Have you noticed that many politicians who have trouble dealing with reality also seem to prefer fantasyland when dealing with budgets? New York politicians have been living in political fantasyland for many years. Upper-income people living in New York City have faced the highest state and local income tax rates in the country (over 12 %). Recent studies show high-income earners are in mass flight from New York to friendlier tax environments. The rational thing for New York politicians to do would be to cut tax rates to make New York more competitive; but no, they increased taxes on the top earners (many of whom continue to pack their bags). The new Republican governor of Puerto Rico, Luis G. Fortuño, wants to entice them and other productive Americans to his island.  He is determined to provide tax advantages that no state can, even those with no state income tax.  It may be an offer you'll find hard to refuse.

Public opinion polls show the performance rating of Congress at record low levels. Given that Congress and top administration officials are requiring pay cuts for those in the private sector whose companies have performed poorly, should not the same standard apply to those in government who have had a major responsibility for running the economy into the ground? Don't presidents and members of Congress always claim credit when the economy is performing well?  So isn't it fair to blame them when the economy is in a mess? Could it be that one reason Congress has performed so poorly is because, for 100 years, its members' compensation has been totally unrelated to their performance? (All wise observers know that one reason socialism fails is that workers are not rewarded for superior performance or penalized for performing badly.) I do not claim to know what the "right" pay is for members of Congress, but I do know their present compensation system makes no sense. Such a system gives them no vested interest in protecting the rest of us from inflation or any interest in pro-growth economic policies.

For at least a century, the Washington political class has been correctly known for creating more problems than solving existing ones. This tendency to enact destructive, rather than constructive, solutions for problems (most often created by government) has now gone into hyper-drive. Many who see this situation often blame it on "excessive partisanship," where the real problem is caused by a bipartisan lust for power that breeds too much accommodation, rather than questioning and resistance to bad ideas. The failure of either political party to get serious about reining in the growth of government has caused despair among small government conservatives, libertarians and others who believe in limited government. And this despair is contributing to the list of "destructive solutions" now infecting Washington.

Is the current recession the worst since the Great Depression? Even though the president, many members of Congress and many journalists keep saying we are in the worst recession since the 1930s, it is an assertion that is premature, to say the least. At the end of World War II, from 1945 to 1946, there was a very sharp drop in U.S. output (12.1 percent) as the war economy began its transition to a civilian economy. The deepest and longest-lasting recession the United States has experienced since then began in 1980, when Jimmy Carter was president (the gross domestic product dropped 9.6 percent in the second quarter of that year) and did not end until fourth-quarter 1982, almost two years into the Reagan presidency. As can be seen in the accompanying chart, both President Reagan and President Obama inherited an economy suffering from a year of no growth, along with rising unemployment.  Yet their approaches to the problem are polar opposites.

Has the Obama economic stimulus program helped or hurt? Administration officials keep saying the stimulus program has been beneficial, but where is the evidence?  There are several ways to see if it is working as advertised. First, what did the proponents say would happen when they were pushing the plan versus what has happened? Second, how has the United States fared compared to other nations that had smaller or no stimulus programs? Third, how have the results to date compared to what pro-stimulus, Keynesian-school economic theorists advocated versus what other theorists (principally Austrian-school) who largely opposed the stimulus plans said?

1939 was not a good year. World War II started, and much of the world was still in the Depression. The leaders of too many countries were either despots or naïve and weak. 2009 has not been a good year.  There's been a global recession. And seventy years later, as in 1939, the leaders of too many countries are either despots or naïve and weak. Too many of today's leaders all too closely resemble the leaders of 1939 and seem equally capable of starting the chain of events that destroyed much of mankind in the 1940s. Who among the leaders of free democracies is not a weakling, who has the courage to stop the despots?  Who among them is a Churchill and not a Chamberlain?

In just the last eight months, the Congressional Budget Office estimates of the amount of additional federal debt to be held by the public grew by an astounding $4 trillion for the 2010-19 period; and that the amount of federal debt held by the public grew from $5.9 trillion to $7.5 trillion in just the last 12 months. The federal government (i.e., taxpayers) now owns (primarily through Fannie Mae and Freddie Mac) or insures (through the Federal Housing Administration and other government programs) about 80 percent of the $14.6 trillion of home mortgages outstanding in the United States. Last week, Congress passed a bill (House Bill 3221) requiring all student loans be made by the federal government rather than banks, which means the taxpayers will be 100 percent liable for any student loan defaults. The  Federal Deposit Insurance Corp. is considering tapping its Treasury credit line for up to $500 billion. It needs to do this because of the high number of bank failures and because each bank account is insured by the government (i.e., taxpayers) up to $250,000. Very soon, the debt bomb is going to go nuclear.

Do you think your tax dollars should be used to help those who want to open a house of prostitution and illegally bring underage girls into the United States as "sex workers"?   As you may have seen on Fox News over the last few days, the taxpayer-funded ACORN (Association of Community Organizations for Reform Now) has been doing just that. Who exposed this latest bit of corruption at ACORN?  The FBI? The local police? A congressional investigating committee? The mainstream media? No, no, no, and no. It was a 20-year-old college student named Hannah Giles and a 25-year-old law student and investigative journalist named James O'Keefe. I first met Ms. Giles almost a year ago in her home town of Miami. Through mutual friends, she had contacted me to see if I could help her get an internship with a policy group in Washington.

Do you think the Internal Revenue Service should have the right to share your tax information with foreign governments -- even ones run by thugs and those that engage in human rights abuses and/or suppress freedom in their countries? A meeting was held in Mexico City last week under the auspices of the Paris-based Organization for Economic Cooperation and Development (OECD), whose implicit goal is to create a global high-tax cartel. In order to create a global tax cartel, the OECD needs to have tax information shared among nations -- which means that the citizen of any country that signs on to this scheme may have his or her tax information shared with other member jurisdictions.  The Obama Administration is fully supportive of this wholesale violation of basic rights.

Do you think pedophiles should be given Viagra at taxpayers' expense? Despite what appears to be an absurd question, that is exactly what occurred in Britain under their National Health Service (NHS). Reports surfaced last week that a pedophile who had abused an 11-year-old girl had been spared jail, yet was continuing to receive Viagra, courtesy of the British taxpayer. If the United States creates a government-run health system, it is a safe bet the same types of abuses and problems that plague Britain will occur. The reason is simple: There will only be limited funds available for the government-run health care system, and thus individuals employed by the government will decide who gets what and when. Some of the decisions will be wise; others will be foolish, wasteful, or just plain daffy -- because humans who spend other people's money don't tend to be all that careful.

Marseille, France.  Why does it appear France is bouncing back more quickly from the recession than the United States? France has long been known for having an economy that suffered from too much government interference, too-high taxes and destructive union activity. Yet it grew 1.4 percent in the second quarter of 2009, while the U.S. economy continued to decline. The United States and Britain have had the largest "stimulus" programs of the major economies (as measured by increases in government spending and deficits relative to gross domestic product) and yet they are not moving toward recovery as rapidly as France and most other countries that had far smaller stimulus programs or none.

Stockhom, Sweden.  Do you think America would be better off with a Swedish-type welfare state? This question tends to evoke strong reactions from both the left and right, yet few understand Sweden's economic history and the revisions it has been making to its welfare-state model in recent years. Those who wish to chase the Swedish model need first to decide which model they seek: The high-growth, pre-1960 model; the low-growth model of the 1970s and 1980s; or the reformist, welfare-state model of recent years. The irony is that the current Democrat Congress and administration are rapidly emulating the parts of the Swedish model that proved disastrous and rejecting those parts that are proving to be successful.

We are likely to have a double-dip recession, and this is why. Your Uncle Sam has been having a hard time because he spends more than he makes. He engages in much unproductive behavior and wastes a lot of money on things that he doesn't really need. He is easily influenced by his irresponsible children, Nancy and Harry, whose mantra is: "Spend, Sam, spend." Sam is also sloppy with his finances. His record keeping is poor, and he is frequently ripped off by people who claim to be his friends. Recently, Sam experienced a big drop in his income, because his employer (the American taxpayer) had been taking financial hits.  So Sam did what he's best at -- he borrowed and spent more, more than ever before.  Then things began to turn a bit sour.

If Congress, under a revised "cash for clunkers," suddenly required every car and truck in America (all 250 million of them) to be immediately destroyed and replaced with new cars and trucks that got better gas mileage, would the country be worse off or better off? Congressional Fantasycrats would say "better!" - so let's apply their logic to housing. Why not knock down all houses built in America before 2000 and replace them with new and more energy-efficient houses? Wait -- we already evidenced the results of that experiment -- it happened in New Orleans. Rather than the government directly knocking down the houses, Hurricane Katrina did it for us. Many in Congress argue that the reason New Orleans is still a mess - after hundreds of millions of taxpayer dollars - is because of federal, state and local government mismanagement and corruption. Yes, but now don't they want the government to run the health care system? And these folks are telling us that their new medical system will cover more people, will cost less, give us better care and not add to the budget deficit -- hmmm. Fantasyland!

After nine months of spending trillions of bailout dollars and failing to revive their economies, it has become clear that the political leadership in the world's major economic powers has been pursuing policies that can only result in failure. Worse, the leaders of the US, Japan, UK and EU seem to have little idea of what to do next.   Thus a prominent international financial expert has dubbed these powers "zombie governments." Yet the solutions to their problems are not rocket science and are well-known to thoughtful people:

Washingtonosis (n): A disease most often found in people working within three miles of the U.S. Capitol building in Washington, although pockets also are found in New York, Chicago and Los Angeles. It tends to infect elected officials, government bureaucrats, those working in the media, "government relations specialists," association executives and even top corporate executives. Symptoms include an overwhelming desire to associate and be seen with those in power or those perceived to have power and/or fame. Those infected tend to lose judgment, values, principles and sense of honesty as well as common sense. Last week, officials of the American Medical Association (AMA) revealed that they had caught the disease. They endorsed the House version of the health care bill even though it would reduce the incomes of many of their members, restrict their freedom to practice medicine as they think best and limit choices for their patients.

Las Vegas, Nevada.  How old were you before you realized your actions could result in unintended consequences? Men create democratic governments to protect life, liberty and property. Yet much of what modern government does daily has the largely unintended consequence of endangering and/or reducing all three. Taxes reduce liberty and often erode the value of property. Most regulations reduce liberty and some erode property values and even endanger life. We now spend much of our lives trying to figure out how to reduce our tax burdens and to comply with never-ending government regulations and forms. Most of those who enter government, either as elected politicians or bureaucrats, do not start out to deliberately erode basic freedoms and property rights, but all too many in the political class act like children -- irresponsibly and thoughtlessly.

Why did a bare majority (219-212) of the members of the U.S. Congress vote for the largest tax increase in American history this past Friday, under the claim it was a vote to save the climate? There is no consensus in the scientific community about how much climate change, other than the normal cycles, is taking place, nor how severe it will be, and how much man-made CO2 is responsible. It is known that the legislation will have a negligible effect on global CO2 emissions, particularly since the big polluters, such as China and India, are not playing ball. It is also known that the "cap and trade" system that the legislation calls for has been a failure in Europe. In sum, serious people understand the legislation will hurt the U.S. economy, reduce the standard of living and yet not accomplish its claimed intent; therefore, why were so many members of Congress willing to vote for it? Are they idiots, or do they have another agenda?

Professor David Smith, a former Bank of England economist and well-known commentator on the British economy, has forecast a rise in government spending to more than 53 percent of national income by 2010, financed by deficit spending of 14% of national income. He argues:  "There must be serious doubt whether deficits on this scale can be financed in a non-inflationary manner without very large capital inflows from abroad. And it is hard to see why such inflows should be forthcoming now that the British economy has become so highly taxed by international standards." If President Obama carries through on his threats to greatly increase U.S. taxes on carbon, etc.; allows the George W. Bush tax cuts to expire next year; and does not begin seriously to reduce spending, many economists will be able to say the same things about the U.S. economy next year that Mr. Smith says about the United Kingdom's economy today.

If you knew that baseball teams with winning records tended to be more profitable for their owners than those with losing records - and if you learned that the Baltimore Orioles had just been purchased by the World Umpires Association (MLB's umpire's union), would you expect the Orioles to win more or fewer games? Almost everyone implicitly understands why the umpires should not be allowed to own teams they referee. In a free-market economic system, the government is supposed to be the umpire and not a player. Its job is to set and enforce the rules, but if it is allowed to also become a player, by owning and managing business enterprises, it is unlikely to treat the competing companies fairly, and there will be little check on its own misbehavior. The record of government ownership and/or control of companies in the United States and elsewhere has been one long disaster. This promises to continue, and far more disatrously.

If you were in debt, would you be more or less likely to increase your liabilities if you knew someone else would pay them off? Many children can quickly figure out the answer to this question, but it seems to be a real stumper for members of the House Financial Services Committee, chaired Rep. Barney Frank, Massachusetts Democrat. They are considering having the federal government reinsure municipal bonds. Such fiscal madness likely would make even citizens of banana republics blush. The Feds are engaged in exactly the same behavior that got American International Group Inc. in trouble: insuring financial assets without having adequate resources to pay off all of the potential insurance claims. Such behavior can be viewed as criminally irresponsible.

A sign of immaturity - most often found in children and certain politicians - is being in denial or even unaware of the consequences of one's actions. The global political class has always suffered from an excess of immaturity, but every generation or so, political immaturity explodes like a star in its death throes and vaporizes everything in its vicinity. Current examples are all too numerous.  We'll discuss three of the most explosively damaging.

London, England. Imagine reading a news report that "U.S. House of Representatives Speaker Nancy Pelosi resigned this morning, and it is expected that more than half of the members of Congress will either resign, choose not to run again or be defeated in next year's election." This statement might seem to be a dream come true, but it is equivalent to the headlines the British public was treated to this past week. Effective June 21, Michael Martin will become the first speaker of the British House of Commons to resign since 1695 (a mere 314 years ago). The Times of London reports the expected "departure of 325 [out of 646] members of Parliament as a result of forced resignations, retirement, and defeat at the polls would represent the biggest clear-out of Parliament since 1945."  Will this wholesale slaughter of British politicians be duplicated in the United States?

Bratislava, Slovakia -- This pleasant city on the Danube River is considered part of eastern Europe, although it is only as about as far from Vienna as Washington is from Baltimore (about 35 miles) and is, in fact, near the geographical center of the European continent. On May 15, a meeting sponsored by several think tanks in Slovakia and Vienna's Hayek Institute was held here in Bratislava to discuss the current situation and what should be done. Nobel laureate in economics Myron S. Scholes spoke, as did several other prominent European and American economists. There was nearly unanimous agreement that the financial crisis was not only primarily caused by governments, but that the solution was less rather than more government spending -- and less but more focused financial regulation. There was similar agreement that Europe's financial crisis may be even worse than America's.

Other things being equal, would you start a new business in a higher- or lower-tax jurisdiction, and would you prefer to live and invest in a higher- or lower-tax locale? This is not a tough question for most people, but the powers in Washington (the administration and the congressional Democrat leaders) are incensed that the American people are answering the question in a most politically incorrect way by opting out of high-tax places. Last week, the Treasury announced a whole series of proposed new laws and very complex regulations to prevent both American businesses and individual citizens from investing where they wish. So much for the promise to simplify the tax code. So much for using the recession to reignite economic growth rather than as an excuse to expand political power.

Many on the political left and in the mainstream media complained about the peaceful protests of hundreds of thousands of Americans who held "tea parties" on tax day. Yet they lightly dismiss truly destructive actions by leftist advocacy groups, many of whom take Saul Alinsky's book, "Rules for Radicals," as their bible. Mr. Alinsky wrote, "In war [i.e., war for an ideal or goal], the end justifies the means"; thus almost any action is acceptable for one's cause. How, then, would MSNBC and the New York Times react if free- market groups started hanging "Wanted" posters for Internal Revenue Service officials and employees who clearly serve as instruments for job destroying policies? Inflation is a tax that hits the poor particularly hard and is caused by the Federal Reserve creating too much money and credit. What would happen if monetary-reform groups adopted Alinsky tactics and started picketing the homes of Federal Reserve members and harassing their spouses and children?

Do you know what the word "income" means? My large Webster's dictionary is able to provide a clear and comprehensive definition in a mere 52 words. The shortest definition the Internal Revenue Service could provide in response to my request for its definition was 140 words - but the word income was included 10 times, missing the point that you do not include the word to be defined as part of the definition. Last week, I was in a meeting with some of the nation's best and most experienced tax lawyers and tax economists, several of whom had served in the Treasury, and, again, there was the general lament that the tax code is so complex it is beyond their understanding and repair. Those who claim that the government will be able to get a lot more tax revenue by increasing tax rates on the rich live in a fantasy world.

When will the next round of inflation hit, and how can we protect ourselves? Many economists and commentators, including yours truly, have warned about the potential of a new round of high inflation due to the great expansion of government spending. But does an increase in government spending necessarily translate into higher inflation? The answer is "no," but it most often does, and this is why.  It's also why we are headed for the doom of Jimmy Carter's stagflation -- high unemployment and economic stagnation combined with high inflation -- on steroids.

Do you know who is perpetuating the biggest tax scam ever and who the victims are? It is an organization that claims to be a "service" to the people but whose actual behavior can be summed up in its unwritten motto, "Might means right." As tax day approaches, millions of Americans are finding they are victims of this scam. It is called the capital gains tax, and it is run by the Internal Revenue "Service." Capital gains come from sales of stocks and bonds, businesses, real estate, art objects and anything else of value. The IRS capital-gains tax scam consists of two parts. First, it does not just tax real gains, but also imaginary gains resulting solely from government-caused inflation. The U.S. Constitution - i.e., the 16th Amendment - only gives Congress the power to "lay and collect taxes on incomes." Many legal scholars think taxing the portion of a capital gain caused by inflation is unconstitutional because it is not income.

Why did some banks and financial institutions fail and others succeed? There are many reasons, but one common ingredient of those that have not failed is that they are organized as partnerships and/or are controlled by a family, or are closely held by a few senior officers. That is, they have "skin in the game." So why are not more banks and other financial companies organized as partnerships?  Primarily because the tax code requires partners individually to pay full tax on their pro-rata share of the profits as they are earned. A properly structured tax code would encourage companies to reward their executives on the long-run profitability of the enterprise, rather than on short-run profits, which is now the case. Members of Congress rant against the short-term mentality of many in Wall Street and elsewhere, but it is precisely the tax and regulatory systems put in place by Congress that have caused much of the problem.

The price of oil soon will soar again. The present price of a barrel of oil, $50 or so, is below the price needed to meet current demand for a sustained period of time, and it is well below the price needed to meet global demand as the world economy rebounds. In addition, with the U.S. Federal Reserve System greatly expanding the money supply - which will continue because of the explosion in government spending - the dollar is falling against other currencies; and given that global oil is priced in dollars, the price of oil will rise in dollar terms, just as it did two years ago. Given that many in the political class seem to think the long run is the next five minutes, they do not see or want to see this tsunami coming.  Of course, they will blame anybody but themselves.

Did you notice that the major economic forecasters, both private and government, totally missed the global credit crisis and size of the recession? The mainstream consensus economic forecasts made in December 2007 for the year 2008 for the United States, Europe and Japan predicted roughly twice as much growth as actually occurred. You may recall that a year ago, when oil prices were racing toward $147 per barrel, the high-paid wizards at Goldman Sachs were projecting it to go over $200 per barrel - it's now below $50. The foreign policy/political forecasts were even worse.  Just as those regarding global warming.  Why is this?

Those in the Obama administration blame the Bush administration for the current mess. Yet the markets have continued to fall since President Obama was nominated (S&P down 48 percent), elected (down 28 percent) and assumed office (down 15 percent). Worse yet, the markets are down to less than half the level they were when the Democrats took over Congress two years ago. The markets are clearly registering a vote of "no confidence" in the Democrat Congress and the Obama administration. Markets are leading indicators, and so it is only a matter of time before the general public registers its vote of no-confidence in the Obama administration. Rep. Barney Frank, chairman of the House Financial Services Committee, is on a witch hunt to find people in government and the private sector to threaten and blame.  This is ironic in the extreme, given that Mr. Frank was, and continues to be, a major part of the problem. 

Warning to tourists - it is now illegal to take a photo of a London policeman or "bobby." The time-honored tradition of tourists having their pictures taken with London cops is being dealt a silly death blow by those who control the British nanny-state. The British are not only losing their economic prosperity, but their civil liberties as well. Will Britain again become the "sick man of Europe"? A quarter-century ago, Margaret Thatcher led Britain out of an economic wilderness and enabled it to have the fastest-growing economy among the four big countries in the European Union. Today, however, under Gordon Brown's Labor government, Britain is rapidly rushing backward with pre-Thatcherite economic policies.  At the same time, civil libertarians on both the left and right are increasingly concerned that Britain is drifting toward becoming a police state.

Do you understand why well-known economists, including Nobel Prize winners, are on opposite sides of the debate about the stimulus package and what should be done about the recession? Not only Americans, but people everywhere are confused, largely because the economists who are writing and speaking about what should be done have such fundamental disagreements. There are two main schools of thought. One group is under the broad umbrella of the Chicago or Austrian school economists who are heavily influenced by the teachings of F.A. Hayek (1899-1992) and Milton Friedman (1912-2007).  The economists of the Reagan White House were of this school. The members of the other group are commonly known as Keynesians, who accept many of the teachings of John Maynard Keynes (1883-1946) and his disciples.  Mr. Obama's economists belong to this school. Both schools offer reasonable explanations for what causes and what solves recessions.  But there is one outcome for which Keynesians have no solution:  stagflation.  It turns out that's just where we're headed.

Do you agree with President Obama, who has just limited the pay for executives in some, but not all, of the companies receiving government bailout money to $500,000 a year? One could argue that $500,000 is too much, given that the president only makes $400,000 a year in a job with more responsibility and a larger budget than any other job in the world. Since there were plenty of would-be takers for that job, and some were arguably even qualified, why should we pay anyone more? Many people who rely on the taxpayers, both in the United States and elsewhere, make far more than the president of the United States.  It turns out that the highest pad pubic employees in America are football coaches at taxpayer-funded public universities.  Should their salaries be capped just like Wall Street execs?

If you knew -- "a few weeks ago, the federal government had to commit several hundred billion dollars for a guarantee of Citicorp's assets, though examiners from the Office of the Comptroller of the Currency (OCC) have been inside the bank full-time for years, supervising the operations of this giant institution, under the broad powers granted by the Federal Deposit Insurance Corporation Improvement Act of 1991 to bank supervisors" -- what would you think about the effectiveness of U.S. bank regulation? The above quote comes from a thoughtful and important new paper, Regulation without Reason, by Peter J. Wallison, former general counsel of the U.S. Treasury and now a fellow at the American Enterprise Institute. Mr. Wallison warned for years - in books and articles - that Fannie Mae and Freddie Mac were headed for disaster, and now he is taking on the ill-thought out proposals to increase regulation of the financial industry, both by politicians and people who should know better. The frightening thing is that many of the same intellectually and financially corrupt politicians - e.g. Rep. Barney Frank and Sen. Chris Dodd - whose actions directly helped bring on the present crisis, have now been put in charge of the hen house and are tasked with "making reforms."

If you knew economic growth and new job creation begin to slow when total government spending is larger than about 25 percent of the economy, and you knew total government spending in the United States is about 36 percent of gross domestic product (GDP) - would you propose policies to make government larger or smaller to create more jobs and boost economic growth? Over the last few decades, many economists have done studies on the "optimum" size of government. A new study just completed shows the optimum size of government is less than 25 percent of GDP. Optimum is defined as that point just before government becomes so large as to reduce the rate of economic growth and job creation. Rather than increasing the size of government, the empirical evidence shows that sharply reducing taxes, regulations, and government spending down to at least 25 percent of GDP would do the most to spur economic growth and create more jobs over the long run. There is virtually no empirical evidence - in the United States or anywhere else - to support the belief of economists of the Keynesian school that a big increase in government spending will make matters better, rather than worse. 

You work hard, take care of your family, and pay all the taxes the government says you owe as is typical of honest, upright citizens. But what happens to your tax money? It is now going to "bail out" firms that pay their senior executives millions of dollars a year. Congress also intends to spend your tax dollars on an $825 billion "stimulus program" filled with many dubious projects and plain old-fashioned "pork." Many good economists who have looked at the details of the stimulus package believe it has much more "de-stimulus" than stimulus in it and will make the American economy worse off rather than better off. While you may have thought you are required by law to pay taxes on all your income, you learn the "important" folks in Washington seem to think paying taxes is optional - for them.