only available to the federal government through our central bank, the Federal Reserve System. However, printing money is a terrible option because it leads to inflation. As prices rise, wage increases usually lag behind price increases, squeezing the workers, which economists call the inflation tax. Furthermore, a high inflation rate weakens and depreciates a currency. Some people believe a massive U.S. government debt will lead to a bout of high inflation, and the collapse of the U.S. dollar. Then hard economic times will begin. The 2007 Great Recession will pale in comparison.

Most politicians across the world today use Keynesian economics. They use deficit spending that always leads to the accumulation of debt. Politicians increase spending or decrease taxes, which expand the economy and cause a budget deficit. They use deficit spending during recessions and booms. Unfortunately, a growing government debt becomes a potential ticking time bomb. Once investors lose faith in the government to repay its debt, government experiences a crisis. Government must raise taxes or contract government spending, hindering the economy's growth and creating a period of stagnation. If the politicians used Keynesian economics properly, a government should have budget surpluses during a boom cycle and budget deficits during recessions. The boom cycle allows the government to pay down its debt.

The U.S. federal government cannot restrain its spending, and it has operated large budget deficits since the 1960s. Before the 1960s, politicians only accumulated debt when we were at war. During times of peace, politicians would repay the public debt. During the 1960s, President Johnson started the War on Poverty and escalated the Vietnam War. Then President Nixon began the War on Drugs.

Since these times, perpetual budget deficits have plagued the United States as our public debt continually rises. Figure 1 shows the U.S. federal debt starting with the 1950s, and it surpassed the $14.5 trillion mark in 2011. U.S. debt will attain new heights with President Obama's $787 billion economic stimulus package, and President Bush's $700 billion Wall Street bailout package in October 2008. Unfortunately, the public debt grew exponentially at 7.5% annually for the last 60 years, which surpassed our 3% economic growth rate.

The U.S. government held about $4.8 trillion or approximately 32% of the U.S. debt as of March 2012. Social Security Administration and federal retirement accounts invest their funds and budget surpluses into U.S. government securities.

Although Social Security had surpluses for the last 20 years, Congress already spent this money and replaced it with U.S. Treasury Securities [3]. This is equivalent to putting money in a cookie jar. Then you decide to spend the money and replace the money with IOUs. This trick only works if you do not dig yourself in a large financial pit. After reaching a point, the government can no longer refund Social Security with its money. In 2011, Social Security fund had a $45 billion deficit, and Congress can no longer treat Social Security as free money, which provides one reason why the U.S. government deficits persistently exceed a trillion dollars every year since 2008.

Federal Reserve System held about $1.7 trillion or approximately 11% as of March 2012 [3]. Federal Reserve maintains the nation's money supply and buys U.S. Government Securities to expand it. The 2007 Great Recession was very severe while the U.S. economy continues struggling. Consequently, the Federal Reserve granted $2 trillion in emergency loans to banks, keeping the U.S. financial system afloat. The chairman, Ben Bernanke, euphemistically calls this quantitative easing. The Federal Reserve purchased the toxic mortgages from banks, granting loans to the European Central Bank and buying truckloads of U.S. government securities. Unfortunately, the inflation rate will spike if the banks begin lending to the public, injecting these funds into the economy.

A massive debt is only a part of the story. A growing economy expands the government's tax base, so the government can finance more debt. Furthermore, a flourishing economy requires more infrastructure and bureaucrats, such as more roads, highways, schools, and government services.

Economists use Gross Domestic Product (GDP) to measure the economy's size. A growing GDP indicates our society produces more goods and services while incomes rise. Figure 2 shows the federal government debt relative to the GDP. During the 1950s, government debt was quickly dropping as the government was repaying its war debts. Before the 1970's, the U.S. government only accumulated debt to finance wars. Since the 1980s, government debt took off from President Reagan's massive government deficits, and the debt-GDP ratio currently exceeds 100%. Usually investors stop buying debt when it becomes too high. For example, the investors stopped buying the Greek government's debt, when the debt-GDP ratio reached 140%.

A government debt can affect positively the economy if the government invests in infrastructure, education, or research. Then public spending benefits both the current and future generations. Future citizens benefit from more knowledge, highways, libraries, and universities. For example, the U.S. government funds research institutions such as National Aeronautics and Space Administration (NASA). In turn, NASA buys billions of dollars in parts from hi-tech industries. These hi-tech industries hire more scientists and engineers and expand their research and development. Thus, white-collar jobs flourish in our economy.

Society benefits if a government spends and invests its money wisely. However, a large government debt has five potential problems.

**Problem 1:** Future generations are saddled with repaying this debt. If government wastes money on unwinnable wars, incarcerates people for minor crimes, or bails out corporations that made bad financial decisions, then government wastes this money, and future generations receive no benefits. For example, the U.S. government poured billions of dollars into the War on Poverty and the War on Drugs. We lost both wars, but our government continues fighting these wars. The U.S. government also started the decade-long wars in Afghanistan and Iraq.

**Problem 2:** A large government debt crowds out private investment. An investor buying a U.S. Treasury bond cannot use the same money to buy stocks and bonds from private businesses. Hence, a large, expanding government that heavily borrows squeezes out private investment for businesses. Consequently, a large government debt causes economic stagnation.

**Problem 3:** As the debt becomes greater, the government must pay a greater amount of interest. Interest on the debt was the fifth largest item in the federal budget in 2011. When interest on the debt becomes the greatest item in the budget, then government debt becomes out of control, and Congress will cut funding to other governmental programs.

**Problem 4:** A growing debt indicates an expanding government. A large government debt expands the government's size, scope, and mission.

**Problem 5:** A large government debt can trigger a financial crisis. Each day, some of the debt becomes due, and government rolls over the expiring debt by issuing new debt. If investors lose faith in the government's ability to repay the debt, the investors stop buying the debt, triggering a crisis. If the political leaders refuse to reduce a budget deficit, then the central bank must buy the government debt, which can spark a high inflation rate.

## The Optimal Size of Government

U.S. federal government's budget mushroomed into $3.8 trillion or nearly 25.3% of the U.S. economy in 2011. Table 1 shows the major items in the budget and includes on-budget and off-budget items. Government defines Social Security and the U.S. Postal Office as off budget. Largest expenditures include national defense, social security, income security, and Medicare. Income security is the safety net programs, such as housing assistance, food stamps, etc. Finally, the government paid $207 billion in net interest on the debt.

Has our government become too large? The Rahn Curve illustrates the relationship between the size of the government and a country's economic growth rate. Richard Rahn estimated the optimal level of government spending lay between 15 and 25% of GDP. If a government spends beyond 25% of GDP, then it hinders economic growth. Currently, the U.S. government spends approximately 25.3%, which represents one piece of our government. After we add state and local governments, the government spending lies between 35 and 40% of GDP. Similarly, the United Kingdom is about 43% of GDP while many European countries exceed 50%. After the 2007 Great Recession, these countries experienced terrible economic growth rates. On the other hand, the Asian Tigers - Hong Kong, Singapore, South Korea, and Taiwan have government spending within the optimal range, and their economies are flourishing.

The Rahn Curve has a weakness. It classifies all government spending as equal. If a government provides generous social and retirement programs, then these programs do not boost GDP growth rates. However, if government invests in education, training, or infrastructure, then these investments can boost future GDP growth rates. As Table 1 shows, the four largest items in the U.S. budget include the military, retirement, and social programs. Unfortunately, the U.S. government does not invest in the U.S. economy.

The Rahn Curve places a lower bound on the government's size. Economists experience difficulties measuring the size, scope, and mission of our government. Federal, state and local governments established a variety of quasi-government agencies, authorities, nonprofit organizations, and public corporations. Some refer to this as hidden government because these institutions have little government oversight, not liable to the voters, and can issue debt through the government's name. Some of these institutions became riddled with corruption, mismanagement, bid rigging, or maintaining the "good ole boy system" [4].

Several examples of hidden government include:

  * Local and state governments founded organizations to operate airports, seaports, toll bridges, low-income housing, parks, schools, and universities [4]. Local or state government could be liable for these institutions' debt if these institutions experience financial problems.

  * Some city governments established public corporations or departments to provide utilities for its residents such as water, electricity, or natural gas. Then the public corporations and departments charge high prices and funnel some of the profits to the local government.

  * Federal government created public corporations such as Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), and the Student Loan Marketing Association (Sallie Mae). Fannie Mae and Freddie Mac grant mortgages to low-income households, while Sallie Mae grants loans to college students.

Governments established these institutions to benefit their citizens. However, these institutions do not act like private businesses. Purpose of a personal business is to earn profits. If an owner mismanages a private business, provides low quality products, or offers terrible customer service, then that business could fail and bankrupt. Threat of financial failure forces a business to pay attention to the market, to its customers, and to its products and services, or the business fails. Unfortunately, fiscal failure provides little feedback to public institutions. Public institutions can run to government and beg for subsidies, tax breaks, or favors to keep inefficient, mismanaged public corporations operating.

Public corporations can experience a large financial exposure to changes in a market, generating losses in the billions. For example, the housing market bubble popped in 2007, causing housing prices to tumble. Moreover, the 2007 Great Recession caused soaring unemployment and foreclosure rates. When families stop paying their mortgages, then banks lose money as they foreclose on homes. Then banks pay legal fees and court costs to take possession of a house that has lost market value. Unfortunately, Fannie Mae and Freddie Mac hold roughly half the mortgages in the United States, which equaled about $12 trillion. The U.S. government has already spent billions of dollars to bail out these two financial institutions [5]. As of January 2010, Fannie Mae and Freddie Mac accumulated $400 billion in losses [6], which equaled $1,333 for every man, woman, and child in the United States.

Sallie Mae and the student-loan market also will experience a financial exposure to changes in the market. The 2007 Great Recession was the worst recession since the Great Depression. Although the recession ended in 2009, the U.S. economy is failing at creating jobs for college graduates. If these college graduates cannot find jobs, then they will default on their debt. The default rate hovered around 24% in 2012. A college graduate enters the workforce with an average student-loan debt of $24,000, while law school graduates and other professional graduates accumulate student-loan balances exceeding $100,000. Consequently, the federal government would pay billions to cover its student-loan guarantees to bailout Sallie Mae if it goes under.

## Conclusion

The book's premise is the political system is not important. For instance, communism in Russia did not fail because of communism; it failed because the government tried controlling its entire economy. A democracy trying to control its entire economy will meet the same disastrous failure. Important issue is whether private individuals or businesses make decisions, or whether the government must control everything. With people and businesses, they have simple goals: to better themselves or earn profits. A government can have convoluted, vague, and constantly changing goals. The reader will discover the politicians and bureaucrats have self-interest, and want to better themselves but at the expense of everyone else. Thus, what really matters is how government defines its relationships between government institutions, businesses, and people. A country's legal system defines these relationships.

This book emphasizes the takeover of the U.S. economy from an ever-expanding government and its bureaucrats. An expanding government is creeping socialism but not the traditional socialism where government devises a plan to build a better society or provide benefits to its citizens, such as free healthcare or free college education. Instead, the United States is evolving to a virulent form of socialism that allows individuals and businesses to own property, but bureaucrats control and monitor the use of the property with intrusive government oversight. This rising class of bureaucrats believes they have the right to interfere in all society's affairs from family matters to personal business decisions. No issue is too small or private that elicits the bureaucrats' scrutiny. Bureaucrats in government today interfere actively in families, businesses, and all private matters.

## References

[1] Dobel. J. Patrick. 1978. "The Corruption of a State." _The American Political Science Review_ 72(3): 958-973

[2] Bromley, Daniel W. 1989. _Economic Interests and Institutions: The Conceptual foundations of Public Policy_. New York: Basil Blackwell. Chapter 3, "The Nature of Institutions"

[3] Treasury Bulletin. March 2012. "Ownership of Federal Securities." Available at http://www.fms.treas.gov/bulletin/index.html (03/25/12).

[4] Searcey, Dionne. July 19, 2004. "Hidden government." _Newsday.com_

[5] Goodman, Peter S. July 14, 2008. "Government as the Big Lender." _The New York Times_.

[6] Liu, Betty and Matthew Leising. December 31, 2009. "U.S. to Lose $400 Billion on Fannie, Freddie, Wallison Says." _Business Week_. Available at http://www.businessweek.com/news/2009-12-31/u-s-to-lose-400-billion-on-fannie-freddie-wallison-says.html?source=patrick.net (access date 01/04/2010).

# 2. Crazy Laws

"The marvel of all history is the patience with which men and women submit to burdens unnecessarily laid upon them by their governments."

-William Edgar Borah

When the Founding Fathers created the United States, being a member of Congress was a part-time job. Congressmen held jobs outside of government; usually they were farmers or businessmen. This differs sharply to our contemporary Congressmen because a part-time legislature provides three benefits.

**Benefit 1:** Founding fathers had the insight of owning and running a business or farm. Politicians remained in touch with the people, and they passed laws that sustained a strong private business climate.

**Benefit 2:** Founding fathers had little time dedicated to analyzing and passing laws because they worked part time. Politicians would focus on important business and not waste it on frivolous matters.

**Benefit 3:** Founding fathers were not career politicians. Career politicians earn their income from their government jobs. If he or she loses an election, then he or she becomes unemployed. A career politician may not show true leadership, and always caters to the special-interest groups. Thus, career politicians do not want to offend anyone because they do not want to lose an election.

Currently, many Congressmen are lawyers, and they do not manage a farm or business. They became out of touch with the working people and the meaning of capitalism. Furthermore, Congressmen's job is full time as they employ an army of staff. Consequently, their job is to keep passing laws and regulations.

Legislators are not concerned whether the law is good or bad, or more importantly, the long-term consequences of new laws. Legislators see a heart-wrenching story on the news, and then they instantly pass a new law with no regards to logic or long-term consequences, even if the law achieves the opposite effect. Congressmen and state legislators rarely appeal these laws. They keep busy passing new laws.

Legislators must pass laws, so they can provide feedback to their constituents that indeed, they are working. They pass new laws at a furious rate and write the laws in a confusing and vague language. The current U.S. legal system has become disorganized and illogical from a large number of confusing and contradictory laws.

Thoughtless legislators had passed these following laws:

**Example 1:** The city council in Chico, California passed two pages of ordinances for using nuclear weapons within city limits. Law states, "No person shall produce, test, maintain, or store within the city a nuclear weapon..." The city attorney will file charges with the appropriate court for violations of this law [1]. This is a national-security issue and domain of the federal government. If someone detonated a nuclear weapon within city limits, the city would no longer be there.

**Example 2:** The city council in Pacific Grove, California passed an ordinance that makes it a crime for a person to molest or interfere with monarch butterflies [2]. A violation can generate a $500 fine.

**Example 3:** Los Angeles County passed a law that allows taco truck vendors to park their trucks for an hour. Once the hour is over, they must move to a new location. A judge could fine the violators up to $1,000 or could sentence them up to six months in jail. Law's purpose was to help local restaurants because restaurant owners believe the taco truck drivers have a cost advantage [3]. However, Los Angeles has air pollution problems, and enforcing this law will not help lower pollution levels.

Governments passed these crazy laws, so someone must enforce them. Does the City of Chico employ enforcement officers with Geiger counters running around the city searching for nuclear weapons violations? Does the City of Pacific Grove have officers monitoring the butterflies and ensuring people are not molesting the butterflies? Do police or inspectors in Los Angeles follow taco drivers around and ensure they do not park for over an hour? Do governments have so much resources and time that they can dedicate officers to enforce these crazy laws?

Legislators and Congressmen do not understand the laws can create the opposite behavior. For example, the public and politicians became disgusted by the profanity and explicit language in rap and rock music. Under threat from the federal government to pass a new law, and give the Federal Trade Commission vast new authority [4], the music companies decided to self-regulate and place advisory labels on CDs and audiocassette tapes. No one under the age of 18 can buy music with explicit language.

True outcome of this self-regulation did the exact opposite. Labels drew attention to the language contained in music. Thus, young people being naturally rebellious listen to the profanity-laced lyrics. Furthermore, minors can find adults who will buy this music for them. Consequently, several rappers competed for the most advisory labels on their music as these advisory labels became status symbols to musicians and rebellious teenagers.

Congress and the President had passed another bad law – the Digital Millennium Copyright Act (DMCA). They wanted to protect the artists and authors from online piracy and enhance the copyright laws. Piracy on the internet continues flourishing as some people download pirated books, music, movies, and software. Artists, authors, and software creators should be awarded for their creations, and not allow people to enjoy the copyrighted material freely.

Law has two parts. First, it is unlawful to defeat or circumvent any encryption system used in "electronic" media. Second, it is illegal to design, distribute, or sell technologies that allow circumvention.

Law has the following impacts:

**Impact 1** : A person cannot buy a CD or DVD and make a copy. For example, what happens if a person wants to listen to his CD on a MP3 player, or watch his DVD on his Iphone. This involves decrypting the media and changing its format. Federal government says this is legal, or at least has not made it illegal yet. Regulators change their interpretation of laws over time, especially if they need to boost their arrest numbers.

**Impact 2:** A Russian programmer Dmitry Sklyarov was arrested in the United States in 2001 for violating the DMCA. Although he did not illegally distribute copyrighted material, he wrote a program that could convert Adobe's Advanced e-Book Processor to Adobe PDF files. The conversion eliminated the safety measures embedded in the e-Book Processor. Dmitry's arrest stirred up fear among computer programmers. Consequently, foreign computer programmers avoid the United States and hold computer conferences outside the United States with the sole purpose of escaping this bad law.

**Impact 3:** A student wrote a program, called Embed, which allows fonts to be embedded into a document. That way, computer users do not worry about a program switching fonts, when they use their files on another computer. Although the student used his program for his own fonts, he was sued because the program also works for copyrighted fonts. Thus, this law could hinder innovation.

**Impact 4:** Sony sued competitors who wrote emulator programs for computers. An emulator allows people to play Sony Playstation Games on PC computers. The Playstation, X-Box, and Nintendo are computers. Theoretically, all games could play on one computer system. Unfortunately, these companies want you to buy their console that enhances their profits. Moreover, a company can sue a competitor by claiming the competitor reversed engineered its product, thus violating this law. Consequently, this law reduces competition and protects large companies.

**Impact 5:** Anyone can threaten a website's administrator to remove objectionable material, inciting violation of the DMCA. Administrators routinely comply because they are afraid to violate this law. Google lists the number of DMCA complaints, when users do searches, and some searches were removed. Hence, companies use this law to restrict free speech.

**Impact 6:** This law only applies to the United States. However, the internet is worldwide. People in the United States cannot download movies, games, software, and music from Europe or Asia, like Pirate's Bay in Sweden. Although the U.S. government puts pressure on foreign countries to go after internet pirates, the pirates relocate to other countries with weak copyright laws.

Legislators are passing new, anti-capitalistic laws. For example, the State of Washington cracked down on house flipping. The state believes house flippers renovate homes with substandard work, and they work in the underground economy. A new law requires a person buying a home to occupy the home for at least one year in order to re-sell it. If people plan to flip the property, they must register as contractors with the state or hire registered contractors. State can find any person violating this regulation $1,000 per day per job site, and several violations can result in criminal prosecution [5].

Nothing is wrong with buying a home, fixing it up, and selling it for a higher price. That is capitalism! Government does not need to protect homebuyers because the market already provides a solution. A potential homebuyer can hire an inspector, who thoroughly checks the home for problems and spots any shoddy, defective work. Unfortunately, registered contractors can also do poor work.

Legislators and Congressmen do not understand, strictly enforcing the law could create more criminals. For instance, many young people experiment with marijuana. During the 1960's, the government imposed fines for marijuana possession, and the conviction did not follow people throughout their lives. This was the good ole days before the arrival of massive computer databases. Now, some states have boosted the penalties for marijuana use. If a court convicts people of possessing marijuana, the judge can fine them, place them on probation, or sentence them to jail or prison.

Government strictly enforcing marijuana causes four problems:

**Problem 1:** This person now has a criminal record. Most employers, including minimum-wage jobs, perform criminal background checks. Even if people quit smoking marijuana and can pass a drug test, they could have difficulties finding a job. Thus, this conviction follows them throughout their lives. Furthermore, government bars people from careers in education, health care, and transportation [6].

**Problem 2:** Government could bar people convicted of drug charges from federal financial aid for colleges and universities. With college tuition skyrocketing to the stratosphere, many young people cannot afford to attend college without government assistant. Thus, this person does not attend college. Moreover, some colleges and universities expel violators [6].

**Problem 3:** Government could bar convicted people from federal contracts, grants, and licenses [6]. Furthermore, government may not allow people convicted of drug charges to enter the military. Before the 1960s, judges gave young defendants, charged with minor crimes, a choice: Join the military or go to jail. Military tends to take young, rebellious kids, and turn them into young, respectable men.

**Problem 4:** Many landlords check criminal records, and they could deny a convicted marijuana user a lease [6].

A person convicted of marijuana charges may not find good work, obtain an education, a place to live, an essential government license, or join the military. Which choices does this individual has? Instead of being a drug user, he or she can become a drug dealer.

Texas even stepped up the insanity. Prosecutors can enhance a misdemeanor to a felony charge for repeated offenders of simple marijuana possession. A felony charge in Texas is a death sentence because many institutions and employers check the Texas Department of Public Safety's database for criminal convictions. Convicted Texans could face a difficult time, putting their lives back together, and becoming law-abiding citizens. Unfortunately, the State of Texas funds a massive prison system that the state continuously feeds inmates.

## Above the Law

Lawmakers and politicians will pass thousands upon thousands of laws, rules, and regulations and impose stringent penalties for any violations. They portray themselves as saviors, who must lead the flock of sheep along the righteous path. Our leaders embody the heart and soul of the Puritans. Unfortunately, these same politicians believe they are above the law and exempt themselves from their own laws. Some of these politicians and lawmakers will flagrantly violate their own laws, rules, and regulations. If the politician is caught for a misdeed, then they believe they can apologize and beg the public for forgiveness.

A wide variety of cases illustrates this message:

**Case 1:** Former New York Governor, Eliot Spitzer, was busted for a clandestine arrangement with a prostitute. He was a New York State Attorney General and a tough prosecutor. He prosecuted Wall Street corruption and busted several prostitution rings [7].

**Case 2:** Federal government indicted Rod R. Blagojevich, former Illinois governor, on 16 felony counts. Government believes Blagojevich tried to sell the U.S. Senate seat that President Barack Obama left vacant. Furthermore, Blagojevich supposedly squeezed campaign contributions from everyone by withholding state contracts, granting regulatory favors, and filling state job vacancies with campaign contributors [8]. Blagojevich was a former prosecutor and helped author ethics laws for the State of Illinois.

**Case 3:** William McCallum, a former assistant attorney general for the State of New Hampshire, was a kleptomaniac. He stole computers, paintings, and rare books from libraries, museums, and universities from the New England area. A court sentenced McCallum to prison in 1998 [9].

Two factors explain why political leaders think they are above the law. First, politicians are greedy. In a materialistic society, they want to elevate themselves to the top social class. Public servants do not earn high salaries. Hence, they scheme, finding ways to elevate themselves. Moreover, political campaigns cost millions of dollars. Public servants must get this money from somewhere. Second, political leaders possess political power. Our political leaders believe they are better than everyone else is and are entitled to numerous privileges.

For example, Congressmen do not collect social security, when they retire. They voted themselves a much better plan. They earn their full salary until their death. Furthermore, Congressmen routinely exempt themselves from their own laws. They do not abide by minimum wage laws, discrimination, and other laws. Congressmen are clever as they write laws. If you carefully read the federal laws, Congress lists all the parties that must comply with the law. However, Congressmen never list themselves and thus exempt themselves.

Some politicians and political insiders are not corrupt. However, they still form good ole boy networks for two reasons. First, U.S. voters divide themselves on many issues equally. For the politicians to get their agenda and laws passed, they form alliances with leaders and politicians from other groups. Politicians and political insiders form social clubs among themselves similar to college fraternities and sororities. Second, our laws, rules, and regulations are complicated. A complicated legal system makes it difficult to bring newcomers into the system because newcomers require lots of time and patience. If a newcomer screws up the paperwork, then projects and money get delayed, creating headaches for government officials and bureaucrats. Life is simpler to work with the same people and organizations, thus forming these good ole boy networks.

No one enjoys paying taxes, including the politicians. However, political leaders hold a unique position. They know if they evade taxes, government will not likely catch them. How often does the Internal Revenue Service audit a President or Congressmen? Likewise, how often does a state tax authority audit a governor or legislator? These politicians pass laws that tax authorities must follow, and they appoint the leadership of the tax authorities. Consequently, these politicians know they can cheat on their taxes and not get caught. Of course, tax agents can be quite brutal if they believe a citizen owes taxes.

President Obama illustrated this epidemic of tax evaders by filling positions in his government. Several President Obama's choices had tax problems. First, Tim Geithner, the Treasury Secretary, did not pay Social Security and Medicare taxes, when he worked for the International Monetary Fund (IMF) [10]. What makes this egregious is the Internal Revenue Service collects these taxes, and it is a department under the Department of Treasury. Second, Tom Daschle was nominated for director of Health and Human Services [11]. Third, Nancy Killefer was nominated for the chief performance officer. Fourth, Hilda Solis was nominated and appointed secretary of Department of Labor [12]. Finally, Ron Kirk was nominated for the U.S. Trade Representative [13].

Now we understand why dead politicians easily win elections.

## Corruption and Government

Politicians and political leaders seek power. Once they attain power, they entrench themselves and expand their power [14]. This pursuit of power was always there, but it took a turn for the worst in the last 30 years. Our leaders have become petty and puritanical. They believe they have the right to meddle into any affair, regardless of circumstance, logic, or common sense. Our politicians and leaders of bureaucracies evolved into warlords, who govern their piece of the pie with an iron fist.

What kind of leaders do we have in America? Our leaders share the following characteristics:

**Characteristic 1:** Political leaders and government administrators despised being blamed for things going wrong [14]. They become experts at dodging blame, manipulating the truth, tell daring, massive lies, and blame others for our problems.

**Characteristic 2:** Political leaders and government administrators are overly optimistic [14]. Every new law they pass, and every government project makes society better. Of course, nobody analyzes the impact of the new laws or government's projects. Leaders and administrators always propose new laws and projects and frown at anyone who examines the past. For instance, we experienced the 2007 Great Recession. Our leaders assured us the U.S. economy is recovering. However, it is already 2012 with no recovery in sight.

**Characteristic 3:** Political leaders and government administrators use fear to expand their agenda and squelch the opposition. For example, politicians claim illegal immigrants traveling from Mexico carry drugs. Thus, states have the right to search anyone, who appears to be an illegal immigrant. Bullies utilize the internet and cell phones to perpetuate their bullying. Thus, school principals must have access to cell phones and email to stop this. Police state marijuana is a gateway drug. One toke and the next day, the users are injecting heroin into their veins. Finally, the government uses the ultimate fear – terrorism, to pass any law they want.

After government officials propagate these fears, then government can restrict rights, circumvent laws, and seize property without any questions, even if they have no basis for these fears. Consequently, our political leaders have greatly strengthened the government's dominion.

Alongside the growth of government is the explosion of corruption. This is no accident. Although corruption is difficult to define, we know corruption when we see it. Remembering that old saying, 'if it looks like a duck, walks like a duck, and quacks like a duck, then it is a duck.' Corruption thrives in societies with tyrants in the state and monopolies dominating a market.

Widespread corruption has four requirements:

**Requirement 1:** A society needs a level of moral loyalty and civic virtue to maintain itself. As a government becomes more corrupt, loyalty and virtue breakdown because people want their way. People and especially the leaders become hedonistic dogs with no moral constraints. They abuse their power to maintain their position and authority [15]. Ethics and loyalties have no place as leaders maintain their positions of power.

**Requirement 2:** Excessive inequality in wealth, power, and status exacerbates corruption of a state. As our leaders, and wealthy climb to the top, they become selfish, proud, and arrogant. They do everything they can to maintain their position, even at the detriment of the people and society [15].

**Requirement 3:** Society breaks down into warring factions. Factions are a source of wealth and power. Once a faction gains power, they influence the lawmakers, who in turn, influences the laws. Then they use the judicial and criminal-justice system to go after their opponents.

**Requirement 4:** If bureaucrats receive low pay, have little chance of being caught, and have wide discretion to withhold important permits or licenses, then they are likely to be corrupt. Moreover, the government experiences problems, extinguishing widespread corruption because corrupt bureaucrats will not report other corrupt bureaucrats. Unfortunately, countries inflicted with severe corruption have difficulties reducing corruption because it becomes a way of life and an acceptable business practice [16].

Has our society reached a point where corruption is a problem? Corporations do dominant the economic activity in the United States. Although a corporation may not technically be a monopoly, it still gained vast power over government and our political leaders, via campaign contributions. Moreover, civic loyalty is declining; inequality is rising while various factions are becoming more vocal. As these characteristics become more prevalent and common, then our society will develop these problems:

  * Public law disintegrates and breaks down. People stop following the laws and become violators [15].

  * Political debates lose meaning, logic, and common sense. Demagogues espouse class warfare and help one faction punish another faction [15].

  * Violence becomes prevalent as people lose faith. Then government has more difficulties in reforming government [15].

Methods to reduce corruption are simple. First, government must reduce the concentration of power. For monopolies, government breaks them up, regulates them, or exposes the monopolies to competition through international trade. Second, the political leaders must reduce taxes, the size of government, eliminate subsidies, and reduce bureaucratic red tape. These policies break up a government's power.

Unfortunately, governments rarely follow these policies. Instead, the political leaders increase the size, scope, and mission of government to eliminate corruption. Hence, the political leaders use more government to eliminate the problems of government.

## Dividing the People

Politicians deliberately passed laws giving preferences to a gender, race, or social class. They claim the law addresses a previous injustice, but they artificially create factions. Faction helps cement an alliance between the politicians and the disadvantaged group. Sadly, the politicians pit the poor against the rich, women against men, minorities against white people, and children against adults, amplifying bitterness and rancor between different social groups.

Government pits the rich against the poor. Government leaders view the wealthy people in America as if they unfairly, illegally, or immorally earned their wealth. Politicians espouse this view because everyone views the rich as a source of tax revenue. For instance, many states are experiencing severe financial difficulties since the 2008 Financial Crisis. Tax revenues are plummeting, so what is our government leaders' brilliant idea? Tax the Rich! This sounds like a simple solution, but it has three problems.

**Problem 1:** United States has a progressive tax system. Rich already pays a higher proportion of taxes on their incomes. Imposing greater taxes on the wealthy only penalize them more.

**Problem 2:** Rich people relocate to states or other countries with low tax burdens. A state over taxing the rich can hurt itself financially if the wealthy people flee.

**Problem 3:** States over relied on the rich for tax revenue. For example, Wall Street was awash with cash and high salaries. With the crash of the financial markets in September 2008, many rich financial people earned losses, causing New York to have a $13.7 billion deficit for 2009-2010 [17], and California had an estimated deficit of $42 billion for 2009 [18].

Nothing is wrong with being rich. Being rich ultimately rewards a person for providing a valuable good or service to society. For instance, Bill Gates started Microsoft in a rundown motel in New Mexico. Steve Wozniak and Steve Jobs started Apple computers in their garage in California, and Michael Dell started Dell Computers in his dorm room at the University of Texas. Even if people inherit their wealth, they must remain vigilant and still work. If they make a wrong investment decision or hire an accountant who steals them blind, then these rich people could end up on the streets as homeless. True social mobility works in both directions. Some poor people can become rich while some wealthy can become poor.

State laws for domestic violence pit women against men. Daily TV commercials inform women that all men are violent, and they must report any violence to the police. Of course, states established special courts to hear domestic violence cases and encourage the police to arrest all males suspected of domestic violence. Several states can charge a person with domestic violence, even with the absence of physical contact. For example, in Oklahoma, a couple arguing in front of a child has committed domestic violence. However, women never perpetrate violence. Police always arrest the males.

Domestic violence laws are not bad. If a partner physically hurts his mate, then the police should arrest him or her. However, the police arrest the males for a scratch on an arm, or the couple argued in front of a child. Some judges fail to understand that some women will falsely accuse a man of domestic violence in certain cases. For example, if a woman wants to divorce her husband, then a false domestic charge swings the divorce decree in her favor. Moreover, a woman becomes angry with her mate and seeks revenge by alleging domestic violence. Consequently, some men believe they became slaves to women. Once a woman is done with a man, she can call the state and have him removed. Then the woman legally steals all his assets.

A question naturally arises. Why do courts and police fret over minor cases of domestic violence? The answer should not surprise you. Most criminals do not have money, and government expends resources to arrest, convict, and house a criminal. Unfortunately, families are a source of income and wealth. Most men will bond out of jail and return to their mate. Then the courts encourage the males to plead guilty and pay for court fines and fees, counseling, and other services.

Sexual harassment is dividing men and women. Theory of sexual harassment is employees in the workplace should be free from sexual advances or objectionable material. Common sense defines the following as sexual harassment.

  * Repeatedly asking a co-worker for a date or constantly flirting with a co-worker, who does not like it.

  * Forcing a co-worker to engage in sexual activity as a condition for employment or advancement.

  * Telling sexual jokes or displaying sexual material.

Equal Employment Opportunity Commission (EEOC) defines sexual harassment as "verbal or physical conduct of a sexual nature [that] unreasonably interferes with an individual's work performance or creates an intimidating, hostile, or offensive work environment." Sadly, lawyers interpret this law broadly. For example, women sued men over unwanted stares in California. Thus, more lawsuits could arise. Could a man sue a woman if she wears provocative clothes? Will the EEOC initiate dress codes to stop unwanted stares? Unfortunately, the government can construe any conflict between males and females as sexual harassment.

Sexual harassment laws are dividing males and females in the workplace and negatively impacting the work environment. Political correctness dictates the men sexually harass the women. Thus, many men are afraid of asking a woman for a date in a workplace or tell a joke that is taken out of context. Furthermore, some women can falsely accuse a male worker to get the male in trouble or fired. Employers are afraid of sexual harassment claims. A woman could sue the male and her employer if she can show a company did not take her accusation seriously. Consequently, managers take the easy solution and fire any males if any conflicts arise in the workplace between genders.

The anti-discrimination laws are pitting whites against the minority groups. The United States was wrong for allowing slavery to flourish in the south. Next step is to move society towards a system that does not look at a person's race. Martin Luther King stated it best, "my four children will one day live in a nation where they will not be judged by the color of their skin but by the content of their character." A way to eliminate racial discrimination is everyone should become color blind with respect to skin color. However, the federal and state governments went in the opposite direction.

Federal and state governments require employers to collect racial information on applicants. Then the government can deny a grant or sue a business if it appears racists. Thus, a business does not want to appear racists, so it hires minorities, which they call tokens. Although this may be against the spirit of the law, an employment recruiter can find reasons to reject a white applicant's application but discount negative information in a minorities' application. Finally, minority workers who are fired can sue and claim discrimination.

Discrimination laws create a split in the law. Employers cannot use race to hire or promote employees. However, a university admissions office can accept applicants based on race [19]. If every applicant has similar qualifications, then an employer or university can always choose a minority, which is not necessarily bad. Nevertheless, many white males feel they are at the bottom of the applicant pool, despite their qualifications and education, creating bitter feelings between white males and everyone else.

Laws are pitting children against adults. Rules and regulations have become so stringent, parents and school officials cannot spank children. If a state allows spanking, then it applies many restrictions. Kids know this! If a parent, teacher, or principal lays any hand on them, they know they can call the police and have that person arrested. Law treats all kids as little darlings who can do no wrong. Moreover, the police arrested teachers and principals for restraining kids after catching the kids fighting [20].

Police aggressively going after the parents, teachers, and principals will cause three impacts:

**Impact 1:** Parents will not discipline their children because they are afraid the state will arrest them. Consequently, behavioral problems in children will worsen.

**Impact 2:** Laws have a chilling effect on teachers [20]. Teachers will avoid breaking up fights or getting involved. Otherwise, the police can arrest them. Kids know this and may become more disruptive.

**Impact 3:** Crazy laws and overzealous enforcement of laws will drive good teachers out of education and other occupations dealing with children. Why remain in an occupation that pays the lowest for college graduates? Children can be disruptive, and the state will go after anyone if it thinks the person did something wrong. Thus, education will continually decline as kids become more disruptive as good teachers flee the schools.

Education is a coercive process. Students must sit at a desk, and study material they normally would not study on their own. Kids usually have a favorite class, but they must learn material for classes they do not like. Remember the old phrase "spare the rod and spoil the child." If you cater to a child, he or she will not learn discipline or study difficult subjects. Unfortunately, children do not appreciate an education until they have reached 30 and started their careers. Then they wished they studied harder in school.

## Complicated U.S. Laws

The current U.S. legal system has evolved into an extremely complicated system. U.S. federal, state, county, and city governments can create and alter laws. Unfortunately, these laws occupy volumes upon volumes of books that span a whole floor in a public library. Sadly, we have so many laws in the United States; we cannot know them all!

Travesty of our complex legal system is that government expands the number of enforcers. If government catches a person violating any laws, the government can seize a person's property, impose large fines, and/or incarcerate the person. With millions of laws, regulations, and ordinances on the books, anybody and everybody are potential criminals. Thus, government at all levels must continuously scrutinize their citizens. Everyone has heard of these cases:

**Case 1:** Code enforcement monitors people's property for violations. Local government goes after homeowners if their grass grows too high, or they started a home business, such as a daycare or car repair. Of course, many communities have homeowners associations, which are just as bad as government.

**Case 2:** Child-Protective Services immediately invade a family's home if someone reports any child abuse. Some people seek revenge and lie to investigators. Investigators do not know who tells the truth or who lies. Therefore, the state could remove kids from innocent parents from a false accusation. Then the innocent parents must spend money for a lawyer to get the children back.

**Case 3:** A person sitting on his couch, watching TV and drinking a beer has violated a law. If a cop sees this behavior through a window, then the state can charge that person for public intoxication.

Why did the legal system become so complicated? Let us start with the federal government. Premier document that established the federal government is the U.S. Constitution and the Bill of Rights. Government changes the Federal law for the following:

**Creating New Laws:** Congress and the President sign new laws, which they write into the United States Code. Supposedly, these new laws should not conflict with previous laws or violate people's rights as defined in the Bill of Rights.

**Interpreting the Laws:** All federal bureaucracies must adhere to the United States Code. However, Congress usually writes vague, confusing laws. Thus, each federal agency must interpret the laws' meaning and record their interpretations into their own law books, which we call the Federal Code of Regulations (CFR). Every agency maintains its own CFRs, and every agency interprets the United States Code differently.

**Modifying the Laws:** Federal court system also interprets, defines, and modifies the laws. Of course, the federal court system can place their own unique spin on the federal laws.

Congress and the President passing laws create the following problems:

**Problem 1:** These laws span hundreds of pages. For example, the Energy Independence and Security Act of 2007 contain 311 pages with standard margins and 12-point font [21]. Unfortunately, Congress typically passes these types of laws.

**Problem 2:** Many Congressmen do not read the laws before they vote on them. An organization, Downsize DC, proposes a new law requiring all Congressmen to read their own laws before they vote for them. More information about the organization is available at www.downsizedc.org.

**Problem 3:** When a country experiences a crisis, the U.S. President bullies Congress into passing laws. For example, President Bush forced Congress to pass the Patriot Act after the terrorists attack on September 11, 2001, and the Troubled Asset Relief Program to bail out Wall Street and the large banks caught in the 2008 Financial Crisis.

**Problem 4:** Congress can only agree on a law if the law boosts their salaries, or the law restricts the rights of U.S. citizens. For example, the Tea Party and Wall Street Protestors rose up to challenge and change the government. Congressmen despise publicity and do not want to lose an election. Therefore, they passed the Federal Restricted Buildings and Grounds Improvement Act of 2011, which makes protests a felony. If a protestor is standing near a location protected by the Secret Service (which could be anywhere), subsequently, the federal government can charge a protestor with a felony. Another law, Congress and the President passed the National Defense Authorization Act (NDAA) in 2012, which allows the military to detain a U.S. citizen indefinitely without a jury trial.

These laws violate the U.S. Bill of Rights. First Amendment to the Constitution states, "the right of the people peaceably to assemble, and to petition the Government for a redress of grievances." Fifth Amendment to the Constitution states, "In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the State and district wherein the crime shall have been committed." Consequently, our new laws clearly violate the U.S. Bill of Rights, so we conclude our laws have become arbitrary and egregious. Congress and the President can pass any law they want and suffer no consequences.

State, county, and city governments replicated the U.S. federal government. They continually create new laws and reinterpret old ones. Consequently, how does government know people are following the laws? Unfortunately, enforcers complement our laws. As a legal system expands, government must hire more enforcers to ensure people are following the laws. Unfortunately, government demands results, and enforcers must find violators, proving they are working hard. They believe these laws are making society a better place to live.

## Conclusion

Our politicians continuously pass new laws to cure everybody's problem or to protect the public from all the evil in this world. Unfortunately, bad, evil things happen to good, honest people all the time and will continue to happen to good, honest people all the time. Leaders stacking law upon law will not help the economy, will not help businesses thrive, and will not help job growth. Instead, continual expansion of complex laws will produce these negative consequences:

**Consequence 1:** Government must expand bureaucracies to enforce these laws. Consequently, government employs more bureaucrats in the federal, state, and local governments over time. Thus, society must pay higher taxes, fees, and fines to pay for these bureaucracies, which hurl more hardship on the private sector.

**Consequence 2:** More laws and more complicated laws mean government finds more people violating the laws. Therefore, the criminal-justice system continually expands over time. Criminal-justice system diverts public funds away from other investments such as education and infrastructure.

**Consequence 3:** Businesses and citizens must hire legal specialists and consultants to interpret laws and keep them in compliance. Specialists and consultants are expensive, which increases businesses' costs. Businesses pass these higher costs onto the consumers as higher prices for goods and services. Consequently, a complicated legal structure expands the industries for compliance specialists while other industries contract, such as the U.S. manufacturing industry.

Unfortunately, people earning their living from the legal system will fight against de-regulation or simplification of the rules. For example, the overly complicated tax code has given birth to a whole industry of tax accountants, consultants, and computer software companies. If the government simplified the tax system such as imposing a flat tax, the tax industry would fight the change.

De-criminalization of marijuana represents another example. Criminal-justice system would see fewer cases for marijuana, and would contract because marijuana violations comprise a large fraction of court cases.

Government expanding the drug laws in the 1960s fueled the massive growth of federal and state prisons. If the federal and state governments decriminalize drug use, our leaders could cut the criminal-justice system in half. Many judges, lawyers, prison guards, and police would become unemployed and scare the public about an imminent crime wave.

## References

[1] Chico Municipal Code. "Nuclear Free Zone Law." Division IX – Nuclear Weapons, Chapter 9.60. Accessed on (5/15/08) at ttp://www.chico.ca.us/municipal_code/title_9.pdf

[2] Pacific Grover Municipal Code. " Monarch Butterflies." Title 11 Health, Safety, and Environment, Chapter 48.010. Accessed on (5/20/08) at http://www.ci.pg.ca.us/

[3] Rogers, John. May 15, 2008. "In L.A., controversy sizzles over taco truck restrictions." _Houston Chronicle_.

[4] Lieberman, Joe. April 26, 2001. "The Media Marketing Accountability Act." Available at http://lieberman.senate.gov/newsroom/release.cfm?id=208614 (access date 01/12/09).

[5] Howell, Parker, May 29, 2008. "House flipping now can draw hefty fines." _Spokesman Review_.

[6] Aho, Karen. November 27, 2007. "The Basics: What illegal drug use can cost you." _MSNBC_

[7] Arena, Kelli and John King. March 11, 2008. "Source: Spitzer investigated for link to prostitution ring." _CNN Politics.com_

[8] Coen, Jeff. April 3, 2009. "Former Gov. Rod Blagojevich indicted." _Los Angeles Times_.

[9] Associated Press. December 16, 2008. "Former NH lawyer stops payments for art thefts." _Auction Central News._

[10] Wolf, Bryon. January 26, 2009. "Senate Approves Geithner Despite Tax Issues." _ABC News_. Available at http://abcnews.go.com/Politics/President44/story?id=6733907&page=1 (access date 05/15/09).

[11] Freking, Kevin. February 2, 2009. "Daschle apologizes for failure to pay $120,000 in taxes." _Houston Chronicle._

[12] Kelley, Matt. February 5, 2009. "Tax snafus add up for Obama team." _USA Today_. Available at http://www.usatoday.com/news/washington/2009-02-05-solis-husband-taxes_N.htm (access date 05/15/09).

[13] Murray, Mark. March 2, 2009. "More tax problems for Team Obama?" _MSNBC_. Available at http://firstread.msnbc.msn.com/archive/2009/03/02/1817065.aspx (access date 05/15/09).

[14] Morgan, Theodore. 1964. "The Theory of Error in Centrally-Directed Economic Systems." _The Quarterly Journal of Economics_ 78(3): 395-419.

[15] Dobel. J. Patrick. 1978. "The Corruption of a State." _The American Political Science Review_ 72(3): 958-973

[16] Aidt, Toke S. 2003. "Review: Economic Analysis of Corruption: A Survey." _The Economic Journal_ 113(491): F632-F652.

[17] WBNG News. December 16, 2008. "Governor Paterson's Executive Budget." _WBNG._

[18] Christie, Jim. December 11, 2008. "California budget shortfall seen nearing $42 billion." _Reuters_

[19] Trachtman, Michael G. 2003. "Is There Anything Wrong With Favoring Minorities To Promote Diversity In Your Workplace?" _NewsletterAccess.com_. Available at http://www.newsletteraccess.com/display_article.php?id=10099 (access date: 12/24/08).

[20] Pape, John. 2008. "Principal Claims Innocence, Says His Arrest Sends Wrong Signal." _Fort Bend Now_. Available at www.fortbendnow.com (access date 07/03/08).

[21] U.S. Government Printing Office. 2007. Energy Independence and Security Act of 2007. Washington, DC: Available at http://purl.access.gpo.gov/GPO/LPS94451 (access date 10/21/08).

# 3. Frivolous Lawsuits

"It's strange that men should take up crime when there are so many legal ways to be dishonest."

-Author Unknown

Every country developed a system of codified laws that define the legal relationships between people, businesses, and government. We define codified laws as four types:

**English Common Law System:** All former English colonies, except Malta have this system, such as Australia, Canada, Hong Kong, India, Great Britain, and the United States.

**Civil Law System:** The civil law system is one of the oldest and most dominant legal systems, originating from the ancient Roman Empire. Most European and Latin American countries use a civil system. They adopted either the Napoleonic or Germanic civil code.

**A Religious Legal System:** Religion becomes the inspiration and source of law. All Christian nations moved away from a religious legal system. However, several Muslim countries still use a Muslim religious legal system known as Sharia Law.

**A Hybrid System:** A country mixes religious and common law, or religious and civil law.

United States has a common law system, whereas the court system provides additional checks and balances on the other two branches of government. Congress and the President can sign new laws into existence, and the court system can shape these laws. If Congress and the President passed a bad law, a court can remove the law through judicial review or re-shape the law.

Common law creates the following benefits:

**Benefit 1:** Courts provide an additional check on government. Most states and the federal government appoint judges, who are free from the whim of the voters. Judges do not seek re-election or appease the voters. Some states such as Michigan, Oklahoma, and Texas elect judges for public office. Are judges in these states serving justice or running popularity contests?

**Benefit 2:** English common law is flexible. Judges can reshape laws as society changes.

**Benefit 3:** English common law uses jury trials. Jury trials provide an immense check on the legal system. Attorneys on both sides of a trial present their case in front of an impartial jury, which is a group of people from society. Consequently, attorneys must do research, so they can sway a jury to their side.

The common law system has three disadvantages.

**Disadvantage 1:** If Congress and the President signed a bad law into existence, the court system waits for a court case to occur from the bad law. The court system does not immediately strike down bad laws. If it did, it would have enormous power. Thus, bad laws can be in the law books for years before the courts remove them.

**Disadvantage 2:** The common law system is more complex. Judges refer to the laws passed by Congress and the President, and court cases that set legal precedents. A precedent is an important court case that starts a new interpretation of the law or re-shapes old laws.

**Disadvantage 3:** Government appoints judges based on their political views and not their abilities.

All states replicated the common law system except Louisiana. State of Louisiana adopted a civil system based on the Napoleonic code. Judges in a civil law system strictly enforce the law, and they cannot alter it. Consequently, a civil-court judge enforces all conditions of a contract, while a common-law judge can modify contracts. Finally, a civil-law judge, or a panel of judges are the sole decider in civil systems. However, some countries with civil systems have incorporated juries.

High-income countries usually have a common law system, although the civil law system dominates the world. Table 1 shows the top 10 income per capita countries with their type of legal system. The countries, Bermuda, Brunei, Falkland Islands, Hong Kong, Jersey, and Liechtenstein have a British Common Law System while Singapore and Qatar mix common and religious legal systems. United States was in the top ten, but its ranking continually drops. Consequently, the richest countries in the world have a common law system.

Common law systems usually have strong, pro-business legal systems. Furthermore, common-law judges have shown leadership and initiative by using a court case to re-shape society. Two famous examples are:

**Example 1:** The Bill of Rights originally applied to the federal government. However, the Supreme Court expanded the Bill of Rights to the states through the court case, _Gitlow versus New York_ (1925). State of New York arrested and convicted Gitlow for criminal anarchy because Gitlow was a socialist who advocated the overthrow of the government. Gitlow wrote his views in his "Left Wing Manifesto," and was caught distributing these pamphlets to the public. The Supreme Court ruled the State of New York did not violate Gitlow's right to free speech or freedom of the press because his writings advocated the overthrow of the government.

**Example 2:** After the North won the civil war, President Abraham Lincoln freed the slaves in the south. However, the large plantation owners relied on slavery as cheap labor. Thus, the southern state governments initiated a new system that perpetuated slavery without calling it slavery, which we know as the "Separate but Equal Laws." The South separated African-Americans and whites if the state provided equal facilities for both races. Consequently, African-Americans had different facilities for schools, restrooms, and parks, and separate seating for buses and restaurants. Of course, African-Americans were short changed and given inferior facilities and schooling.

Laws kept them poor and imprisoned on the plantations. In 1954, the Supreme Court removed the Separate but Equal Laws in the case, _Brown versus Board of Education of Topeka, Kansas_. Thus, the Supreme Court legally ended segregation and initiated the civil rights movement.

Common-law judges did great things for our country and helped improve society. However, our contemporary judges and Supreme Court justices possess a pro-government attitude. They expand government and restrict citizens' rights. Two prominent examples are:

**Example 1:** Supreme Court intervened in the 2000 Presidential Election. Election between George W. Bush and Al Gore was very close; one state, Florida, became the deciding factor. Bush [supposedly] beat Gore by several hundred votes. The Supreme Court halted the recount of punch-card ballots in Florida because a recount would violate George Bush's right to the "equal protection of the laws." Justices voted in a 5-4 decision [1]. Did the conservatives on the Supreme Court stand behind Bush because he was conservative or did they truly protect Bush's rights? What happened to the rights of Al Gore?

**Example 2:** U.S. Congress and the President passed the Clean Air Act of 1990 giving the Environment Protection Agency (EPA) the legal authority to regulate pollution emissions of 188 chemicals.

Public awareness of global warming has focused attention on carbon dioxide emissions. Consequently, the U.S. Supreme Court ruled in the _Massachusetts versus the EPA_ (2006) that the EPA must regulate carbon dioxide as a pollutant.

Supreme Court ruling has two problems. First, the original law never contained carbon dioxide as a pollutant. Supreme Court added this to the law. Second, the cycle of life requires carbon dioxide. Humans and animals breathe out carbon dioxide while plants recycle the carbon and create oxygen.

Supreme Court ruling vastly expands the EPA's sphere of power. All humans, animals, and the use of fossil fuels, such as gasoline, diesel fuel, and coal emit carbon dioxide. In the EPA's defense, they were sued to add carbon dioxide. They did not actively seek out this additional responsible. However, the court has given the EPA vast authority over the U.S. economy [2].

Massachusetts sued the EPA because computer simulation models showed the Massachusetts' coast could be under water in 50 years. However, global warming is a theory! We do not know if we are experiencing a warming trend, or if greenhouse gases like carbon dioxide are warming the earth. Scientists, who build these models program their beliefs into the computer model. If the scientists believe in the global warming, then their models will reflect that. Economists built large simulation models of the economy during the 1960s, but they stopped doing it. Models provide poor economic forecasts. Now they build these models for the whole planet!

Pundits of global warming ignore active sunspots. A more active sun may warm the earth. For instance, the 17th century experienced little sunspot activity, and historians call this the mini-Ice Age. Moreover, if you were around in the 1960s, the fear for humanity was the dawn of a new Ice Age because the world experienced a slight cooling trend.

## Torts

Common law system is a strong system if good judges with common sense fill the courts. Common-law judges established and defined the modern laws for property rights, contract law, and torts. A tort is one person or party harms another party. Then a judge or jury compensates the victim for the harm.

Judges can use torts to compensate efficiently people for harms. Compensation makes the harmed party "whole again," so the harmed party is just as well off as if the harm did not occur. Problem is "whole again" is a value judgment. For example, a person owned a car for five years until his relative wrecked the car. Person has used the car for five years, so "whole again" does not mean he should get a new car. He only gets the current value of the car at the time of the accident. Consequently, harmed parties over appraise the harm, while the harmer (tortfeasor) undervalues the harm. Judges or juries must determine if the plaintiff is at fault, and if he or she is, then place a value on the harm.

Torts arise from three situations:

  * One party harms another party intentionally. These harms are usually crimes, such as assault, attempted murder, or murder.

  * One party accidentally harms another party. This harm could be a crime for cases such as manslaughter, maiming, or causing a permanent injury.

  * A defective product harms one party accidentally.

Modern courts expanded the definition of harms. Judges apply tort laws to parties who are not responsible. Moreover, judges and juries can add punitive damages to the compensation. Punitive damages punish the plaintiff for the harm, thus teaching him a lesson.

Four prominent examples show the problems with torts:

**Example 1:** Judges and juries have a difficult task of placing a true value on the harm. Hence, every harm is inflated to a million dollars or more. In one case, Pennzoil versus Texaco, the court initially awarded $11.12 billion in damages and $1 billion in punitive damages [3]. Thus, one lawsuit can easily bankrupt a company or a small corporation.

**Example 2:** Courts include mental anguish and suffering as damages. Judges and juries already have difficulties placing a value on the harm, but now they must place a value on suffering. Of course, defendants receive damages as money, so they have an incentive to exaggerate their suffering.

**Example 3:** Courts expand cause and effect. Tort should remain close to the affected parties at hand. For instance, a drunk driver harmed an innocent bystander because he drove while intoxicated. Drunk driver committed a crime, and an injured innocent bystander has every right to sue for damages. However, alcoholics usually do not have money, so attorneys follow the alcohol and pursue the parties with money, such as bars or liquor stores. If a bar or store did not sell the alcohol, then the innocent bystander would not be harmed.

Problem is, where does the chain of causality stop? In this case, the chain of causality is the drunk caused the harm (immediate), but the drunk drank alcohol; the store sold the alcohol to the drunk; a company sold the alcohol to the store; the farmers sold the ingredients to the company to make alcohol, and God created the yeasts that convert the sugars in grains into alcohol. Lawyers can follow the causality chain well until they reach a party with deep pockets. Fortunately, the court system does not have access to God's checkbook; otherwise, all the lawyers would sue God since he starts at the beginning of all causality chains.

**Example 4:** Courts do not assign responsibility correctly and ignore the notion of free choice. For example, everybody knows which foods are healthy, and which ones are not. We all know fast food is not healthy food. However, two teenagers sued McDonald's in New York, blaming McDonald's for their weight gains and health problems.

McDonald's did not force anyone at gunpoint to eat their food. Teenagers freely choose which foods to eat and which place. McDonald's does sell good salads too, but consumers do not line up to buy salads. Surprisingly, the court correctly dismissed the lawsuit. Remember, McDonald's still hired attorneys to fight his lawsuit, which costs money. If McDonald's lost, then attorneys would file hundreds of lawsuits against McDonald's. Once a piranha tastes blood, they swarm in and devour the victim.

Rise of frivolous torts and lawsuits is leading to a crisis in America. Innocent parties can be sued for the most ridiculous reasons. Out-of-control lawsuits can harm the U.S. economy. Lawsuits expropriate money from businesses and families and could cause bankruptcies. Furthermore, some people are compelled to play the lawsuit lottery game. Public knows many high profile lawsuits, when defendants won millions of dollars from a court case. Some people injure themselves to tilt the lawsuit in their favor.

Some examples include:

**Example 1:** Some obstetricians switched their specialties to lower risk ones. If a doctor accidentally harms a patient, an insurance company pays compensation to the patient. Thus, all doctors must carry malpractice insurance. Unfortunately, these doctors are hit with many lawsuits and large damage awards. Insurance companies hiked the premiums. For example, one doctor, who was never sued seen his malpractice insurance jump to $84,000 per year in 2004. He only paid $23,000 in 2002 [4]. Consequently, obstetricians can no longer afford their malpractice insurance and switch specialties than fight a wave of lawsuits. A shortage of obstetricians is so severe; pregnant mothers drive to the next county or the nearest largest city to find an obstetrician.

**Example 2:** Most infamous case is the McDonald's coffee lawsuit. In 1992, Stella Liebeck and her grandson went to McDonald's, buying breakfast from the drive thru. Her grandson parked the car, allowing Stella to add cream and sugar to her coffee. She accidentally spilled coffee on her lap, causing third-degree burns. Stella stayed in the hospital for two weeks and required skin grafts. Pain and suffering was real, but the problem with this case starts with the definition of a tort. Stella burned herself, which was not McDonald's fault. If a person accidentally hurts himself, then it is their fault, not somebody else. Her lawyer claimed McDonald's sold a harmful product because McDonald's coffee tends to be hotter than other restaurants. A jury awarded Stella $2.86 million, but the trial judge lowered the amount to $640,000. McDonald's and Stella settled for a lower, undisclosed amount [5].

**Example 3:** A federal judge sued a dry cleaner for $65 million because the dry cleaner lost his pants. Dry cleaner found the pants a week later. Dry cleaners were from Seoul, South Korea, and came to this country to live the American dream. Owners have become disenchanted with the U.S. legal system. They are considering their return to South Korea [6].

**Example 4:** A woman wanted to sue Wendy's restaurants because she found a severed, human finger in her chili. Police discovered the woman planted the finger in the chili, hoping to be compensated by Wendy's. This woman also has a history of filing lawsuits. Unfortunately, this incident tarnished Wendy's reputation that persists to this day [7].

These incredibly large damage awards have attracted schools of sharks to the legal profession. These schools of sharks swim around the economy, searching for victims with money. We call these sharks lawyers, and lawsuits are a profitable business, or at least until the 2008 Financial Crisis. Even law firms are laying off attorneys, so the 2008 Financial Crisis does have one positive quality.

Out-of-control lawsuits impose five problems on a society.

**Problem 1:** Lawsuits are expensive. A company spends thousands of dollars to fight a frivolous lawsuit.

**Problem 2:** Some companies have multiple lawsuits filed against them. For example, Wal-Mart is fighting 5,000 lawsuits. Wal-Mart pays an immense legal bill as it sends lawyers across the United States, filing paperwork with the courts.

**Problem 3:** All organizations, even small ones, hire one or more attorneys. Attorneys give legal advice to the managers, but the lawyers do not produce goods and services. Thus, businesses must hire people, who do not contribute directly to the bottom line.

**Problem 4:** Large damage awards can bankrupt businesses or force a business to flee to a country with a more hospitable legal environment.

**Problem 5:** Lawsuits can halt economic development. For example, local government and the majority of citizens want a company to build a factory in their community. The factory will bring jobs, create wealth, and expand the tax base, boosting local tax revenues. One person can halt this progress by filing a lawsuit against the company, stopping economic development.

## Festering Growth of Attorneys

The United States has an unbelievably complex legal system. With too many laws, people outside the legal profession cannot understand them or follow them. An overly complex legal system automatically creates a demand for lawyers. Of course, lawyers cannot remember all the laws, so even lawyers specialize with the common specialties being criminal, civil, divorce, immigration, or tax. Why do we have so many laws? Lawyers pack Congress and the state legislatures. They dream up new laws or expand old ones, which strengthen demand for the legal profession.

According to the American Bar Association in 2008, the United States had 1,162,124 practicing attorneys. This statistic does not include law school graduates who do not practice law. Furthermore, the number of practicing attorneys increased 18,000 from 2007. This number appears small when compared to the U.S. population of approximately 300 million Americans. However, the U.S. has one lawyer for every 300 men, women, and children.

The U.S. economy is teeming with ravenous attorneys. Attorneys provide legal services, such as suing people and businesses for money. If the United States has one lawyer for every 300 men, women, and children, then a lawyer possesses few options. A lawyer works at least 40 hours a week for 52 weeks per year. Consequently, attorneys are creative in filing lawsuits, dreaming new ways of extorting money from businesses and people or creating a demand for their services.

Attorneys utilize six common methods to extort money from innocent parties:

**Method 1:** An attorney files a nuisance lawsuit. A lawyer can sue a person for a silly reason, but the high cost of preparing and going to trial forces the defendant to settle out of court. Some people and businesses have principles and will fight any lawsuit regardless the amount of money. Thus, the defendants will hire a lawyer or a team of lawyers to fight the lawsuit.

**Method 2:** Lawyers do not have an incentive to finish work because they charge by the hour. During a lawsuit, both the plaintiffs and defendants have lawyers, who have a financial incentive to delay the court case, racking up more time and larger legal bills. Thus, lawyers love messy cases because chaotic cases involve time and are expensive.

**Method 3:** Lawyers pick the courts, where they want their cases heard. Some court districts are located in regions, where judges and jurors are favorable to the plaintiffs.

**Method 4:** An attorney files a lawsuit against a person for failure to repay a debt. If the person does not show up to court, the judge automatically grants a default judgment in the lawyer's favor. Now, the lawyer can schedule another hearing to garnish wages or seize a bank account. Lawyers can be dirty if the attorney sends the notice to appear in court to a wrong address or a previous address, ensuring the person does not show up for the hearing. Judges held innocent people responsible for debts that were not theirs.

**Method 5:** Class-action lawsuits provide large financial compensation to lawyers, even from minor harms. For example, if a lawyer has one client with a $1,000 lawsuit, the lawyer may earn 40% or $400 if they win. This represents a small financial incentive. However, if the lawyer can represent 1,000 clients at the same time for $400 per client, then his stake rises to $400,000. Thus, this lawsuit becomes worth time and effort.

**Method 6:** Some lawyers establish rackets. For example, an attorney finds two people with good car insurance and artificially produces a car accident. Then the lawyer sends the people to his network of doctors, who find whiplash and other injuries. Next, the lawyer files a claim or sues the car insurance companies for damages. Doctor, attorney, and the clients get a cut of the insurance check. Unfortunately, everyone in society pays greater insurance premiums.

## The Parasitic Class

A government with an overly complicated legal system creates a parasitic class. A parasitic class represents a group of people who depends on the government for their livelihood. Everyone reading this book concludes people on welfare and other social programs belong to the parasitic class. However, the parasitic class depends on a person's circumstances. If the recipients use government aid temporarily, then they are not in the parasitic class. They use government as a crutch to get them back on their feet. This is why government provides social programs. Nevertheless, if people have the ability to work and depend on government for aid for a lifetime with no intentions ever to give it up, then they are parasites.

Unfortunately, the United States may have a large parasitic class because our social programs have the following problems:

**Problem 1:** Government freely hands out money. Some people will purposely change their circumstance or lie to get government aid. For example, a person lies about a back problem to get disability pay. A mother on welfare avoids marriage or obtains a divorce in order to collect a welfare check. Despite any government crackdown, free loaders, who do not need the aid will always take advantage of free help. Always! One shocking observation about our economy is the large number of young people who look healthy but are collecting disability. Once the government says a person is disabled, that person can collect a check each month for the rest of his or her life.

**Problem 2:** Government provides the wrong incentives. For instance, state welfare programs give more money to single mothers with more children. Consequently, single mothers bear more children to collect larger welfare checks. Unfortunately, the children see their mother receiving free money, which encourages them to do poorly in school and not acquire any skills. They know they can get welfare too, once they attained 18 and have children. Thus, government programs encourage single-parent households and continue a cycle of dependence for the next generation.

**Problem 3:** Government programs create dependence on aid. Many people on aid do not upgrade their skills or search for a job. For instance, if you receive $15,000 a year from government to do nothing, what is your salary threshold to start working? Would you start working for $30,000 per year? Problem is you are working, and you must pay taxes out of that salary. That salary threshold can be quite high for most people.

**Problem 4:** Government programs divert funding away from charity organizations. People contribute less to charities because they know their taxes help support social programs. Of course, if government levies large taxes on people's incomes to finance these public programs, then people are rarely in a charitable mood.

Nothing is wrong with social programs. Government just needs a smarter approach. A good social program requires two components. First, the aid must be temporary. Second, a program must wean the recipients off the aid. Remember the adage, if you give a man a fish, he can eat for a day. If you teach a man how to fish, then he can feed himself for a lifetime.

One exception is social security. Many countries give their senior citizens a form of income security because the government rewards the elderly for being a taxpayer for most of their lives. Of course, the senior citizens are a strong voting group that career politicians must cater to.

The parasitic class is much larger and includes several groups of professionals, such as lawyers and bureaucrats, who depend on government for their employment and livelihood. They thrive on complicated laws and rules, and in turn earn high salaries for their knowledge. Five examples illustrate how professionals are parasites feeding off from society.

**Example 1:** With the government welfare programs, government hires counselors, attorneys, psychologists, and other professionals, who determine who gets aid and how much. If the states did not have these programs, then these professionals would not be working for the government.

**Example 2:** Lawyers represent a large group of parasites. If the rules and laws were simple, then families and businesses would not need the services of lawyers. However, the U.S. and state laws are extremely complicated and beyond the comprehension of most people. Thus, they hire one or many attorneys. Lawyers even hire lawyers to win lawsuits. Furthermore, judges always recommend defendants to retain lawyers, and they frown at people representing themselves.

**Example 3:** Government will deny the claims for half the people who apply for Social Security. Some people hire attorneys and sue the federal government. Thus, the lawyers' employment depends on a federal program. Of course, government may hire investigators and lawyers, who investigate the claimants and prove they are not disabled.

**Example 4:** Overly complicated tax code has given rise to software companies, tax preparers, and accountants, who help the taxpayers remain compliant. Consequently, these professionals would be unemployed if the federal and state governments simplified the tax codes.

**Example 5:** Everyone knows a court case, when a judge or jury awarded large damage awards. People are determined to play the lawsuit lottery. Attorneys do not mind because they get paid, whether they win or lose a case. Furthermore, the judges do not mind because they are working and maintaining full dockets. Then they ask legislators for more funding, hire more judges, and build more courthouses. See how we end up in this vicious cycle?

A parasitic class is difficult to reform, after becoming a dominant class in society. When a large group of people depends on government for their livelihood, they fight against any reform or changes that threaten them. For example, if Congress and the President streamlined the tax code and made it simple, several corporations would bankrupt while thousands of tax preparers, accountants, and tax lawyers become unemployed. If you want proof, just look at Greece. Between 2010 and 2012, the Greek government had severe financial problems and reduced its spending. Unions, workers, and people went on strikes and protests. Several protests erupted into violence as protestors clashed with the police. Some Americans believe Greece is a prelude to what will happen in the United States within several years.

## Conclusion

Judges in courts today differ from the judges a century ago. During the 19th century, judges were pro-business. For example, citizens could file a nuisance lawsuit against a factory because factories generate pollution and noise. However, the citizens usually lost their court case because judges knew the factories employed workers and created wealth.

Contemporary judges differ from the judges in the 19th century. Businesses and law-abiding citizens usually lose court cases, even for frivolous matters. Unfortunately, people and managers do not have perfect foresight and do not know the infinite ways for idiots to abuse their products. Several silly lawsuits include:

**Lawsuit 1:** Two people mowing their lawn had a bright idea. They picked up a running lawnmower to hedge bushes. Unfortunately, the lawnmower chopped off their fingers. Then the idiots sued the lawnmower company because the company did not provide any warning or disclaimer for using a lawnmower to hedge bushes.

**Lawsuit 2:** A burglary tried breaking into someone's home by climbing onto the roof. Unfortunately, the burglar fell through the roof, landed on the floor, and was shot by the homeowner. Although the burglar committed a crime, he sued the homeowner for using excessive force [8].

**Lawsuit 3:** Asbestos led to the largest and most expensive litigation in U.S. history. Construction companies used asbestos as a common building material because it was an excellent fire retardant and insulator. Unfortunately, people, who breathe in the asbestos fibers, can develop respiratory illnesses such as mesothelioma, lung cancer, and asbestosis. Consequently, lawyers sued the asbestos industry, and the industry started a fund to pay future asbestos claims. Unfortunately, everybody likes to play the lawsuit lottery. People who thought they saw asbestos sued for a piece of pie because they thought, they could develop an illness. Industry has not used asbestos since the 1980s, but in 2002, more than 8,400 defendants and 730,000 claimants sued or plan to sue the industry [9].

English common law system is an excellent system, but it depends on good judges. Good judges can help rein in the legal system, stopping out-of-control attorneys and zealous prosecutors. If a judge truly believes in truth, justice, and the law, then he or she uncovers the truth and ensures justice. Judges punish the guilty and set the innocent free. However, if a judge does not want to appear weak on crime or appear politically incorrect, then the judge sweeps the truth and justice under a rug.

## References

[1] Savage, David G. October 22, 2008. "Roe vs. Wade? Bush vs. Gore? What are the worst Supreme Court decisions?" _Los Angeles Times_ , Available at http://www.latimes.com/news/nationworld/nation/la-na-scotus23-2008oct23,0,1693757.story (access date 12/12/08).

[2] U.S. Supreme Court. 2006. "Massachusetts et al. v. Environmental Protection Agency et al." Available at http://www.supremecourtus.gov/opinions/06pdf/05-1120.pdf (01/03/09).

[3] Sherman, Stratford P. March 17, 1986. "The Man Who Got Hit for $10.5 Billion." _CNN Money_. Available at http://money.cnn.com/magazines/fortune/fortune_archive/1986/03/17/67302/index.htm (access date: 01/03/09).

[4] Attkisson, Sharyl. April 2, 2004. "High Cost of Malpractice Insurance." _CBS Broadcasting, Inc_.

[5] Wikipedia. May 2008. "Liebeck v. McDonald's Restaurants." Available at www.wikipedia.org (access date 5/10/08).

[6] Associated Press. May 3, 2007. "Judge: Cleaner owes me $65 million for pants - 2 years of litigation x 1 pair of trousers = headaches for family business." _MSNBC_.

[7] Associated Press. April 13, 2005. "Finger-in-chili accuser has litigious history." _MSNBC_.

[8] _Channel 3000_. September 21, 2006. "Accused Burglar Sues Homeowner Who Shot Him." Available at http://www.channel3000.com/news/9905807/detail.html?rss=c3k&psp=news (access date 01/03/09).

[9] Wikipedia. December 2008. "Asbestos." Available at www.wikipedia.org (access date 12/31/08).

# 4. Regulating Excessively

"If we had to follow all the regulations, then Russia would not be growing at 7%."

-A Russian Businessman

A regulation is government limits the behavior of individuals or a business because it sees a problem in society and wants to correct it. The only way for the government to know whether people are following a regulation is to expand a regulatory agency or establish a new one that enforces the limitation.

Regulations are not necessarily bad! Some regulations make society better off. Several examples of good regulations include:

  * The government established the U.S. Department of Agriculture to inspect food and to reduce contaminated foods from entering the food supply.

  * The U.S. Government established the Federal Aviation Administration to regulate airspace and inspect airplanes.

  * Government founded the Federal Trade Commission to investigate monopolies. Thus, the federal government could regulate or break up a monopoly.

A monopoly is a firm controls a market or a product. Thus, by definition, a monopoly does not have competition. Then the monopolist reduces production, boosting the market price and earning enormous profits. Monopolies usually form in the petroleum, communications, electricity, and natural-gas industries.

A government steps in and regulates the market, curbing a monopolist's power. This is why corporate mergers require permission from government because mergers allow companies to expand into larger ones as it acquires smaller companies. Growing companies can grow into monopolies.

Government implementing regulations is a complex process, involving politicians, interest groups, industries, and regulatory agencies. Furthermore, various groups in society strive for control or influence over regulatory agencies and politicians. Interest groups can form for any purpose or cause. Common interest groups are:

  * Consumer groups want low prices and safe products.

  * Stores want access to cheap Chinese imports.

  * Manufacturing wants to earn high stable profits, so they want government to restrict international trade and restrict labor unions.

  * Labor unions strive for greater workers' wages, thus reducing businesses' profits and raising business costs.

Fastest method to gain control over the regulatory agency is the interest groups capture the politicians, who control the law-making process. Campaign contributions become the sure, quick, and easy method because politicians want to remain in office, but political campaigns cost millions of dollars. For example, the campaign cost to win a house seat in Congress averaged $1 million in 2004 while a Senate seat cost $7 million. Unfortunately, the person with the most money wins. Hence, politicians beg and solicit interest groups for money by knocking on people's doors or using mail, internet, and telephone [1, 2].

Campaign contributions can influence politicians' decisions. If a company contributes $1 million to a politician's campaign, and this company wants a special law, the politician will help him. Once politicians win and get into office, they always set their eyes on the next election or a higher position in government. They need a continuous flow of campaign contributions to help sponsor them. If politicians lose elections, then they must find real jobs and work for wages. Remember that old joke, "Talking to politicians is fine, but with a little money, politicians hear you better."

One problem is a large portion of campaign contributions flows to consultants. During the 2003-2004 federal elections, consultants earned almost $2 billion. For example, President Bush paid $177 million to Maverick Media for his 2004-reelection commercials [2]. Problem is the consultants inform politicians how to win the election, such as which issues to side, which interest groups to ask for money, and which laws and regulations to propose.

Politicians and consultants want to win the election at any cost. Once in office, they have their eyes on the next election and the ensuing round of fund raising. Thus, politicians do not pass laws and regulations to make society better off; their goal is to get into office, support any issues that get them there, garner campaign contributions, and pass any laws that make their interest groups happy. Consequently, politicians are career politicians who cater to special-interest groups.

Educated people also exacerbate the expansion of regulations because they use regulations to generate business for their specialties. Unfortunately, a complicated, convoluted regulatory system boosts demand for professionals. Several examples are:

**Example 1:** Certified Public Accountants (CPAs) want an overly complicated tax code. Thus, businesses and people hire them to ensure businesses and people comply with the tax rules and pay the lowest level of taxes. If the United States passed a simple, flat income tax, the majority of CPAs would be standing in the unemployment line.

**Example 2:** Counselors want everyone to get counseling. Any minor cases brought before the judge of a criminal court usually require counseling. Counselors aid truant kids, married couples, alcoholics, and drug addicts. Unfortunately, this counseling is not free, and the evidence is not clear whether counseling helps people. With all the violence and wars that plagued humanity, we somehow made it to the 20th century without psychologists and counselors. Remember, Sigmund Freud invented psychology and counseling in the 1880s, and incidentally, three-quarters of his patients were wealthy.

**Example 3:** Universities and colleges want education to be a continuous process. Many occupational licenses from state governments such as teaching certifications, CPAs, etc. require people to continually take courses for their annual re-certification. These courses are available through the internet and cost several hundred dollars.

Politicians, consultants, and educated people help expand government regulations to the point where regulations are out of control. During the last 40 years, social regulations have exploded in the United States. A social regulation means a government regulates behavior that it believes makes society better off, which can be anything. For example, during the mid-1960s and 1970s, the U.S. government established the following agencies:

  * **Environmental Protection Agency (EPA)** – must decrease pollution and improve the environment.

  * **Occupational Safety and Health Administration (OSHA)** – must improve worker safety standards. OSHA can dictate which machines and equipment employers can use to satisfy regulations.

  * **Equal Employment Opportunity Commission (EEOC)** – to ensure employers do not discriminate against minorities and women for job hiring, promotions, or working conditions.

  * **Consumer Product Safety Commission (CPSC)** – to ensure consumer products are safe. CPSC can force businesses to recall consumer products if the CPSC believes products are not safe.

  * **Federal Emergency Management Agency (FEMA)** – a government agency to aid local communities, devastated by a natural disaster such as an earthquake or hurricane. FEMA provides food, medicine, and shelter to needy residents.

Government created these agencies to make society better off. For instance, the EPA must reduce pollution, reducing the pollutant's harm to the public. However, the EPA dictates its goals and tells industry which equipment to buy to reduce pollution. A business has no say about the costs.

A better approach uses a market. Instead, government tells industry how much to reduce pollution, and the industry decides how to meet these goals. EPA has implemented some market incentives for pollution emissions from sulfur dioxide and mercury.

Another problem is the bureaucracies become incompetent, or the regulations become complex, silly and onerous. Several examples include:

**Example 1:** OHSA specified the height of handrails, and the spacing of posts in a workplace.

**Example 2:** Churches, thrift stores, or people sell second-hand goods at garage sales, flea markets, or through the internet. People cannot sell one of thousands of products that the CPSC has recalled. CPSC started Resale Roundup, where enforcement officers search vigorously for violators through the internet. They track down, arrest, and jail anyone who resells an item appearing on the CPSC recall list [3]. Unfortunately, safety standards have no bounds nor does stupidity.

**Example 3:** FEMA tends to be slow, bureaucratic, and hampers rescue efforts. FEMA showed poor leadership for Hurricane Hugo in 1989, Hurricane Andrew in 1992, and Hurricane Katrina in 2005. In FEMA's defense, FEMA tends to be poorly funded and a dumping ground for politically connected appointees with no experience [4].

**Example 4:** Texas Workforce Commission forces yoga training schools and studios to apply for a certificate or request an exemption. State can fine the studios and schools $50,000 for non-compliance, while a certificate can cost between $1,000 and $3,000 per year. Since the State of Texas does not have an income tax, the state agencies are aggressive in collecting fees and fines. Some yoga studios closed down while others banded together to challenge the state [5]. Sometimes you must ask why the state must be so petty, so trifling?

**Example 5:** People can legally buy cigarettes in U.S. if they are 18 or older. However, state governments heavily tax cigarettes, won multimillion-dollar lawsuits against tobacco companies in 1990s, and passed many laws restricting tobacco use. Many states and city governments ban cigarette smoking in restaurants, bars, near building entrances, schools, near children, in cars, etc. Instead of having thousands of these regulations, it would be simpler to make tobacco illegal. Of course, if tobacco were illegal, then government could not collect money from lawsuits and high cigarette taxes.

**Example 6:** Criminal sentencing rules are so complicated in Texas; judges, prosecutors, and prison officials cannot figure them out. Consequently, prisoners hire attorneys and sue the state to determine their remaining prison time. Then compound this problem with inmate overcrowding, budget problems, and parole hearings [6]. This is very foolish because a jury or judge determines the time for a convicted felon. Then the state grants a parole board the power to release the nonviolent criminals early to relieve overcrowding. If the state imposed simple, straightforward rules, then Texas would not have this problem. Remember – complicated regulations create a demand for more professionals such as attorneys.

These glaring examples indicate regulations are out of control in the United States. For example, Office of Advocacy – a small office within the U.S. federal government – estimated a small business spent $7,647 per employee in 2005 to comply with federal regulations while a large business spent $5,282. A small business employs fewer than 20 employees, while a large one employs more than 500 [7].

Although small businesses create most the jobs, government hurls a large share of the regulatory burden upon them. Some claim large corporations love regulations because regulations reduce competition and prevent small businesses into growing into large ones. Then the large corporations can contribute campaign contributions to the politicians, who pass favorable laws for the corporations.

## Parkinson's Laws

C. Northcote Parkinson observed regulatory agencies expand in size each year without any relationship to amount of work the regulatory agency does, which became Parkinson's Law. Northcote noticed as the British Empire shrank, the number of employees in the Colonial Office increased. Colonial Office administered the British Empire, and a smaller empire implies less work [8, 9]. Thus, the number of employees should decrease over time and not increase!

Parkinson's Law applies to all government agencies because all government agencies increase their scope, mission, and influence over time. Parkinson observed "the total of those employed inside a bureaucracy rose by 5-7% per year irrespective of any variation in the amount of work (if any) to be done" [8,9]. Northcote explained the regulatory agency's growth using three statements.

**Statement 1:** "Expenditures rise to meet income." An agency always spends their funding, regardless of funding level. If a government agency saved money, the legislators will notice and could reduce future funding. Moreover, government bureaucrats always request additional funding and then spend it [8, 9].

**Statement 2:** "Work expands so as to fill the time available for its completion." If a bureaucrat needs four hours to complete a task and has an 8-hour workday, then the bureaucrat will expand the task into eight hours. Thus, the bureaucrats must create work [8, 9], whether creating new forms or forcing citizens to jump through new hoops for permits, approvals, or other such documents.

**Statement 3:** Bureaucrats will "multiply subordinates, not rivals." If a bureaucrat hires a rival, then that rival competes for the same promotions. However, bureaucrats can elevate themselves to managers by hiring subordinates. In order to hire subordinates, bureaucrats must "create work for each other" [8, 9].

Bureaucrats have self-interest to prolong their jobs and create job security. They design long-term programs and continually expand the size, scope, and mission of government. Over time, regulatory agencies expand paperwork, broaden regulations, and increase the complexity. Consequently, educated bureaucrats want complex rules because they can earn higher salaries and create a greater demand for their services. Thus, the size of bureaucracies continually expands and rarely contracts.

## Government, Technology, and Urbanization

Technology encourages the growth and intrusiveness of government bureaucracies. As technology improves for communication, transportation, and record keeping, bureaucracies become larger. Bureaucrats use technology to improve monitoring and ensure compliance with their rules and regulations [10].

For example, smugglers secretly import products and avoid paying duties and taxes to the government. Government uses several methods to combat this. First, customs agents use planes, ships, radar, and satellites to track down ships and airplanes that are not docking at the ports. This vast network searches the skies and seas for violators and smugglers. Second, if the smugglers successfully get their products to the stores and merchants, government agents can backtrack and trace the products back to the smugglers. Stores and merchants record their transactions on documents that government agents can scrutinize. Records allow government agents to match what a merchant sells to what he purchased. If a merchant claims he bought all his merchandise from one distributor, then the agents can check that distributor's records for discrepancies. Finally, tax agents will investigate anyone, who carries too much cash and cannot explain where the money came from.

One hundred years ago, government did not have this technology. Consequently, government had difficulties tracking down and prosecuting smugglers. Thus, the United States maintained a capitalistic and market-oriented economy.

National government uses technology to dominate the entire economy. National government uses the bureaucracies to control cities, villages, and communities that are located far from the bureaucracies [10].

Government maintains large computer databases on people and businesses. If government agents think someone has violated a rule or regulation, they can have a team of agents there within hours, using planes, helicopters, or cars. It is no coincidence the U.S. government has usurped power away from the states. Consequently, bureaucrats in Washington, D.C. are bombarding the county and city governments with numerous rules and regulations. Thus, technology expands the intrusiveness of government.

For example, a business opens an illegal mine in the backwoods of Montana. Eventually, the bureaucrats in Washington, D.C. will hear about the mine and have agents and regulators there within hours to investigate. Mine will show up on a satellite image, or an angry environmentalist reports the mine to the government. One hundred years ago, this mine could operate in secrecy without being caught. Government was too far and remote to intervene in a business's affairs.

Drug testing is another example of intrusiveness and has become a recent phenomenon. Employers and government could not do drug testing before the 1990s. Currently, judges, government officials, high-school principals, and employers want drug testing, even for low-paying jobs.

Drug testing is biased towards only one drug – marijuana. If a person smokes a joint, the active ingredient, tetrahydracannibal (THC), remains in the fatty tissues in the body for a month or more. On the other hand, if people use cocaine, meth, amphetamines, or barbiturates, they abstain from those drugs for two days, and their urine will test clean because the human body quickly metabolizes these drugs.

Many U.S. institutions are intrusive and want drug testing for a wide group of people. Of course, the drug-testing companies profit greatly from this expanding industry. Governors of Michigan and Florida in 2011 want all state employees tested for illegal drugs. Incidentally, the governors indirectly own the medical clinics that will do the testing.

Before the 1990s, an employer checking criminal records would go to the local courthouse and search through the court records. Of course, employers only checked for crimes committed in their county, and convicted felons could move to a new county or across a state line, starting a new life. Criminal records did not follow people in the old days.

Since the 1990s, government and large companies created massive computer databases. Consequently, a criminal record can trail after a person like shackles anywhere within a country. A criminal record exists forever and never goes away. Databases' dominion grows at an alarming rate. Within several years, criminal records will follow a person across countries. Unfortunately, the U.S. criminal system evolved into a puritanical system with no forgiveness. People can have their lives destroyed over a small incident. For example, the unemployment situation has become so bad in 2012; an employer will not hire any employee if anything negative comes up. That trespassing charge or drunken driving incident from college can haunt a person for the rest of his or her life.

Companies report customer information to credit bureaus, such as ChexSystems, Experian, TransUnion, and Equifax. In theory, banks and companies report the credit worthiness of their customers. Nevertheless, the banks and companies use these credit bureaus as a stick to beat on their customer's heads.

For example, if a customer overdrafts their checking account, then the bank adds exorbitant fees to the customer's account. In the old days, a customer could walk away and not pay the outrageous fees. Now, the customer must pay these fees, even if an overdraft results in hundreds of dollars in penalties because the banks report outstanding balances to ChexSystems. Subsequently, that person cannot open another bank account until he or she pays the fees.

In some cases, banks delayed payments or applied withdrawals first before applying the credits, which boost the chance of an overdraft. Consequently, the banks collude with each other via ChexSystems, like the mafia to extract as many profits as they can from their customers. Unfortunately, employers want access to a person's credit history, even for jobs where good credit is not necessary for job performance.

Satellites in the sky form the backbone of a GPS system. A GPS device receives a radio signal from the satellites and calculates the device's location within inches, anywhere on the earth's surface. Unfortunately, GPS has opened new avenues of surveillance. Federal agents can track people of interest with GPS monitoring devices usually connected to a person's car, even without a court order.

Imagine in the old days, two agents would follow a suspect around physically. Agencies expended manpower to survey a person. Currently, those two agents can keep track of thousands of suspects with GPS as agents sit behind a computer screen and track people without leaving the office. Modern cars automatically come with a GPS system. Thus, the agents do not expend energy to install a GPS system on a car because manufacturers have already installed them in modern vehicles.

Once the GPS devices become small enough to implant into the human body, then the government can track people. First, government will require felons to get GPS implants, then anyone convicted of misdemeanors. Next, anyone viewed as a threat to government will require implants. Finally, government will recommend parents to get GPS implants for kids, so they can be located easily if kidnappers grab their child. Of course, government will never remove these implants. Thus, everyone will have GPS implants, and the government monitors everyone. Then the U.S. government evolves into a totalitarian state.

Government agents can track cell phones but not as accurately as GPS. Some state governments are cracking down on pre-paid cell phones because the user remains anonymous. Government wants a person's identity tied to his cell phone.

Modern vehicles contain a black box, which is a computer. Computer adjusts the car's engine and transmission to reduce pollution. However, the computer remembers. As you guessed, attorneys now file paperwork with the court to grab their sticky hands on those black boxes. Those black boxes remember how fast people were driving before the accident, or whether the driver hit the brakes.

Black boxes open new avenues for government. Some legislators are debating laws requiring a car's computer to include Global Position Satellites (GPS). GPS track's a car's location anywhere on the earth's surface. Then a state government monitors a driver's mileage and sends the driver a tax bill for repair and maintenance of highways and roads. Why stop there? A car's computer, connected to a GPS system can keep track of a driver's speed. Thus, if the driver speeds, the computer communicates this information to the local police, where a computer system automatically issues a speeding citation.

Although the government can use technology for good intentions, sometimes the politicians and bureaucrats go too far. For example, all states have laws requiring sex offenders to register with the police. Then the police enter this information into a sex-offender database that the public can access freely.

Government is not wrong to establish these databases. However, these databases create two problems. First, a court does not list an offender's specific crimes or at least not in detail. For example, a court convicted an 18 boy with statutory rape of his 17-year-old girlfriend even if they both attend the same grade in high school. He must register as a sex offender. Second, legislators and police are expanding the list of offences that require offenders to register even for non-sexual crimes. They reason some crimes endanger the public. Thus, offenders must register because they are endangering the public. By definition, is not any crime a safety concern for the public? For instance, a person who speeds endangers the public. Hence, should speeders register as sex offenders because their speeding threatens public safety?

Urbanization creates another factor that expands and enlarges a government's intrusiveness. People living in the country migrate to the cities, searching for work, and escaping the misery and poverty of rural communities. Unfortunately, urbanization always leads to a larger government and more bureaucracies.

Imagine living in a rural community, raising cattle. Which services can government provide? Ranchers are self-sufficient and require little government services because they are separated by wide-open spaces.

Cities have a greater population density as thousands of people live in close quarters to each other. This closeness sparks conflict and problems. For instance, urban areas consume large quantities of fresh water and generate large amounts of garbage, wastewater, and pollution, which stress the environment. Finally, crime, noise, and traffic congestion plague large cities. Consequently, local government expands to reduce these problems, and urban dwellers pay higher taxes than people living in the suburbs, or in the country.

City governments impose building codes, stronger regulations, and greater taxes than rural communities do. Rich and middle-class residents become tired of an intrusive city government and poor government services, so they migrate to the suburbs. As the city loses tax revenue and citizens, it annexes the surrounding suburbs, expanding and enlarging a more bureaucratic government.

## Problems of Regulations

Government is a unique institution. Regulatory agencies can waste taxpayer money, and then the government turns around and raises taxes and fees to cover any budget shortfalls. No other institution in our society has that power. Two examples hone this point:

**Example 1:** U.S. government passed a law, Nuclear Waste Policy Act, to locate a disposal spot for the nation's nuclear waste. Government founded and developed a geographically stable site in Yucca Mountain, Nevada that sits next to the nuclear weapons test site. The government bored a 5-mile long U-shaped tunnel into the mountain. However, political opposition and lawsuits delayed the opening of this facility for decades. Meanwhile, the U.S. military and nuclear electric power plants are stockpiling nuclear waste at their facilities. As of 2008, the government has wasted approximately $9 billion into this project.

**Example 2:** Federal Emergency Management Agency (FEMA) had 10,770 trailers sitting vacant at a deserted military airport in rural Hope, Arkansas. FEMA stockpiled trailers as temporary housing for victims of natural disasters. Unfortunately, FEMA did not make the trailers available to Hurricane Katrina victims because federal law prohibits trailers used in a flood plain. Instead, victims and survivors were living in tents. Government paid $431 million for these vacant trailers [11].

Regulatory agencies may produce the opposite impact than intended. For example, the federal government passed laws and regulations to protect historic buildings and sites. On the surface, this appears to be a good law because the government protects history. However, these regulations destroy historic homes.

If a non-profit or contractor rehabilitates a historic home using government funds and then sells it to a family, subsequently the agency encounters three problems.

**Problem 1:** Nonprofit or contractor applies for permits (or permission) from a historic government agency. Historic bureaucrats can take a long time to approve the project and subject the project to their whim. If the authority is a state government agency, then it takes six months or more to receive a response. Thus, historic preservation agencies add another level of bureaucracy.

**Problems 2:** Historic preservation raises the rehabilitation costs. For instance, if the house needs new windows, a contractor cannot simply rip out the old windows and install new ones. This destroys the "historic integrity" of the home. Instead, the person must repair each window, so it matches the original design, which could greatly increase the rehabilitation cost.

**Problem 3:** Homebuyers are not interested in buying historic homes because ownership comes with many restrictions. Homeowners need permission from a government agency like historic preservation to paint, renovate, or install new equipment such as an air conditioner in historic homes.

Consequently, nonprofits and developers avoid historic houses because they must deal with the historic preservation bureaucracy, more expensive to rehabilitate, and are more difficult to sell. Therefore, these homes sit vacant until government bulldozes the home, when it becomes a hazard to the community. Consequently, historic preservation regulations encouraged the destruction of historic homes.

Other problems of regulations include:

**Problem 1:** Federal, state, and county governments pass regulations that could conflict with each other. For example, the State of California legalized marijuana for medicinal purposes while the U.S. federal government still considers any marijuana use illegal. For another example, the U.S. Department of Energy wanted electric power plants to use more coal during the 1970s to reduce the reliance on imported petroleum. However, the U.S. Environmental Protection Agency penalized coal use because it is a dirty fuel [12].

**Problem 2:** Regulations become rigid as bureaucrats become used to regulating in a certain manner. They rarely change as society changes.

**Problem 3:** Bureaucrats are more concerned with maintaining their jobs and importance and not necessarily helping people. They become good at justifying their programs and importance to legislators because legislatures allocate the funding and money.

**Problem 4:** Different government workers interpret the laws and regulations differently. Some government workers are strict while others are lax. For example, Internal Revenue Service (IRS) workers give conflicting information to taxpayers because tax laws are too complex, and everyone interprets them differently.

**Problem 5:** People with agendas and hidden motives may penetrate and become leaders of government bureaucracies. For example, an environmentalist, who hates corporations becomes the director of an environmental agency, creating red tape and problems for businesses. A woman, who hates men becomes a judge or prosecutor for a domestic violence court or a family court. Consequently, any man brought to court must be found guilty.

**Problem 6:** Large corporations prefer more regulations and complicated regulations because regulations create an entry market barrier. For instance, if regulations are so onerous and complicated, potential new competitors cannot enter the market. A large corporation can absorb these costs by creating a specialized department that keeps the corporation in compliance with the regulations. Unfortunately, small companies cannot afford this small department of professionals.

**Problem 7:** Regulatory agencies and their regulated companies become "too friendly" over time. Thus, regulators may become lenient on their regulated companies. Corruption represents an extreme form of "too friendly" as company managers pay bribes to regulators. High-ranking government officials often become consultants and work for the companies they once regulated.

## Society's Costs of Regulations

Regulations create a demand for bureaucrats, and bureaucracies consume financial resources. They depend on fees, fines, and taxes to finance their budgets. Thus, every time government establishes a new bureaucracy or expands an old one; the government needs more funding. Total costs of a bureaucracy include the following:

**Cost 1:** Bureaucracies raise businesses' costs. Bureaucracies regulate and enforce the law, which imposes enforcement costs and regulatory burdens on the private sector. Consequently, businesses submit documents to government, invest in new equipment, and/or hire compliance specialists.

**Cost 2:** Government diverts resources from the private sector to the regulatory agency. Government pays bureaucrats' salaries by collecting taxes, fines, and fees, shifting resources from the private sector to the public. Thus, salaries comprise the largest item in regulatory agencies' budgets. If the government did not employ staff, then they would work in the private markets.

**Cost 3:** Taxes and regulations lower economic activity, potentially "destroying" the market. Government finances regulatory agencies through taxes by expanding the infamous tax authorities. Tax authorities add another bureaucracy that employs staff and consumes resources. Furthermore, taxes always increase prices and reduce market quantities because consumers reduce their spending as products become more expensive.

**Cost 4:** Taxes and regulations create violators. When government creates regulations or imposes taxes, some people will violate the regulations or evade taxes. Consequently, government consumes resources to enforce and punish violators. Government must expand its courts and prison systems.

As government establishes more bureaucracies, and the bureaucracies expand larger relative to the economy, the bureaucracies create drags on the economy and stifles free enterprise. A faltering economy generates less wealth and lowers the tax base. Thus, declining tax revenue encourages government to establish more bureaucracies and hike taxes to finance the expanding bureaucracies. Then government enters a vicious cycle of increasing taxes, fines, regulations to offset declining tax revenue. Subsequently, society begins stagnating and decaying.

## Conclusion

The United States had experienced three official growth spurts for creating a large number of regulatory institutions. Growth spurts are:

**Regulating Industry** – From 1870 to 1910, government founded a number of new institutions and expanded the government's power. Federal government started inspecting food, breaking up monopolies, and regulating railroad rates. State governments imposed price controls and created public service commissions. Commissions regulated utility companies that quickly grew as cities adopted electricity and water. State of New York even regulated the milk price.

**Government Expands the Economy** – Franklin Roosevelt established numerous new institutions during the Great Depression during 1929 to 1940. Roosevelt tried to get the U.S. economy growing again by stabilizing the financial markets, imposing price and wage controls, and creating the first national pension fund, Social Security.

**Growth of Social Regulations** – From the 1970s to the present, government at all levels imposes their beliefs onto society. Thus, all governments increased their regulatory powers over everything, concerning private property, families, businesses, and industries.

Establishing new regulatory institutions create a problem. They never go away. Many regulatory institutions that were founded in the 1900s and during the Great Depression still exist. When the regulatory institution meets its objective, government rarely dissolves regulatory institutions. Instead, the regulatory institutions alter their mission and broaden their sphere of influence.

For example, President Roosevelt founded the Tennessee Valley Authority (TVA) in 1933, which helped modernize Tennessee and provided electricity to rural areas. TVA met their mission, but it still lives. Currently, TVA subsidizes electricity to households.

Some regulatory agencies never achieve their objectives. For instance, the U.S. government established the Department of Energy (DOE) in 1977 because the oil crisis in 1973, when Arab nations stopped shipping petroleum to the United States. Oil embargo sparked a supply shock to the U.S. economy that led to a recession. DOE's objective was to reduce the United States reliance on imported petroleum. In 1973, the U.S. imported 2.2 billion barrels of oil that rose to 3.1 billion barrels in 2011. Consequently, the DOE failed its mission.

U.S. government founded the Department of Urban Development (HUD) in 1965 to provide affordable housing, affordable rental units, protect consumers, and improve the quality of life. Urban blight and low-quality housing remain problems in the large cities. Thus, this agency failed miserably.

Government sometimes creates agencies that society does not need. For example, President Roosevelt started the excise tax on gasoline to finance highway construction without a government department. Then President Eisenhower started constructing the interstate highway system that linked the major cities between states during the 1950s. Finally, the U.S. government established the Department of Transportation (DOT) in 1967 to create a fast, efficient, and safe transportation system.

## References

[1] Becker, Gary S. 1983. "A Theory of Competition among Pressure Groups for Political Influence." _The Quarterly Journal of Economics_. 98(3): 371-400.

[2] Bergo, Sandy. September 26, 2006. "A Wealth of Advice - Nearly $2 billion flowed through consultants in 2003-2004 federal elections." _The Center of Public Integrity_.

[3] Rosen, James. August 20, 2009. "Seller, beware: Feds cracking down on secondhand sales of some products." _Kansas City Star_.

[4] McQuaid, John and Mark Schleifstein. 2006. _Path of Destruction_. New York: Little Brown and Company, pp. 112-114, pp. 308-344.

[5] Dulai, Shaminder. August 22, 2010. "Yoga professionals to state: Leave us in peace." _Houston Chronicle_.

[6] Marshall, Thom. November 16, 2003 "Figuring felon prison time growing business for firm." _Houston Chronicle_.

[7] Office of Advocacy. September 19, 2005. "Small Business Hard Hit By Federal Regulatory Compliance Burden." Washington, DC: U.S. Small Business Administration. Available at http://www.sba.gov/advo/press/05-43.html (Access date: 7/11/08).

[8] Parkinson, C. Northcote. 1957. _Parkinson's Law_. Cambridge and Massachusetts: The Riverside Press.

[9] Parkinson, C. Northcote. November 1955. "Parkinson's Law." _The Economist_.

[10] Kiser, Edgar and Joshua Kane. 2001. "Revolution and State Structure: The Bureaucratization of Tax Administration in Early Modern England and France." _The American Journal of Sociology_ 107(1): 183-223

[11] Neuman, Johanna. February 10, 2006. "The Land of 10,770 Empty FEMA Trailers." _The Los Angeles Times_.

[12] Palmer, Jay. November 27, 1978. "The Rising Risks of Regulation." _Time_.

# 5. Taxes Destroy Wealth

"People do not work, consume, or invest to pay taxes."

-Arthur B. Laffer

We need a government for a well-functioning economy. For a capitalistic country to thrive and flourish, government must finance three activities: the legal system, national defense, and commerce. These three activities come straight from Adam Smith, _An Inquiry into the Nature and Causes of the Wealth of Nations_.

**Activity 1:** Government establishes a legal system or the rules of the game. A government with a good legal system helps protect private property rights, enforce contracts, and settle disputes. Hence, government establishes police and fire departments and a variety of courts to administer "justice." Consequently, any legal system with strong property rights will have rich property owners that the government will defend at the expense of the poor.

**Activity 2:** Government protects its interests, people, and land from invading armies, navies, and aircrafts. Thus, government finances a military.

**Activity 3:** Government expands commerce. Hence, government invests in infrastructure such as bridges, highways, harbors, canals, and airports. A good infrastructure connects people and markets together. Then regions within a nation specialize as they transport their goods quickly to markets located anywhere around the nation and world. Finally, government also coins money that people and businesses use in commerce.

Private companies could carry out the functions of government. However, these institutions would possess enormous powers, and the public may develop a strong hatred for these institutions and shun them. For example, would you trust a person to own and manage a police department or the fire department? For instance, Marcus Licinus Crassus owned the first fire department in Rome. As a person's house was burning down, Crassus negotiated the price for his services. Usually, Crassus bought the property at a discount and added it to his wealth.

Many experts and philosophers in the 18th century added another critical function to government – education. An educated workforce develops technical skills, allowing an agricultural society to transform into an industrial one. This argument is still floating around. Just change technical skills to computer skills. These economists said the government should promote education, which does not mean to micro-manage it. Consequently, all countries created an education system that includes schools, colleges, and universities.

People and political leaders added many functions to government. Consequently, governments provide a network of parks, reserves, construct and manage libraries, deliver the mail, protect the environment, and reduce income inequality. Thus, the pursuit of a Utopian society has expanded the size, scope, and mission of government.

For the government to provide its critical functions to society, a government must collect taxes to pay for them. Economists define a tax system as the ratio between a household's taxes and their income, classifying them into three types: Progressive, proportional, and regressive.

A progressive tax rate is the average tax rate rises with income. For instance, the income taxes for the United States are progressive. Low-income households pay small average tax rates while high-income households pay higher tax rates. In 2005, the top 5 percent of wage earnings paid an average tax rate of 20.8% while the bottom 50 percent paid an average tax rate of 3%. Many people believe this tax system is fair because the "rich" are stuck with larger tax burdens.

A proportional tax rate is the average tax rate stays the same across all income levels. For example, Russia and the Republic of Kazakhstan impose flat income tax rates of 13% and 11% respectively. Thus, the rich or poor pay the same proportion of their income to the government.

A proportional tax system has two nice properties. First, taxpayers do not remit taxes to the government. Workers' employers automatically withhold and remit taxes to the government. Only the employers submit paperwork to the government. Second, businesses and people can predict future tax payments. Each dollar a person makes, he or she knows the exact percentage that goes to the government. Hence, a proportional tax system would be the simplest and the easiest to administer and enforce.

A proportional tax system has one large problem. Businesses can employ workers illegally. Employers can remit taxes to government for illegal workers by using tax ID's from legitimate workers. Legitimate workers may never find out because they never verify their income with government.

A regressive tax rate is the average tax rate falls as a person's income increases. For example, a sales tax on food constitutes a regressive tax. If two families spend $10,000 each on food per year and the sales tax rate equals 10%, subsequently government collects $1,000 from each family. If the first family earns $50,000 in income, then their average tax rate on food equals 2%. If a second family has an income of $10,000, then they pay a 10% tax on their food. Clearly, the tax hits poor families harder.

Government imposes a variety of regressive taxes. U.S. government funds Social Security and Medicare through regressive taxes. Federal government stops collecting Medicare and Social Security's taxes once income exceeds $110,100 per year. Property, excise, and sales taxes are also regressive taxes because the government does not use income to determine tax rates. Thus, these taxes hit the poor much harder than the rich. Moreover, governments impose excise taxes on alcohol, tobacco, and gasoline. An excise tax is a tax on a specific good for a specific amount while a sales tax is a percentage applied to a product's value that applies to a broad class of goods sold in stores and shops.

The tax code in the United States is difficult to analyze because it is riddled with numerous exemptions and tax credits. A common rumor is the U.S. tax code is so complex; members of Congress hire accountants to calculate and file their tax returns. Ironically, these same imbeciles had passed these tax laws! If the people who passed these stupid laws cannot understand them, then how can people outside the tax profession understand them.

U.S. income tax system has three major shortcomings:

**Shortcoming 1:** Taxpayers have a difficult time in determining what their true tax burden is. If families experience significant changes in income or situations, they cannot predict how their taxes will change given all the exceptions and forms.

**Shortcoming 2:** Taxpayers may not claim all tax credits that reduce their tax burden. For example, some taxpayers are afraid to apply for tax credits because they believe too many tax credits will trigger an audit. Furthermore, to claim tax credits, taxpayers must fill out complicated, confusing forms. On the other hand, some taxpayers abuse the tax credits. They broadly interpret the rules to reduce their tax burden. Consequently, the U.S. tax system is unfair.

**Shortcoming 3:** Politicians help propagate complicated tax codes. It is a universal truth – everyone hates paying taxes. However, many U.S. leaders are career politicians, who favor expanding government. They hand out the most pork possible to their constituents, so the voters will reelect them. To prevent public protests, politicians usually pass small taxes on everything and keep inventing new taxes and fees. Furthermore, some clever politicians made campaign promises to reduce one tax but then raise other taxes to cover the shortfall.

A problem of having a large number of small taxes leads to larger government bureaucracies because government creates different bureaucracies to collect and enforce all these distinctive small taxes. Tax inspectors also spend their time scrutinize every tax credit or exemption for accuracy and errors. It would be simpler to have one or two tax agencies oversee the collection of all taxes. For example, in some states like Texas, a school district, county government, and water utility district have their own bureaucracies to collect their portion of property taxes.

A consequence of economic decline is government agencies with severe financial troubles will force their citizens and businesses to pre-pay future tax liabilities. (You think this would be illegal). Essentially, taxpayers prepaying a tax give the government an interest-free loan. For example, the State of Michigan has experienced budget problems since the 2001 Recession. Local governments force Michigan's residents to pay their property taxes this year and the next five months of the next year in advance [1].

Federal Deposit Insurance Corporation (FDIC) represents another example. FDIC has been experiencing financial problems since the 2008 Financial Crisis. As of November 2009, 120 banks failed, causing FDIC to lose approximately $28 billion. FDIC insures bank deposits up to $250,000 per depositor. This insurance is not voluntary because regulators force banks to pay this insurance. With FDIC experiencing financial hardship, it requires banks to pay future insurance three years in advance [2].

Financial crisis struck the banks hard while government hurls further hardship onto the banks. What happens if the U.S. economy does not turn around and start growing again? How far in the future will the government force its citizens to pay taxes?

## Taxes Alter Behavior

Politicians elected into office do not understand the long-term consequences of their actions. When a legislator dreams up a new tax or hikes an old tax, the legislator believes the tax will have no impact on human behavior. For example, the legislature and governor pass a new tax on red cars because they believe red cars cause more accidents. If the state has 100 million red cars, then the tax base will not remain at 100 million cars. People and businesses can avoid this tax by driving non-red cars. This is a natural phenomenon. If government sticks its hand into your pocket, you figure a way to keep that hand from grabbing too much money. Furthermore, the court system would be bombarded with lawsuits over the color of red. Is maroon close enough to be considered red and hence taxed?

Political leaders examine the economic activity and industries in their jurisdiction, scheming on new ways to extract more taxes and fees from their businesses and citizens. For example, the state politicians placed the internet under a microscope since the 2008 Financial Crisis.

Many internet businesses do not charge a sales tax for selling items to customers living in other states. Some states became aggressive towards the large internet companies, like Amazon. State governments want access to customers' records and business transactions, although Amazon may not have a presence in that particular state. Moreover, some states went after their Indian tribes. Although Indian reservations retain their own sovereignty, people flock to the Indian reservations to gamble and buy discounted gasoline and cigarettes. States want a piece of their action.

Tax authorities continually expand the scope and nature of taxes. For example, in St. Joseph County, Indiana, the government wants to impose a wheel tax because the wheels wear and tear the roads, and the government wants drivers to pay for them. Wheel tax produces two problems. First, the state collects an excise tax on gasoline and diesel fuel that government uses to build and maintain highways. Second, the state imposes numerous taxes on vehicles. If you buy a car in Indiana, you pay the sales tax, a tag fee, a title fee, and emissions-testing fee. Unfortunately, the wheel tax burdens the businesses heavily that use semi-trucks. A semi could have from 4 to 10 wheels without a trailer. If the tax includes a trailer, then add another 4 or more wheels. Hence, this tax becomes another cost burden to businesses.

Taxes raise businesses' operating costs. Thus, businesses pass the costs onto their customers, reduce their profits, or relocate to another state or country with favorable tax codes. Worst-case scenario is the business bankrupts with the wheel tax being the final straw that broke the camel's back. For example, if St. Joseph County imposed a wheel tax on businesses, a business could circumvent the wheel tax by registering its trucks in Mexico and employ cheaper labor. If a company does not operate in Indiana, then that company does not pay a variety of business taxes and does not employ people who would pay income taxes. Therefore, out-of-control taxes produce more unemployment and lower tax revenues collections.

People may migrate to another state or country to reduce their tax burden. For example, the 2008 Financial Crisis hit many states hard, like California. Consequently, the politicians want to hike income taxes on the wealthiest Californians. Unfortunately, California is next door to Nevada, which imposes no state income tax. If this tax passes, some millionaires could leave the state, taking their wealth and assets with them. Rich already pay more taxes than the poor because they pay progressive federal and state income taxes. If the affluent Californians leave the state, then the State of California will increase other taxes to cover the lost tax revenue [3].

Large, excessive taxes create black markets and lead to smuggling. For example, Michigan imposed the second largest tax on cigarettes in 1994, which raised the tax from $0.25 per pack to $0.75. (Currently the tax is $2.00 per pack [4]). Unfortunately, Michigan lies next to Indiana, and Indiana imposes one of the lowest taxes on cigarettes. Tax created almost a $0.50 difference per pack in retail price. What do rational consumers do as prices become steep? They search for places where they can find bargains and head south to Indiana to buy their cigarettes.

Michigan cigarette tax is foolish for four reasons:

**Reason 1:** Tax would force some people to stop smoking, which the politicians claim as their reason for hiking the tax. However, if all smokers had stopped smoking, then government would not collect these taxes anymore. The 2008 Financial Crisis hit the states hard. Consequently, politicians hiked cigarette taxes to cover the lower tax revenue collections.

**Reason 2:** People from Michigan will buy fewer cigarettes in Michigan. Instead, they buy them from Indiana [5]. Tax revenue for Michigan falls as droves of people purchase their cigarettes outside of Michigan. Whether or not Michigan gains more cigarette tax revenues depends on the larger tax per cigarette pack versus the number of cigarettes bought in Michigan, which is the basis for the Laffer Curve that we discuss in this chapter.

**Reason 3:** Criminal groups become involved and smuggle cigarettes. Smugglers could earn large profits, when government artificially makes a $0.50 per pack price difference [5]. Michigan wants to create jobs, so this will help.

**Reason 4:** This law creates more violators. Thus, Michigan will spend more money tracking, prosecuting, and incarcerating violators, who smuggle cigarettes into Michigan.

Complex tax system creates another problem – large businesses and corporations prefer complicated, incomprehensible tax codes, while small businesses cannot afford to hire tax specialists or consult with attorneys. These specialists are quite expensive. On the other hand, large businesses can absorb these costs by hiring specialists.

Some taxes, like an inheritance tax, destroy small businesses. A small company is a proprietorship and is dissolved, when the owner dies. Heirs of the business must reorganize the business or dissolve it, but they must pay the inheritance tax. For instance, the federal inheritance tax forced many small lumber companies out of business because the heirs liquidated the business to pay these taxes.

Politicians and leaders say the inheritance tax prevents the creation of a plutocracy. A plutocracy represents a political system where the wealthy governs and controls the government. However, the inheritance tax has a severe flaw. Since corporations can theoretically live forever, they will never pay an inheritance tax. Consequently, corporations garner wealth and bribe politicians with campaign contributions or gifts, such as exotic vacations, scholarships for the children, or reduced mortgage payments. We should coin a new word, corptocracy. Corporations indirectly govern the government by controlling the politicians and political leaders. Of course, another good word is kleptocracy. A system of government where politicians and leaders steal everything they can get their hands on.

Our complex tax system has led to the creation of tax abatements. State and local politicians use tax abatements to attract new businesses to their area. New businesses invest in buildings and equipment and hire workers. Moreover, new businesses revive blighted neighborhoods and create jobs. However, tax abatements cause four problems.

**Problem 1:** Government acknowledges the high taxes and temporarily reduces them to create wealth.

**Problem 2:** Tax abatements penalize businesses that were operating in the community without receiving any tax abatements. Those businesses remaining loyal to their community and paying their taxes suffer a disadvantage. New comers enter their market and compete with lower costs from the tax abatement.

**Problem 3:** Businesses migrate around the country, searching for communities with the highest tax abatements. After the tax abatement had ended, the business migrates to another community, searching for new tax abatements.

**Problem 4:** Small businesses do not get these breaks, although small businesses are responsible for most of the job growth in the U.S. economy. Politicians usually wine and dine the large corporations.

The 2008 Financial Crisis added a new twist to tax abatements. Politicians are afraid of further job losses because the staggering layoffs that occurred in 2009 while the unemployment rate hovers around 10%. Some businesses demanded more tax breaks, or they will close down and relocate to another community, taking the jobs with them. In 2012, the Sears Corporation and the Chicago Board of Trade demanded tax concessions from the State of Illinois, or they would leave the state, even though the state has severe financial problems.

## The Laffer Curve

The Laffer Curve shows the relationship between tax rates and tax revenues, imbedding consumers' behavior. When government increases the tax rate, two opposing effects occur. First, government collects more taxes from every item that it taxes. Second, a tax always raises the price. Consequently, consumers invariably decrease their consumption as products become more expensive. Furthermore, consumers could evade the tax or alter their situations to reduce the impact of a tax. Therefore, a tax increase always contracts the tax base [6, 7].

When government raises a tax, a tax increase has one of these two impacts:

1) With low tax rates, a government hiking taxes collect more tax revenue. Government collects more revenue from a higher tax rate than the amount of revenues lost from the smaller tax base.

2) With high tax rates, a government raising taxes collects less tax revenue. Tax base contracts, wiping out the gains from the higher tax rate.

No one knows the true shape of the Laffer Curve. Economics teachers use it as a teaching tool for economics courses. We know only two points on the Laffer Curve.

  * If the tax rate equals 0%, then the government collects zero tax revenues.

  * If the tax rate equals 100%, then government collects zero tax revenue. Nobody will work if government seizes all their earnings.

A Laffer Curve is similar to the Rahn Curve, which we discussed in Chapter 1. A Laffer Curve resembles an upside down U-shape, and only a particular tax rate maximizes government revenue. Figure 1 depicts a Laffer Curve with a 40% tax rate that maximizes tax revenues.

Many bureaucrats and political leaders ignore the Laffer Curve. As government expands, government leaders always hike taxes and fees to boost tax revenues. However, they ignore the high tax rates destroy a market economy and contract the underlining tax base. If politicians see tax revenues fall after a tax increase, then they believe people are evading taxes and cheating the government out of its money. Subsequently these same politicians expand their tax authorities, searching for these elusive tax evaders.

We see the effects of the Laffer Curve on federal excise taxes on gasoline and diesel fuel. Table 1 shows the tax rates and the effective date, when government started collecting the tax. President Roosevelt was the first President to impose taxes on gasoline and used the tax revenue to construct the U.S. highway system. Moreover, the President used highway construction to create public service jobs during the Great Depression. Table 1 shows two patterns. First, tax rate increases occur more frequently towards the present time. Second, the tax hikes become larger over time. However, this table does not include the state excise tax, which averages about 6 cents per gallon.

Some people clamor for greater taxes on fossil fuels to maintain the highway system and replace dilapidated, crumbling bridges and roads. However, Americans constructed our highway system when taxes were as low as one cent per gallon of gasoline. Unfortunately, government raising taxes on gasoline and diesel fuel may depress revenues further.

The Laffer Curve was the basis of Reaganomics. President Reagan reduced tax rates during the 1980s as his economic plan. Consequently, the U.S. economy grew furiously. Although the average tax rates for the 'rich" fell, the top 1% of income earners paid a whopping 43.9% more in taxes. A flourishing economy always boosts tax revenues, which offset the lower tax rates [7]. Many blame Reagan for the huge government deficits during the 1980s and the rapid rise in U.S. public debt. However, the U.S. economy had plenty of good-paying jobs with benefits during the 1980s.

## Instability in State Government Financing

All state and local governments, except one state have balanced budget amendments, which makes public finance more unstable. Common sense dictates a balanced budget law should make government finance more stable, so where does this instability come from? Politicians continually expand government, but to meet this spending, government must collect more tax revenue. Consequently, the instability comes from the two states of the economy:

**Growing economy:** A growing economy lowers unemployment and raises incomes. More people are employed, earn greater incomes, and pay more taxes. Unfortunately, politicians always spend this extra revenue and never save it. They spread the money around, greasing the wheels for their constituents. Thus, politicians always expand the government's size.

**Recessions:** A contracting economy increases unemployment and lowers incomes. More people are not working, earning less income, and paying fewer taxes. However, politicians rarely cut government spending or contract government programs. Furthermore, laws prevent state and local governments to operate budget deficits. Thus, politicians must raise taxes to maintain government spending, creating the financial instability. State and local governments always experience a financial crisis during downturns in the economy. Then they raise taxes on a faltering economy.

For example, the State of New York rapidly increased government spending as tax revenues poured into the state coffers from Wall Street before 2008. However, the 2008 Financial Crisis slowed the financial markets and bankrupted several large financial firms. Thousands of workers on Wall Street lost their jobs. Supposedly, New York State received 25% of its tax revenue from Wall Street. Consequently, New York State had $14 billion budget deficit for 2009-2010, and the state wants to tax everything and anything.

U.S. real estate market was on fire between 2001 and 2007. Property values were soaring while local governments collected more property taxes because they tie property taxes proportionally to a property's value. Local government officials were awash with tax money and greatly expanded the size of local governments, such as building new jails and schools and hiring more police and teachers. Arizona, California, Florida, and Nevada witnessed the largest rises in property values. With the collapse of the housing bubble in 2007, these same states experienced the worst financial problems in the nation.

State governments imposed individual and corporate income taxes in two waves. First wave occurred during the Great Depression. Twenty-six states passed a combination of individual and corporate taxes during the 1930s as our nation suffered during the Great Depression. Second wave happened during the 1960s and 1970s, when seventeen states imposed income and/or corporate taxes. In the early 1970s, the Organization of Petroleum Exporting Countries (OPEC) withheld petroleum from the United States, causing petroleum prices to spike. Unfortunately, industries use petroleum in almost all products, such as gasoline, diesel fuel, jet fuel, plastics, fertilizers, and much more. Consequently, greater petroleum prices raised all prices in the economy, creating a supply shock and a recession. During a recession, tax revenue falls, which hurts the state governments. However, states always survive as they adopted income and corporate taxes to cover falling tax revenues.

Do you need more examples? Many states legalized lotteries to boost tax revenues. Politicians claim the lottery would fix public funding for education. Funding always helps until the next downturn in the economy. Then a state government invents new tax sources to make up for budget shortfalls. Government is too stingy to make cuts or impose financial restraints on itself.

State governments also have financial instability on their expenditure side. Federal and state governments finance a variety of social programs to help the elderly, poor, disabled, unemployed, and students. Instability source arises from the two states of the economy:

**Growing economy:** Jobs become plentiful and easy to find. Consequently, people collect less unemployment, food stamps, welfare, and state health insurance, which reduce government expenditures. Unfortunately, politicians never save this money. They may reduce eligibility for state aid or expand social programs as states collect greater tax revenues.

**Recessions:** Jobs become scarce and difficult to find. Therefore, states spend more on social programs as people collect more unemployment, food stamps, welfare, and other public aid. A recession can bust budgets, and the politicians usually tighten the requirements for these programs. Thus, states hike taxes to reduce their budget deficits. Increasing taxes during a recession weakens the recovery.

## Property Taxes versus Income Taxes

Many people and organizations argue for eliminating state income taxes. They argue that seven states do not have an income tax, which are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. They believe a state eliminating its income tax would grow faster and create more jobs. We can check this premise by examining the state's economic data that Table 2 shows.

First statistic is the Tax Burden, which is the percentage of income that goes to the state and local government. Federal income taxes were excluded because high-income states, like Massachusetts, pay more federal income taxes, as opposed to other states. Average tax burden for state and local governments in 2009 was 9.8%. Seven states without state income taxes have a lower tax burden.

Second statistic is the State's Real Gross Domestic Product (GDP). State GDP represent the total amount of goods and services produced in a state for a year. Real means analysts removed inflation's effect. Furthermore, growth in GDP means the state's economy expands, and the GDP was adjusted for a state's population, defined as GDP per capita. Average state GDP in 2009 was $41,808 per capita. All states have a higher GDP per capita than the average except Florida and Nevada. These two states were hit hard from a tsunami wave of foreclosures and high unemployment.

Third statistic is the state's real GDP Growth Rate, which measures the percentage increase of the state's economy. Average state real GDP growth rate was -2.5% in 2009. All the states in Table 2 have a higher GDP growth rate than the average, except Florida and Nevada.

Last statistic is the Unemployment Rate, which the government defines as the percentage of workers who are unemployed and actively searching for work. Average unemployment rate was 9.3% in 2009. Florida, Nevada, and Washington, have higher unemployment rates than the average. One must be careful because people migrate to more business-friendly states, which are the states with no state income taxes. Moreover, if a jobless person gave up his job search, then the government no longer considers this person unemployed and excludes this person from the unemployment statistic.

Data suggests five out of seven states with no income taxes are doing better than the national average. However, 2009 was just one year after the Great Recession. If we examine previous years, then this relationship weakens because a recession challenges the strength of a state's institutions.

Three factors weaken the relationship between no income state taxes and economic growth. First, the average tax burden of the U.S. government was 26.6% in 2009, which far exceeds the states' tax burden. Second, Texas imposes a franchise tax on its businesses within the state, while Florida imposes a corporate tax. A corporate tax is a tax on a corporation's income, while a franchise tax is a tax on any businesses' income. Finally, states with income taxes rely on fines, fees, and property taxes, which are regressive taxes. Thus, regressive taxes hurt the poor and the elderly more.

Property taxes are regressive taxes. For example, the State of New Jersey is one of the most heavily taxed states with the highest property taxes in the nation. Property taxes average nearly $8,000 annually on a house [9]. Someone on a fixed income must pay at least $666 per month just to pay his or her property taxes. That is insane!

A property tax is an inherently unfair tax. Property taxes are based on housing market values, and one or two homes selling in the neighborhood establishes the market value for everyone else. Then the tax authority uses formulas to apply this market value to other homes in the neighborhood. Problem is houses are unique and vary in condition. Some homes are new whiles others are deteriorating and falling apart.

Property taxes are detrimental to industrial properties. Local government taxes the land, buildings, machines, and equipment. Then a bureaucrat determines the market value of large industrial machines. How do you place a market value on a 20-year old, 10-ton press? Furthermore, property taxes are tied to a property's value and not a company's profits. Companies earning a loss still pay property taxes. At least with an income tax, a company earning a loss would pay lower taxes. Thus, property taxes put an industrial complex at a severe disadvantage.

The 2007 Great Recession will have an interesting impact on property taxes. As of 2012, housing market values continue falling. Thus, in theory, property taxes should also be falling, which means local governments should be losing tax revenue.

Local governments can do one or more of the following to prevent property taxes becoming lower:

**First:** Homeowners go through a process to dispute the value of their homes with the tax authorities. Local government can make the process difficult. Unfortunately, a court lies at the end of an appeal process. County government relies on property taxes to fund county courts. Thus, county courts have a financial incentive to maintain high property appraisals.

**Second:** Local governments could raise the tax rates on property values. For local governments that are at their maximum constitutional tax rates, they could invent new taxes and fees.

**Third:** If homes are not selling in a neighborhood, then a homeowner cannot prove his or her home is losing value. Homeowners must prove their home's value becomes lower than the government's assessed value to get the government to reduce property taxes.

**Fourth:** Several local governments ignore the selling price of a foreclosed house. With foreclosed homes being discounted by 30% or more, local governments claim these sales represent special cases.

Several states like California, Idaho, Massachusetts, and Washington use the home's last selling price to determine a house's value. This could be a good system, especially for the elderly who bought their homes 30 years ago. However, homeowners who purchased a home at the peak of the housing bubble are locked into high property values. Homebuyer only can escape these high property taxes by purchasing a new house for a lower price [4].

Thus, a government experiences a greater financial exposure during downturns in an economy if it relies on numerous tax sources. For example, one state government has several small taxes while another state imposes many taxes. When the economy enters a recession, the lower economic activity harms the state government more with the numerous taxes because that government experiences more declines across all revenue sources. This helps explain why states with no income taxes remain in better financial shape.

## Conclusion

Capitalistic societies go through a life cycle. If a country has a capitalistic system with strong private property rights and minimal interference from government, it becomes richer over time. A strong, rich society expands the tax base while government becomes awash with more cash. As the government spends the tax revenue, government establishes new bureaucracies and expands old ones. Consequently, a strong economy and expanding government create a large number of good-paying jobs. However, overtime, government keeps expanding regulations and increasing taxes. Eventually, too many regulations and taxes become detrimental to the economy, causing incomes and business activity to fall. Problem is the government does not reduce its size, even if the population is falling, or people are fleeing. Then government enters a cycle of increasing taxes to make up for lower tax collections, causing society to stagnate and crumble.

Life cycle occurred in two southern states: Louisiana and Oklahoma. During the early 1980s, the Organization of Petroleum Exporting Countries raised the petroleum price vastly. As non-petroleum producing states entered a recession, the petroleum producing states, Louisiana and Oklahoma, were thriving. Petroleum industry created jobs, and the state governments collected large flows of tax revenue. Then the states expanded their education system, expanded state government, and built massive prison systems. When the oil price went bust in late 1980's, these states did not reduce the size of their governments. Instead, they imposed a variety of tax hikes to sustain their high-level of government spending that remain in effect today.

Life cycle occurred in the U.S. economy on a large scale. U.S. economy transformed from an industrial society to a service-oriented one. Our politicians claim our tax systems are antiquated and obsolete, and they must update them because taxes are based on a manufacturing economy and not a service oriented one. They argue government exempts many services from taxes. Our politicians have a flaw in their reasoning. U.S. manufacturing sector left the United States from high taxes and excessive regulations while the service-oriented sector prospered under low taxes. A government subjects a manufacturing company to these taxes:

  * **Income taxes:** A business pays federal, state, county, and city income taxes. These taxes vary by jurisdiction.

  * **Corporate Tax:** United States imposes separate taxes on corporations. Tax rates vary from 15 to 35% [10], which makes the United States one of the highest taxes in the world. Corporations file various tax credits to reduce their tax burdens.

  * **Social Security and Medicare taxes:** Employees pay approximately 6% to Social Security, and roughly 1% to Medicare. These are matching taxes because employers match the amount the employees pay.

  * **Property taxes:** Government levies property taxes on land, machines, equipment, and buildings: Consequently, government taxes high-tech and capital-intensive industries heavily through property taxes.

  * **Workers' disability compensation:** States determine the insurance rates, which makes them a tax because businesses must buy this insurance that states manage.

  * **Unemployment insurance:** States determine the rates. The state forces employers to pay this insurance and administers this program. This really is a tax.

  * **Mandated benefits:** Businesses must provide benefits such as medical insurance and pensions to full-time employees. Thus, many service-oriented businesses rely on part-time labor to avoid paying these benefits, reducing their costs.

A manufacturing company can avoid these taxes and pay lower taxes by moving to China. Furthermore, China has cheap labor and lax regulations. One of the largest corporations in the world, Wal-Mart, can compete with all retailers in price with its cheap Chinese products.

## References

[1] McHugh, Jack and Steve Stanek. November 1, 2004. "'Shift-and-Shaft' Tax Proposal Ekes out Win in Michigan." _Budget and Tax News_. Available at www.heartland.org (access date: 01/04/2010).

[2] Gordon, Marcy. November 13, 2009. "Banks will have to prepay insurance fees." _The South Bend Tribune_.

[3] Chamberlain, Andrew. June 12, 2006. "Is California's Tax Base Preparing to Flee?" _Tax Foundation_.

[4] Christie, Les. October 14, 2008. "Home prices may plummet, but taxes won't." _CNN_. Available at www.cnnmoney.com (access date: 10/15/08).

[5] Mumford, Lou. February 13, 2004. "Michigan stores fear smokers will head south." _South Bend Tribune_.

[6] Becsi, Zsolt. 2000. "The Shifty Laffer Curve." _Economic Review – Federal Reserve Bank of Atlanta_ 85(3): 53- 64.

[7] Laffer, Arthur B. June 1, 2004. "The Laffer Curve: Past, Present, and Future." _The Heritage Foundation_. Available at www.heritage.org (access date: 3/23/07).

[8] Federal Highway Administration. September 1999. Federal Tax Rates on Motor Fuels and Lubricating Oils. Washington, DC: U.S. Department of Transportation, Table FE-101A. Available at http://www.fhwa.dot.gov/ohim/hs98/tables/fe101a.pdf (access date: 8/14/06).

[9] Summers, Pat. June 5, 2008. "Homeowners Demand Tax Reassessments As Market Values Plummet." _eFinanceDirectory_.

[10] Internal Revenue Code. 26 United States Code 11. Available at http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000011----000-.html (access date: 1/30/2012).

# 6. Corrupt Police and Kangaroo Courts

"When men are pure, laws are useless; when men are corrupt, laws are broken."

-Benjamin Disraeli

Traditional role of police is to protect and serve the public. However, local and state governments changed the role of its police force. Government encourages police to write and issue more citations and tickets, pursuing revenue. Political leaders assure us that police do not have quotas and issuing tickets is a money loser for government [1]. Nevertheless, why do police write citations or arrest people for silly infractions of the law? Several examples include:

**Example 1:** In Washington, D.C., the police arrested a woman for eating a candy bar in the subway [2].

**Example 2:** Police in Georgia wrote a citation to a woman for operating a vehicle without a driver's license. Woman has cerebral palsy and drives her electric wheelchair to work on the shoulder of a road. Police also threatened to impound her wheelchair [3].

**Example 3:** In New York City, police issued a citation for a pregnant woman sitting on the steps in a subway [1].

**Example 4:** In Galveston, Texas, code enforcement issued citations to restaurant owners for displaying the hours of operation because this violated historic preservation ordinances.

**Example 5:** On December 3, 2005, Charles Atherton was walking across a street and was hit by a car in Washington, D.C. Strong impact knocked him out of his shoes, and his head hit the windshield. As he lay there waiting for the ambulance, a policeman wrote Charles a $5 jaywalking ticket. Police claimed he was conscious, and he did not walk along the crosswalk [4].

These examples illustrate the police are more aggressive, and they write tickets for minor offenses. City, state, and the federal government keep hiring more police officers and agents. If criminals are not committing any crimes, then police cannot sit around and wait. They must arrest people and write tickets. Thus, each person sitting in a jail cell or each ticket sent to a court proves the police officers are working.

Criminal-justice system does not care whether the violations are minor. Moreover, the criminal-justice system can easily classify minor crimes as serious ones. For example, police and prosecutors have charged people for assaulting a police officer because they growled at a police dog. Even an Ohio appeals court ruled that barking at a police dog is not illegal [5].

Why do local, state, and federal governments hire more agents and police officers? First, these government agencies keep passing laws, and someone must enforce those laws. Government officials want complete, total compliance to their laws, although they are likely to violate their own laws. Thus, the more rules a society has, the more citizens will break these rules [6], which necessitates the need for a state to hire a large group of police and enforcers. Second, the media focus on crime daily, scaring the public. Public believes crime is soaring even though violent crime has been decreasing since the 1990s.

Several examples show the state expanding the size and scope of laws:

**Example 1:** Police arrested an 80-year-old woman for feeding ducks in Lynn, Massachusetts. Elderly woman violated a city ordinance, although she has been feeding the ducks for 45 years [7].

**Example 2:** States established the food police, who threaten, harass, and arrest people, who grow and sell organic foods or donate food to the homeless. Staff at a school in North Carolina confiscated a girl's lunch that she brought from home in 2012. School forced the girl to eat the processed food from the cafeteria [8].

**Example 3:** City of Canton, Ohio, passed a new law, where the city can incarcerate its citizens for not mowing their lawn. A second violation of tall grass becomes a misdemeanor [9]. How will the city enforce this law? Will police officers drive around and measure the height of everyone's grass? Of course, the enforcement officers will avoid the poor neighborhoods, but patrol heavily the middle-class neighborhoods. Middle class is likely to pay the fines, while the rich people may have strong connections to the political leaders and will complain about police harassment.

**Example 4:** In 2000, the State of Oklahoma expanded the definition of drinking under the influence (DUI). For instance, if an intoxicated person walks home with his car keys in his pocket, then the state can charge him with DUI. Possession of car keys implies a person intended to drive drunk. If a person does drink too much, then the best thing for society is for that person to walk home and not drive, but Oklahoma is one of those states that love incarcerating its citizens.

Contrary to what government officials say, government does not lose money for writing tickets or arresting people. First, government collects taxes to pay for police officers, prosecutors, judges, jails, and prisons. Taxpayers pay these expenses. Second, any money collected for fines or fees is extra money for the government. City and state governments vary where this money goes. Money could be deposited into the general fund or to pay for new police equipment. Of course, some states like Louisiana, Oklahoma, and Texas built massive prison systems, which require enormous amounts of funding.

In one extreme case, the police in Tenaha, Texas are highway pirates. Police pull over unsuspecting motorist and charge them with a crime. Prosecutors agree to drop the criminal charges if the motorists agree and waive their right to their property. Police seize cars, jewelry, cash, cell phones, and sneakers. Mayor, George Bowers, defended the actions of the police by stating, "It's always helpful to have any kind of income to expand your police force." Mayor wants additional money to add a second police car and expand the police department [10]. Then you know what comes next. More police means they can pull over more motorists and steal more property.

The Crowning achievement of our criminal-justice system was the arrest of George Norris, who was arrested for importing and selling banned orchids. However, he did not break the law because his orchids were not on the banned list. Nevertheless, the federal government spent months investigating George and dispatched a team of armed agents to search his home and business. Instead of apologizing to him, the federal government sent him to a federal penitentiary for mistakes in his paperwork. Judge stated, "Life sometimes presents us with lemons... turn lemons into lemonade" [11].

Orchid case caused a small public outcry of the over-criminalization of our laws. Our government subjects us to many laws that are open to broad interpretation. Consequently, many Americans could be imprisoned for breaking any of these laws.

## The Race to Incarcerate

A problem evolves when a country's laws, rules, and regulations become too numerous and complicated. Consequently, the government finds more people violating the law. Of course, the United States uses incarceration to punish people, and incarceration rates have skyrocketed by 500% since the 1970s. Several states adopted themes like "get tough on crime," the "war on drugs," and "three strikes, and you are out," causing incarceration rates to surge [12]. These catchy phrases and slogans suggest states are in a race to incarcerate.

Figure 1 shows the incarceration and violent crime rates, where the federal and state governments are incarcerating more people while violent crime is decreasing. Incarceration rate is the number of prisoners serving time in federal and state prisons and county jails. Violent crime index is the total number of murders, manslaughter, forcible rapes, robberies, and aggravated assaults. Both rates are adjusted for changes in population and are expressed as per 100,000 persons. Furthermore, the incarceration rate does not include defendants sitting in jail, waiting for their trial.

Government incarcerates people to improve society by removing individuals, who severely violate society's rules. Originally, a prison was a place for criminals to think about their crimes and ask god for forgiveness. Penitent is the root word for penitentiary. However, prisons evolved into warehouses that store malcontents and felons. Several states sponsor psychological treatment for inmates and/or offer a chance to complete a college degree. Nevertheless, these programs do not work because the recidivism rate hovers around 67%. Thus, on average, seven inmates out of 10 will return to prison [13].

Why do the federal and state governments lock people up? It is not a vast conspiracy! Police, judges, and prosecutors locate, convict, and incarcerate people. That is their job! Like everyone else, they want job security and higher wages. If the police arrest fewer people, prosecutors file fewer dockets, and judges hear fewer cases, then they cannot run to the legislature and request more funding. If the amount of work the criminal-justice system does is declining, subsequently, their funding should decrease. For the criminal-justice system to continue expanding, they must arrest, prosecute, and incarcerate more people, so they can beg more money from the legislature. Thus, Parkinson's Law applies to the criminal-justice system too.

Society pays a large cost if it incarcerates a large number of people. The total costs are:

  * States must pay for the incarceration with tax revenue. They pay an average cost of $23,876 per year to lock one person up in 2005 [14].

  * Criminal-justice system removes a potential taxpayer from society. This person does not earn wages or pays taxes. Key word is potential because some criminals are deadbeats who do not work.

  * Government diverts public funds from other programs like education and social programs. Thus, prisons and the criminal-justice system compete against other government agencies for tax dollars such as schools, parks, universities, and food stamps.

Table 1 shows the 2009 incarceration rates for the states with the five highest and five lowest incarceration rates. Average incarceration rate in 2009 for the United States is 442 per 100,000 persons, which excludes the federal government. Unfortunately, the states with the highest incarceration rates have a low portion of their population with a high school diploma or higher, except Oklahoma. Furthermore, the highest incarceration states have the lowest school funding per pupil, except Louisiana. Pattern reverses for states with the lowest incarceration rates. These states have a higher portion of citizens with a high school diploma and higher, except Rhode Island and have larger funding per pupil except North Dakota.

Table 2 shows a weaker pattern for higher education. States with higher incarceration rates have fewer college graduates as a percentage of its population while the states with the lowest incarceration rates have a higher percentage of educated citizens. However, state college funding is a paradox. States with the greatest incarceration rates grant larger funding to higher education that exceeds the states' average except Alabama. Meanwhile, the lowest incarceration states grant lower college funding than the average, except North Dakota. An answer to this paradox is states with the highest incarceration rates have fewer full-time college students, so they can fund higher education at a greater level.

Compounding the incarceration rate, state governments have built too many prisons. When a state builds a brand-new prison, then the state officials have an obligation to fill it. Otherwise, the taxpayers become furious because the state wasted funding on a new empty prison. To fill these prisons, the criminal-justice system may incarcerate innocent people, or the state elevates minor crimes into major ones, requiring prison sentences. This problem repeats itself for many county governments because counties continually build new jails and facilities that quickly become overcrowded.

Why do states build so many prisons? It cannot be the violent crime rate, which was falling since the early 1990s. State governments build more prisons because politicians do not want to appear soft on crime. Furthermore, states want economic development. Opening a new prison in a small, stagnant community could cause an inflow of federal and state dollars, thus providing jobs and economic growth.

Prisons contribute little to local economic growth or create few jobs in a community. Prison supplies are specialized and are not provided locally. Moreover, prisons hire a limited number of guards, and local governments may divert funding from other public investments because they must invest in roads and utilities for the prison [15]. Therefore, prisons may be a terrible source of economic development for a small community.

## Administrating Justice

Police are the first contact with the criminal-justice system. They investigate crimes, arrest perpetrators, and provide critical information to the judges and prosecutors. Thus, a natural question arises. If police are protecting the public, why do police sometimes violently attack innocent citizens? The following includes examples of police brutality:

**Example 1:** Three policemen beat up a retired, black school teacher in New Orleans, Louisiana in October 2005. Police even threw one bystander onto a car because he was filming the incident. Retired schoolteacher was charged with public intoxication, battery on a police officer, and resisting arrest [16]. Videotape clearly shows the schoolteacher on the ground as four police officers violently kicked and struck him.

**Example 2:** In a small Louisiana town, a white cop tasered a 240-pound black man nine times, although the defendant was handcuffed. Officer claimed the man did not move fast enough. Police chief replied the officer could either let him free, taser him, or shoot him. Tasering was the best option because officers do not let criminals go [17]. Is the police chief stupid? Tasers shoot out probes that stick to a person's body and jolt suspects between 20,000 and 150,000 volts of electricity [18]. How fast could you move if the police tasered you multiple times?

**Example 3:** Brothers were filming sheriff deputies in 2002 as they raided a neighbor's house in Houston, Texas. Deputies did not like being filmed, so they charged into that family's house with guns drawn, threatening to shoot the brothers. Then they took the videotape. Deputies arrested the brothers who filmed them and charged them with resisting arrest. Police even destroyed the tapes. Luckily, the falsely arrested brothers settled a lawsuit from Harris County for $1.7 million [19]. Harris County Sheriff's Department became so angry over this lawsuit that they placed the brothers under police surveillance. The public became enraged, and the Sheriff's Department had to disband their surveillance unit [20, 21].

Does it matter that citizens are photographing or videotaping the police? If the police are doing their duty and the right thing, then a videotape only enhances their actions. Unfortunately, police abuse will become worse because courts and government are removing the checks on police power.

Legislatures pass more laws, transferring more power to the prosecutors and the police. With this transfer of power, police can easily arrest a person for minor violations or trump up false charges. Every time a police officer attacked a citizen; the prosecutor charged the citizen with resisting arrest.

Politicians and bureaucrats assure us that they are protecting the public, but government uses national security and public safety as arguments to take over its society, creating a police state. Remember the adage – power corrupts and absolute power corrupts absolutely. As the criminal-justice system gains more power, we will see more and more abuse by our judicial system and police.

The government and courts continually expand police powers over time. For example, forty years ago, all states had no seat belt laws. Drivers and occupants could decide whether they wanted to wear a seat belt or not. Then legislators and governors passed seat belt laws because wearing seatbelts increases the chances of a person surviving a car accident.

On the surface, the government portrays it cares for its people by protecting them. However, seat belt laws embed a hidden agenda. First, the police can write citations for not wearing a seatbelt, providing another revenue stream for the government. (Of course, the court system wants you to pay the seat belt fine rather than be concerned for your well-being). Second, one person in a car, who does not wear a seatbelt gives the police the power to pull that car over and investigate them. Then police can determine whether the occupants had violated other laws. In the old days, we educated people about the benefits of using seatbelts and then gave them free choice, whether they wanted to use them or not.

Consequently, courts rarely keep police powers in check. Several reasons explain this.

**Reason 1:** Courts evolved into bloated bureaucracies that need and consume financial resources. Police need time to write reports; a prosecutor need time to review the report, and a judge needs time to review a case. All this time is expensive! If a judge acquits a defendant, the judge has no basis to collect fines. Furthermore, criminal-justice system does not look good if it has a large percentage of cases where the judges acquitted the defendants. How could the criminal-justice system request the legislature for additional money if they are arresting innocent people?

**Reason 2:** Press and news give the public a false impression that crime is rampant and rising. Judges must find the defendants guilty, so they do not appear weak and soft on crime.

**Reason 3:** Courts operate like a factory. Every day, the sheriff's deputies round up defendants and line them in front of the judge, like cattle at the slaughterhouse. With the dockets full, courts can encourage, coerce, and frighten defendants to plead guilty and send them to the numerous agencies, like probation office, counseling programs, and forced volunteer work for non-profit agencies.

**Reason 4:** In small communities, the municipal court, prosecutor's office, and police are housed under the same building. They see each other daily and may be friends outside of city government. Defendants are outsiders that judges must find guilty of their crimes.

Municipal and county courts usually rule in favor of the enforcement agencies. It makes no difference if the police lied, withheld evidence, or violated a defendant's rights. Courts excuse an officer's behavior. If the police are never punished for lying, withholding evidence, or violating defendant's rights, then nothing keeps an abusive police force in check. Numerous cases bring this fact to life:

**Case 1:** Problems plagued the City of Houston's Police Crime Lab. Federal government closed the DNA section of the lab in 2003 because 93 cases had "serious issues." Investigators also found problems with analysis of firearms, narcotics, and body fluid. Investigators placed the blame on incompetent lab technicians and the need to tailor reports to find defendants guilty [22].

A defendant could spend thousands of dollars to re-test the evidence. Thus, shoddy, fraudulent lab work would rarely be exposed in most court cases. This is not an isolated problem. Problems were found with the City of Oklahoma City Crime Lab, FBI Crime Labs, and state crime labs for California, Florida, Illinois, Montana, and Washington [23].

**Case 2:** In Tulia, Texas, one law enforcement officer wanted an excellent arrest record, and who is also a racist, thief, and liar. He arrested 43 minorities, claiming the minorities sold him cocaine. The officer provided no evidence other than his word. Minorities received harsh sentences, and the officer received the Texas Department of Public Safety's 1999 Outstanding Lawman of the Year.

Cracks appeared in the officer's story because judges dropped charges against five defendants. When the drug sales occurred, two defendants were at work. One was in another state at a bank, and the other two had inaccurate descriptions. Eventually, Rick Perry, the Texas Governor, pardoned the 35 minorities, and the defendants settled for a meager, lump sum of $250,000, agreeing not to sue the county government [24, 25].

**Case 3:** In Berwyn Heights, Maryland, the mayor returned home and saw a package on his porch. He carried the package into his home, and seconds later, the SWAT team crashed through the mayor's front door and shot his two dogs. Unfortunately, someone mailed a box containing 32 pounds of marijuana to the mayor's house [26].

**Case 4:** In Dallas, Texas, a drug informant planted cocaine into people's vehicles. However, he crushed sheetrock, making it look like cocaine. Fifty-nine people with Mexican descent were charged with drug charges. Several defendants took plea deals, and others were deported until two defense attorneys uncovered the truth and tested the substances for cocaine [27].

**Case 5:** A favorite is undercover detectives chopped up macadamia nuts. Then the detectives sold the chopped nuts to drug users because they look identical to crack-cocaine. Consequently, judges imposed harsh, long prison sentences for cocaine offenses. Unfortunately, the key word for convictions is the intent and not reality. Although people can possess macadamia nuts legally, the buyers thought they had purchased cocaine [28]. Thus, the taxpayers paid the bill to lock up these criminals for buying nuts.

These cases are not isolated, independent examples. Criminal-justice system has convicted innocent people for crimes across the United States. Some of the cases above came from police task forces. A task force involves several police agencies that form to tackle a particular crime, such as drug trafficking and prostitution rings.

Problem is a task force receives funding from the United States government and from property seizures. Thus, a task force must show results. That is why forming these task forces are dangerous! If a task force forms to find drug traffickers, then agents must find drug traffickers. Otherwise, a failed mission jeopardizes federal funding and a failure to the government agency [27]. Sometimes, police officers fabricate evidence and convict innocent people rather than admit a public failure.

Innocent defendants can appeal their fraudulent convictions to a higher court because every defendant has the right to an appeal. However, the government does not tell you it takes time and money. Appealing a wrongful conviction could easily cost a few thousand dollars and take several years. Tulia, Texas only appeared in the spotlight because _The Texas Observer_ and _Time_ magazine wrote articles about Tulia, causing intense scrutiny.

States create another problem by releasing criminal records, and a fraudulent conviction shows up on a person's criminal record. It shows a person's charge, outcome from court, and any appeals. A criminal record never states the police fabricated evidence, or a judge railroaded a person to prison. Wrongful convictions can trail a person for the rest of his life.

Judges do not hesitate to throw innocent people into jail, but they will play favorites and exonerate fellow members in the criminal-justice system. For example, a judge in Cleburne, Texas threw out the blood-alcohol test results for State District Judge Elizabeth Berry. The judge ruled that police did not have sufficient evidence to search this judge, although she drove 27 MPH above the speed limit, had numerous, empty beer cans in her car, and her breath wreaked of alcohol. Consequently, the charges were dropped because lack of evidence [29]. If a regular citizen did this, he or she would rightly spend time in jail.

## State Protection of Children

All states have passed laws to protect its children because some parents abuse their children. Thus, the state should intervene and remove the children.

Many decent, loving families had lost custody of their children because caseworkers cannot distinguish between true child abuse or alleged cases of child abuse. Any vindictive, bitter relative or acquaintance can falsely report child abuse to a hotline, and a caseworker must investigate this allegation. Furthermore, the state never releases the callers' identities. State child-abuse hotlines received 3.3 million reports in 2005, and most reports were found not to be true. Parents were reported to the state for spanking children, home schooling, or an accidental injury [30].

Four factors cause child-protective services to be aggressive with parents.

**Factor 1:** Parkinson's Law also applies to the child-protective agencies because they employ a large number of professionals, like caseworkers, lawyers, and therapists [30]. For these professionals to request more funding, they must process more cases. Hence, they must find more and more children in need of services.

**Factor 2:** States leverage funding from the federal government. Every case the state processes, the federal government reimburses the states for some of their costs. Thus, a state tries to maximize the number of child abuse cases, and therefore, the cash flow from the federal government [30].

**Factor 3:** State enters the names of suspected parents into a state database for child abuse. If parents are entered into this database multiple times, then the state could automatically take custody of the kids, even if the state has no proof of child abuse.

**Factor 4:** Child-protective services and its courts have poor oversight [30]. Since child abuse involves children, judges throw out many of the standard criminal rights out the window. Parents cannot request jury trials or question children on the stand. Furthermore, the judges seal the court records, hiding their decisions from public scrutiny. In extreme cases, caseworkers can coax or trick children to say anything on video camera. Then caseworkers present the videotape as evidence, which the defense cannot cross-examine.

Current system is not necessarily bad as long as the judges, caseworkers, and therapists are honest and truly want to help families. Then judges are not likely to take custody of children for false allegations. However, greed and Parkinson's Laws still apply. Following cases illustrate this point:

**Case 1:** Two judges in Philadelphia received payoffs from a private youth detention center. Two judges received $2.6 million and sentenced juveniles for minor offences to long terms in this youth treatment facility [31]. Youth detention centers charge government at least a $100 per day.

**Case 2:** Many blogs on the internet complain about abuse from child-protective services. For example, child welfare investigators in one county, Contra Costa County, California, supposedly terrorized families. Once a family appeared on the radar screen, investigators would continually harass them.

Government will punish a government agency if the public protests loud enough. For instance, Contra Costa County experience a financial crisis in 2008, and many families appeared at the county hearings and complained loudly about Child-Protective Services. Consequently, the county commissioners decimated this department, laying off 75 caseworkers. However, the county decimated other departments too in 2008.

## Conclusion

Public officials are so worked up over crime and the need to pass laws and hire police officers; some local governments destroyed their budgets. For example, Vallejo, California has a population of 120,000 and is located near San Francisco. The city filed for Chapter 9 bankruptcy because city officials cannot control their spending. City has an operating fund of $87 million with police and fire departments comprising 75% of the city budget [32]. Consequently, politicians and bureaucrats will hire more police officers and build more prisons and jails until it busts their budget.

Government fails to understand that incarcerating people for minor offenses can destroy people economically. If a judge incarcerates a person in jail for a month because he could not pay his fine like wearing the wrong clothes for jogging – a crime in Stillwater, Oklahoma – then that person could lose his job. After a job loss, the person loses his car and home while homelessness waits around the corner. The a person has a criminal record that severely hinders him in finding new employment. Furthermore, government still wants to collect the court fees, fines, and cost of incarceration, although it destroys a person's life.

Thus, an ever-expanding police state fuels hatred between the government and its people. Unfortunately, the government does not understand that it cannot lock up everybody, which is why police states have short lives.

Many states started the dangerous trend to force inmates to pay for their incarceration. An overzealous and cash-hungry judicial system will incarcerate more people for silly infractions of the law. Charging inmates for incarceration produces three outcomes:

**Outcome 1:** Police officers have an incentive to jail more people. Although violent crime rates are falling since the 1990s, the judicial system packs jails and prisons for minor infractions.

**Outcome 2:** Court system has a strong financial incentive to find the defendant guilty. If the court does not find the person guilty, then it cannot charge defendants room and board for jail.

**Outcome 3:** Government must build more jails and prisons if the government fills them with inmates to capacity. Then society enters a viscous cycle where government keeps building new jails and fills them with more violators. Then with a falling crime rate, government must expand the laws to produce more criminals.

The 2008 Financial Crisis brings another complication. U.S. economy is shedding job. Unemployment and poverty are climbing while the people lose hope. Some inmates refuse to be released from jail while other people deliberately commit crimes, so the state locks them up. State pays for room, food, and in some cases medical care. This is a problem in Detroit, Michigan [33] and will quickly spread to the other cities as the U.S. economy continues stagnating.

## References

[1] Archibold, Randal C. and Nichole M. Christian. June 4, 2003. "To Embattled Mayor, Tickets Are the Hottest Issue in Town." _The New York Times_.

[2] Associated Press. July 29, 2004. "Candy bar lands woman in police custody." _Houston Chronicle_.

[3] theNewspaper.com. March 14, 2008. "Georgia: Traffic Cop Tickets Wheelchair." Available at www.theNewspaper.com (access date: 9/25/08).

[4] Associated Press. December 3, 2005. "Man hit by car gets jaywalking ticket." _Houston Chronicle_.

[5] Loewe, Wayne. April 4, 2003. "Barking at police dogs is not illegal." _Court TV_.

[6] Morgan, Theodore. 1964. "The Theory of Error in Centrally-Directed Economic Systems." _The Quarterly Journal of Economics_ 78(3): 395-419.

[7] _Treehugger_. December 10, 2011. "80-Year-Old Woman Jailed for Feeding Ducks After Doing It for 45 Years." Available at http://www.treehugger.com/culture/meet-80-year-old-woman-who-criminal-duck-feeder-video.html (access date 4/23/12).

[8] Huff, Ethan A. March 2, 2012. "Parents protest freedom-crushing food police who search lunch bags of schoolchildren." Available at http://www.naturalnews.com/035123_food_police_lunch_bags_schoolchildren.html (access date 4/23/2012).

[9] Associated Press. June 3, 2008. "Ohio city OKs jail time for failing to mow lawn." _Houston Chronicle_.

[10] Sandberg, Lisa. February 7, 2009. "Property seizure by police called 'highway piracy'" _Houston Chronicle_.

[11] _The Washington Times_. October 5, 2000. "Criminalizing everyone." Available at http://www.washingtontimes.com/news/2009/oct/05/criminalizing-everyone/?page=all (access date 4/24/12).

[12] Shelden, Randall G. 2004. "The Imprisonment Crisis in America: Introduction." _Review of Policy Research_ 21(1): 5-12.

[13] Bureau of Justice Statistics. 2002. "In a 15 State study, over two-thirds of released prisoners were rearrested within three years." Available at http://www.ojp.usdoj.gov/bjs/reentry/recidivism.htm (access date 01/09/09).

[14] Aizenman, N.C. February 29, 2008. "The high cost of incarceration." _The Washington Post_. Available at http://www.denverpost.com/ci_8400051 (access date 01/02/09).

[15] Hooks, Gregory, Clayton Mosher, Thomas Rotolo, and Linda Lobao. March 2004. "The Prison Industry: Carceral Expansion and Employment in U.S. Counties,1969–1994." _Social Science Quarterly_ 85(1): 37-57.

[16] Simon, Dan, Alina Cho, Terry Frieden, Rod Griola, Chris Strathmann, Jeanne Meserve, and Susan Candiotti. October 12, 2005. "Beating victim: No anger toward police." _CNN_.

[17] Griffin, Drew and David Fitzpatrick. July 22, 2008. "Man dies after cop hits him with Taser 9 times." _CNN_. Available at www.CNN.com/Crime (access date 7/11/08).

[18] Harris, Tom. 2008. "How Stun Guns Work." _Howstuffworks_. Available at http://electronics.howstuffworks.com/stun-gun3.htm (access date: 12/24/08).

[19] Miller, Carlos. March 9, 2008. "Houston brothers receive $1.7 million in wrongful arrest suit." Photography is not a crime. Available from http://carlosmiller.com/

[20] O'hare, Peggy. June 3, 2008. "Under fire, Sheriff's Office disbands surveillance unit." _Houston Chronicle_.

[21] Texas Cable News. May 19, 2008. "Some lawmakers want Texas AG to investigate Harris County Sheriff's Office." _KHOU News_. Available from http://www.txcn.com/

[22] Khanna, Roma and Steve McVicker. May 12, 2006. "Police lab tailored tests to theories, report says." _Houston Chronicle_.

[23] Maier, Timothy W. June 2003. "Inside the DNA Labs." _Insight Mag_. Available at www.insightmag.com (access date: 7/11/08).

[24] Sherrer, Hans. "Travesty in Tulia, Texas: Frame-up of 38 Innocent People Orchestrated by a County Sheriff, Prosecutor and Judge." Available at www.forejustice.org (accessed on 7/3/08).

[25] _Drug Policy Alliance_. 2008. "Drugs, Policy, and the Law – Tulia, Texas." Available at http://www.drugpolicy.org/law/police/tulia/index.cfm (access date: 02/05/08)

[26] Zongker, Brett. August 8, 2008. "Police clear name of Md. mayor after drug raid." _Yahoo News_.

[27] _DRCNet Foundation_. February 2, 2002. "Backlash Emerges as Texas Drug Task Forces Run Amok." The Drug Reform Coordination Network (DRCNet). Available at StoptheDrugWar.org (access date 7/11/08).

[28] _Wikipedia.org_. "Crack Cocaine." Available at http://en.wikipedia.org/wiki/Crack_cocaine (access date 08/22/2010).

[29] Associated Press. January 23, 2009. "Texas Judge's Blood-Alcohol Test Inadmissible." _Houston Chronicle_.

[30] Hahn, Bill. July 11, 2007. "Family Attorney Blows the Whistle on State Child Protective Services Agencies." _The T.R.U.T.H. Project_.

[31] Hurdle, Jon. February 13, 2009. "U.S. judges admit to jailing children for money." _Reuters_.

[32] _The Canadian Press_. May 25, 2008. "California city that is in bankruptcy may become the model for others."

[33] Crary, David and Corey Williams. December 26, 2008. "Detroit replaces New Orleans as most beleaguered American city." _South Florida Times_. Available at http://www.sfltimes.com/index.php?option=com_content&task=view&id=2273&Itemid=42 (access date 01/02/09).

# 7. Eroding the Bill of Rights

"A man will fight harder for his interests than for his rights."

-Napoleon Bonaparte

Thirteen colonies were afraid to establish a new strong centralized government. States just won the Revolutionary War that separated the colonies from the King of England. States believed if they created a strong centralized government, it would become powerful and eventually usurp power from the state governments. First Congress ratified the Bill of Rights to appease the states, limiting the power of the United States government.

The Bill of Rights is a powerful document because it clearly sets a limit on the federal government's power. The Bill of Rights originally applied to the federal government, but through a Supreme Court case, _Gitlow versus New York in 1925_ , was the Bill of Rights applied to the states. Supreme Court upheld the conviction of Benjamin Gitlow, who was a socialist and advocated the overthrow of the government. The Supreme Court ruled that speech and writings advocating the overthrow of the government did not violate the free speech clause of the First Amendment.

The Bill of Rights is a piece of paper, which cannot impose limits on government. Only government officials can limit their power. The Bill of Rights helped restrain government's power for 200 years because it imbued a set of ethics and duties on politicians, judges, Presidents, governors, and legislators. However, through the acts of Congress, Presidents, and the federal courts, the government circumvented the Bill of Rights. Unfortunately, the states' nightmare became true. The federal government has usurped control and power away from the states.

States are not big on the Bill of Rights either. They are becoming as oppressive as the U.S. federal government. For example, after the terrorist attacks on the World Trade Center on September 11, 2001, the state police and the FBI can brand a U.S. citizen as a terrorist if he quotes the Bill of Rights. If a citizen cannot quote the laws that the government officials and agents supposedly must follow, then the laws no longer exist.

We write each amendment of the Bill of Rights as a section heading and explain how the federal or state government has circumvented it.

## Amendment I

"Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances" [1].

Judicial system has severely abused, twisted, and distorted this Amendment. This amendment's purpose protects religion and a free press from government.

Founding fathers did not intend the American people to be atheists nor remove god from the public institutions. They did not want the federal government to sponsor a particular religion. With the United States being a melting pot of different cultures, the founding fathers wanted people to choose their own religion, whether it was Catholic, Presbyterian, Lutheran, Baptist, or Judaism.

Founding fathers did not want a godless, atheistic society because religion has power. For example, if 99% of the U.S. population believes in God and the 10 Commandments, we would have a society with a tiny government. Religion is a source of discipline and behavior control.

U.S. government successfully eliminated religion from society. Government encourages the breakup of traditional families and helps finance out-of-wedlock children. Indirectly, the federal government has contributed to the deterioration of society. What have we achieved? Government builds more prisons, more court buildings, more jails, and more treatment facilities. U.S. incarceration rate is 2% of the U.S. population, and the federal and state governments are rapidly going broke. However, crime still occurs.

Courts have expanded freedom of the press to cover all kinds of behavior. We have the freedom to walk naked. Nudists want to walk around with no clothes: Pornography is viewed as free speech. College professors have the freedom to grade students. In the 8th U.S. Federal District Court, you have the freedom to give a cop the middle finger. (Interpretation of laws can differ among federal court districts until a Supreme Court decision brings all districts to the same consensus).

Judges forgot the purpose of free speech, which liberates news reporters from government control. For example, the Soviet Union controlled all newspapers, TV channels, and book publishing. Soviet government only told its citizens what the government wanted them to know. In the United States, the press may be free, but reporters do not ask politicians and government the tough questions that need to be asked.

A new technology came along that allows anyone to become a writer: the internet. The internet has become the most versatile invention of the 20th century because anyone with access to a computer can become a press with little cost. However, some lawyers and judges discovered ways to punish people, who use the internet as a free press. For example, if a person creates a website, or he or she runs a TV commercial against a political opponent in Texas, then this person may be violating a campaign-finance law. Opponent could sue this person and pay high damages, or even be subjected to criminal prosecution. Texas campaign law requires people to register with the state and disclose all financial contributors. Consequently, political organizations that are unhappy about negative campaign ads encourage and hound the Texas prosecutors to examine these cases for campaign law violations as a clever way to shut people up. Some Texas politicians utilize the campaign-finance laws to quiet the Tea Party Movement,

Government has eroded the right to a peaceful assembly. Usually when a political group becomes angry over an issue and wants politicians to pay attention, the group has a public protest. These protests make headlines that political leaders pay serious attention to. However, some political leaders do not like the message or the publicity, so they sic the police on them. Thus, the police have been aggressive toward the protesters, such as the Mexican protesters, who protested the new immigration laws in Los Angeles in 2007 [2] or the Occupy-Wall-Street protestors, who want to stop the corruption on Wall Street in 2011.

Government utilizes two methods to stop protests.

**Method 1:** Government requires a permit. Hence, government takes its time to approve the permit or arrest the protesters if they did not get the necessary paperwork. Of course, the key word is approval because the government can also decline permits, forcing citizens to go through a lengthy, appeal process. Government can create formidable roadblocks, when it deems it necessary.

**Method 2:** President Obama passed a new law in 2012 that allows the U.S. government to charge protestors with a felony if they protest near secret service agents. Ironically, when President Obama was 29 years old, he protested for minority rights at Harvard University in 1990. Leaders usually forget their roots as they climb up the leadership ladder.

Final assault of the first amendment was the expansion of police powers after the terrorist attacks on September 11, 2001. President Bush and Congress passed the Patriot Act to broaden the federal government's surveillance and police powers. For example, the Federal Bureau of Investigation (FBI) could issue a National Security Letter and request information from any financial institution, library, insurance company, internet provider, or travel agency. Letter automatically comes with a lifetime gag order. Thus, a person cannot talk or write about it or confer with an attorney about it. U.S. government can sentence a violator up to five years in prison [3].

Lifetime gag order creates two serious problems:

**Problem 1:** A National Security Letter does not require approval from a judge. Thus, the FBI does not need probable cause.

**Problem 2:** FBI issued approximately 200,000 letters between 2003 and 2006 [3], which means the FBI is abusing its power.

## Amendment II

"A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed" [1].

In the beginning, the United States did not have a large, full-time military because the soldiers worked their jobs and farmed the land to support their families. Thus, the states needed access to soldiers, whom the state called up on short notice to protect people and towns from invaders and the Indians. (We did steal land from the Indians, so they have every right to be angry with the Europeans). State wanted these people to own their guns.

This Amendment clearly places a limit on the federal government. If the federal government becomes too powerful, a state government could easily rebel because they have fast access to its armed population. If the federal government went too far, a potential bloody war could ensue. United States lost more soldiers in the U.S. Civil War than in World Wars I and II combined because a civil war is the worst war a country can fight.

Current government has a problem with people owning guns, and it successfully placed barriers to gun ownership.

Common barriers are:

**Barrier 1:** A person can own a gun but cannot fire it within city limits because of city ordinances. Government does not care what the circumstances are.

**Barrier 2:** A person could be prosecuted in certain states if a burglar tries to break into the house, and the owner shoots him. An owner can only go up one step to remove the threat. Of course, how could a person know what the threat level is as someone breaks into his or her home? Burglar could be unarmed or armed.

**Barrier 3:** Government imposes another restriction – a person needs a special permit to carry a concealed weapon. A person must ask a government agency to have permission to carry a firearm.

**Barrier 4:** Government uses domestic violence as a popular means of gun control. A person loses their right to have a firearm if a court has convicted a person (i.e. male) of domestic violence, or has issued a protective order against him. Of course, judges grant protective orders easily in some states as defendants cannot challenge them. If the defendants do not turn in all guns into the police, then the state can charge them with felonies for gun possession.

**Barrier 5:** Felony convictions prevent gun ownership for the rest of a felon's life.

Why would a government want to limit gun ownership? Federal, state, and local governments are in the mode of taxing, stealing, and expropriating property. Government rationalizes this behavior by labeling a person as a criminal or has broken an obscure law and must have his property and assets taken. It can be as simple as a person carrying too much cash, and the government steals your money by claiming this person is a drug dealer. If people are armed, government has more difficulty expropriating property. Who in their right mind would want to be a government agent if every time the agent knocks on a door, and the occupants shoot at the agents? This can become very expensive in terms of manpower and the potential loss of government agents.

Machiavelli (1520) summed it best in the _Art of War_. A republic with armed citizens has a longer life span than a Republic where the citizens are unarmed [4]. If the people are armed, then government must be afraid of its people. If the government is armed, then the people must be afraid of government. If the people do not have weapons, a leader can seize power and easily establish a dictatorship.

## Amendment III

"No Soldier shall, in time of peace be quartered in any house, without the consent of the Owner, nor in time of war, but in a manner to be prescribed by law" [1].

Government did not violate this Amendment because the U.S. military receives tax dollars to house soldiers in barracks.

## Amendment IV

"The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized" [1].

Government easily circumvented this Amendment and uses three methods:

**Method 1:** If the police want to search a house or vehicle, the police can lie and say anything to a judge or magistrate. Judges or magistrates usually sign the search warrants.

**Method 2:** If police believe a person is armed or is destroying evidence, then the police will crash through someone's door without a search warrant. This was an actual case in the federal district court in Texas. A person was taking a shower and did not hear the police knocking on the door. Imagine the person's surprise to see a multitude of guns pointed at him as he stepped out of the shower. Federal courts deem this okay. Of course, to a person with common sense, how could the police ever know a person is armed or is destroying evidence? Police cannot read minds. Thus, the police have the power to kick in any door under these pretenses without the need for a warrant.

**Method 3:** The Patriot Act expanded the powers of the federal government. Any federal agent can request any information about a person using a National Security Letter, which was already discussed under the First Amendment.

State governments are not happy with this amendment. For example, the Texas Department of Transportation went after a homeowner, who constructed a billboard on his property that stated the fourth amendment, 'Just say NO to police searches!' Billboard also listed a telephone number with a pre-recorded message of the 4th Amendment. Department of Transportation claimed the owner violated the Texas Highway Beautification Act, which occurred at the same time the State of Texas stepped up its campaign of "consent searches of vehicles on our highways." Homeowner won his case in court using "freedom of speech" from the first amendment [5].

This homeowner was concerned the police were pulling over too many people and searching their cars. Homeowner did the right thing and posted our right about "unreasonable searches and seizures." If the police follow the rules and obtain a search warrant, they would need several hours. Judge must sign the search warrant and deliver the warrant to the person. These several hours could prevent police from pulling over a dozen more cars and searching them. Remember, time is money, and the police must keep writing tickets. Florida solved this problem by having a judge sit in a patrol car near a police checkpoint.

Police do not respect smart asses that say 'no' to an officer's request to search the vehicle. Of course, this could be dangerous in Texas, where police officers have their own methods to deal with "difficult citizens."

## Amendment V

"No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation" [1].

Government circumvented this Amendment. A grand jury approves of serious charges against a person, but it does not state who serves on grand juries. In Harris County Courts (Houston, Texas), all judges choose the people, who serve on grand juries. Only one judge selects a grand jury from voter registrations. We should not be surprised that retired police officers, retired prosecutors, and court employees are over represented on grand juries in Harris County. Could retired employees of the criminal-justice system remain unbiased if their former colleagues have charged someone?

A grand jury investigated the Houston Crime Lab scandal and found no violations. Grand jury had one Houston police officer as a member. However, the FBI shut down this same lab for numerous problems.

Prosecutors also shop around the court system, and select a court with highly biased grand juries for weak court cases [6].

This Amendment also allows a government to seize property through eminent domain. Eminent domain is the power to condemn a property and take it over without consent. Traditionally, government only seized property for public projects, such as building a highway, expanding streets, building a new school, or expanding an airport. These public goods benefit society.

Key word is "just compensation." Property owners usually overvalue their property while government seizing the property undervalues it. For example, a person owns a house that is worth $50,000, but he values it at $70,000 while government wants to pay only $10,000. If a homeowner and government agency cannot agree on the compensation, then this case would go to court, and a judge would decide the property value.

First assault on private property started in the early 1970s, when Congress and the President signed the Endangered Species Act of 1973. Congress and the President gave the federal government the power to halt land development if the development harmed an endangered species or its habitat. Problem with this law is the federal government does not provide "just compensation."

For example, you buy a piece of land and want to build a house on it. Then the federal government finds an endangered bird living on your land and tells you to halt any construction. Now the land drops in value because people do not want to hold land for the sake of holding land. Government does not compensate you for this loss. Federal government seized your land because it limits the activity that a person could do with it. Congress knew the power of the federal government would be severely limited if it had to compensate landowners, when it destroyed their land values. Similar laws protect wetlands, and many states imposed laws that restrict land development. For example, California has very tough laws that prevent landowners from sub-dividing their property. Other laws that impact property rights include the Clean Water Act of 1972 and the Coastal Wetlands Planning, Protection and Restoration Act of 1990.

Final assault on property owners was the Supreme Court's decision, _Kelo versus City of New London_. Court allows a government to seize land if it believes it can collect more tax revenues. Government can seize property from one private owner and transfer it to another private owner [7]. For example, a city government could use eminent domain to seize properties in a neighborhood and transfer the properties to a developer. Then a developer demolishes the homes and builds new condominiums or a shopping mall. New development brings in new property taxes and new sales taxes [8]. However, this power can have a chilling effect on private investment. Who would invest in a building or buy a condominium if a government will seize the property again several years later? Consequently, government has converted private property into a land-lease from government.

## Amendment VI

"In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the State and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the Assistance of Counsel for his defence" [1].

Founding fathers never specified the exact terms of this Amendment. For instance, what is a speedy trial? Does it mean the trial starts in one year, two years, or eight years? Consequently, prosecutors ensure a judge sets the defendant's bail too high, so the defendant sits in jail. People do not enjoy sitting behind bars and will cave into a prosecutor's plea agreement even if they did not commit the crime. People sitting in jail for several months could lose their job, housing, and their standard of living. Hence, innocent people can be coerced into pleading guilty because it is the cheaper alternative.

Judges and prosecutors want to avoid jury trials because jury trials take time and are expensive. Prosecutors and defense attorneys spend a large amount of time organizing the evidence, preparing witnesses, and filing paperwork with the court. Furthermore, jury trials are random events. In some cases, prosecutors had strong evidence, but the juries found the defendant not guilty. Other juries convicted defendants on circumstantial evidence. Moreover, judges like to avoid jury trials. Court spends time to summon jurors, prepare the juries, and hear the case. A judge's docket becomes clogged with too many cases.

Judges and prosecutors want to avoid jury trials. If a difficult defendant demands a jury trial, prosecutors devise ingenious methods to force people to plead guilty and forgo their right to a jury trial. Examples include:

**Example 1:** A defendant has two legitimate charges against him. Then a prosecutor invents and adds three additional bogus charges. Prosecutor will drop the three charges if the person pleads guilty to the original two. If a jury finds the person guilty on all five charges, he would spend a long vacation in prison.

**Example 2:** Prosecutors can threaten to remove children or seize property unless the defendant accepts the prosecutor's plea agreement.

**Example 3:** Prosecutors ask the judge to set a defendant's bail really high. A person could sit in jail up to a year waiting for his jury trial.

**Example 4:** If the defendant posted bail, the person must appear in front of the judge every month. Court ensures the person appears, and then the prosecutor keeps asking for a continuance, i.e. more time. Subsequently, the judge resets the case for next month.

Resetting the case does two things. First, a person wasted his day to come to court, like take a day off from work. Second, if that person brought his lawyer, then he pays his lawyer for appearing in court. If the court keeps resetting the case for two or more years, many defendants will give up and accept the plea bargain from the prosecutor. People cannot afford to bring an attorney to court month after month. Defense attorneys also do not mind because they come to court and are paid for doing nothing.

Judges have another problem. They can indirectly help prosecutors win court cases because they control the information that enters the court. In case you did not know, many judges were former prosecutors. The following cases illustrate these people are guilty without a doubt.

  * Police catch an elderly woman smoking marijuana in her house.

  * A person attacked another person with a weapon.

  * A convicted felon fired a gun at another person. Thus, a felon possesses a firearm.

These are open and shut cases. However, would you change your mind if you had more information? Read the cases again.

  * Police catch an elderly woman smoking marijuana in her house. She has severe glaucoma, and marijuana helps relieve the pain.

  * A person attacked another person with a weapon. This other person molested the attacker's daughter, and the judge dismissed the child molestation case on a technicality.

  * A convicted felon fired a gun at another person. This person was robbing the felon, and the felon grabbed the weapon, causing the gun to fire.

These cases are not fictional! They actually happened. For prosecutors to win these cases, they must hide this extraneous information. Of course, these people can appeal against a wrongful conviction. However, defendants usually cannot appeal a jury's decision; they can only appeal if a judge made a mistake. In these cases, the violators did violate the letter of the law. Unfortunately, appeal judges do not consider extenuating circumstances, but juries would consider.

This Amendment allows defendants to bring witnesses in their favor. However, the criminal-justice system must be honest because the police and prosecutors must disclose pertinent information to the defendant. What happens if a prosecutor or police does not turn over the evidence, or names of all witnesses to the defense? Thus, defendants cannot request witnesses to appear on their behalf if they do not know their names? For instance, prosecutors always bring witnesses to court who claim the defendant committed the crime, while the defense brings witnesses, who exonerate the defendant. Police and/or prosecutors could withhold a name of a key witness that weakens a state's case.

This Amendment also requires criminal courts to supply attorneys for the poor, which was a Supreme Court ruling in _Gideon versus Wainwright_ in 1963. Thus, all states must provide counsel for poor defendants for serious misdemeanors and felonies. Unfortunately, many states ensure the public defenders earn the lowest salaries, overburden with heavy caseloads, and provide no financial assistance for expert witnesses. Consequently, public defender offices have trouble retaining experienced attorneys, have high turnover rates, and have trouble recruiting good attorneys [9, 10]. Prosecutors also make the same claims for their offices, but they earn greater salaries than the public defenders do.

State of Texas provided one attorney, who slept during a death-penalty trial. State of Texas claimed the "death sentence should be upheld because a sleeping lawyer is no different from a lawyer, who is intoxicated, under the influence of drugs, suffering from Alzheimer's disease or having a psychotic break." After a lengthy appeals court battle, the defendant was granted a new trial [11].

States vary widely in how they fund public defenders. States use two common methods are:

**Method 1:** Court provides legal counsel [9]. A judge hires a private attorney to represent poor defendants who stand before the judge. In this case, do the private attorneys represent the defendants or work for the judges? Is justice served, or do the judges want to clear their dockets with guilty pleas?

**Method 2:** Court uses a public defender's office that sends an attorney to represent poor defendants. Public defender's offices receive funding from the county and state governments [9].

## Amendment VII

"In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise reexamined in any Court of the United States, than according to the rules of the common law" [1].

Government at the local, state, and federal levels rewrote laws removing jury trials. For example, the State of Texas changed its laws for red-light cameras, changing a traffic violation from a criminal offense to a civil one. Thus, the city governments can choose whether to provide jury trials.

Currently, the City of Houston has 70 red-light cameras, and some members of the city council want to expand the number to 200. Mayor Bill White claimed, "cameras raise awareness about red-light safety and free up officers to patrol neighborhoods" [12].

State changed the law for red- cameras as a means for local government to grab more money. In 2008, the red- cameras generated 387,000 citations. A violation costs $75, which equals $29 million in revenue if all violators pay the fine, of course. If 10% of the violators requested a jury trial, the court system would be flooded with new cases.

Government uses red-light cameras to increase public safety. However, the number of collisions at intersections with red-light cameras doubled since they were installed. If the City of Houston is concerned about public safety, then the red-light cameras should be removed [13]. This Amendment clearly states all citizens can request a jury trial if the fine exceeds $20. Unfortunately, government exempts itself from the law, while the public must comply with it.

Citizens and businesses do not get jury trials in many cases. Many states set up special courts to decide these cases:

**Case 1:** Defendants do not get jury trials in many states for tax code violations.

**Case 2:** Defendants do not get jury trials for civil infractions, which include traffic tickets, housing code violations, and pet violations.

**Case 3:** Juries do not hear court cases involving children.

**Case 4:** President Obama signed the National Defense Authorization Act. A U.S. citizen can be detained indefinitely without a jury trial if government labels him or her a terrorist. Unfortunately, one definition of a terrorist is a person, who quotes the Bill of Rights or reads passages from the U.S. Constitution.

Many heart-wrenching stories come from courts that deny jury trials because jury trials impose an immense check on government.

## Amendment VIII

"Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted" [1].

Legal system has abused the "cruel and unusual punishment" clause of this Amendment. Cruel and unusual punishment is a judgment call. United States reserves the death penalty for treason and premeditated murder. However, the U.S. Supreme Court ruled the death penalty unconstitutional in 1972 but reinstituted it in 1976. Government uses the death penalty to deter crime because a violator pays the ultimate price for murder or treason. Furthermore, some people are psychopaths and inherently evil. Society would be better if the state removed these people permanently.

Here is where the legal system gets crazy. Federal and several state governments use lethal injections to execute prisoners because they consider this a more humane method. However, firing squads, hangings, and electric chairs constitute cruel and unusual punishment. All these methods have one common theme. They induce death to the prisoner. Death is death! Does it really matter if it takes 10 seconds to kill a prisoner or 2 minutes? Is one method of death more humane than another method?

States could save money by incarcerating a person for the rest of his life than pay for the legal appeals of a death penalty. Unfortunately, the attorneys use the death penalty as a source of employment. For instance, the most ridiculous case involves the appeals of Richard Cooey. A judge sentenced Richard to die in 2008 because he murdered two college students. Richard claimed he was too fat to die, and the executioners would have trouble finding his veins to administer the injection. Consequently, lethal injection in his case would constitute cruel and unusual punishment. (Richard never claimed he was innocent.) This is not made up! U.S. Supreme Court denied his appeal [14]. For this case to appear before the U.S. Supreme Court and Ohio Supreme Court, lawyers filed paperwork and generated time on this case. Who paid for this time? Unfortunately, the taxpayers pay for the indigent defendants.

Funding for the death penalty cases should go towards the trial. Judges and lawyers ensure the defendants receive fair trials and have a fair chance to defend themselves. Unfortunately, many state and county courts push convictions through for poor defendants with no concern for their rights.

Criminal-justice system has become sensitive to particular crimes after the terrorist's attacks on the United States on September 11, 2001 and several prominent school shootings. For example, on the way to school, a student called a rival bus and threatened to open fire on them. Although this was a tasteless joke, a judge sentenced a 17-year old kid to eight years in prison for making terroristic death threats in Tyler, Texas. The kid had no means and no weapons. The judge stated, "the times we live in" [15]. This kid should be punished, but does this crime necessitate eight years in prison?

Hate crimes should constitute cruel and unusual punishment because hate crimes skew efficient punishment systems. An efficient punishment system is minor crimes warrant less severe punishment, than serious crimes. Thus, the punishment matches the severity of the crime. Table 1 shows an efficient punishment scale. An inefficient punishment system would be a criminal gets 10 years for murder, but the death penalty for attempted murder. If all murderers know this, then they kill the victim.

Hate crimes add a dimension of capriciousness and unfairness to the justice system. First, the same crime results in different penalties. If two white men had fought, then they get the regular penalties. If two men had fought, and one is a minority while the other is white, then the court must punish the white more severely. Second, prosecutors determine whether to charge a defendant with a hate crime. Some cases the prosecutor charges defendants with a hate crime and others he does not. Third, more defendants may challenge the charges and request jury trials because a hate-crime conviction adds more time to a person's sentence. Consequently, the defendant could challenge the charges. Finally, courts already have trouble determining whether a defendant is guilty or not. A hate crime requires the court get into the defendant's head, which makes court cases more complicated.

Criminal records constitute "cruel and unusual punishment." Before computers, if employers wanted to check a person's background, they would go to the courthouse to search through the court records. Consequently, most people did not check criminal records. If a person moved to a new state, then he or she started with a clean slate because employers could not check criminal records in other states. Cases exist where a convict broke out of prison and became a schoolteacher in another state. Now, everyone has potential access to criminal records through the internet from all 50 states.

Problems with a criminal record are:

**Problem 1:** A criminal record exists forever, so a conviction follows a person throughout his life. Punishment for minor crimes should have a stopping point. For severe crimes, the person would sit in a prison for a long time, so a criminal record would be irrelevant.

**Problem 2:** A criminal record for a person may exist in a court's database, the state's database usually administered by the state police, and the FBI's database. Furthermore, the FBI connects all police and state's criminal databases together as one large database for the whole United States and Canada, which the FBI calls the National Crime Information Center (NCIC). What happens if a person has a mistake in his or her criminal record? What would happen if the wrong name was recorded in a database? This has happened! People were denied jobs because a background check revealed a felony conviction that was a mistake. Unfortunately, the burden of the proof falls upon the person with the false record. He must hire an attorney and legally challenge the record, which could be expensive and takes time.

**Problem 3:** Many states release arrest records. If police falsely arrest a person and the case never goes to trial, the arrest record still shows up. Would an employer hire someone who was arrested for "assault with a weapon," although the state dropped the charges?

**Problem 4:** Vindictive people have falsely accused victims for crimes they did not commit. In other cases, police and prosecutors were overly aggressive. For example, a person was arrested for barking at a police dog. Unfortunately, his criminal record contains the charge," assaulted a police officer." His criminal record would never give details, such as the "defendant barked at a police dog."

Intent of our founding fathers was not to use court records to shackle a person for the rest of his life. The public can view court records because they keep the judges honest. If a judge makes a bad decision, and the public knows it, then it could lead to a public outcry.

## Amendment IX

"The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people" [1].

No problems were found with this Amendment.

## Amendment X

"The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people" [1].

Although this Amendment recognizes state power, the federal government uses three ingenious methods to circumvent this Amendment.

**Method 1:** Federal government interprets the powers in the constitution broadly and maintains a multitude of federal bureaucracies. Bureaucracies impose numerous unfunded mandates on state and local governments.

**Method 2:** Federal government has the right to regulate interstate commerce.

**Method 3:** Federal government funds a variety of projects, and this money comes with a long list of conditions.

U.S. Congress and the President founded powerful federal bureaucracies. For example, the U.S. government created the Environmental Protection Agency (EPA) in 1970 to protect the environment. If you read the U.S. Constitution, no language can be construed that gives the federal government this vast power to create a bureaucracy to protect the environment. Unfortunately, the EPA actively enforces the environmental regulations.

EPA imposes its standards on people, businesses, and state and local governments. For example, the EPA issued orders to water utility companies in central Oklahoma to lower the arsenic levels. However, the mandates have two problems: First, the EPA does not pay the cost of its ruling. It dictates its rules that people, businesses, and local governments must follow. Second, the EPA did not give people in central Oklahoma the right to determine which arsenic level, they would be happy with. However, they will pay higher local taxes, or greater water bills, so the water-treatment facilities comply with the EPA's ruling.

Federal government has the right to regulate interstate commerce. What is interstate commerce? A business makes something that residents in another state consume. Thus, a business can produce anything that potentially is involved in interstate commerce.

Traditional examples include:

**Example 1:** A grid of wires connects the electric power plants and their customers together. This grid crosses state's lines, and hence, the federal government regulates this whole industry. One state, Texas, did not connect to the national grid, so Texas could escape from the federal regulators.

**Example 2:** Airplanes fly between airports located in different states. Thus, the federal government regulates the airline industry. When Southwest Airlines first started, it only flew airplanes within Texas and escaped from the federal regulators. Southwest had a cost advantage and grew fast before going national.

**Example 3:** Federal government regulates the trucking industry because trucks carry freight from one state to another.

**Example 4:** Federal government regulates the food and pharmaceutical industries because products cross state lines.

**Example 5:** President Obama used the interstate-commerce clause to pass his healthcare plan. Federal government wants all U.S. citizens living within the U.S. to purchase healthcare insurance. Obamacare was challenged in court in 2012, but the courts had not found it unconstitutional.

A recent Supreme Court case, _Gonzales versus Raich_ , re-asserts the federal government's power to regulate interstate commerce. State of California allows residents to smoke marijuana for medicinal purposes because marijuana helps people with glaucoma and eases pain from multiple sclerosis and cancer. However, the federal government still views marijuana use as a crime. A person sued the federal government to stop its intrusion over a state's right. Consequently, the Supreme Court had ruled marijuana use is interstate commerce, and the federal government has the right to pursue violators [16]. Thus, the federal government can potentially regulate all industries and businesses.

For the last method, the federal government control states by controlling the money. Federal government funds a variety of projects and uses this funding to dictate laws and conditions. For example, the federal government imposed the legal drinking age of 21 on all the states. Nowhere in the U.S. Constitution states the federal government has the legal authority to set the legal drinking age. No words in the constitution could be interpreted broadly enough to give Congress the power to pass such a law. However, the federal government threatened to reduce funding for highway projects for several states if these states did not raise the legal drinking age from 18 to 21 years of age. People can marry, enter contracts, own property, or sent to another country to die in a war at the age of 18, but they cannot drink alcohol until they had reached age 21.

## Conclusion

We always had problems that plagued our justice system. Before the 1960s, the judicial system was small and had little interaction with its citizens. Thus, injustice would be a rare event, but it did happen. Originally, courts sustained slavery and enforced discrimination against women during the 19th century. Now days, courts from the city level to the U.S. Supreme Court rule over everything. Judges invaded families, schools, neighborhoods, and businesses. Consequently, injustices occur frequently as judges shove their hands into everything.

Judges became social crusaders. They believe they have the right to regulate all of society's behavior that they deem bad. Then they over extend the law to achieve their goals. This causes a problem with the Bill of Rights because this document limits the government's power. Consequently, judges allowed the government to circumvent it through court rulings.

Before the 1970s, the following were not crimes:

  * People could smoke cigarettes freely.

  * Parents and school officials could spank children.

  * Some families are violent and fight. Police would break up the fights and force some family members to leave.

  * One parent would take (or kidnap) the children if he or she did not agree with a custody agreement.

  * People used drugs and alcohol openly. Parents could throw a keg party for a child, who graduated from high school. High-school students could smoke reefer during lunch on school property.

All these activities became illegal. The criminal-justice system expanded, so it could go after people who commit these new crimes. Furthermore, judges enforce the laws that indirectly target families. Families have members who work and are a source of wealth and income. Thus, family members are afraid to go to jail or be incarcerated. They will cave in to the state's demands, pay their fines and fees and not challenge the state. On the other hand, the state has to expend resources to go after real criminals, and the criminals have little resources to reimburse the state.

Courts and government believe they are making the United States a better place to live. People, who have been around for several decades, know this is a bunch of crap. Ronald Reagan said it best, "Are we better off now than we were 10 years ago?"

## References

[1] The Bill of Rights. 1791. National Archives Experience. Available at http://www.archives.gov/national_archives_experience/bill_of_rights_transcript.html (access date: 12/24/08).

[2] Associated Press. May 4, 2007. "Police chief 'not happy' with LAPD immigration clash." _USA Today_. Available at http://www.usatoday.com/news/nation/2007-04-26-LAPD-immigration-rally_N.htm (access date 01/09/09).

[3] Zetter, Kim. August 10, 2010. "'John Doe' Who Fought FBI Spying Freed From Gag Order After 6 Years." _Wired_. Available from www.wired.com.

[4] Machiavelli, Niccolo. 1520. The Seven Books on the Art of War.

[5] Blumner, Robyn E. August 1, 1999. "What's this man's sign? Try the Fourth Amendment." _St. Petersburg Times._

[6] McVicker, Steve. November 13, 2004. "Are judges taking a narrow view of justice?" _Houston Chronicle_.

[7] Associated Press. June 23, 2005. "Homes may be 'taken' for private projects." _MSNBC_.

[8] Jones, Tim. November 16, 2003. "Private property gets condemned for profit." _Chicago Tribune_.

[9] Parker, Laura. September 29, 2005. "8 years in a Louisiana jail, but he never went to trial." _USA Today_.

[10] Patrick, Robert. March 6, 2005. "Public lawyers face low pay, high turnover." _St. Louis Post-Dispatch_.

[11] The Justice Project. August 14, 2001. "Texas Death Row Defendant With Sleeping Lawyer Deserves New Trial, Rules Full Fifth Circuit Court." Available from www.thejusticeproject.com

[12] Houston Politics. June 11, 2008. "Rodriguez: More red-light cameras = more officers." _Houston Chronicle_.

[13] Olson, Bradley. December 29, 2008. "Study: Wrecks increase at red-light cameras sites." _Houston Chronicle_.

[14] Kinney, Terry. October 14, 2008. "Inmate who says he's too fat to die to be executed." _South Bend Tribune_.

[15] Associated Press. June 7, 2008. "Student, 17, gets 8 years in prison for phone threat." _Houston Chronicle_.

[16] Mears, Bill. June 7, 2005. "Supreme Court allows prosecution of medical marijuana." _CNN_.

# 8. Repeating History – The Roman Empire

"When thou art at Rome, do as they do at Rome."

-Miguel de Cervantes

Ancient Roman Empire and the United States share many characteristics. The Roman Empire dominated the civilized world between the eighth century B.C. and the fifth-century A.D., whereas the United States dominated the 20th century, and early 21st century. We study the Roman Empire to illustrate the life-cycle theory of a legal system because many empires experience a life cycle. Every stage of the life cycle has prominent characteristics, and we compare the characteristics of the Roman Empire to the United States.

A legal system evolves in several prominent stages. In the beginning, a new society forms that starts with an excellent legal system that encourages hard work, forms strong private property rights, and allows free enterprise. Consequently, businesses thrive and create wealth by creating products for consumers because indirectly, industries create jobs and employment. Government still exists because government establishes the rules of the game. Thus, government collects taxes to finance itself.

As wealth and incomes increase, government collects large tax revenue flows, giving birth to government bureaucracies. Eventually, bureaucracies start to increase in size on their own volition, and always need taxes to sustain this growth. Eventually, these bureaucracies become too large that they literally destroy the free markets. They pass complicated, convoluted rules, and regulations, and impose numerous taxes until the society no longer has free enterprise.

Excessive taxes, regulations, and large bureaucracies cause society to stagnate. Businesses flee or bankrupt; wealth and incomes begin to dissipate while masses of the unemployed appear. Unfortunately, the bureaucracies continue expanding, and they keep raising taxes on a stagnant economy. Eventually, society crumbles and a rich powerful country transforms into a third-world banana republic.

The Roman Empire went through this life-cycle of a legal system. Historians define two eras: the Roman Republic and Roman Empire. In the beginning, the Roman Republic started as a democracy and grew at an incredible rate. As a democracy, government granted citizens legal rights, including the right to vote. As the Roman Republic approached its apogee, and her military dominated the world, the Republic transformed into the Roman Empire that an emperor controlled. Emperor was a dictator, who controlled all government institutions and all the people. Towards the end of the Roman Empire, the empire evolved into a totalitarian state with the Roman Emperor having absolute power until the Western Roman Empire collapsed in the fifth century while the Eastern Roman Empire, called the Byzantium Empire, survived until the 15th century.

## The Roman Republic Rises

Kings ruled Rome for the first 200 years until the aristocrats expelled the last king and established a republic. The Republic was a representative government, or in other words, a democracy controlled by a Senate. Only aristocrats, called patricians, could sit on the Senate, and the Senate controlled the machinery of government.

Aristocrats strongly distrusted powerful kings, and they decentralized the power of the government. Furthermore, the Romans published Roman law onto twelve tablets, and the laws emphasized, "all free citizens had their rights to fair justice guaranteed" [1]. Early Romans also gave its citizens the right to vote and hold public office, where the Roman government defined citizen in narrow terms. Citizens were free adult males who owned weapons, and the weapon's requirement was necessary, so the government could call people to serve in the military [2]. Finally, Roman laws were shaped from actual court cases and common sense. Romans had a common law legal system that emphasized individual rights and the private ownership of property.

This is déjà vu because the United States Founding Fathers similarly established the United States as a republic after we defeated the British army. Founding fathers distrusted kings and created a decentralized government. Our cherished rights were similar to the Romans, such as the right to vote and hold public office. Of course, government restricted these rights to white, adult males, who owned property. Consequently, Americans adopted the British Common Law system like the other British colonies except Malta. As already espoused, the British Common Law System is pro-business, allows court cases to shape the law, and builds a strong foundation for private property rights.

Similarly, the United States and ancient Rome absorbed the cultures of other countries. For example, the Romans imported the Etruscans artistic and architectural styles, which included the Roman's trademark – the arch. Moreover, Rome absorbed their religious, legal, and political ideas from other cultures as well as the gladiators, who fought to their death [3]. Likewise, the United States absorbs the culture, ideas, and people from other countries as the United States becomes a melting pot of all the world's cultures and people. We take the best from the world and assimilate it into our culture.

The United States and Romans integrated the conquered lands and people into their country. The Romans granted legal rights and citizenship to the conquered people and introduced them to the Latin language, Roman law and customs [4, 5]. The Romans did expropriate lands and booty from the conquered countries, but were ingenious when conquering them. Once the Roman Republic integrated the conquered countries, these countries could share the spoils with Rome if Rome conquered new territories [6]. Likewise, the United States expanded its boundaries by annexing new states to the Union. As the United States was expanding westward across the Great Plains, the United States allowed new states to form, and become equal members with the other older states. New states could send senators and representatives to Congress and have their citizens elected to the highest levels of government.

Many countries form colonies if they expand beyond their borders. Leaders do not possess the foresight of integrating conquered lands and people. An empire usually extracts as much wealth and resources as it can from a colony and treats the conquered people as inferior and sub-human. Over time, the poor treatment causes tension, leading to revolts and uprisings. Then the empire finances a military to squash the revolts and restore order. Eventually, if the military costs become too high, the empire must withdraw and pull out.

The United States was a colony of the British Empire, and the British spent large sums of money for armies to protect the Midwest territories from the French and Indians. British crown wanted the American colonies to help pay the military costs through new taxes, but the American colonies had no representation in England. Colonists were second-class citizens. Eventually, Americans revolted and broke away from the British Empire.

The United States and Roman Republic connected together their citizens and cities with a massive infrastructure. The Romans built aqueducts, baths, bridges, and roads [7]. Ancients once proclaimed all roads led to Rome, and after 2,000 years, some of this infrastructure still exists and being used in the 21st century. For example, several aqueducts built in the Augustan Age still transport water to Rome. The people in southern France still use the aqueduct, Pont du Gard [8]. Moreover, the Spanish still cross a Roman bridge in Alcantara [9]. Likewise, a massive infrastructure of highways, roads, railroads, and ship ports connect the states in the United States.

A good infrastructure allows a strong economy to form. A large, efficient infrastructure lets different regions specialize in products and services, and sell them to consumers anywhere within the country. Businesses can transport Idaho potatoes, Michigan automobiles, Texas crude oil, and Florida oranges to any place cheaply within the United States or the world. Consequently, trade flourishes as businesses rush products from one side of a country to the other side.

## Birth of the Roman Empire

Towards the end of the Republic, the Roman Republic fell into decline while politics dissolved into chaos. The Republic fragmented into quarrying groups [10], and two civil wars disrupted the Roman Republic with an explosion of violence [11]. Many Senators became fearful of the powerful and popular generals, like Caesar and Pompey because they could take advantage of the political chaos and seize control of the government.

Caesar was popular with the people because he was a brilliant general, a war hero, had the gift of rhetoric, and born into a noble class. Some Senators were afraid of Caesar and tried to turn Pompey and Caesar against each other. Other Senators wanted Caesar to relinquish control of his army, so the Senators could file corruption charges against him, removing him from power by using the Roman court system. However, Caesar rebelled against the government using his army and defeated Pompey's army. Subsequently, Caesar gained control of the Roman government, but his long-term plans were cut short, when several conservatives of the Senate assassinated Caesar [12].

The Roman government fell into disarray as its fiscal health was declining fast. Rome accumulated a large debt, experienced declining revenues, and issued new coins [13]. Top leaders could not control the government budget and hiked taxes to cover budget shortfalls. Government taxed anything with a name. Government imposed head taxes on free men and slaves. Government levied taxes on corn, soldiers, arms, equipment, and transport. The Roman government even levied taxes on columns and doors [14]. As poverty spread throughout the Republic, the people fled from the poverty of the countryside and moved to Rome. They remained idle as they sought free corn and public aid [15].

The Senate was considered quite corrupt. Senators would lend money at exorbitant interest rates to people who lived in the provinces, so they could buy luxury items or pay taxes. Provinces were conquered Roman territories located outside of Italy. Senators would also receive bribes from tax farming, where bidders paid bribes to collect taxes in the provinces [16]. Some Senators would serve one-year terms as governors of the provinces. This one year allowed the governors to extort as much property and wealth possible in the form of taxes. In some towns and regions, the people were forced into poverty and could not pay their poll taxes [17].

In the final days of the Republic, politicians won elections by bribery, corruption, and violence [18]. Senators and other top government officials bribed judges and juries. In one instance, the Roman government charged the Governor of Sicily with mismanagement because he plundered the wealth of his province. He would use the first year's profits for his defense attorney; the second year's profits were used to pay the jury, and he pocketed the third year's profits [19]. Nevertheless, the prosecutor was Cicero, who was one of the greatest lawyers of the Roman Republic. The governor fled into exile because he knew, he would not win his court case against the powerful Cicero.

Cicero was a young attorney, philosopher, and one of the most brilliant orators to rise out of the Roman Republic. Cicero was born from equestrian stock but rose to the consulship. An equestrian comes from the lower class of aristocrats, while the upper class is the patricians. A patrician only could hold the consulship with few exceptions. Cicero firmly believed in the Roman Republic and tried to prevent the government's transformation into a dictatorship [20].

The rich became more ostentatious towards the end of the Roman Republic, and the number of rich were so few that Cicero remarked, "less than 1,000 men in Rome were wealthy" [21]. Affluent or the aristocrats were few but controlled the machinery of the Roman government [22]. Richest Roman citizens ostentatiously displayed their wealth, and they used their wealth to bribe elections and juries [23].

Early in the Republic, families own small plots of land to grow crops. Then families could sell their surplus crops in the markets. Towards the end of the Republic, nobles bought or expropriated the small plots and public lands and consolidated them into large estates. Subsequently, the nobles pushed the families off the land and used the property-less tenants and slaves to cultivate the land. For instance, the rich stole a poor man's land if he served too long in the Roman military [24]. Top officials used another method. They expropriated a person's property, when assessing a fine or penalty [25].

The Romans grew tired of the political chaos and violence. They were fed up with the pirates roaming the seas, and thieves strolling along the countryside. They yearned for peace and wanted law and order [26]. One person rose up to meet the challenge; he was Gaius Julias Caesar Octavianus, otherwise known as Augustus. Augustus was Caesar's grandnephew and inherited 3/4 of Caesar's wealth. Augustus used his wealth to raise an army and crushed the armies of the conservatives, who murdered Caesar. He also assassinated Cicero [27]

Augustus was a dictator and became Rome's first emperor. Many consider Augustus one of the greatest leaders of the ancient world because he restored law and order, and established a new framework of government [28]. People of the Roman Empire suffered less from extortion and had a more friendly form of government. Augustus even tried to address the immorality of his times [29] and allowed autonomy of local governments [30].

Augustus's reforms brought peace and prosperity to the Roman Empire that lasted for the next 200 years. "More people could enjoy the fruits of prosperity than was possible again for the following 1,500 years" [31]. Augustan Age led to a massive construction spree where large public projects were constructed, such as amphitheaters, aqueducts, bathhouses, coliseums, and temples. The pollution record in the polar icecaps captured this construction boom and the sharp decline that occurred in the third century A.D. [32].

New cities were founded while the older cities grew rapidly. Trade flourished within and outside the Roman Empire. The Roman Empire established trade routes with Arabia, India, and China [33]. Furthermore, the arts and letters prospered under the Augustan Age. Several cities instituted public education that taught reading, writing, and arithmetic [34].

The Roman legal system changed gradually over time as Roman emperors consolidated their power. Towards the end of the Roman Empire, the Roman government evolved into a total dictatorship with the emperor controlling every aspect of the state and Roman society [35].

We argue the United States is developing in a similar fashion. Federal, state, and local governments are passing laws that boost the government's power while restricting the people's rights. Size, scope, and mission of government have become an intrusive, large sector of the U.S. economy. Consequently, a huge government with a strong military can give birth to an empire as the strong authoritarian rulers replace the democratic legal system.

## Roman Empire Begins Declining

The Roman Empire went into decline during its last three centuries. Each Emperor assumed more control over society and kept raising taxes to finance a growing, bloated government bureaucracy. The Roman government kept hiking taxes to pay for three institutions. First, Rome financed its army and navy, which were the biggest expense in the emperor's budget. Over time, emperors bought the troops' loyalty with cash [36]. Second, the government bureaucracies became larger, more complicated, and more expensive. Third, the government provided social welfare to feed the poor in Rome. Emperors provided free bread, Spanish olive oil, salt, and pork to Roman citizens. Emperors also imposed price controls on wine [37]. Consequently, the Roman government had trouble financing these activities as Rome's prosperity began falling.

The Roman government raised taxes to high and oppressive levels [38]. Written history does not contain enough information about the level and oppressiveness of the Roman's tax system, but historians have several accounts of the high taxes at the end of the Roman Empire. For example, Egyptian leaders complained to Rome about taxes because people were fleeing the villages, escaping from the tax collectors. If someone defaulted on his tax payments and fled, the tax collectors would beat the person's family and relatives and subject them to other types of punishment. Family and relatives would either pay the taxes or tell the tax collector the tax evader's hiding place. Tax collectors invented new forms of executions for tax defaulters. If no family or relatives were left, then the tax collectors would punish the tax evader's neighbors or seek revenge on whole villages [39]. The Roman tax system destroyed the taxpayers [40]. (You probably thought dealing with the Internal Revenue Service was bad, but it could be a lot worse).

Government can finance a large government by printing money to cover its spending. Although the Roman government minted coins from silver, the emperors debased the coins to create more money. When the silver coins returned to government, the government melted down the silver coins and mixed in cheap metals like copper. Then the government increased the money supply by creating more coins without adding new silver. At the beginning of the Empire, coins were almost pure silver. Towards the end of the Empire, coins contained a speck of silver. Rapid increase in the money supply caused rampant inflation and weakened the currency. Heavy taxation and a weak currency put Rome's financial system into decline. Furthermore, the high inflation driven food from the markets [38].

The Roman local governments had trouble balancing their budgets. They spent more than what they collected in taxes. Other things changed as well. At the end of the Roman Empire, the emperor eliminated the autonomy of local government. Emperor interfered with local government administration and imposed rules and mandates on local governments. City councils collected the taxes, enlisted military recruits, and enforced the emperor's orders [38, 41].

The Roman society evolved into a police state with an all-powerful central government [42]. Peasants became tied to the farmlands, making free movement impossible. Peasants cultivated the fields and became recruits for the Roman army, when the Emperor needed soldiers [43]. The Roman emperors even established secret police, who would trick people into saying some bad words about the emperor, so the police could arrest and execute them [44].

The population started decreasing in the second-century A.D. along with a declining production. Fewer people have a lower demand for goods and services because they buy fewer homes, food, and other products and services. Over time, industries contract. A smaller population also places pressure on the armed forces [38]. Furthermore, technological improvements halted, [38] because under an oppressive state, men no longer create fresh, original ideas [45].

Some scholars believe the Roman Empire should have collapsed in the third century A.D., but two emperors, Gallienus and Diocletian, reformed the empire. Emperor Gallienus reformed and restructured the Roman army and navy and introduced the cavalry. A cavalry is armed soldiers mounted on horses, becoming a mobile, and an efficient striking force. Emperor Gallineus could suppress quickly internal rebellion or drive out the invaders. However, the Roman government paid greater costs to feed both soldiers and their horses [46].

Diocletian reorganized the whole Roman Empire. He further reformed and restructured the Roman army and navy. Moreover, he reformed the tax system and proclaimed, "No man shall possess any property that is tax exempt" [43]. Diocletian divided the provinces into smaller units and created a new class of bureaucrats who regulated the empire, causing further financial burden. An orator once remarked, bureaucrats are "more numerous than flies on sheep in the springtime" [47].

Diocletian further split the Roman Empire into the Western and Eastern Empires. Thus, the emperors retained tighter control over the provinces, which reduced internal strife and conflicts between the provinces and Rome. Diocletian usurped control and freedom from local governments, binding them to an all-powerful emperor. Unfortunately, the growth in bureaucracies isolated and buffered an emperor from his people. Finally, each person inherited the social class of his parents, completely freezing social mobility [48].

By the third century A.D., the empire blamed the Christians for the economic hardships of the empire. The Roman government executed any church member [49]. Another reformer, Constantine the Great, issued an edict in 313 expressing religious tolerance. Emperor Constantine became the first Christian Emperor and switched the state's religion to Christianity.

A restructuring can shock a legal system and may get bureaucracies to function correctly again temporarily. However, the Emperors kept increasing the size of government, and the benefits of re-structuring were short-lived [41]. Unfortunately, the increase in an emperor's power led to arbitrary rules, graft, favoritism, and corruption at all levels of government.

Government became larger, more oppressive, and more inefficient towards the end of the Roman Empire. Restructuring of the Empire from Gallienus and Diocletian evaporated because the Roman Empire showed signs of collapse in the fifth century. For instance, Rome possessed one characteristic of a banana republic. The army routinely murdered its emperor and then appointed another [50]. Technically, Roman law forbade an emperor to station an army in Rome. However, Roman emperors created armed guards called the Praetorian Guard that routinely assassinated an Emperor and appointed another.

With the constantly changing Roman leadership coupled with severe financial troubles, people along the northern frontiers rebelled against the Roman government frequently [51]. The Roman Empire fell into barbarism as the dividing line between civilization and savagery disappeared. No wonder why the Germans could raid the Empire easily [52].

## Conclusion

Analyzing Rome is a complex topic because this civilization collapsed over 15 centuries ago. Of course, the author interpreted events, emphasizing a growing government and a government's hunger for tax revenue. However, historians do this as their job. A historian uses inference and deductions to connect the dots in a story because many details and facts are missing.

Rome started with a great legal system, and over time, the Roman government through an emperor took complete control over its economy. We see the same pattern in the United States. The United States started with a great legal system, but now the government at all levels exerts their influence over all aspects of the economy. We only differ from Rome because the rate of change occurs at a faster pace.

Technological progress has shortened the life cycle of a legal system. For instance, the Roman Republic lasted 500 years before it transformed into a dictatorship. Then the Western Roman Empire lasted another 500 years before it completely collapsed under an oppressive government. The Soviet Union lasted about 70 years, while the United States is falling apart after 200 years after its creation.

Technology allows a government to control its population and rapidly change the legal system. Modern states can easily squash troublemakers and quickly execute or imprison them. Government can use Global Position Satellites, vast computer databases, and a large military to exert a tight grip over its people and citizens.

Ancient Rome experienced another trend – a declining population. Economic prosperity usually slows down a country's population growth rate. People want to accumulate assets and wealth and obtain an education. As the level of society's wealth increases, people need a longer time to accumulate this wealth. Antithesis of wealth is children. Unfortunately, bearing and raising children are time intensive and hamper the accumulation of wealth. Therefore, many couples have no kids or few kids in wealthy societies.

European countries like Germany almost have no growth in population, while the United States has a little population growth from immigration. Over time, less people mean fewer consumers. All industries experience a gradual decline of demand for their products. Furthermore, all units of government have less people to regulate and control. That becomes the crux. Government rarely contracts its size, scope, and mission. If government maintains its original size or expands, a smaller population means people pay larger tax bills. Then higher taxes coupled with more regulations over time become so burdensome that causes the economy to fail.

Declining population is impacting several regions of the United States. For example, many cities in the State of New York experience declining populations. As the residents flee, the size of municipal governments rarely contracts. Instead, they devise new and greater taxes, which further drive businesses and people from the State of New York.

## References

[1] Starr, Chester G. 1971. _The Ancient Romans_. New York, NY: Oxford University Press, pp. 12-16.

[2] Nardo, Don. 2002. _The Rise of the Roman Empire_. San Diego, CA: Greenhaven Press, Inc., p. 23.

[3] Ibid, p. 22.

[4] Ibid, p. 25.

[5] Starr, Chester G. 1971. _The Ancient Romans_. New York, NY: Oxford University Press, p. 21.

[6] Crawford, Michael. 1978. _The Roman Republic_. Cambridge, MA: Harvard University Press, p. 46.

[7] Grant, Michael. 1999. _The Collapse and Recovery of the Roman Empire_. London and New York, NY: Routledge, p. 68.

[8] Starr, Chester G. 1971. _The Ancient Romans_. New York, NY: Oxford University Press, p. 158.

[9] Ibid, p. 130.

[10] Crawford, Michael. 1978. _The Roman Republic_. Cambridge, MA: Harvard University Press, p. 46.

[11] Ibid, p. 124.

[12] Starr, Chester G. 1971. _The Ancient Romans_. New York, NY: Oxford University Press, pp. 82-85.

[13] Crawford, Michael. 1978. _The Roman Republic_. Cambridge, MA: Harvard University Press, p. 162.

[14] Ibid, p. 176.

[15] Ibid, p. 161.

[16] Starr, Chester G. 1971. _The Ancient Romans_. New York, NY: Oxford University Press, pp. 72-73.

[17] Ibid, pp. 116-118.

[18] Ibid, p. 72.

[19] Ibid, p. 116.

[20] Ibid, pp. 78-79.

[21] Ibid, pp. 118-119.

[22] Ibid, p. 73.

[23] Crawford, Michael. 1978. _The Roman Republic_. Cambridge, MA: Harvard University Press, p. 134.

[24] Ibid, pp. 102-108.

[25] Ibid, p. 141.

[26] Starr, Chester G. 1971. _The Ancient Romans_. New York, NY: Oxford University Press, pp. 120-121.

[27] Ibid, p. 87.

[28] Ibid, pp. 86-88.

[29] Ibid, p. 92.

[30] Ibid, p. 132.

[31] Ibid, p. 124.

[32] Goldsworthy, Adrian. 2009. _How Rome Fell_. New Haven, CT: Yale University Press, p.145.

[33] Ibid, pp.48-49

[34] Starr, Chester G. 1971. _The Ancient Romans_. New York, NY: Oxford University Press, p. 104.

[35] Ibid, pp. 152-155.

[36] Goldsworthy, Adrian. 2009. _How Rome Fell_. New Haven, CT: Yale University Press, p 164.

[37] Ibid, pp. 131-132.

[38] Starr, Chester G. 1971. _The Ancient Romans_. New York, NY: Oxford University Press, pp. 144-145.

[39] Ibid, pp. 179-180.

[40] Grant, Michael. 1999. _The Collapse and Recovery of the Roman Empire_. London and New York, NY: Routledge, p. 46.

[41] Starr, Chester G. 1971. _The Ancient Romans_. New York, NY: Oxford University Press, p. 198.

[42] Ibid, p. 197.

[43] Ibid, p. 199.

[44] Ibid, p. 173.

[45] Ibid, p. 142.

[46] Grant, Michael. 1999. _The Collapse and Recovery of the Roman Empire_. London and New York, NY: Routledge, pp. 35-38.

[47] Goldsworthy, Adrian. 2009. _How Rome Fell_. New Haven, CT: Yale University Press, p.164.

[48] Starr, Chester G. 1971. _The Ancient Romans_. New York, NY: Oxford University Press, pp. 197-198.

[49] Ibid, p. 191.

[50] Grant, Michael. 1999. _The Collapse and Recovery of the Roman Empire_. London and New York, NY: Routledge, pp. 3-13.

[51] Ibid, p. 16.

[52] Starr, Chester G. 1971. _The Ancient Romans_. New York, NY: Oxford University Press, p. 207.

# 9. The 2007 Great Recession versus the Great Depression

"A nationally planned economy is the only salvation of our present situation and the only hope for the future."

-Donald Richberg,

Member of the Roosevelt Administration

Great Depression embodies a decade of human misery and economic decline that affected all social classes from the poor to the rich [1]. It started in 1929 and lasted 11 years. Unemployment rate peaked at 26% [2], and poverty became widespread as shantytowns sprang up across the landscape. Homeless scrounged crates, cans, and auto parts, and constructed shantytowns on vacant lots and under bridges. Shantytowns had no water, electricity, and other utilities [3]. Everyone blamed President Hoover and called these shantytowns – Hoovervilles in his honor. People roamed from state to state, searching for work [4]. Breadlines stretched around street corners while some people committed crimes, so they could receive room and board at the jail [5].

Many economists do not know what started the Great Depression and why it lasted so long because a recession usually lasts between one and two years. We use this chapter to note the similarities and differences between the Great Depression and the 2007 Great Recession. The Great Depression started as a mild recession that gradually worsened. It is possible the United States will not leave the 2007 Great Recession as it becomes the prelude to the Second Great Depression.

## Prospering 1920s

Before the start of the Great Depression, the United States grew enormously. Family incomes significantly rose while the living standards improved for all Americans. We call the 1920s the Era of Prosperity, which was one of the most prosperous eras in American history.

During the 1920s, American consumers garnered enough wealth to purchase a new product that changed the American landscape – the car. With more wealth coupled with mass production technology, the car prices fell, causing demand for cars to surge. Number of cars registered jumped from 9 million to 23 million during the 1920s. With more cars on the road, other industries related to cars expanded. Government paved roads, built bridges, and installed signs and traffic lights while businesses built gas stations, auto parts stores, repair garages, and car dealerships [6]. Automobile industry significantly influenced the U.S. economy during the 1920s because it created jobs, wealth, and new industries.

During the 1920s, households invested heavily in homes, commercial real estate, and consumer products. Families wanted to escape the confines and stress of the city, and they began migrating to the suburbs. Mortgage financing was pivotal for this migration because a family could buy a house in the suburbs [7]. Of course, every family wanted all the new electronic devices such as radios, cooking devices, vacuum cleaners, washers, dryers, and other appliances [8]. Finance companies helped families finance these consumer products [9]. Finally, large corporations wanted to show their power and financial position by investing in massive office buildings. For example, they built the famous landmark – the Empire State Building during the 1920s [7].

Everyone economically benefited during the prosperous 1920s. However, not everyone shared the benefits equally. With a strong manufacturing sector, the 1920s saw the rise of skilled labor who earned higher wages than the unskilled earned. Towards the end of the 1920s, the richest people in the United States also saw the largest gains in wealth. Wealth of the top 1% of the wealthiest people in the United States saw their wealth rise from 32% to 38%. Overvalued stock market contributed to the high salaries for CEOs. Consequently, the 1920s saw the "highest income inequalities in American history" [10].

Morality also declined during the 1920s. The divorce rate in America reached the highest level in its history during the 1920s. American families experienced one divorce out of every six marriages [11]. Furthermore, the people partied more as the new wealth poured in from the stock market.

As the economy grew and created jobs and wealth, American families and corporations accumulated debt with no problems. Problems only arose, when incomes and wealth started falling. Stock market crash wiped out paper wealth, and not too far behind, real estate prices collapsed as the real estate bubble bursts. At the end of the 1920s, developers over supplied the number of housing plots in the suburbs [7].

The 1920s were prosperous times, and unfortunately, as Newton's Law of Gravity states; what goes up must eventually come down. Prosperous 1920s came to an explosive close like a shotgun blast on a still, cold night. The Great Depression began with the stock market crash in 1929.

## The 1929 Stock Market Crash

Stock market rose dramatically during the 1920s. Stock prices were rising so fast that people spread rumors about shoeshine boys and waitresses becoming millionaires by investing their meager tips into the stock market [12].

During 1927, the Federal Reserve and President Hoover tried slowing down the rapidly rising stock prices by increasing the interest rates. They believed the market was overvalued, and they wanted to prevent a stock market bubble [13, 14].

Some believe the U.S. government and Federal Reserve did not want gold to leave the United States because our country was on the gold standard. A higher interest rate would encourage international investors to keep their money in the U.S. economy and not cash in dollars for gold. However, the Federal Reserve's actions had no impact on the economy.

The stock market experienced a bumpy ride during October and crashed on October 29, 1929, which everyone knows infamously as "Black Tuesday" [15]. On that infamous day, investors traded 16 million shares on the New York Stock Exchange, accumulating losses in the billions. Stock market crash struck the country psychologically, and many viewed the crash as a blow to a strong U.S. economy [15].

With the stock market crash in 1929, corporate corruption and excessive greed rose to the surface. U.S. government passed laws requiring corporations to disclose more information to stockholders, and President Roosevelt established the Securities Exchange Commission to police the stock markets. The federal government passed new laws making insider trading and bear raids illegal. A bear raid is an investor borrows a financial security and hopes to buy it for a lower price [16].

Many similarities exist between the Stock Market Crash of 1929 and the stock market decline in October 2008. Technically, the stock market did not crash in 2008, but stock prices declined in value significantly. Dow Jones peaked roughly at 14,000 and bottomed out around 7,000, declining by 50% in value, and this severe drop reverberates throughout the economy. Declining stock prices have two impacts on the U.S. economy:

**Impact 1:** People and businesses holding stock see their paper wealth dissipate in the air like smoke. As their paper wealth disappears, people and businesses reduce their consumption, especially in luxury goods. It is no coincidence the travel industry, durable goods like cars, and business investment have taken massive hits from the 2007 Great Recession.

**Impact 2:** Working people invest their pension plans into the financial markets. With massive losses in the financial markets, many people nearing retirement had delayed their retirement plans. Furthermore, people keep their money out of the stock market and hide it under their mattresses.

## The Banking System

At the beginning of the Great Depression, government delayed the liquidation of bad business loans, and encouraged financial institutions to keep lending to businesses, even to businesses that should never receive any investment [17]. Government wanted to keep investment spending high, which should help the stock market rebound.

Federal Reserve stood on the sidelines and allowed a large number of banks to fail during the Great Depression. However, most people do not realize the United States was on the gold standard. Fed could not increase the money supply or provide emergency loans to banks because it did not have enough gold. Government fixed the exchange rate between gold and U.S. dollars at 1 ounce = $20. Furthermore, people lost their faith in the banking system and transferred their money into gold. People withdrew gold from the Federal Reserve and hoarded it. In 1933, President Roosevelt declared the holding or hoarding of gold illegal, and the United States left the gold standard.

Currently, the United States is not on the gold standard. Federal Reserve can issue as much money or grant as many loans as its wants, and it does.

Interest rates drop to historic low levels during severe economic contractions. Federal Reserve discount rate dropped from 4.5% to 1.5% during the Great Depression [18]. Discount rate is the interest rate the Federal Reserve charges financial institutions for emergency loans. Similarly, the Federal Reserve discount rate nosedived similarly during the 2007 Great Recession as the discount rate dropped to 0.5% in December 2008 [19].

Usually interest rates move together. As the discount rate falls, other interest rates fall. This is great news for borrowers because their loan payments become cheaper. However, this represents bad news for lenders, investors, and savers because they earn less interest income, shrinking their profits and incomes. Nevertheless, the problem with low interest rates signals two worrisome problems for the 2007 Great Recession:

**Problem 1:** Federal Reserve System has injected trillions of dollars into the banking system even though the U.S. economy still sheds jobs while foreclosures and bankruptcies continue climbing. Moreover, the Federal Reserve granted over $2 trillion in emergency loans to financial institutions and did not disclose which banks had received loans, believing depositors and investors would panic if they discovered their banks were in financial trouble.

**Problem 2:** Lower interest rates may not spur economic development for two factors. First, Americans have borrowed the maximum they can borrow. Experiencing troubles repaying their debt, they will not add to it. Second, house and car prices are falling. It would be foolish for consumers to get loans on assets that are losing value. Borrowers would wait until the prices hit rock bottom before taking on new loans. Furthermore, banks may not lend for assets with falling prices, just in case they must foreclose on the asset.

## Deflation

During the Great Depression, the U.S. experienced a sharp deflation [20]. Deflation occurs as prices drop in the economy, and economists consider it a two-edged sword. On one hand, falling prices benefit consumers because consumers purchase more products as they become cheaper. On the other hand, deflation harms an economy because lower prices squeeze business profits. A business cannot survive if it cannot earn a profit, so a business must reduce its costs. A business has three methods to lower its costs.

**Method 1:** A business could adopt new technology that increases efficiency, so businesses could produce more using the same resources. Usually businesses do not invest during downturns in the economy. Business managers are uncertain about future profits, and they rather would save money than to invest in new technology.

**Method 2:** Largest cost to a business is labor, so a business will reduce wage rates or lay off workers. If employers lay off workers, then workers earn less income to buy goods and services, which contracts the economy. This is a bad trend for the U.S. consumer economy.

**Method 3:** Business relocates to countries where they have cheaper operating costs. In our case, that would be China. Unfortunately, the business creates jobs and wealth in China and not within the United States. This leads to another bad trend for the U.S. manufacturing economy.

During the Great Depression, severe deflation led to massive layoffs and a significant drop in production. Production of durable goods fell by 50%, and nondurable goods fell by 20% while retail sales dropped by 25% [21].

Government tried to help businesses during the Great Depression by passing the Smoot-Hawley Act, which the U.S. government used tariffs to protect the U.S. agriculture and manufacturing industries from international competition. Government wanted to "build up the domestic industry" because with less competition, businesses can raise prices [21].

Businesses and farmers earn greater profits by selling commodities for higher prices. Businesses use some of these profits to pay the stockholders of corporations, which help boost the stock market. Furthermore, businesses use some of the profits to pay higher wages to the workers. Moreover, farmers earning greater incomes would slow down the large number of farmer bankruptcies and farm foreclosures. However, the tariffs backfired. Trading partners with the United States also passed similar tariffs, causing international trade to collapse. We do not know how many farmers and domestic businesses benefited from the tariffs, but the loss of the export industry led to further unemployment and income losses.

The United States is experiencing a mild deflation, and businesses are not absorbing the lower prices through adopting new technology. Moreover, retailers had reported disappointing sales for 2008 Christmas, and Chrysler and GM filed for bankruptcy in 2009. Moreover, many companies left the United States and opened new factories in foreign countries like China. Then they began exporting the cheap Chinese products to the United States. With companies leaving the United States, companies create fewer jobs and generate lower incomes for the American people. Incidentally, the tax base contracts as people pay fewer taxes to the government. It is no coincidence that many states and local governments are going broke in the United States.

U.S. government has not passed any wide sweeping trade restrictions for the 2007 Great Recession. However, this could rapidly change. Presidential debates in 2012 have expressed anger with China over the loss of U.S. manufacturing jobs.

## Farmers

The Great Depression hit the U.S. farmers the hardest. Before the stock market crash, farmers were already hit with declining agricultural prices. With prices plunging and a severe drought in the Midwest, bankruptcies and foreclosures drove the farmers from their lands. Some farmers gathered arms and became militant, while other farmers fled to states like California to search for work [23].

U.S. government responded to falling agricultural prices by interfering with the agricultural markets. Government uses two techniques to boost farmers' incomes. First, government expands farm exports by supplying international consumers. More consumers mean higher prices. Unfortunately, during the Great Depression, the U.S. government destroyed free trade. Second, government boosts farmers' incomes by increasing prices of agricultural products, subsidizing cheap credit to farmers, or subsidizing farm cooperatives [24]. A cooperative is an organization that unifies the farmers into one supplier, and one supplier becomes a monopoly that raises the selling price. Government usually considers monopolies bad, except the ones it supports.

During the Great Depression, President Hoover let the U.S. government intervene heavily in the butter, cotton, grape, wheat, and wool markets, but the market price of these commodities continued falling [25].

When President Roosevelt came into power, he took government control one step further. Government set production quotas on corn, cotton, dairy products, hogs, rice, tobacco, and wheat. Federal government paid subsidies to farmers to stop farmers from planting crops on their land. If farmers produced too much, then the government would buy the excess and destroy it. Government intervening aggressively boosted farm incomes, but consumers paid greater food prices. Unfortunately, as some people were starving, the U.S. government destroyed food.

U.S. government still imposes price controls, and they remain ineffective because agricultural prices have been dropping since the 1990s. Most economists consider price controls useless because an artificially high price causes farmers to supply more. As the supply rises, the market price falls. Then government enters the ridiculous situation, when it stock piles a massive amount of agricultural products, or ends up destroying them, in order to bring the supply back down.

Since the 2007 Great Recession, many agricultural prices are dropping while some farmers did not receive payment for commodities that they shipped to the markets in 2008. Those companies had bankrupted.

## Employment

During the Great Depression, more and more people became unemployed over time, and the unemployment rate peaked at 26% in 1932. With scarce jobs and applicants lining up for one job, the power balance between the employer and employee shifted towards the employer. Employers reduced wages, boosted workloads, increased work hours, and reduced benefits. Employees become powerless as numerous applicants lined up for their jobs [26].

One particular company turned its employees into slaves. People living near the coalfields in Harlan, Kentucky had a harsh place to live during the Great Depression. Coal-mining companies owned the miners' homes and local grocery stores. Companies extracted every penny from the miners by lowering their wages, forcing them to live in the companies' homes and selling them groceries at the companies' stores [27]. Companies controlled completely the economic affairs of their employees.

Teenagers and children did not find jobs and stopped attending school during the Great Depression. State budget problems caused many schools to close their doors. Furthermore, teenagers and children accepted the hobo lifestyle and drifted back and forth across the United States [28].

African-Americans experienced more discrimination during the Great Depression as jobs became scarce. They paid more money in rent compared to white families, and they rented rat infested basements and used cans as toilets. Many African-American families rented, or shared their apartment space with other families to help pay for rent. They also turned to charities and other public relief programs [29].

President Hoover in 1929 encouraged businesses to not lay people off or reduce the wage rates. High wages maintain strong consumer spending [17]. If businesses still employ people, the people retain their purchasing power. If employers lay off workers or cut their wages and hours, they cannot buy houses, cars, appliances, and other goods. U.S. government granted concessions and subsidies to businesses [17]. President Roosevelt took this a step further and tried to boost the number of jobs by creating public works jobs, imposed regulations on businesses, lowered the workweek to 40 hours, and passed child labor laws.

Finally, the U.S. government significantly cut the immigration quota by 90% in 1930 because they believed cheap foreign labor reduced wages [30].

President Obama has not influenced businesses in terms of employment. Many corporations continue laying off thousands of employees. Massive layoffs impact an economy negatively. For instance, laid-off workers will reduce their purchases on houses, cars, appliances, travel, and other luxury goods. As revenues to these industries fall, their profits decrease, causing these industries to reduce their work force. Then more laid-off workers reduce their spending further. Unfortunately, this vicious cycle continues indefinitely.

If workers remain employed, they see these job losses and become fearful of losing their jobs. Consequently, they reduce their spending and increase their savings, adding more misery to a weak U.S. consumer economy. A consumer economy cannot grow if the people save as much money as they can. Maynard Keynes called this the Paradox of Thrift.

As a country economically declines and stagnates, citizens pick on an ethnic group and blame them for a country's financial problems and malaise. Nevertheless, the United States represents a large melting pot of cultures and peoples, and the government and the people cannot blame a particular ethnic group. Instead, they blame the illegal immigrants.

For example, the State of Arizona had passed a new tough immigration law that allows officers to ask for a person's citizenship status and makes it illegal to help or transport undocumented residents. State will incarcerate more priests and nuns, when they help feed and clothe people in need like illegal immigrants. God does not care about a person's immigration status.

Rumors abound that illegal immigrants are fleeing Arizona because of the new tough state laws. People and government of Arizona do not understand the state loses workers and customers. Business cost will rise as they hire more expensive, legal labor, and fewer immigrants will buy and rent homes, shop at stores, and buy cars. Consequently, the economy of Arizona could tank further as a portion of their population flees.

Many states cracked down on residents applying or renewing their driver's licenses, which our state leaders say they are reducing illegal residents. State wants numerous documents, such as a recently certified birth certificate, marriage and divorce papers and licenses, several documents showing proof of residency, etc. Most people do not realize we have adopted the Soviet system of bureaucracy. One trip to a Soviet bureaucracy resulted into multiple trips to other bureaucracies. Then citizens must plead or argue with the bureaucrats for the numerous certified documents.

What is interesting is illegal immigration has always been a problem since the 1980s. No one cared about immigration until the 2007 Great Recession struck the economy. People have become upset over illegal immigration, becoming a nationally charged issue.

Labor market remains horrible in 2012. Although the U.S. unemployment rate was 8.3%, roughly 12 million workers left the labor market. Many college graduates did not find jobs while foreign workers fled the United States, returning to their home countries. After four years since the start of the 2007 Great Recession, the jobs have not returned and they are not likely to return.

## Rising Taxes

At the start of the Great Depression, President Hoover passed small tax cuts. Personal income tax rate fell from 5% to 4% while corporate income tax rate fell from 12% to 11%. The theory behind the tax cuts is people, and businesses will have more money. When consumers have more money, they spend more, creating higher demands for goods and services. If businesses have more money, they hire more workers and invest in more machines and equipment. Investment allows businesses to operate more efficiently and produce additional goods and services. Consequently, tax cuts should boost a weak economy. At the beginning of the Great Depression, the U.S. federal government still had a surplus that became smaller after the tax cuts [31].

Federal government began experiencing budget deficits as the Great Depression raged on. Severe contraction in manufacturing and the massive number of bankruptcies eroded the tax base. In 1931, President Hoover did a complete reversal and passed the largest peacetime tax hike in American history. Hoover instituted new taxes on gas, tires, malt, stock transfers, bank checks, and real estate, including the hated inheritance tax. He also hiked the income tax rates [32]. Furthermore, Hoover wanted to stimulate consumption and discourage savings, so the government-imposed taxes on investment [17].

When President Roosevelt came into office, he also passed a slew of new taxes. Roosevelt did not want high government debt, so he created numerous government agencies and large, expensive public works projects. Thus, Roosevelt increased income and estate taxes and imposed an excise tax on almost everything. Some of the excise taxes were on lubricating oil, malt syrup, brewer's wort, tires, toilet articles, furs, jewelry, automobiles, trucks, radio and phonograph equipment, refrigerators, sporting goods, cameras, firearms, matches, candy, chewing gum, soft drinks, and electricity [33].

Excise tax is a tax on a specific good, and if the government imposes numerous excise taxes, it creates a more complex tax system. Every tax has its own rules and tax schedule that businesses must keep track of. It would be simpler to impose a simple sales tax and apply it to everything.

Tax hikes are disruptive to economies during recessions. If households and businesses are hurting financially, then hiking taxes intensifies the hurt. Unfortunately, the 2007 Great Recession is lowering incomes while foreclosures and bankruptcies continue soaring, and several industries teeter on collapse. Many states and local governments are hurting financially. Consequently, many state politicians dreamed up new taxes or expanded old ones, and they also hiked fees and fines. Although the federal government reduced taxes, states nullified the tax decrease with hikes in state and local taxes.

President Obama passed a national health-care plan that expands health care coverage to everyone, including 35 million people without health insurance. Government will hit the businesses with additional taxes and fees to pay for this health-care plan and pay for expanding Medicare and Medicaid bureaucracies. These policies work against the economy and hinder economic growth.

President Obama will hike taxes on a bad economy. Since the 2008 Financial Crisis, the U.S. federal government has operated trillion-dollar deficits. Eventually, investors will question the financial health of the U.S. government and stop buying U.S. government securities. Consequently, the federal government will have three options: Increase taxes, reduce budget expenditures, and/or force the central bank, Federal Reserve, to buy U.S. securities, which would create higher inflation.

## Growing Government

President Hoover used the power of the federal government to shorten the Great Depression. Hoover asked states to expand state public works programs [34] that created jobs for the unemployed workers by building new bridges, roads, and parks. Moreover, the Hoover Dam was also built [5]. When workers have more money, they buy more products, creating a demand for more goods and services. In addition, the state has more roads, sidewalks, and infrastructure.

Franklin Roosevelt easily won the presidency because many people blamed the Great Depression on capitalism and excessive greed. He took Hoover's plan and greatly expanded it. President Roosevelt created numerous government agencies and a slew of new taxes to pay for them. Only the prominent government agencies are listed below because the list is quite long:

  * **Federal National Mortgage Association** (i.e. **Fannie Mae** ) is an agency that grants mortgages to the poor. Many banks collapsed or stopped lending during the Great Depression; Fannie Mae tried to get the housing market growing again by granting mortgages.

  * **Federal Deposits Insurance Corporation (FDIC)** insures banks' deposits. Deposit insurance helps prevent bank runs. A bank run occurs when all the depositors show up at their bank at the same time to withdraw their deposits because they believe the bank will fail. A bank lends most of its money out, and cannot pay all the depositors, when they show up at the same time. Thus, a bank run always causes a bank failure. Depositors believe their deposits are safe because FDIC insures them. If the bank fails, then FDIC pays the depositors their money.

  * **Federal Bureau of Investigation (FBI)** tracks down criminals who violate federal laws. FBI evolved from previous enforcement agencies. During the Great Depression, many people lost their money when their banks had failed. Thus, bank robbers like John Dillinger, Babyface Nelson, and Bonnie and Clyde became folk heroes because they struck back at the banks. Federal government through FDIC insured bank deposits made bank robbing a federal crime. President Roosevelt wanted the FBI to track down and capture those bank robbers.

  * **Securities and Exchange Commission (SEC)** polices the stock markets. SEC agents investigate financial fraud and manipulation of stock prices.

  * **Federal Communications Commission (FCC)** regulates radio and TV transmissions.

  * **National Recovery Agency (NRA)** was a government agency that set prices and wages on business and labor, and imposed numerous regulations and production standards for all goods and services. This agency no longer exists because the U.S. Supreme Court ruled this agency unconstitutional in 1936.

  * **Public Works Administration (PWA)** was a government agency that contracted with private companies to build 34,599 large public works projects. Government dissolved the PWA during World War II because the war pulled the U.S. economy out of the depression. The government no longer needed these jobs.

  * **National Labor Relations Board** was a government board that expanded labor unions. Labor unions boost workers' wages and benefits through strikes. A strike is a coercive technique to force businesses to give into unions. If a business does not agree with the labor union, the workers shut down production and walk off the job site, financially harming the employer because it has no products to sell.

The U.S. economy became more socialized during the Great Depression, and the economy did improve slightly. However, the government did not pull the economy out of the Depression. World War II brought the country out of the Great Depression. As Hitler began annexing Austria, Sudetenland, and Poland, the European war machines fired up, and Europe started buying U.S. military goods. Then U.S. manufacturing was infused with money and jobs.

After the 2007 Great Recession, President Obama founded a new agency, Bureau of Consumer Financial Protection, to protect consumers from banks and finance companies. Many banks and finance companies that experienced the 2008 Financial Crisis are the same ones that charged excessively high fees and involved in loan fraud. Government should allow these financial institutions to bankrupt. Bankruptcy gets rid of bad businesses and institutions, making room for the good businesses to thrive and grow.

President Obama passed his healthcare plan that requires all Americans residing in the United States to purchase health insurance after 2014. However, some experts believe the healthcare plan has created massive uncertainty for businesses. No one wants to hire new workers because businessmen and managers do not know how their costs will change once the government implements the healthcare plan. Consequently, the labor market in 2012 was the worse this author has seen in his life.

Many people think capitalism failed, and government, like superman, will swoop down and fix all our problems. Although the federal and state governments are not likely to establish new bureaucracies, we have enough bureaucracies to create a government-controlled economy. We would expect President Obama to expand continually the powers of the federal bureaucracies while the state governments continue expanding theirs.

## Conclusion

Many experts and economists predicted a turnaround in the U.S. economy in 2010, but it has not materialized. Many companies continually leave the United States. Then companies continually lay off workers, and most states operate budget deficits. Similar to the Great Depression, many experts predicted an improving economy. However, as the economy improved slightly, something else collapsed. People needed a decade to realize something severe struck the economy.

Economists do not know what started the Great Depression, or why it lasted so long. Every story always has two sides, and in many cases, nobody knows which story is the correct one. For example, many people view President Roosevelt as a leader, who helped eased the Great Depression. He used the federal government to stop prices and wages from dropping, created public works jobs, and established a variety of new alphabet-soup government agencies.

President Roosevelt delivered a message of hope to the citizens, but some economists believe his reforms extended the Great Depression. U.S. economy entered a recession in 1937, when we were still in the Great Depression. If the United States were in a depression, how can it enter a recession? These economists believe the Great Depression should have lasted several years if the government did not interfere with the economy.

Some great minds, like Irving Fisher, believed depressions have two characteristics that wreak havoc on an economy:

  * **Deflation** – an economy experiences falling prices. Deflation hurts business profits because their revenues drop from decreasing prices. Then businesses lay off workers. More unemployed workers have less income to buy products, and businesses experience a further decrease in sales. Then, this viscous cycle continues.

  * **Credit-Debt Cycle** – too much credit allows asset bubbles to form, and then an economy reaches a saturation point, when they cannot borrow anymore, and the asset bubble pops.

Credit-debt cycles are vicious to an economy because an expansion of credit allows industries to expand rapidly. For example, during the 1920s, consumers borrowed, so they purchased homes, appliances, and cars. Factories quickly expanded production from the greater demand for their products. This expansion created manufacturing jobs and wealth. However, consumers reached a point when they cannot borrow anymore. Then demand for these products plummeted, sparking widespread unemployment and bankruptcies. It sounds suspiciously similar to the situation in 2008, when American consumers had accumulated too much debt, and they stopped buying in the consumer economy.

Credit-debt cycle occurred in the Stock Market Crash in 1929. Investors borrowed funds to invest in the stock market by borrowing on the margin. For example, an investor invested $1,000 into stocks by using $100 of his own money and borrowing $900 on the margin. Of course, buying on the margin allows people to overextend themselves, but everybody wins as the stock prices continue soaring. As stock prices keep climbing, more and more people invest more money into the market. Eventually, the money stops flowing into the market. As stock prices start falling, investors panic and withdraw all their money out of the market, crashing the stock price. Then many financial companies bankrupt as investors cannot repay their margins.

A credit-debt cycle occurred during the U.S. housing boom between 2001 and 2007 as banks created new exotic securities to attract investors to the mortgage market. Unfortunately, asset bubbles can occur for any commodity. First recorded asset bubble was the Tulip Mania that occurred in 17th century Netherlands. An asset bubble occurred from flower bulbs [35]!

## References

[1] Nishi 2001, Dennis. 2001. _The Great Depression_. Greenhaven Press, Inc: San Diego, p. 27.

[2] Rothbard 1972, Murray. 1972. _America's Great Depression_. Sheed and Ward, Inc: Kansas City, p. 1.

[3] Nishi 2001, Dennis. 2001. _The Great Depression_. Greenhaven Press, Inc: San Diego, p. 17.

[4] Ibid, p. 18.

[5] Ibid, p. 15.

[6] Hall , Thomas E. and J. David Ferguson. 2002. _The 1920s: A New Era of Prosperity_. The Crash of 1929. Greenhaven Press, Inc: San Diego, pp. 22-24.

[7] Ibid, pp. 24-25.

[8] Ibid, pp. 22-25.

[9] Gerdes, Louise I. 2002. _The Crash of 1929_. Greenhaven Press, Inc: San Diego, pp. 12-13.

[10] Hall , Thomas E. and J. David Ferguson. 2002. _The 1920s: A New Era of Prosperity. The Crash of 1929_. Greenhaven Press, Inc: San Diego, pp. 26-27.

[11] Klingaman 2002, William K. 2002. "Everybody Ought to be Rich:" _The Midsummer Boom. The Crash of 1929_. Greenhaven Press, Inc: San Diego, pp. 38-39.

[12] Nishi 2001, Dennis. 2001. _The Great Depression_. Greenhaven Press, Inc: San Diego, p. 31.

[13] Rothbard 1972, Murray. 1972. _America's Great Depression_. Sheed and Ward, Inc: Kansas City, p. 145.

[14] Nishi 2001, Dennis. 2001. _The Great Depression_. Greenhaven Press, Inc: San Diego, p. 12.

[15] Gerdes, Louise I. 2002. _The Crash of 1929_. Greenhaven Press, Inc: San Diego, p. 11.

[16] Axon, Gordon V. 2002. _Establishing Government Regulations and Safeguards. The Crash of 1929_. Greenhaven Press, Inc: San Diego, pp.129-133.

[17] Rothbard 1972, Murray. 1972. _America's Great Depression_. Sheed and Ward, Inc: Kansas City, pp. 26-27.

[18] Ibid, pp.212-213.

[19] Board of Governors. December 18, 2008. "Press Release." Federal Reserve System. Available at http://www.federalreserve.gov/newsevents/press/monetary/20081218a.htm (access date 01/09/09).

[20] Rothbard 1972, Murray. 1972. _America's Great Depression_. Sheed and Ward, Inc: Kansas City, p. 231.

[21] Ibid, pp. 230-237.

[22] Ibid, pp. 213-214.

[23] Nishi 2001, Dennis. 2001. _The Great Depression_. Greenhaven Press, Inc: San Diego, pp. 120-121.

[24] Rothbard 1972, Murray. 1972. _America's Great Depression_. Sheed and Ward, Inc: Kansas City, p. 196.

[25] Ibid, pp.204-207.

[26] Nishi 2001, Dennis. 2001. _The Great Depression_. Greenhaven Press, Inc: San Diego, p. 87.

[27] Gates, Sudy. 2001. _A Hard Life in the Harlan Mines. The Great Depression_. Greenhaven Press, Inc: San Diego, pp. 144-118.

[28] Nishi 2001, Dennis. 2001. _The Great Depression_. Greenhaven Press, Inc: San Diego, p. 158.

[29] Hedgeman 2001, Anna Arnold. 2001. _Hard Times in Harlem. The Great Depression_. Greenhaven Press, Inc: San Diego, pp. 82-85.

[30] Rothbard 1972, Murray. 1972. _America's Great Depression_. Sheed and Ward, Inc: Kansas City, pp. 215-216.

[31] Ibid, p. 225.

[32] Ibid, p. 231.

[33] Tax History Museum. "1901-1932: The Income Tax Arrives." Available at http://www.taxanalysts.com/museum/1901-1932.htm (access date 12/31/08).

[34] Rothbard 1972, Murray. 1972. _America's Great Depression_. Sheed and Ward, Inc: Kansas City, p. 193.

[35] Wikipedia. 2008. "Tulip Mania." Available at www.wikipedia.org (access date 12/26/08).

# 10. Dissecting the 2008 Financial Crisis

"A business that makes nothing but money is a poor business."

-Henry Ford

The 2008 Financial Crisis developed into the perfect storm because five unrelated factors came together that created a massive housing bubble in the United States. The five factors were:

**Factor 1:** Banks lend anyone money for a mortgage. If the applicant has a heartbeat and a paycheck stub in his pocket, then he or she has a mortgage. In the old days, banks carefully scrutinize all applicants. Banks wanted tax returns, stable employment, number of times an applicant was married, et cetera.

**Factor 2:** Wall Street Bankers created new exotic financial securities that they marketed to the world. As incomes and wealth rose in Europe, the Middle East, and Asia, the investors bought trillions of dollars of these exotic securities. Wall Street bankers channeled this money into the housing market, rapidly appreciating the housing values.

**Factor 3:** Investors did not understand the exotic securities, but they invested in them because the rating agencies rated them as triple A. Hence, the exotic securities were always packaged to have a triple A credit rating. These securities lacked transparency because few people truly understood them.

**Factor 4:** U.S. government did not regulate the financial markets for the new exotic securities. U.S. regulatory agencies stood on the sidelines and watched these markets mushroomed into trillions of dollars.

**Factor 5:** Statistician, David Li, invented a method to price these exotic securities using advanced mathematics. He replied the Wall-Street banks were not using his method correctly. His method prices securities using historical values. Consequently, the securities' prices rely on increasing property values because property values continually rose since the Great Depression.

United States entered the 2007 Great Recession. As the unemployment rate soared while incomes fell, some people stopped paying their mortgages, which sent a shockwave through the financial markets. Foreign investors began questioning what they bought and stopped the flow of money into Wall Street, precipitating the 2008 Financial Crisis.

The U.S. government utilizes the 2008 Financial Crisis to take over the U.S. economy. Politicians and regulators tell the public the free market had failed, and government must step in to fix it. Rampant, excessive greed at Wall Street put the whole country in jeopardy.

The U.S. government will not tell you that they knew about this problem because a smaller event happened in 1998. Hedge fund, Long-Term Capital Management, crashed and burned during the 1998 Asian Financial Crisis. The hedge fund invested $1.25 trillion in a variety of exotic financial securities. New York Federal Reserve organized $3.6 billion bailout that stopped the financial disaster spreading to the U.S. banks.

One person in the United States government saw the problems and flaws with these exotic securities and pushed for new regulations. Congress, the Department of Treasury, and the Federal Reserve immediately stopped her. Political leaders who stopped the new regulations are the same ones who criticized Wall Street in 2008. Frontline produced a great documentary, _The Forewarning in 1998: Long-Term Financial Capital_ that covers this event.

## Pushing for Homeownership

The U.S. government planted the seeds that sprouted into the 2008 Financial Crisis. These seeds came from the American Dream where all American families should own their own home. Thus, the politicians and government officials help perpetuate this dream by passing favorable laws for homeownership.

The Community Reinvestment Act (CRA) of 1977 forced banks to lend to low-income households [1]. On the surface, government created a good law because banks should grant mortgages to low-income households. Furthermore, cities are teeming with poor neighborhoods and poor households; thus, this law could help banks invest in blighted neighborhoods and helps transform them into thriving neighborhoods. This law makes this investment possible without using taxpayer money.

Some community organizations like the Association of Community Organizations for Reform Now (ACORN) used the Community Reinvestment Act to strong-arm banks into granting loans to low-income households. If a bank wants to merge with another bank, or open a new bank branch, the U.S. government has the authority to approve this activity. However, if a community organization believed this bank did not grant enough loans to poor people, it would petition the U.S. government, claiming the bank violated the Community Reinvestment Act. Thus, an organization could delay bank mergers and bank branch expansions indefinitely with these petitions [1].

Banks are caught in a catch 22. Low-income households are more likely to default on loans than the middle-class and wealthy, but not making enough loans to poor people could jeopardize future business expansions. Moreover, banks could not charge greater interest rates to compensate for this higher default risk. Some low-income households are minorities, and the public and government leaders would call the banks racists for charging greater interest rates.

Community Reinvestment Act also strong-armed two public corporations: the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). President Clinton used the law during the 1990s to pressure Fannie Mae and Freddie Mac to expand loans to low-income households, especially black and Hispanic households. Consequently, both Fannie Mae and Freddie Mac expanded mortgages until low-income households comprised at least 42% of their loans [2, 3].

Fannie Mae and Freddie Mac provide mortgages to low-income households and make the mortgage market more liquid. Investors prefer liquid assets because they can sell assets quickly with little transaction costs.

Mortgages were traditionally illiquid assets because once a bank grants a mortgage, it was stuck with the mortgage until the bank forecloses on the home, or the homeowner repays the mortgage. Investors avoided buying mortgages because they are long-term loans and entail high risk. If a homeowner stops paying his mortgage, investors can incur large losses. Several bad loans in a portfolio can bankrupt a mortgage fund.

An ingenious innovation came along that allowed banks to grant mortgages to anyone. Moreover, this innovation allowed the banks to earn enormous, short-term profits and involved little risk. Consequently, banks easily approved mortgages for low-income households. Banks removed their stringent loan guidelines, such as verifying borrowers' income, ignoring employment history, and not requiring borrowers to put any money down.

Banks granted 100% financing for homes to anyone. Families, whom a bank would never approve for a mortgage before the 1990s, could get a mortgage, although they are more likely to default. This class of loans evolved into the subprime loan market. As home foreclosures escalated during 2008, everyone dubbed these subprime loans as toxic mortgages.

## Mortgage Asset-Backed Securities

Banks create a new security when they package loans with a known cash flow into a fund. Cash flow originates from the borrowers repaying their debts. Consequently, once a bank grants a new mortgage, the bank places it into a fund in order to get rid of it. Then, investors buy into the fund by purchasing the fund's securities. If the fund is full of mortgages, then banks call this a mortgage asset-backed security.

A fund issues different types of securities called tranches. A tranche is a French term meaning a portion or slice. Each tranche has a security associated with a risk level, and thus, each tranche of securities has a different credit rating. Some securities are rated AAA and pay the lowest return to investors. However, investors are first in line if the fund goes bust. Fund also issues risky securities that pay a higher return, but investors can lose their investment if the fund bankrupts. A good question is – how can the same fund issue both AAA and junk rated securities if it holds the same assets in the fund?

Mortgage asset-backed securities caused banks to expand their mortgage lending. When the borrowers pay their mortgages, the payment goes into the fund, and the fund managers pay a return to the investors. Bank gets its money back from the mortgages and can use this money to grant new mortgages. As long as most borrowers pay their mortgages, these funds remain solvent as investors earn an investment return.

Banks earn profits from the closing-cost fees from a new mortgage and fees for managing the fund. Of course, the banks do not earn profits from the cash flow of a mortgage; the fund investors do. For example, if a family bought a $100,000 home with a 7% interest rate and a 30-year mortgage, then their monthly payment equals $665 per month. This does not include property taxes, homeowner's insurance, and other fees. However, the homeowner pays a total of $139,509 of interest to the investors' fund over the life of the loan.

Banks persuaded homeowners to accept adjustable-rate mortgages (ARMs). Consequently, an ARM mortgage payment starts with a low interest rate with low monthly payments. Then several years later, the mortgage interest rate resets to a higher level, raising the monthly payments. For example, the monthly payment for a $300,000 mortgage for 30 years with an interest rate of 3% is $1,265. If two years later the interest rate climbs to 6%, then the homeowner's monthly payment climbs to $1,722 per month. Once the ARM sets to a higher level, families are struck hard financially. Banks and real estate agents persuaded homeowners to accept ARMs because they could refinance into fixed-rate loans several years later. Unfortunately, the mortgage market collapsed in 2008 and refinancing became unavailable.

Biggest players in mortgage asset-backed securities included the private banks: Countrywide Financial, Lehman Brothers, and Wells Fargo, and the public corporations: Fannie Mae and Freddie Mac. They suffered billion dollar losses, when the United States entered the 2007 Great Recession.

Nothing is wrong with asset-backed securities. Problem was the banks, Fannie Mae, and Freddie Mac extended too much credit to poor people. Poor people are vulnerable to downturns in an economy because recessions boost layoffs while jobs become scarce. Subsequently, people have trouble repaying their debt. Furthermore, homeowners cannot pay their mortgages if they lose their job, and cannot find a new one. Consequently, bankruptcies and foreclosures rise, putting severe financial strain on the mortgage companies.

The 2007 Great Recession meted out severe punishment to Fannie Mae and Freddie Mac. Both held approximately $6 trillion in mortgages as loan default rates shot up from 5% and soared to 20% in 2009. Consequently, both Fannie and Freddie hemorrhaged massive losses daily. David Kellermann, former Chief Financial Officer of Freddie Mac, committed suicide in April 2009 [4]. As of January 2010, the losses of both Fannie and Freddie exceeded $400 billion [5], which equaled $1,333 for every man, woman, and child in the United States.

U.S. federal government nationalized both agencies in September 2008 by annexing them to the federal government. U.S. Treasury Secretary became the CEO of these two companies, eliminated the dividends, and bought $100 million of preferred stock in both companies [6]. Preferred stock elevates investors higher up on the liquidation ladder. Hence, investors have better protection of their investment if a bankruptcy court liquidates the company.

## Collateralized Debt Obligations (CDOs)

The story becomes a little crazier. Investment banks wanted to profit from the U.S. housing market. An investment bank differs from a traditional commercial bank. It helps corporations issue new stocks or bonds and helps city, county, and state governments issue new bonds. They are marketing agents for new financial securities. On the other hand, a commercial bank accepts deposits and makes loans.

U.S. government split the functions of investment and commercial banking during the Great Depression by passing the Glass-Steagall Act of 1933. Federal government believed banks assumed too much risk that led to the massive bank failures during the Great Depression. For instance, if a bank helped a company issue new bonds, then the bank would push these bonds onto its customers. Unfortunately, the federal government repealed the Glass-Steagall Act at the end of the 1990s, allowing investment banks to expand into new activities, including commercial banking. Despite the law, insider trading, conflicts of interest, and excessive greed have perpetually plagued investment bankers on Wall Street since the Great Depression.

Investment banks created a new exotic security, Collateralized Debt Obligations (CDOs). They purchased mortgage asset-backed securities from the commercial banks and added other forms of debt. Then they pooled the assets into a fund and sold them to investors. Investment bankers created a new asset-back security from old asset-backed securities.

Investment banks earned huge profits from the origination and management fees of CDOs. Furthermore, the CDOs were a low risk to the investment banks because the investors who purchased the CDOs' securities, assumed all the risk. Investment banks got their money back and used it to set up another CDO fund. Main players of CDOs were Bank of America, Bear Stearns, Citigroup, Deutsche Bank, Lehman Brothers, Merrill Lynch, and Wachovia [7].

A CDO fund issues different tranches, and thus, each tranche reflects a different security with a risk level and credit rating. Furthermore, the investment bankers marketed the CDOs outside the United States to avoid U.S. taxes and regulations.

U.S. government assesses taxes on foreign companies if they are involved in a trade or business with the United States. However, if a foreign company invests in stocks and bonds, then it does not pay U.S. taxes because the U.S. government does not consider financial securities a trade or business. This loophole probably exists because the U.S. government wants international investors to buy U.S. Treasury bonds. The U.S. government heavily sells U.S. government securities to foreigners.

Investment bankers always packaged CDOs to have an AAA rating [8], which attracted the international investors. Some experts believe the rating agencies, Standard & Poor and Moody's, participated in fraud, were inept, or had trouble accurately assessing the true risk of CDOs. Hence, the investment bankers always blended subprime mortgages with high-quality mortgage pools to obtain the AAA grade.

Investment banks went into overdrive. CDO market quickly mushroomed from $552 billion to $2 trillion in 2006 as foreign investors poured money into the CDO funds. Consequently, CDOs fed a large flow of money into the U.S. housing market, causing housing values to surge.

Investment and commercial banks needed to grant more mortgages to keep this system going. They kept lowering their lending standards and granted anyone a loan. Joke among Houston's realtors was if a homebuyer has a heartbeat and a paycheck stub in his or her pocket, then he or she has a mortgage loan. Furthermore, many homeowners cashed out their equity from the higher property values. They paid off credit card debt, planned exotic vacations, or bought new cars or appliances.

A large infusion of money flowing into the housing market caused property values to soar. States like Arizona, California, Florida, and Nevada experienced double-digit growth in housing values. Most states tie the level of property taxes to property values. With property values quickly rising, local governments experienced surges in property tax revenue. They used property taxes to expand the police and fire departments; to build new jails, libraries, and schools; and to hire more teachers.

U.S. politicians did nothing to stem this. They were happy that banks granted anyone a mortgage. Unfortunately, affordable housing remained far from their minds or worse yet, how poor homeowners could afford to pay higher mortgage payments when they reset to higher interest rates.

The U.S. mortgage party ended in 2007. International investors questioned the financial health of their CDOs, and they turned off the spigot of mortgage funding. Then the United States entered the Great Recession in December 2007, which started the hemorrhaging of jobs.

Homeowners with ARM mortgages saw their interest rates reset to higher levels, making their monthly payments unaffordable. Thus, more homeowners declared bankruptcy as foreclosures began soaring. Consequently, foreclosed homes are flooding the real estate market, causing home values to plummet. Some homeowners even fled from their homes because their mortgage became worth more than the home's value. Thus, neighborhoods become infested with deserted, boarded-up houses, which attract squatters. Squatting led to the growth of a new industry as squatting companies patrol neighborhoods to drive the squatters out.

Bankruptcy and foreclosure rates continued soaring during 2010. Unfortunately, the exotic securities created several legal problems for foreclosures.

**Problem 1:** Who has a legal right to foreclose on a home if the borrower defaults? Bank sold the mortgage to the fund and transferred ownership to the mortgage fund. Technically, the fund investors own the home, although the bank manages the fund. Moreover, who has the legal right to renegotiate the terms of a mortgage? Some homeowners thought they had renegotiated lower mortgage payments to the bank. Then the investors foreclosed on their homes because they did not agree to the new mortgage terms.

**Problem 2:** Bank sometimes misplaced or lost the mortgage paperwork. Thus, some homeowners challenged banks in court and made the banks prove they own the mortgages. Some homeowners used this technique to delay a foreclosure, or if the homeowners are lucky, and the bank lost the paperwork; they could renegotiate a mortgage with more favorable terms.

**Problem 3:** Some homeowners bought investment homes with mortgages and rented these properties to tenants. All states differ in their eviction laws. For instance, what would happen to the renters if they paid their rent in full, but the landlords defaulted on their mortgages? President Obama fixed this problem by passing the new federal law – The Protecting Tenants at Foreclosure Act.

Companies can utilize CDOs for fraudulent purposes. For example, a company's financial statements look terrible because the company accumulated too much debt on the books. Then the company packages its debt into a CDO along with debt from other companies. Then the company turns into an investor and buys into the CDO, converting a debt into an asset. Thus, companies can improve their financial statements using smoke and mirrors. We do not know how many companies used CDOs to inflate their financial statements artificially.

## Credit Default Swaps (CDS)

Here is where the story becomes crazier. Some insurance companies and investment banks created Credit Default Swaps (CDS), which is a type of insurance. For example, some investors want to purchase risky securities because they pay higher returns. However, if a business bankrupts, then these securities become worthless, and the investors lose their money. Thus, CDSs were born.

Investors could buy risky securities, which included Collateralized Debt Obligations and buy Credit Default Swaps. Investors pay the insurance premium to the investment banks and insurance companies. If a company bankrupts, and its risky securities collapse in value, subsequently, the investment bank or insurance company pays the investors their loss CDS contract specifies. If a company with risky securities does not bankrupt, then the investment banks and insurance companies keep the premium payments as pure profits.

Investment banks and insurance companies exposed themselves to high risk. During good economic times, companies rarely file for bankruptcy, even risky businesses that issued risky securities. Companies with a triple A rating have a zero default rate while the risky companies have a default rating less than 4%. Thus, the investment banks would collect CDS premiums as pure profit.

A recession always exposes an organization's weaknesses. For example, during the 2001 recession, AAA rated companies had close to a zero default rate while the default rate shot up to 10% for risky securities [9]. As bankruptcies soared and securities lost their value, companies can experience staggering losses during a downturn in the economy. Biggest players of Credit Default Swaps were the same companies that the U.S. government bailed out in 2008. Companies included American International Group (AIG), Bank of America, Citibank, Countrywide Home Loans, GMAC (i.e former subsidiary of General Motors), General Electric Capital, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Merrill Lynch, Morgan Stanley, and Wachovia [10, 11].

CDSs are contracts that investors can buy and sell in the financial markets. Anyone can buy them, even if the investors do not own the risky bonds, specified in the CDS contract. Therefore, speculators can enter the market and gamble on outcomes. For example, a gambler believes Company XYZ is bankrupting. This gambler does not hold any stock or bonds for this company, but can buy a CDS contract. Gambler only pays the CDS premiums. However, if this company does indeed bankrupt, the gambler gets a payout from the issuer of the CDS contract. If Company XYZ does not bankrupt, then the gambler has lost his bet, which is the CDS premiums. Imagine how much money someone could make if he or she possessed inside information about a company's finances. Some investors even bet the housing market would collapse and bought CDS contracts on CDOs [11]. If you have trouble understanding them, then think of this analogy. You have purchased insurance on your neighbor's house and pray the house burns down to collect the insurance.

Finance companies can stack Credit Default Swaps upon each other. For example, Company X buys a CDS contract from an insurance company and pays 2% of the contract's value as a premium. Then the financial health of the company, specified in the CDS contract, deteriorates, increasing the risk on its securities. Company X can exploit this situation by creating and selling a new CDS contract to Company Y for a 6% premium, earning 4% commission on the deal. If that company does indeed bankrupt, then the insurance company pays Company X its CDS insurance, and in turn, Company X pays Company Y the same insurance money, earning a quick 4% commission on the deal. Thus, multiple CDS contracts cover the same debt. Unfortunately, the CDS contracts depend on an important assumption. Issuing companies can pay off the CDS contracts if the companies fail.

CDS market quickly grew into $47 trillion market by June 2008, covering a debt of approximately $34 trillion [10]. Putting this number into perspective, the size of the U.S. economy was roughly $15 trillion. Consequently, the potential losses exceeded the size of the U.S. economy by three times if all CDS contracts must be paid.

When the U.S. economy entered a recession in December 2007, AIG quickly accumulated losses into the billions as investors requested the payouts from the CDS contracts. AIG's losses exceeded $60 billion and grew by the day, creating the largest loss in U.S. corporate history. The U.S. federal government owns 80% equity share [12] and has promised AIG four bailout loans worth a total of $163 billion [13]. Unfortunately, AIG worked with several investment banks like Goldman Sachs and Lehman Brothers, which experienced severe financial troubles. Few news reporters covered this, but AIG thought the U.S. government would bail out Lehman Brothers. Therefore, it issued Credit Default Swaps in the billions of dollars and thought it would collect huge profits from the CDS premiums. Instead, AIG paid billions in claims as Lehman Brothers went into bankruptcy while its securities became worthless.

Once the public learned that Lehman Brothers was insolvent, and the U.S. government would not bail it out, the financial markets nosedived in September 2008. Credit markets froze as the financial institutions stop lending. About 350 banks and investors lost their CDS insurance because Lehman Brothers bankrupted. It issued nearly $400 billion in CDSs on debt that was valued at $155 billion. Unfortunately, Lehman Brothers issued more CDS contracts than the debt amount by 2.5 times [14].

It is interesting that the federal government let Lehman Brothers fail. Henry Paulson, Secretary of the U.S. Treasury in 2008, showed the U.S. government would not bail out all the financial institutions. At least, one company must fail, which was Lehman Brothers. However, the Lehman Brothers' collapse spread to other financial institutions, like a contagion. Henry Paulson had a possible conflict of interest because he was CEO of Bears Sterns, which fiercely competed with Lehman Brothers.

Lehman Brothers became the largest casualty of the 2008 Financial Crisis and the largest bankruptcy in U.S. history. Barclays, the second-largest bank in England, bought Lehman Brother's core assets for $1.3 billion, including Lehman Brother's skyscraper in Manhattan [15]. Excessive greed finished a 158-year-old company.

We list the status of the largest U.S. financial institutions caught in the financial crisis:

  * U.S. federal government helped JP Morgan Chase acquired Bear Stearns [16] and Washington Mutual. Washington Mutual held roughly $52.9 billion in adjustable-rate mortgages [17]. U.S. Treasury purchased $25 billion in preferred stock [18, 19].

  * Bank of America acquired Merrill Lynch and Countrywide Financial Corp. Countrywide held about $25.4 billion in mortgages [17]. Bank of America plans to lay off between 30,000 and 35,000 employees [20]. Bank of America received $45 billion from the U.S. Treasury and requested an additional $20 billion. U.S. Treasury purchased $25 billion in preferred stock [19, 21]. During 2009, Bank of America repaid the $45 billion government loan and earned a quarterly profit of 3.2 billion in July. However, BoA earned the profits from one-time sources, such as selling its stake in a large Chinese bank [22].

  * Citigroup Inc. bought Wachovia that held $122 billion in adjustable-rate mortgages [17]. Moreover, Citigroup plans to lay off up to 19,000 employees [23]. U.S. government purchased $45 billion in preferred stock, and Citigroup plans to repay $20 billion to the U.S. government. Recently, the federal government converted some of the preferred stock into common stock, giving the U.S. government 34% stake into the corporation [24].

  * Deutsche Bank reported 3.9 billion euro loss [25]. This became its first financial loss in 50 years.

  * U.S. Treasury purchased $25 billion in preferred stock in Wells Fargo, and 10 billion each for Goldman Sachs and Morgan Stanley [19].

  * U.S. Treasury invested $19.4 billion in General Motors (GM). However, GM filed for bankruptcy in June 2009. Government may spend another $30 billion to help GM restructure. Meanwhile, GM sales had dropped by 45% in 2009 while the company closed plants and dropped product lines like Pontiac, Saturn, and Hummer. GM plans to lay off 20,000 workers [26].

  * Federal government owns a 36% stake in GMAC, and it invested $12.5 billion as two loans [27]. Furthermore, GM sold its interest in GMAC as Cerberus Capital became the majority shareholder in GMAC while the U.S. federal government became second.

## Conclusion

Exotic securities depend on a strong, growing U.S. economy. Mortgage default rates remain low while few companies file for bankruptcy. Thus, many U.S. financial companies reaped substantial profits. However, business cycle oscillations plague all market economies. The United States experiences a recession roughly every 10 years. It had a recession in 2007, 2001, 1991, and 1981. Nevertheless, these financial geniuses at Wall Street ignored this simple fact as they over extended themselves and their companies for short-term profits.

The Federal Reserve and U.S. government should share the blame. They should have slowed down the housing bubble. The Federal Reserve could raise interest rates, which would slow the growth of new mortgages. Federal government could impose regulations on the exotic securities or tightened lending practices. Unfortunately, Freddie Mac paid $11.7 million to lobbyists, who persuaded Congress to loosen lending standards on the mortgage industry [28]. Consequently, the federal government wanted universal homeownership for all Americans at any costs.

Financial bailout of the large banks and Wall Street came at a high cost. President Bush offered a $700 billion bailout package in October 2007 to the financial system; President Obama offered a $787 billion to jumpstart the U.S. economy while the Federal Reserve granted at least $2 trillion in loans to the banking industry. Unfortunately, the Federal Reserve does not publicly release company names because investors would panic.

The public views the government's bailout as free money, so everyone stands in line for a cut. For example, GMAC and two investment banks, Goldman Sachs and Morgan Stanley, became bank holding companies. Thus, they asked the Federal Reserve for emergency loans. It is debatable whether these companies can repay these loans because they earned substantial losses.

Advantages of the bailout package are:

**Advantage 1:** Bailout may slow down the collapse of large financial institutions and provides national and international confidence in the U.S. financial markets. Financial sector represents an important sector of the economy by linking the savers to the borrowers. If savers hoard their money and bury it in their backyards, they remove money from the economy. If the savers deposit this money into financial institutions, then the financial institutions inject this money into the economy, putting the money to work.

**Advantage 2:** Many households have pension plans that are linked to the financial market's performance. Although many pension plans took a severe hit, it could be much worse if the government allowed the financial institutions to fail.

Problems of the bailout include:

**Problem 1:** Nobody bailed out the investors, who bought the exotic securities. However, some investors protected their investment by purchasing Credit Default Swaps. They remain protected as long as the issuers can pay their obligations.

**Problem 2:** Bailout package rewards the financial industry for bad decisions. Financial companies should be punished. If the U.S. government bails them out, then the government should buy the toxic debt and toxic mortgages for a fraction of their book value, forcing companies to take a loss. If companies know the government will always bail them out, then these companies will always take excessive risks.

**Problem 3:** Several large banks caught in the crisis should fail because they treat their customers badly. Banks charged excessively high fees and misrepresented loan conditions. For example, a bank applies the charges and withdrawals first to a person's checking account and then applies the deposits, hoping the checking account became negative. Next, the bank hits the consumer with excessive fees if the account goes negative.

**Problem 4:** Financial institutions guaranteed too many Credit Default Swaps (CDS) that exceed the size of the U.S. economy several times. Bailout package comprises a minuscule drop of water, compared to a potential flood of CDS payouts.

**Problem 5:** Bailout was to get financial institutions to lend again. Unfortunately, the banks hoarded the bailout money.

**Problem 6:** Inflation could become a problem. U.S. government and Federal Reserve System injected trillions of dollars into the banking system. If the banks begin lending this money, they inject the money into the economy that will create inflation.

**Problem 7:** Government programs require the homeowners to default before they can get help. This encourages people to default deliberately on their mortgages, so the government can bail them out too.

**Problem 8:** U.S. government has gained ownership in the financial industry. Bureaucrats make terrible decisions and are slow, bureaucratic, and perpetuate complex rules. Moreover, if the U.S. economy enters a decade-long recession like Japan, then U.S. government could accumulate large losses from holding these financial assets that are losing their value over time.

**Problem 9:** Bailout could further weaken the U.S. dollar. Bailout had added trillions to the U.S. government debt. Some international investors worry about the government's ability to repay its debt.

A bright spot emerged through the stormy clouds of the 2007 Great Recession. Families are coming together. Kids returned to live with their parents, or the parents moved in with their kids. Furthermore, some couples postponed divorce because they cannot sell the house and divide the marital assets. Finally, economic hard times like the Great Depression produced great leaders. The 2007 Great Recession will produce strong leaders who will lead the United States into the next century as a world power.

## References

[1] DiLorenzo, Thomas J. September 6, 2007. "The Government-Created Subprime Mortgage Meltdown." _LewRockwell_. Available at http://www.lewrockwell.com/dilorenzo/dilorenzo125.html (access date 02/25/09).

[2] Lotterman, Edward. November 3, 2008. "Lotterman: Blame meltdown on Fannie, Freddie, federal policies." _Idaho Statesman_. Available at http://www.idahostatesman.com/business/story/556667.html?ref=patrick.net (access date 03/03/09).

[3] Schulzke, Kurt. September 26, 2008. "Hidden Clinton "Success Story": Fannie Mae subprime loans for minorities." _Contraries_. http://iperceive.net/hidden-clinton-success-storyfannie- mae-subprime-loans-for-minorities/ (access date 02/25/09).

[4] Charles, Deborah. April 22, 2009. "Freddie Mac CFO in apparent suicide: police source." _Reuters_.

[5] Liu, Betty and Matthew Leising. December 31, 2009. "U.S. to Lose $400 Billion on Fannie, Freddie, Wallison Says." _Business Week_. Available at http://www.businessweek.com/news/2009-12-31/u-s-to-lose-400-billion-on-fannie-freddie-wallison-says.html?source=patrick.net (access date 01/04/2010).

[6] Swann, Christopher and Pimm Fox. September 7, 2008. "U.S. Losses on Fannie, Freddie May Be $300 Billion, Poole Says." _Bloomberg_. Available at http://www.bloomberg.com/apps/news?pid=20601087&refer=patrick.net&sid=aCGy_.UswSS0 (access date 02/26/09).

[7] Rosen, Richard J. November 2007. "The role of securitization in mortgage lending." _Chicago Fed Letter_. Available at http://www.chicagofed.org/publications/fedletter/cflnovember2007_244.pdf (access date 02/22/09).

[8] Rozeff , Michael S. December 26, 2008. "Rating the Rating Agencies and Securitization." _LewRockwell_. Available at http://www.lewrockwell.com/rozeff/rozeff250.html?ref=patrick.net (access date 303/09).

[9] Hamilton, David T., Praveen Varma, Sharon Ou, and Richard Cantor. January 2004. "Default & Recovery Rates of Corporate Bond Issuers.' Moody's Investors Services.

[10] Bajaj, Vikas. November 4, 2008. "Surprises in a Closer Look at Credit-Default Swaps." _The York Times_. Available at http://www.nytimes.com/2008/11/05/business/05swap.html?_r=1&ref=patrick.net (access date 3/3/09).

[11] Morrissey, Janet. March 17, 2008. "Credit Default Swaps: The Next Crisis?" _Time_. Available at http://www.time.com/time/business/article/0,8599,1723152,00.html (access date 03/04/09).

[12] Karnitschnig, Matthew, Deborah Solomon, Liam Pleven, and Jon E. Hilsenrath. September 16, 2008. "U.S. to Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as Credit Dries Up." _The Wall Street Journal_. Available at http://online.wsj.com/article/SB122156561931242905.html (access date 03/03/09).

[13] _Dow Jones Newswires_. March 3, 2009. "THE FED: Bernanke Feels Heat From AIG Bailout." Dow Jones & Company. Available at http://money.cnn.com/news/newsfeeds/articles/djf500/200903031154DOWJONESDJONLINE000537_FORTUNE5.htm (access date 03/03/09).

[14] Bawden, Tom and Suzy Jagger. October 11, 2008. "Lehman Brothers demise triggers huge default." _The Times_. Available athttp://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4922981.ece?ref=patrick.net (access date 02/26/08).

[15] _BBC News_. September 20, 2008. "Judge approves $1.3bn Lehman deal." Available at http://news.bbc.co.uk/2/hi/business/7626624.stm (access date: 01/04/2010).

[16] Merced, Michael J. de la, Vikas Bajaj and Andrew Ross Sorkin. September 21, 2008. "As Goldman and Morgan Shift, a Wall St. Era Ends." _The New York Times_. Available at http://dealbook.blogs.nytimes.com/2008/09/21/goldman-morgan-to-become-bankholding-companies/?hp&ref=patrick.net (access date 02/26/09).

[17] Ivry, Bob. September 29, 2008. "Wachovia's `Great Success' Became $122 Billion Burden." _Bloomberg_. Available at http://www.bloomberg.com/apps/news?pid=20601109&sid=aebs.K1QUWTo&refer=patrick.net (access date 2/26/09).

[18] Kiel, Paul. February 5, 2009. "Report: Treasury Collects $271 Million in Dividends on Bailout." _ProPublica_. Available at http://www.propublica.org/article/report-treasury-collects-271- million-in-dividends-on-bailout (access date 03/05/09).

[19] Special Inspector General. February 6, 2009. "Office of the Special Inspector General for the Troubled Asset Relief Program." _Initial Report to Congress_. Available at http://s3.amazonaws.com/propublica/assets/docs/sigtarp_090205.pdf (access date 03/05/09).

[20] Weiss, Tara. December 16, 2008. "Bank Of America Is Doing Layoffs All Wrong." _Forbes_. Available at http://www.forbes.com/2008/12/16/bank-america-layoff leadershipgovernance-cx_tw_1215bofa.html (access date 03/05/09).

[21] Mildenberg, David. March 3, 2009. "Bank of America Downgraded by Standard & Poor's." _Bloomberg_. Available at http://www.bloomberg.com/apps/news?pid=20601087&sid=aWu38qrgIbjQ&refer=home (access date 03/05/09).

[22] _The New York Times_. December 17, 2009. "Bank of America Corporation." Available at http://topics.nytimes.com/top/news/business/companies/bank_of_america_corporation/index.html (access date: 01/05/2010).

[23] Ellis, David and Aaron Smith. November 14, 2008. "Citigroup to lay off another 10,000 – report." _CNN Money_. Available at http://money.cnn.com/2008/11/14/news/companies/citigroup_layoffs/index.htm?postversion=2008111415 (access date 03/04/09).

[24] Ellis, David. December 14, 2009. "Citigroup strikes deal to repay TARP." _CNN Money_. Available at http://money.cnn.com/2009/12/14/news/companies/citigroup_tarp/ (access date: 01/05/2010).

[25] Investor Relations. February 5, 2009. "Deutsche Bank reports net loss of EUR 3.9 billion for the year 2008." _Deutsche Bank_. Available at http://www.db.com/ir/en/content/ir_releases_2009_7249.htm (access date 02/26/09).

[26] Isidore, Chis. June 2, 2009. "GM bankruptcy: End of an era." _CNN Money_. Available at http://money.cnn.com/2009/06/01/news/companies/gm_bankruptcy/index.htm (access date: 01/04/2010).

[27] Irwin, Neil and David Cho. May 22, 2009. "As GMAC Gets More Aid, Bailout Becomes One of Nation's Biggest." _The Washington Post_. Available at http://www.washingtonpost.com/wp-dyn/content/article/2009/05/21/AR2009052101742.html (access date 01/04/2010).

[28] _SF Examiner_. December 9, 2008. "Daily Outrage: Mortgage giant paid $11.7 million to lobby Congress." Available at http://www.sfexaminer.com/opinion/Daily_Outrage_Mortgage_giant_paid_117_million_ to_lobby_Congress.html?ref=patrick.net (access date 03/03/08).

# 11. A Grim Future

"I think we have more machinery of government than is necessary, too many parasites living on the labor of the industrious."

-Sir Francis Bacon

Our U.S. legal system is not healthy and does not promote free enterprise. Government at all levels has invaded the lives of families and private business as it regulates all aspects of our lives. Here is where the problem lies. U.S. has created a complex legal system that far exceeds being too complicated for the people and the experts. Even the experts hire experts to help them understand the law.

Then the federal, state, and local governments have established a multitude of regulatory agencies to enforce these complex rules. Unfortunately, the enforcers and regulators became petty and puritanical as they incarcerate people and seize property for the smallest infraction of the law, even for silly violations.

We, the people, have an out of control government. This creates a severe problem because government should consolidate government programs, reduce bureaucracies, and control government spending. However, government at all levels continues doing the opposite. Government keeps expanding bureaucracies, raising taxes, and increasing the complexity of our laws.

An overly overbearing monstrous government threatens and destroys society. This simple premise is easy to prove. Look at the 2007 Great Recession, the U.S. economy is still sputtering in 2012 while the recession continues with no end in sight.

Then examine the last three recessions. Economists call the 1991 recession the Jobless recovery. U.S. economy recovered, but the economy did not create jobs as our society left that recession. We call the 2001 recession the Job-Loss recovery. U.S. economy recovered, but companies and corporations continued shedding jobs and laying people off. Now, we experienced the 2007 Great Recession with a non-existent recovery.

If we went back in time to 1961, we had a recession that lasted one year. Recession was only a bump in the road, and subsequently, the U.S. economy recovered and moved ahead at full steam. Every recession since then, the recovery has become weaker and weaker. Which trends would cause weaker recoveries since 1961? Technological change, bigger government, and the decline of ethics and morality. Which entity would you blame for our continued stagnation?

## Perpetual Bear Financial Markets

People and businesses using a first line of defense against an intrusive, cash-hungry government will use more cash transactions. Cash transactions do not create third party records. For instance, if a business uses a check to pay for its bill, then that business's bank becomes a third party to this transaction and maintains a record of it. Subsequently, government can use bank records to piece together a person's income and wealth. Consequently, government cannot verify a person's or business's income if they use cash transactions.

Cash transactions can protect people against lawyers because lawyers do background searches on people before initiating a lawsuit. Why would a lawyer sue a person if he appears to have no money? Thus, more businesses and people will avoid paying their taxes, or they protect themselves from lawsuits using cash transactions.

Several states and European countries outlawed cash transactions. For example, the State of Louisiana banned cash transactions for second-hand sales, while Spain prohibits all cash transactions above 2,500 euros. The government wants to collect its tax revenue, even if government hikes taxes to unreasonable levels. Finally, many states require workers receiving unemployment benefits, or other state aid to use debit cards that create third party records.

Holding large amounts of cash is dangerous. People and businesses using a second line of defense can move their wealth to offshore accounts. An offshore account is a bank account located in a country with strict confidentially laws, little regulations, and low tax rates. Common places include Bahamas, Cayman Islands, Lichtenstein, and Switzerland.

Problem of offshore accounts is people and businesses can hide income. For example, a person works for a company in the U.S., and all the paperwork indicates this person earns $30,000 per year in taxable income. Nevertheless, the company pays its worker $60,000 by using offshore accounts to hide some of his income. Company makes secret bank transfers from its offshore account to that person's offshore account. All the paper work resides outside the United States and beyond the reach of the tax agents, scum-bag lawyers, and bureaucrats.

U.S. government worries about tax evasion and has become more insidious about tracking down foreign bank accounts. IRS can scrutinize anyone's credit card information, such as VISA and MasterCard and check whether people travel to countries with offshore banking. IRS views these people as potential tax evaders who require closer scrutiny. Furthermore, the U.S. government can put pressure on these countries to force these countries to reveal bank records, but a person needs seconds to transfer electronically his funds to another bank in another country. Recently, the IRS and U.S. government prosecutors threatened to incarcerate the top executives of USB, a Swiss Bank, to reveal accounts held by Americans in Switzerland or face long prison sentences.

A cash economy and offshore accounts strain a country's financial markets. People do not invest the cash into bank accounts, stocks, bonds, and pension funds within the United States. Financial markets are vital for wealthy countries because they link the savers to the borrowers. People deposit their money into financial institutions. In turn, the financial institutions lend the funds to borrowers. Borrowers include a business that uses the loan to invest in machines and equipment, or a family borrows to buy a house, car, or appliance. Thus, the loans feed the money into the economy and help generate a society's wealth.

If people lose faith in the financial markets and hoard their cash or hide this cash in foreign bank accounts, then savers do not invest this money into the U.S. financial markets. Many people did not deposit their savings into banks during the Great Depression. People hid money in mattresses or buried it in back yards. Unfortunately, they do not invest this money into the U.S. economy.

U.S. federal government panicked during the 2008 Financial Crisis and offered a bailout package of $700 billion. Purpose of the bailout was to prevent the financial markets from going under. A faltering financial system forces a country down the path to a third-world country. Third-world countries do not develop and become affluent.

Bailout has several problems.

**Problem 1:** Everyone considers this free money, and many institutions stood in line for the handout, such as banks, insurance companies, automobile industry, school districts, and state governments. Even the porn industry, Larry Flint of Hustler and Joe Francis of "Girls Gone Wild," had asked for a handout [1].

**Problem 2:** U.S. government did not provide oversight on the funding. This was unusual because the federal government always imposes its authority and control over public funding.

**Problem 3:** Public became enraged over the bailout. Taxpayers believe the government had bailed out companies that made bad investment decisions.

**Problem 4:** Adding fuel to the fire, several companies inappropriately spent the bailout money. Some companies used the bailout money to buy other banks, to pay bonuses to high-ranking executives, or to hoard the money. Remember, the government gave the bailout money to get banks to start lending again and not hold onto the money!

Many financial analysts do not talk about the retiring baby boomers. For stock prices to keep increasing, people must invest continually funds into the stock market over time. However, as the baby boomers start retiring, they will cash out their stock portfolios. Hence, the U.S. stock markets could be a poor investment because the baby boomers retire and withdraw their savings from financial markets. Then compound this problem with people hiding their money from the government, lawyers, and bureaucrats.

## Fleeing Businesses

Businesses are fleeing the United States and relocating to Asia and Mexico. Many experts cite the cheap labor in China and Mexico. However, no one mentions the punitive legal environment in the United States that result from excessive regulations, frivolous lawsuits, and high taxes. They boost the cost of doing business in the United States. Then couple the high costs with high-wage rates, the U.S. has a crushing business environment. A business operating in the United States must pay:

**Income Taxes:** A business may pay federal, state, county, and/or city income taxes. Income taxes vary by state and locality. A business with several branches in different states requires a department to keep track of the different rules, regulations, and taxes.

**Property Taxes:** In some cities, property taxes are quite high, especially for capital-intensive industries, such computer chip and automobile industries. Many people do not realize this, but many localities assess taxes on machines and equipment. Thus, the manufacturing industry pays high property tax bills, which encourages the industry to relocate overseas.

**Social Security and Medicare Taxes:** Federal government collects these taxes from the employer and employee. Workers pay roughly 6% of their wages to social security and 1% to Medicare. Employer matches the dollar amount of the taxes that the employees pay.

**Workers' Disability Insurance:** State governments dictate the insurance rates. This insurance is not voluntary. Therefore, we should view it as a tax because a business transfers money from itself to government. Furthermore, many young people are inflicted with a disability and do not work. Unfortunately, it is difficult to assess whether the person is disabled or pretending to be disabled to receive a monthly check.

**Unemployment insurance:** State governments set the rates for unemployment insurance. This insurance is not voluntary because employers must pay this insurance. Unlike workers' disability, unemployed workers receive this aid temporary at least in theory. For the 2007 Great Recession, some laid-off people successfully collected unemployment for 99 weeks (almost two years). They call them the 99 Club because Congress kept extending the time for unemployment insurance for states that were hit hard by the recession.

**Medical insurance and pension plans:** Employers must offer full-time workers medical insurance and contribute to employees' pension funds. Key word is full time, which is why some employers in the services industry rely on part-time workers.

**Unfunded mandates:** Federal, state, and local government impose numerous mandates on businesses. Government dictates a rule or regulation but does not pay for it.

**Lawsuits:** Attorneys continually attack the medical and pharmaceutical industries. Lawsuits can add millions to a company's loss.

Governments in Asian countries do not subject their businesses to all these insurance programs and taxes. Furthermore, lawsuits are rare, and regulations are lax. Chinese workers earn a meager $10 per day for 12 hours of work, and the Chinese companies ship the products to the United States.

Decline of manufacturing in the U.S. became so devastating; scrap metal dealers load barges with scrap metal and ships them to China. Then Chinese factories produce finished products that U.S. companies ship to the United States.

How does the United States government reward businesses and help them to thrive and grow? U.S. government passed universal health care and a permit system for greenhouse-gas emissions. Healthcare plan caused massive uncertainty, and employers stopped hiring workers, creating an extremely bad job market in 2012. Then the permit system requires firms emitting greenhouse gases to buy permits. Thus, these two recent laws will hurl more hardship and costs onto our businesses. Consequently, government encourages more U.S. businesses to flee, produce in foreign countries, and export their products to the United States.

Fleeing businesses cause a severe problem. If businesses leave the United States, who employs the workers? With tax revenues decreasing and governments at all levels experiencing severe budget deficits, then government would stop hiring. Therefore, the U.S. unemployment rate continually rises over time. Margaret Thatcher summed this up best by saying, "First we produce. Then we consume." Asian countries know this secret well and continue growing, even after the 2008 Financial Crisis. In 2012, China's economy continues growing phenomenally at 10% per year.

Fleeing businesses also lead to under investment in our society. High taxes, fees, fines, regulations, and lawsuits create a punitive legal environment that does not encourage new investments. Consequently, businesses extract every penny they can from their capital and refuse to update their machines, equipment, and infrastructure. For example, a natural-gas line ruptured and exploded in California, killing four people, and several oil platforms in the Gulf of Mexico erupted into flames, including the infamous British Petroleum's oil well that spewed almost a million gallons of crude oil into the Gulf of Mexico.

Government does not invest into the economy. It worries about locking people up than replacing old, outdated, and dilapidated bridges, roads, and other infrastructure. For instance, a bridge collapsed in Minnesota, and several dams were on the verge of collapsing during torrential rain storms in the Midwest. Consequently, government underinvests in our society.

Unfortunately, we constructed most of our infrastructure during the 1940s and 1950s. Over time, more accidents will occur as our infrastructure continues aging and crumbling while businesses and government refuse to invest in our society.

## Excessively Enforcing the Laws

A large intrusive government requires funding that it collects from the taxpayers. With a punitive legal system, people will hide their money and income from government. Businesses could bankrupt, relocate to a foreign country, violate the law, or evade taxes. All these activities cause a loss of tax revenue for the government. An eroding tax base hurts government finance, which imposed the following costs onto society:

**Cost 1:** As tax revenues continually decline, a government must contract. How can government pay for the army of bureaucrats, jails, prisons, and government buildings if the government has no money? Government does finance good institutions, such as libraries, schools, universities, and parks. These institutions would experience severe budget problems as our leaders reduce funding for these programs. Usually, government funds these good institutions last.

**Cost 2:** An eroding tax base may cause our government to pass more laws with the sole purpose to create more violators. Then the state and courts would depend on the police and regulators to write tickets and citations, bringing money into the government coffers. For example, code enforcement officers may comb through middle-class neighborhoods and measure the height of grass, citing any offenders for too-tall grass. However, these same officers avoid the poor neighborhoods because those citizens may not pay the fines and may attack the officers. Thus, the legal system becomes more arbitrary as it seeks revenue.

**Cost 3:** If the government actually contracts, this would create a power vacuum, and criminal groups like the mafia would fill this void. Mafia will supply products, which could be legal or illegal. As the mafia accumulates money and wealth, they pay off the police, judges, and bureaucrats. If the police and prosecutors are not corrupt, then they have few resources to do their jobs well.

Police officers must follow orders from government, or the government leaders will fire them. For police to do their jobs, they take an "us versus them" mentality. Each time a police officer clocks in; he or she goes to battle with the public. That is why they call every person of interest a criminal. Military uses the same mentality to train soldiers by defining the enemy as subhuman. Thus, soldiers can handle the intense emotions of war and killing people. Some long-run consequences of excessive enforcement of the laws include:

**Consequence 1:** Government relies on violators to pay their tickets and citations. As police write more citations and enforce stupid laws, more people will become scofflaws and not pay them. Government will increase court and police power to seize assets and turn decent citizens into criminals. For example, a person refused to pay for his ticket for a violation he did not do. A court could suspend his driver's license, or other licenses. Legal right to drive a car in our society is a necessary privilege, so he may start driving illegally, not insuring his vehicle legally, and stop paying for car inspections and state car tags. Furthermore, this person may drive junky cars on the road if he knows the police will seize his vehicle, when caught. Overzealous enforcement of laws creates more criminals and scofflaws.

**Consequence 2:** More people will avoid the police. Would you call the police or open the door for the police if you know they are there to write tickets and citations? Remember, the police are the first contact with a government that is starving for cash. Government switched the role of police from public safety to revenue thugs with guns. Even in Arkansas, citizens flash their car headlights twice to warn oncoming traffic that police are farther up the road.

**Consequence 3:** Police and court rely on the public for information. If many people hold their government in low regards and do not trust it, then people will not help it. For example, if a citizen had discovered that someone had vandalized police cars, the citizen may not report it.

**Consequence 4:** Police lose their credibility during jury trials. Many people will learn the police will lie, even for minor things such as traffic citations. Police officers must write citations and arrest people to keep their quotas up. That is why the federal and state governments rewrote laws to move away from jury trials.

**Consequence 5:** Court abuse will become greater and bolder. Economy remains stuck in a recession. Tax collections continue plummeting while many states and local governments go broke. Thus, courts will collect as much money as they can as judges declare all defendants guilty!

Government passing stupid laws and excessively enforcing laws will fuel ill will and bitterness between the people and government. Consequently, more people will attack their government. They can vandalize state property or physically harm the police or bureaucrats. For example, an arsonist set the Texas Governor's Mansion on fire, causing severe damage [2]. This book does not advocate that people should start attacking their government. The author merely presents long-term consequences, when government fosters an acrimonious relationship between the government and its citizens.

## Growing Crime and Black Markets

Black markets flourish in highly regulated and over taxed societies. A black market is where people engage in illegal activities, and it exists for the following reasons:

**Reason 1:** Government deems certain products and services illegal. Unfortunately, as the government makes more products and services illegal; black markets expand. If consumers have a demand for the illegal products and services, then somebody will supply them. That is the flaw with the War on Drugs. U.S. and state governments deemed marijuana use illegal. As a government arrests more drug dealers, marijuana supplies dwindle, which boosts the market price. Then the high prices attract more people to this illegal market as more people become drug dealers.

**Reason 2:** People and businesses use black markets to avoid laws and regulations. For example, some workers circumvent restrictions on retirement. Retired people receive social security and other benefits from government, but work "under the table" for extra income. If the government knew about this income, it would reduce their benefits. For another example, foreign laborers working illegally in this country, use fake names and social security numbers [3].

**Reason 3:** People use black markets to avoid high taxes. One method is barter, when two people trade goods or services with each other, and they do not exchange money. Thus, they place no value on the transaction and hence pay no taxes. Other ways to avoid high taxes is people and businesses underreport income and assets, or over state debt. For example, taxpayers in the United States can claim children on U.S. federal taxes. More children mean lower taxes. Before the 1990s, some people claimed their pets as children to reduce their taxes. People no longer get away with this practice, unless their pet has a social security number.

Regulations and taxes cause people to perceive their government overburdens them, so they operate in the shadow economy. (Black markets, shadow economy, and hidden economy mean the same thing). However, a growing shadow economy imposes the costs onto society:

**Cost 1:** A growing shadow economy leads to more corruption and bribery because individuals engage in illegal activity will bribe public officials, and thus, they can avoid regulations or avoid paying taxes.

**Cost 2:** A growing shadow economy erodes the tax base, so the government has fewer resources to invest in infrastructure and education. Furthermore, an eroding tax base may cause a government to hike taxes, forcing firms and individuals to enter to the shadow economy, creating a vicious cycle. Many businesses and people who evade their taxes may be good for governments that incarcerate a large percentage of its population.

**Cost 3:** Government collects statistical data, and this data may not be accurate. For example, if people work "under the table," then they may lie to the government and say they are working. Consequently, the unemployment statistics would be higher than reality. Some people working under the table receive money from disability or unemployment insurance.

**Cost 4:** A growing shadow economy expands the criminal groups because they thrive in highly taxed and regulated economies. That is what criminals do; they commit crimes.

**Cost 5:** Government must build and expand prisons to incarcerate violators and criminals.

## Declining Civic Loyalty and Growing Political Corruption

Rapid rise in the State causes people to give up on the political system. Government expands as its bureaucrats make more decisions. Consequently, the only thing growing in the economy is taxes, regulations, and bureaucrats' salaries. For instance, if we are the freest people in the world, why do half the eligible voters vote? Furthermore, a 2002 survey showed 43% of people in the U.S. have no or little trust in the government with the highest distrust being the young and elderly [4]. Conversely, 57% of the population trusts the government, but this seems low since we are a democracy.

Many people view their government negatively. These opinions do not come from criminals and drug dealers. Highly educated people, government employees, and former veterans of the armed forces criticize our government.

Veterans criticizing harshly the government are shocking because the veterans defended this country, putting their lives in jeopardy. They made the greatest sacrifice a person can give – their life. They could return to the United States in a coffin while serving a mission in another country. When you hear veterans utter harsh words about the government, then we know we have a problem.

Citizens develop opinions of their government through their daily dealings with it. If a citizen was burned from a new tax, violated a crazy regulation, or sued for a stupid reason, then citizens would develop harsh views of their government. Moreover, excessive laws and frivolous lawsuits destroy the market system. Incomes and wealth begin falling as the job-creation machine shuts down. As incomes fall, so does the tax revenue. If government perpetually operated budget deficits, then salaries for judges, police, and bureaucrats will decline. Once the salaries become too low, subsequently more judges will accept bribes to determine, who wins a court case. Police will accept cash fines; teachers will take bribes and pass failing students. This is no joke because they became severe problems in Russia.

Black markets became ingrained into the Russian's people psyche, and crime skyrocketed after the Soviet Union broke up in 1991. Mafia, called "new businessmen," spread to all parts of the post-Soviet economy like a cancer. Mafia created rackets, where they colluded together to sell products such as cigarettes, sodas, and other products for high prices, and earned huge profits. Then the mafia would bribe the government officials. Then the government officials would protect the mafia and their businesses.

Foreign companies had trouble entering the Russian markets. For example, a foreign company wants to enter the country and open a new factory. However, the mafia does not want any competition, and they pay off the right people, so this foreign company could never get the licenses and permits to operate. Furthermore, the foreign companies must follow all the rules because the Russian government will expel them for any violation. Unfortunately, their local competitors may not follow all the rules, giving them a cost and price advantage. Hence, the post-Soviet economies became riddled with criminal groups while consumers pay high prices for everything.

Once corruption has taken root, it grows into a vicious weed that is hard to get rid of. Widespread corruption creates two problems. First, government has more trouble stopping the corruption. If all the public officials take bribes and steal, who will stand up and stop this, especially if this person is also stealing? This is one of the major problems cleaning up corruption in Louisiana. Most political leaders steal, and they do not want to draw attention to themselves. Second, people lose respect for their government institutions. Thus, taxpayers do not feel bad when they cheat or lie on their tax returns. They believe the government will waste and squander their hard-earned money.

## Collapsing U.S. Dollar

U.S. free trade policies are insidious and continue destroying our country. Correct definition of free trade is one country makes something and sells it to another country. Then, the other country also makes something and sells it back to the first country. Thus, both countries produce products and export the excess to other countries.

United States does not do that. Instead, government encourages U.S. companies to shut down in the United States and relocate to Asia. Then they specifically produce products that they ship to the United States. No mutual exchange of goods exists between the countries. Thus, the manufacturing industry creates wealth and jobs outside the United States, although U.S. businesses sell the final products to American consumers. Consequently, the U.S. companies can escape the punitive U.S. legal structure, and still earn profits by selling to Americans.

One popular escape for U.S. companies is China. Consequently, China has a quarter of the world's industrial space, grows phenomenally with wealth soaring. With all this new wealth, the Chinese government finances a space program, and it sent an astronaut into outer space.

This is great for the Chinese, but what about the plight of the U.S. workers? Our fellow Americans are losing the good-paying factory jobs in the rust belt. The rust belt includes states like Indiana, Ohio, Michigan, and Wisconsin that experienced massive factory closures. Factory buildings become abandoned and gradually rust away from the elements.

The U.S. consumers subsidize the growth of Asian countries like China through trade deficits, which has plagued our country since the 1960s. A trade deficit occurs when the U.S. consumers buy more foreign-made goods than what they sell to foreigners, causing U.S. dollars to flow to foreign countries. As foreign governments and investors accumulate these dollars, they have three investment options.

**Option 1:** Foreign businesses and companies invest in their economies by purchasing machines and equipment from the United States. They spur future economic growth by investing in their own economy.

**Option 2:** Foreign governments and investors can save the dollars. Usually, foreign central banks like holding strong currencies like the U.S. dollar. These foreign central banks can use these dollars to manipulate exchange rates. Asian countries weaken their currencies and strengthen the U.S. dollar. They boost their exports, creating jobs and wealth in Asia.

**Option 3:** Foreign investors can invest the U.S. dollars in the U.S. economy. Asian and Middle Eastern countries buy U.S. government securities, U.S. businesses, and real estate. However, foreigners expect to earn a profit, which means future dollars will flow out of the country again as the foreigners cash in their investments.

With the 2008 Financial Crisis, international investors are rethinking about their investments into the U.S. economy. They worry the U.S. federal government has accumulated too much debt, and the 2007 Great Recession may transform into the Second Great Depression. If investors drop the U.S. dollar, then its value would collapse.

A weak U.S. dollar has a dual effect. A weak U.S. dollar hurts U.S. consumers by making foreign products more expensive. However, the U.S. businesses benefit because they make U.S. produced goods cheaper to foreigners, and subsequently, they buy more. A weak U.S. dollar would not jump-start the U.S. manufacturing industry because a weaker dollar would not be strong enough for manufacturing companies to overcome all the problems associated with regulations, taxes, and lawsuits in the U.S.

A collapsing U.S. dollar spells trouble for the U.S. government. Foreign investors and savers hold strong currencies, thus maintaining their investments. If international investors stop holding the U.S. dollar, then the dollar would collapse in value. Consequently, international investors would not invest in the United States and stop buying U.S. government securities. Federal government could not rely on foreigners to finance its massive debt.

Once the foreigners stop buying U.S. government securities, the U.S. government must cut its spending drastically. If the U.S. government refuses to control its spending, then high inflation would strike the economy as the U.S. government turns to printing money to cover its spending. This is why the price of gold soared beyond $1,900 per ounce in 2011. During an economic crisis, investors hold precious metals to protect their wealth from high inflation or hyperinflation.

Which foreign currency would replace the U.S. dollar? Euro was strengthening and gaining value against the U.S. dollar until 2008. However, Europe entered severe financial troubles after the 2008 Financial Crisis while the euro quickly lost its value. With China still growing, the viable alternative would be the Chinese Yuan. Unfortunately, if the U.S. currency collapse and no other currency replaced the U.S. dollar, then international trade would halt. This happened during the Great Depression, when the United States government imposed high tariffs on imports, and all the trade partners reciprocated.

## Hyperinflation

The last section was never supposed to be added to this book. Everyone with basic economic knowledge knows the source of hyperinflation. A government's central bank always creates hyperinflation. When an inflation rate exceeds 10% per year, then the central bank has caused it by injecting too much money into the banking system and economy.

Common scenario is a government has a severe budget deficit, and investors refuse to buy the government's debt. Investors believe the government finances will become unstable, and they do not want to risk their money. Standard & Poor downgraded the U.S. government's credit rating in 2011. Consequently, government must reduce its spending, increases taxes, or uses the central bank to print money.

Although the Federal Reserve System remains independent of the U.S. federal government, the federal government could force the Federal Reserve to buy its securities. As the Federal Reserve buys trillions in U.S. securities, it injects trillions of dollars into the banking system and the economy, creating inflation.

Then high inflation leads to hyperinflation, which has five problems:

**Problem 1:** People with debt will see hyperinflation erase their debt. As the value of money plummets during a hyperinflation, the value of debt also falls. Hyperinflation would eliminate the U.S. government debt of $14 trillion over a year. Unfortunately, the savers would see their savings reduced to nothing.

**Problem 2:** People who receive aid from the government will experience decreases in their benefits as the prices for food and necessities rise faster than their government aid.

**Problem 3:** Value of the U.S. dollar on the international markets will weaken and plunge. Most countries will choose another currency like the Yuan for international transactions. However, trade with the U.S. and the rest of the world will halt as the U.S. dollar becomes worthless.

**Problem 4:** Banks, financial markets, and pension funds will bankrupt. People stop accepting U.S. dollars for payment and use barter, foreign currencies, or valuable commodities for exchange.

**Problem 5:** Police and firemen may desert their posts as hyperinflation reduces their salaries to nothing. Consequently, violence and chaos would erupt in the cities.

Some experts believe the U.S. hyperinflation will be short because the U.S. government will eliminate its large debt and then start over, and redefine the U.S. dollar. However, during the interim, hyperinflation will push many people onto the streets as they become homeless and hungry with no prospects. Violent protests and riots will riddle the United States.

## Conclusion

The 2008 Financial Crisis and Great Recession help the U.S. government to take over the economy. They believe capitalism has failed, and government must come to the rescue. For example, the federal government re-nationalized Fannie Mae and Freddie Mac in September 2008. They were government public corporations, but the U.S. government had privatized them in the 1990s. Furthermore, with the $700 billion government bailout, the government accepted some of the "toxic mortgages" and corporate stock as collateral. Then the government became a stockholder, and it foolishly believes it can profit with the taxpayers' money, coming out ahead. However, assets prices took 20 years to recover from the Great Depression after the stock market had crashed in 1929.

These smart people in government do not realize one important thing. They want to improve society through state management of the economy. Another leader, Vladimir Lenin, shared this same vision. Lenin used communism to build the Soviet Union. Communism was a way for a state to build a perfect, Utopian society. Communism would eliminate the social classes, and everyone would live in harmony. Of course, government must control the entire society, helping during the transition. Soviet Union did some amazing things, which were:

  * Russia was a backwards nation at the turn of the 20th century. Soviet Union established a large education system and boosted its citizens' literacy rate to 99%.

  * Soviet Union officially did not have unemployment. State created jobs for everyone. Of course, nobody actually worked, and the customers shopped in stores with bare shelves.

  * Soviet Union started the space race by sending the first astronaut into outer space.

  * Although the Soviet Union was an extremely sexist society, the state allowed women to hold high offices. Women became judges, professors, and scientists.

  * Divorce rates were extremely low because the Soviet Union had a shortage of housing. A divorced woman had two choices. She could live with her husband or live with her parents.

  * When the world entered the Great Depression during the 1930s, the downturn did not impact the Soviet economy. Soviet Union grew fast as government added and expanded cities to the empire until the 1970s.

Soviet economy stagnated during the 1970s and 1980s. Furthermore, citizens of the Soviet Union paid high costs for these benefits, which were:

  * Government set all prices and wages in society. Government set the wages and prices correctly during the 1960s, but severe shortages occurred during the 1980s.

  * Soviet factories produced only several brands and products. Everyone had the same furniture, appliances, and TVs. Some products suffered quality problems. Soviet managers had production quotas, and they viewed quality as secondary.

  * Government owned all property, including cars and houses. State forced the people to live in dreary, small apartments.

  * Soviet Union created new social classes. Members of the Communist Party were at the top; scientists and academe came second, and everyone else was third. Communist Party members also shopped at their own special stores with fully stocked shelves while the people shopped at state stores with bare shelves.

  * Government controlled TV stations, newspapers, and book publishing. State controlled all sources of information.

  * Government established secret police, who arrested anyone the state viewed as a threat. Furthermore, the government constructed a massive prison system, Gulag, to house all the prisoners.

  * When Stalin seized power, he shuffled resources around to create the Soviet industrial economy. Thousands died from hunger as the state expropriated lands and livestock. Stalin also executed millions of people whom he deemed a threat to the state.

  * Government restricted mobility of its citizens. A person needed permission to leave a city. All cities had outposts on the city's periphery where the state regulated all traffic leaving and entering a city.

  * Soviet citizens could not leave the country nor socialize with foreigners.

Does this sound like a great place to live? Of course, it would be nice to get the Soviet benefits without the costs. However, when government controls society, we get the good, bad, and ugly of a government-controlled economy.

The real travesty in our growing government is the difficulty in dismantling public institutions and reforming the legal system. For instance, remnants of the Soviet legal system still exist today, although the Soviet Union broke up in 1991. Soviet Union created manual, document heavy bureaucracies. Corrupt, incompetent bureaucrats enjoy forcing citizens to jump through hoops and legal hurdles. Citizens and businessmen must scurry around the city collecting documents from various agencies. Unfortunately, the post-Soviet governments want to scrutinize and examine every private transaction in society.

Although the Soviet legal system is beautiful in theory, it successfully killed businesses. Unfortunately, many of the former Soviet countries are still plagued with these bureaucracies and the Soviet legal system. Then people wonder why these countries see little growth grow. The real problem for us is the U.S. politicians want a similar system with an all-controlling government. Thus, the U.S. economy will continue to stagnate until people wake up and stop this insanity! However, we will fall into the same trap as Russia. Once government creates these laws, and the bureaucracies come to life, they are very hard to get rid of and extremely difficult to reform.

## References

[1] Hill, Catey. January 7, 2009. "Porn kings Larry Flint and Joe Francis go begging for a bailout." _Daily News_. Available at http://www.nydailynews.com (access date 01/08/09).

[2] Robison, Clay and Janet Elliot. June 8, 2008. "Arson suspected at Governor's Mansion." _Houston Chronicle_.

[3] Schneider, Friedrich and Dominik H. Enste. March 2000. "Shadow Economies: Size, Causes, and Consequences." _Journal of Economic Literature_ 38(1): 77-114.

[4] _Decision Analyst_. August 30, 2002. "As September 11th Anniversary Nears More Americans Trust U.S. government." Available at http://www.decisionanalyst.com/publ_data/2002/trust.dai (access date: 12/24/08).

