Rarely do you see a political party in the process of what appears to be a deliberate attempt to commit suicide while shooting a hostage. In this case, the hostage is the U.S. economy, and the political party is the Democrats.

For the first time, Congress has not even passed a budget. The open question remains: Is the current Congress the worst in American history?

The Republicans have the facts on their side about which party taxes and spends less. The Democrats have successfully been blaming Mr. Bush for the big spending increases and deficits of the last two years of his administration while conveniently forgetting they were in charge of Congress - taxing, spending and deficits. The Republicans need to make people aware that the last budget they were responsible for (2007) had a deficit of just 1.2 percent of GDP. The supersized deficits of the past few years - approaching 10 percent of GDP - happened only after the Democrats took control of Congress. The Democrats have a death wish - the Republicans should help them along in their desire for defeat by making the American people aware of the real deficit facts.

What is the most corrupting institution in society? Quite simply, it is government, because it controls and distributes more money to more people and institutions than any other single entity and it has the power to coerce and punish or reward that dwarfs what any private party might be capable of doing.

The political class and the media decry the growth of lobbyists in Washington. Yet why is it so hard to understand that as government increasingly gives away more money and dispenses more favors, it attracts greater numbers looking for those benefits?

The Obama administration, despite claims of caring about the poor, has initiated a series of policies — higher taxes and more regulation — that guarantee a huge increase in those dependent on government. Who has a vested interest in more people being dependent? As the old saying goes, any politician who promises to tax Peter to give to Paul will always have the support of Paul.

On Friday evening, a tall, bespectacled 30-ish Englishman, Matthew Elliott, escorted Lady Margaret Thatcher into a reception at London's 800-year-old Guild Hall. Despite the fact that England is going through its worst economic crisis since Mrs. Thatcher became prime minister more than three decades ago, she was of good cheer as she conversed with those of us who had come to pay our respects. Perhaps a reason for her upbeat manner was that the ideas she (and Ronald Reagan in the United States) championed are once again gaining currency.

If a medical doctor prescribed a treatment for a patient that only worked in theory, and the patient did not get better, the doctor could rightly be sued for medical malpractice if tried-and-true cures were known. When members of Congress and a president engage in economic malpractice, the patient's (i.e., the American public's) only recourse is to vote them out of office.

The Obama administration claimed that the unemployment rate would not go above 8 percent and that both the economy and job growth would be strong by this time if Congress passed the "stimulus" bill. Instead, the economy is barely growing, and the unemployment rate is rising.

How did they get it so wrong?

Have you noticed that many in the political class are absolutely shameless in trying to protect themselves and their colleagues from legitimate inquiry into their activities? For instance, Congress has passed a number of whistle-blower statutes, including the "financial-reform bill," to protect government and private-sector employees from retaliation when reporting the misdeeds of their superiors. Yet, the staff of members of Congress - precisely the people who are most likely to know about political corruption - enjoy no such protection.

Congress, under the guise of "campaign-finance reform," has repeatedly tried to find constitutional ways of limiting the free speech of real and potential opponents. What is even more remarkable, some members of Congress are not content with just trying to protect themselves, but have gone so far as to try to protect corrupt foreign leaders from those who may wish to expose their wrongdoing.

A sweetheart deal between a corrupt French president and Saudi Arabia has hurt the U.S. defense industry.

Former French President Jacques Chirac (1995-2007) is almost certain to be accused of overcharging Saudi Arabia for French military equipment. The Saudis overpaid for 100 French military helicopters through a deal worked out by a Saudi fixer, Khalid Bugshan of the Bugshan Group. The overpayments apparently were spread liberally to French politicians.

The trial is likely to provide at least a partial open window to some of the corrupt practices in international arms dealings. Khalid Bugshan and his group had their agreement with the French, and their contacts included French government officials and some in the inner circle of the Saudi ruling family. One of the interesting questions is: “How much did the Saudi ruling family know about the overpricing - or was Bugshan primarily running a rogue operation?”

If the Saudi royal family knew, were they doing it to purchase political influence and/or tilt French foreign policy?

Last week, it was reported that the sea turtles in the Gulf of Mexico seem to have weathered the oil spill without much problem. But they are still unnecessarily endangered.  In fact, they always will be, because of people behaving like juveniles who have a hard time understanding the consequences of their actions. During the past several months, we have seen much of the political class in Washington increasingly act like juveniles, making the rest of us suffer. But first, let's go back to the turtle. Why are sea turtles endangered, while chickens and cows are not? The answer, quite simply, is that chickens and cows are privately owned and turtles are not - thus they suffer from "the tragedy of the commons." When things are owned in common - socialism - no person takes responsibility for protecting the property, and thus it most often ends up being neglected or even destroyed - hence the fate of the sea turtle.

Where is the historical evidence to show that big increases in government spending as a percentage of gross domestic product (GDP) lead to faster economic growth and more job creation? Answer: There isn't any. Compare the first four quarters after the bottom of the recession in 1982 that resulted in an average quarterly growth rate of 7.8 percent, versus an average quarterly growth rate of just 3.2 percent in the first four quarters after the bottom of the 2009 recession. In addition, unemployment fell sharply - 2 percent under the Reagan tax-rate-cut solution in 1982-83 versus no drop under President Obama's greatly increased government spending "solution" - in the first four quarters of the recovery from the bottom of each recession. Tax rate cuts trump government spending increases. Tell this to those who want even more spending, such as New York Times columnist Paul Krugman, and you'll get Krugman's silly rebuttal:

Do you think more government spending helps economic growth or harms it? Last Friday (7/23), the White House again increased its federal budget deficit forecast and reduced its economic growth forecast for 2011. It is abundantly clear that the economic program the Democrat Administration and Democrat Congress instituted 18 months ago - primarily massive increases in government spending - is not working as advertised. Surprise, surprise.  Isn't it interesting how Democrats are always surprised by their ignorance?

Did you know there are nine states that have no state income tax? The non-income-tax states (see chart below) are geographically and economically diverse, ranging from the state of Washington in the Pacific Northwest, to Texas and Florida in the South, and up to New Hampshire in the Northeast. Why is it that some of the states with the biggest fiscal problems have the highest individual state income tax rates, such as New York and California, while some of the states with the least fiscal problems have no state income tax at all?  Further, on average, schools, health and safety, roads, etc. are no better in states with income taxes than those without income taxes. Where is all the extra money from these state income taxes going? It is going primarily to service debt, and to pay for inflated salaries and employee benefits.  Thus, as two recent studies by my colleagues at the Cato Institute show, the keys to state solvency are no state income taxes and no public worker unions.

If those managing a company had acted as recklessly and irresponsibly as has Congress with the U.S. economy, they rightly would be fired. Congress by its actions is driving away foreign capital, new and existing companies and jobs; burdening the people with excessive debt - and even providing an incentive for murder. The death tax rate this year will be zero as a result of the Bush-era phaseout of this destructive tax, but it is set to jump to 55 percent as of Jan. 1. There have been many articles about the likelihood of individuals attempting to time their deaths before the end of the year to save their heirs many millions of dollars in "death taxes."   When incentive is given to cause a premature death by an interested party in order to gain a great deal of money, the probability is that it will happen in some cases. Members of Congress normally are exempt from civil prosecution for actions and statements made in Congress, but it would not be beyond possibility to see some enterprising lawyer charge those irresponsible members of Congress with abetting murder (which is not protected by congressional immunity) because of their lack of action to "fix" the death tax. How just!

It's this simple: Most of the current problems facing America stem directly from the failure of our elected representatives to follow the Constitution. Much of what the Tea Party activists are demanding is a return to the principles and procedures found in the Constitution. Many of those running for office are venting about excessive spending, deficits, taxation, regulation and so forth, but are struggling to say what they are for and what they would actually work to accomplish once they are elected. To deal with this problem, candidates for office should state that, if elected, they will have a "Contract with the Constitution," much like the Contract with America that Newt Gingrich and Dick Armey developed for the Republicans in 1994.

Who is in charge of stopping the oil leak and the cleanup in the Gulf of Mexico - BP or the Obama administration? If you have a hard time answering the question, it probably is because the president has told us the "buck stops" with him and officials of his administration say they are "in charge." Yet the administration also tells us that BP has the responsibility for stopping the leak and for the cleanup - but the company's every action has to be approved by the government! One, among several, major reasons government agencies tend not to perform as well as private ones is because often there is little or no accountability. BP stockholders are being severely punished because of the failure of BP's management to prevent this crisis - and you can bet many heads will roll at BP. Yet how many heads will roll in the U.S. government, which had the responsibility to make sure BP operated safely and that the beaches and marshes were protected?

Podgorica, Montenegro.  Of all the people you know, friends, family and acquaintances, who has done the most to benefit his country and/or the world? I ask this question because here in Montenegro, there is a man who already has done much to benefit his country, and yet his real impact will not be known for many years, perhaps generations. First, a bit about Montenegro. It is one of the world's smallest countries, with a population of 672,000 and a land area that is a little smaller than the state of Connecticut. It was the last of the former Yugoslav republics to gain independence from Serbia in 2006. Unlike the wars that resulted when other sections of Yugoslavia declared their independence, Montenegro's move toward independence was peaceful, gradual and democratic. Perhaps nowhere else on earth is a country more blessed with so much physical beauty in such a small space. Even though the word "spectacular" is overused, there is no other way to describe the Adriatic coastline of Montenegro - where majestic mountains spring from a clear blue sea, occasionally broken by splendid deep-water bays. What a wonderful place for a true free market economy!

If you are an elected official, and you have to make a choice between raising taxes on your constituents or cutting the number of government employees and their salaries, what would you do? For most of the last few decades, in most places, the politicians would just raise taxes. Now that is changing, and here is why. In recent weeks, what used to be a rare event is becoming commonplace, and that is public employees losing their jobs or having their wages and benefits cut. Government employees are rioting in Greece (as if that does any good when the cupboard is bare) because many of them are losing their jobs. Greece, Spain, Portugal and even the Cayman Islands have announced they will be cutting public-employee wages and benefits. Many state and local governments in the United States are doing the same thing. As most of the world's governments head toward a Greek-style meltdown, taxpayers increasingly realize that if government spending is growing faster than the economy, there is no way that tax increases can solve the problem - and most countries have about reached the limit of how much more tax revenue they are going to be able to coerce and extort from their citizens.

If government spending is growing faster than gross domestic product (GDP), can the resulting deficit problem be solved by: (A) decreasing the rate of growth of government spending, (B) increasing tax rates, (C) decreasing the rate of growth of government spending and increasing tax rates? If you answered A, you have a strong brain and can go to the head of the class. If you answered B, you have a flaccid brain and will need to repeat the class. I will get back to the C students later. People with flaccid brains have a hard time understanding the consequences of actions, and they tend to treat variables as constants (e.g., I know how to drive, so I should be able to drive drunk).  They rarely do real cost-benefit analyses or think about the long run. An example of a flaccid brain is that which occupies the skull of Sen. Bill Nelson, Florida Democrat, who, in a hysterical reaction to the Gulf oil spill, wants to shut down all offshore drilling.

The "Dodd financial reform" bill being considered by the Senate will make it illegal for 99.6 percent of the population to invest in needed new and promising start-up companies.  At the same time, the bill ensures that the 33 largest banks, which control 92 percent of all bank assets, will be required to purchase more federal government debt before giving loans to businesses and individuals. Quite simply, the government is continuing to practice financial fascism. The new financial reform bill will make it illegal to invest in a new venture or start-up company for anyone who does not have a liquid net worth of $2.2 million or an annual income of roughly $450,000 if single or $675,000 if married - which rules out all but fewer than 1 percent of the population. If this passes and is signed into law, Congress and the president will be saying to the American people, "Ninety-nine-plus percent of you are too stupid to know how to invest your own money." They think the rest of us are as irresponsible as they are. What right do the financial fascists in Washington, who created the world's biggest financial Ponzi schemes (i.e., Social Security and Medicare) and the largest unsustainable debt in history, have to tell more than 99 percent of the rest of us what we can and cannot invest in?

A century ago, if you had told typical citizens of Argentina (which at that time was enjoying the fourth-highest per capita income in the world) that it would decline to become just the 76th richest nation on a per capita basis in 2010, they probably would not have found it believable. They might have responded, "This could not happen; we are a nation rich in natural resources, with a great climate for agriculture. Our people are well educated and largely descended from European stock. We have property rights, the rule of law and an open free-market economy." But the fact is, Argentina has been going downhill for eight decades, and it now has one of worst sovereign credit ratings in the entire world - on a par with Pakistan and lower than Bangladesh. Argentina, despite its natural resources and human capital, has managed to throw it all away. Argentina did not become relatively poor because of having been involved in destructive conflicts. It became poor because it has had a series of both democratically elected leaders and non-elected dictators who never missed an opportunity to make the wrong economic decisions.

It is, of course, true that no one loves the tax collector and that taxes are the price we pay for a civil society. But, as with anything else, there are proper and improper taxes and tax collection procedures and methods. According to news accounts, attacks and threats against IRS personnel are rising, and unfortunately, this trend is likely to continue until there is a fundamental change in our tax laws and collection methods. People who do not have access to the media and cannot afford expensive tax lawyers sometimes reach such a level of frustration with the IRS that they resort to violent or irrational behavior. IRS officials and workers will say the tax code is not their fault - it is the fault of Congress - and they are only doing their jobs. It is unambiguously true that the tax code and IRS are creatures of Congress, with all of its self-dealing, corruption, ignorance and incompetence. But this also is true: as was made explicit at the Nuremberg trials, those who carry out orders that they know to be wrong or should know to be wrong are not absolved of personal responsibility.

Zurich, Switzerland.  Economists, political scientists, reporters and pundits spend too much of their time looking at dysfunctional societies and trying to explain why there are poverty, joblessness and hopelessness. In many ways, Haiti is easy to explain - no rule of law and 200 years of corrupt and incompetent governments. Switzerland is the polar opposite. It has almost no corruption and has the rule of law with honest, competent judges and government administrators. The question should be, "What can we learn from the Switzerlands of the world about how to do things right" rather than, "What is wrong with the Haitis of the world?" Switzerland manages to run a smaller government as a share of gross domestic product than the United States and most other countries while providing a higher level of service, security, prosperity and freedom. How does it do that? Both the United States and Switzerland are federal republics. If one reads the Federalist Papers and the oworks of the American Founding Fathers, it is clear they envisioned a nation that operates much more like Switzerland than one with the large central government the U.S. now has.

The expression "Failure is not an option" may be a motivator for very high-risk situations, but failure must always be an option for players in a properly functioning market economy. If you had a choice between buying a bond issued by a company considered "too big to fail" - which is an implicit government guarantee of its debt - would you buy that bond or one issued by a company without a government guarantee? Companies with government guarantees will be able to borrow at less cost, and, ultimately, their unfair competitive advantage will drive the companies without guarantees out of business. You may believe that the housing bubble and the subsequent financial meltdown were caused primarily by the Fed or Fannie Mae and Freddie Mac (the two multitrillion-dollar government-sponsored secondary mortgage buyers), or by the very largest commercial and investment banks. But whichever theory you choose, note that it was either the government or those heavily regulated by the government that were the source of the problem - and all were considered "too big to fail."

If President Obama and Congress have their way with the so-called health reform bill, the American people will have had their pocketbooks and liberties plundered once again. The basic purpose of government is to protect individuals and their property and to ensure their liberties. However, Congress and most other legislative bodies spend the bulk of their time doing just the opposite. They take, primarily through taxation, from one group of people what those people worked hard to produce and give it to some other politically favored group. They pass a never-ending series of regulations, which chip at our liberties until little is left. When Congress seizes your money, it claims to be creating jobs by giving it to someone else who did not earn it. There is more honesty among those in the Mafia, who at least do not try to claim they are stealing from us for our own good.

Many government officials like to pretend that the effects of tax rates on the willingness of people to purchase goods or services, or work, save and invest are far less than the empirical and historical evidence shows. The Obama administration is now engaging in this type of misrepresentation and forecast fraud, which will result in much higher deficits and lower levels of economic growth and job creation than it claims. To understand how serious this type of fraud is, think about how government officials would react if a company forecast a huge increase in revenues - and sent press releases of the forecast to the investment community, but failed to reveal that this forecast was based on the intention to double the prices for the company's products while assuming it will not reduce demand. Such actions by company officials would be considered irresponsible misrepresentation, for which they could be held legally liable.  Shouldn't government officials be held liable for their fraud and misrepresentation?

Which was the only country in the 27-nation European Union to register economic growth without going through a recession last year? The surprising answer is Poland. Over the past couple of weeks, Greece has been grabbing the headlines as a poster child for bad fiscal management. The Greek tragedy is threatening to undo the Eurozone and cause a pan-European financial crisis. There is no mystery as to why Greece is in the financial soup - its politicians have continued to spend far more than the government receives in taxes. The more interesting question is: What did Poland do right - and will Poland be better off or worse off if it joins the Eurozone?

Most economists, including yours truly, have been saying that the huge budget deficits the country is running will result in inflation. So, where's the inflation? Inflation normally lags changes in the growth of the money supply by one to two years. The big monetary expansion took place in the last half of 2008. So if the economy follows past trends, one would expect to see growing inflation by the latter part of this year. There are several reasons why inflation does not occur simultaneously with a sudden growth in the money supply. (Remember, inflation is caused by the money supply growing faster than the supply of goods and services.)

Over the last two weeks, the rule of law has been strengthened in a couple of major cases, one in the United States and one in Switzerland, but has been undermined in an action - surprise, surprise - by the IRS. On Jan. 22, a Swiss court upheld the rule of law by saying that an agreement between the U.S. and Swiss governments to turn over UBS files on private bank clients to U.S. authorities violated Swiss law. Switzerland has different laws than the United States regarding financial privacy and what parts of the tax law are felonies and which are not. Just because the Swiss law is different does not make it inferior to U.S. law. (In fact, Switzerland has direct democracy and a very long tradition of upholding human rights.) The United States considers it a felony not to file a W-9 tax form, while the Swiss do not consider the failure to file the appropriate form a felony. An IRS official said, "We expect the Swiss government to continue to honor the terms of the agreement" - despite the agreement having been deemed unlawful. Of course, the IRS has a long tradition of ignoring the law and the Constitution when it suits its purposes.

"So what?" is the implicit expression of much of the Washington political class when it comes to spending and taxing. The consequences of Washington's fiscal irresponsibility are not evident to many in the media and electorate - yet. But the pain will come - and it will hit almost every American. Last week, I explained how government deficits are strangling necessary capital formation. The following describes the impact on job creation and growth, and next week, I will present a way out of the mess. This past week, the White House claimed that the stimulus bill "saved 2 million jobs," but just before the stimulus bill was passed, the administration said the unemployment rate would peak at 8 percent with the stimulus bill and 9 percent without it. Now, we have both the stimulus bill and an unemployment rate of more than 10 percent, which shows that the White House is developmentally challenged when it comes to basic arithmetic.

Even though the government is running massive deficits, interest rates and inflation are low. So, what's the problem? The following discussion will clarify the problem. The United States is now in a situation in which the government is taking a very large share (40 percent) of the nation's savings to finance its deficit spending, leaving a diminished pool of capital to meet the needs of both families and businesses. You might be thinking, if there are not enough savings available for investment needs, why are interest rates so low? The answer is that the Federal Reserve (Fed) has been creating money by loaning the banks nearly free money and buying mortgages from Fannie Mae and Freddie Mac. Soon, as even the Fed acknowledges, it will have to start selling the mortgages it owns to private parties and increase short-term interest rates to avoid saddling the country with high inflation. In sum, inflation cannot be avoided without a big increase in both long- and short-term interest rates.

The long-term outlook for the stock market is not good, and here is why. For the past 100 years, there has been an inverse relationship between changes in the size of government and the growth or decline in the stock market.  The accompanying chart clearly shows the inverse relationship between the direction of the size of government and stock market performance. The Stock Market and Government Spending Time Period Change in Government Spending as Percentage Share of GDP Stock Market Percentage Change in Real Dollars 1910-1919 +21.6 points -53% 1919-1929 -20.5 points +206% 1929-1945 +44.2 points -48% 1945-1953 -26.8 points +30% 1953-1965 -4.6 points +180% 1965-1982 +6.5 points -55% 1982-2000 -4.6 points +579% 2000-2009 +9.7 points -66%

Assume you are a scientist and have been given a major financial grant to prove that the mythical unicorn really did exist. You know that as long as you can demonstrate some progress in showing the unicorn might have existed, your financial grant will be renewed each year, provided some other scientist does not come out with substantial evidence that the unicorn could not have existed. Under such conditions, you would have a very strong incentive to disregard much of the evidence that the unicorn could not have existed and each year provide only the data that could demonstrate that the unicorn might have existed. You also would have a very strong incentive to attack any scientist who raised serious questions or provided evidence that the unicorn could not have existed. You even might go so far as to refer to them with the disparaging term "unicorn deniers."

The underground or "black" economy is rapidly rising, and the fault is mainly due to government policies. Here is the evidence. The Federal Deposit Insurance Corp. (FDIC) released a report last week concluding that 7.7 percent of U.S. households, containing at least 17 million adults, are unbanked (i.e., those who do not have bank accounts), and an "estimated 17.9 percent of U.S. households, roughly 21 million, are underbanked" (i.e., those who rely heavily on nonbank institutions, such as check cashing and money transmitting services). As an economy becomes richer and incomes rise, the normal expectation is that the proportion of the unbanked population falls and does not rise as is now happening in the United States. Tax revenues are falling far more rapidly at the federal, state and local level than would be expected by the small drop in real gross domestic product (GDP) and changes in tax law that have occurred since the recession began.

Today, December 3rd, the White House is hosting a "Jobs Summit."  What should the attendees be advising the president? Unlike Ronald Reagan, President Obama was schooled in law, not in economics. Thus, he may not understand that there is really no mystery as to why we have our current unemployment, and how we can regain full employment. It would, of course, have been no mystery to Ronald Reagan, who was fond of saying:  "Government is not the solution to our problem; government is the problem."  That is, the recipe for more jobs is simple:  lower taxes, fewer regulations.  Job creation should be at the top of the administration's domestic priorities, because the inability to find a job causes more misery and hardship to far more Americans (and particularly to those who can least afford it) than the lack of health care for the 10 percent who are uninsured or potential global warming ever will. If the president really wants to see employers go back to hiring large numbers of people, the administration will do the following:

Do you think people who refuse to (or cannot for whatever reason) purchase health insurance should be subject to a $250,000 fine and/or five years in jail? Well, a slim majority of the U.S. House of Representatives seems to think such a draconian (and probably unconstitutional) measure is just fine because that is one of the provisions of the health care reform bill they just passed. A person, or group of people, who are unable to think through the consequences of their actions and often resort to oppression of others are either clueless or despotic.  Thinking and compassionate people, by contrast, understand that there may be many good reasons why people do not buy, or do not wish to buy, health insurance. The health care bill is Exhibit A to demonstrate that a majority of Congress is now clueless/despotic when it comes to economic sense or understanding about how the U.S. Constitution was designed to protect individual liberty. Then there are Exhibits B, C & D.

It has been well-known for decades that paper currency is a major source of disease transmission. During the life of the average dollar bill, it will be handled by hundreds, if not thousands, of people. It is hard to think of any physical object that is handled by more different people than paper currency. Millions become ill every year as a result of handling currency, and a not insignificant percentage of them die. The good news is that it is no longer necessary to use paper currency in the digital age. Payments of all types can be made by electronic means - with electronic banking; credit, debit and smart cards; and cell phones - all of which help the user avoid physical contact with dirty paper (actually cooton cloth) money. The bad news is that government policies are slowing down and, in many cases, preventing the movement to the use of digital currencies. The government's war on "money laundering" has resulted not in clean money but requires more people to handle dirty paper money. Goverment currency kills.