Last week, Jamie Dimon, CEO of the nation's largest bank, JPMorgan Chase, revealed that the bank had made a $2 billion-plus trading mistake. The bank has more than $2 trillion in assets and made a profit of about $20 billion last year. So it lost one-tenth of 1 percent of its assets and about 10 percent of its income for last year. No big deal, despite all the hand-wringing of the political and media class. Predictably, Sen. Carl Levin, Michigan Democrat and arguably the most irresponsible member of Congress, immediately issued a press release calling for more bank regulation. Congress has the oversight responsibility for the U.S. government, in much the same way a corporate board has the oversight responsibility for a corporation. Mr. Levin has the responsibility (along with his colleagues) to make sure taxpayer dollars are spent wisely and not wasted or stolen. Medicare, for example, spends more than $500 billion annually. Sen. Tom Coburn, Oklahoma Republican (and medical doctor), who, unlike Mr. Levin, tries to be fiscally responsible, estimates that about 20 percent, or $100 billion, of Medicare spending is fraudulent. Yet  Mr. Levin and many of his colleagues prefer to spend their time bashing private businesses rather than protecting the taxpayer, which is their responsibility.

Denial is leading to collective economic suicide in Europe and the United States. The French on Sunday (5/06) elected a socialist president who wants to raise taxes on those elusive rich and keep spending as if there is no tomorrow.  Many on the left, including European socialists in tandem with the New York Times and its economist Paul Krugman, are falsely claiming that Europe and even the United States are being saddled with "austerity." Their claim is that governments are not spending enough to reduce unemployment. They want higher taxes on the most productive plus bigger government. The chart below shows that rather than the austerity the left is whining about, government spending has risen as a share of gross domestic product (GDP) in all of the major economies. The irony is that the refusal by those on the left, in both Europe and the United States, to deal with the "entitlement" problem is going to cause an involuntary austerity in which real incomes are going to fall for most people.

What would you think of a secretary of the Treasury who failed to do serious cost-benefit analysis about regulations that could cost millions of Americans their jobs and cause innocent people to be subject to political abuse or worse, and yet have almost no benefit to the United States? Over the past several years, Treasury Secretary Timothy F. Geithner was warned by many private economists and members of Congress of the adverse consequences of a proposed rule that would force U.S. banks to be uncompensated tax collectors for foreign governments. On April 18, Mr. Geithner issued the rule anyway. It only gets worse. The Treasury/IRS has finalized another rule set to go into effect on Jan. 1, 2013, called the Foreign Account Tax Compliance Act.

Mr. Obama's insistence on high business taxes drives away opportunity.  How can he not know this? The United States already has the highest corporate tax rate in the world.  Yet this is not good enough for the Obama administration, which is now proposing to make the U.S. even less competitive internationally by reducing the corporate tax deferral on income made abroad. Somehow, Mr. Obama fails to understand that companies can charter themselves anywhere in the world, and their tax rate depends largely on where they are chartered. They do have to pay local tax rates where they conduct business, but that is only on the business done in tha particular state. Companies increasingly have been moving out of the United States for tax reasons, and of greater concern is that many new businesses are deciding to choose a home other than the U.S. This is not good for future U.S. employment and economic growth.  Again, how is it possible for Mr.Obama to not know this?

Do you think it is more important to have a tax policy that raises the most revenue at the least cost, in order to maximize job growth and economic opportunity -  or to have a tax policy like the Buffett rule, which falsely claims it would make all millionaires pay a higher tax rate than their secretaries?  President Obama released his tax return last week, showing he had an effective rate of a little more than 20 percent of his income, even though he is rich by his own definition. One of major ways the Obamas were able to reduce their tax rate was by giving away 22 percent of their income to charity, which I applaud. But their actions raise several interesting points. When we donate money to a charity, church or some other worthy cause, we are allowed a tax deduction, which means the government gets less of our money. The president and many in his party keep telling us that the government needs more money, but if they believe this, why are they taking charitable deductions? Why didn't they give it to the IRS which they say needs it so much?

Americans, now 236 years removed from the Declaration of Independence, have acquiesced to far more tax tyranny -- and I do not use that word lightly -- than the British tax tyranny that ignited our revolt. Modern-day apologists for the progressive income tax argue that it is just - because it is imposed by the "consent of the governed" -- and that is merely their first lie. America was established as a constitutional republic to protect despised minorities from the tyranny of the democratically elected majority. Democracy and consent of the governed are distinctly different concepts. Once it becomes acceptable to divide a population into classes, majorities can easily take the right of consent from a minority. A progressive income tax only meets the test of "consent of the governed" when a majority of each class of taxpayers consents to its tax rate. Otherwise, it is tax tyranny of a low-tax-rate majority against a vote-poor, high-tax-rate minority. The apologists for the progressive income tax claim it is only "fair," ignoring the fact there is nothing at all "fair" about taxing at a higher tax rate those who work longer and harder and/or spend more time acquiring an education and work skills. It is destructive and tyrannical for a society to tax the most productive, innovative and job-creating people at a higher rate than others.

The Supreme Court last week ruled against the Environmental Protection Agency (EPA) in a unanimous decision. The EPA had charged a couple with violating the Clean Water Act. It claimed their property was a "wetland" and said it would fine them up to $75,000 per day - but there was no water on the property and there had been no judicial review of the charge. Where are the members of Congress whose funding enables the EPA to engage in this tyranny? Republicans whine that they cannot control spending because they only control one half of Congress. But the plain fact is that the Constitution is very specific. Any spending bill must be passed by both houses of Congress and signed into law by the president. Thus, there is nothing - nothing - to prevent the House Republicans from refusing to fund the EPA's desired budget until the agency puts procedures in place to guarantee the basic constitutional rights of all Americans.  Yet they are all whine and no guts.

Most people intuitively understand that job creation requires capital investment, but many in the Obama administration and in Congress seem to have missed this basic fact of economic life. As the late Jack Kemp used to say, "How many truck drivers would you have if nobody had money to buy trucks?" There are numerous studies that try to measure the cost of the average job, but a figure of $225,000 on average is in the ballpark. There has been much discussion in the press about all of the new job-killing environmental regulations coming out of the administration, such as the restrictions on coal plants and oil and gas drilling. The press has been less focused on the job killing that stems from all of the new financial regulations, which may end up eliminating tens of millions of jobs. An exaggeration you may say, but think about the following:

Fed's Sole mission should be maintaining value of currency

All of the Republican presidential candidates have called for getting rid of Fed Chairman Ben S. Bernanke, but only Rep. Ron Paul has advocated abolishing the Fed. Mr. Paul wants to return to a gold standard. There are pros and cons of going back to gold, but, short of that, there are a number of constructive things that can be done. One reason Fed policy is so confused and conflicted is that the Fed has been given multiple targets and tasks, some of which, at times, conflict with one another. The Fed is supposed to maintain not only price stability but also full employment. In addition, it is supposed to make sure the banking system is sound. The Dodd-Frank bill gave it the additional task of consumer financial protection.

To understand the problem...

Of those who are running for president, who has the best and worst tax plans? The worst plan is easy: President Obama's. By way of disclosure, I was part of the small team that developed and helped market President George H. W. Bush's economic platform back in 1988. The first President Bush won, in part, because he had a clear, understandable plan - ‘Read my lips: No new taxes' - and a ‘flexible freeze' to control spending. Unfortunately for him and the country, he abandoned the ‘flexible freeze' soon after taking office and the tax pledge two years later. His reversal played a big part in his subsequent defeat in 1992. Mr. Obama seems not to have learned from the mistakes of the first President Bush. He has repeatedly pledged not to increase taxes on anyone making less than $250,000 a year and to do everything possible to increase jobs. Yet, in fact, he has already signed 21 tax increases into law. It's easy to have a tax plan better than this.  So let's look at those of all four GOP candidates.

President Obama has just presented his new budget, which again ignores reality. It contains another trillion-dollar deficit, which assumes a large increase in revenue resulting from a tax-rate increase on ‘the wealthy' and corporations. He knows, and so does everyone else, that Congress is not going to pass the tax increase. Corporate taxes are paid by consumers in higher prices and by workers in lower wages - so much for the promise not to increase taxes on those making less than $250,000. Every good tax economist knows this, but the president chooses to ignore reality and demagogue the issue. Even more disturbing is the lack of discussion about a contingency plan if his projected economic scenario does not work out - and the probabilities are that it will not work out. The reality is that the United States and most other governments, particularly the Europeans, have reached or are close to reaching the limits of their ability to tax and borrow. This situation means there is going to have to be either massive cutbacks in government spending or very high inflation.

Government corruption can take many forms. Last week, most of those forms could be seen in the actions of the Obama administration: Everything from government officials taking simple bribes, to covering up wrongdoing, to using taxpayer money to pay off political supporters, to using government prosecutors to punish enemies, to failing to fulfill its fiduciary duty to citizens by not performing cost-benefit analyses before taking actions. Promulgating policies that knowingly hurt millions of people is far more serious than a government official requesting a cash bribe - as despicable as that may be. Pushing for tax increases without first getting rid of counterproductive or useless programs and cleaning up mismanagement is an example of policy corruption. The results of the extensive moral, intellectual and policy corruption in the United States in recent years can be seen readily in the accompanying chart, which includes data from both right- and left-leaning organizations.

Last week, ABC News ran a story that led with the statement, ‘Mitt Romney has millions of dollars of his personal wealth in investment funds set up in the Cayman Islands, a notorious Caribbean tax haven.' What the reporters failed to mention was that ABC, a unit of the Disney Corp., also has millions of dollars in Cayman-registered funds. Probably most employees at ABC, including the reporters who wrote the story, have some of their money in Cayman-registered funds, as probably do many of you reading this column, even though you don't know it. This is how the real world works.  There is a very good reason why fund managers place a portion of their portfolios in the Caymans.  It's that the Cayman financial regulatory system is far superior to America's.

Ambergris Caye, Belize.  The Cayman Islands are rich, and Belize is poor. Why? Both are small Caribbean countries with the same climate and roughly the same mixed racial heritage, and both were English-speaking British colonies. Belize (the former British Honduras) received its independence in 1981, while Cayman is still not fully independent but is self-governing at the local level, with its own currency, laws and regulations. Belize should be richer: It has a larger population than Cayman (345,000 as contrasted with Cayman's 54,000). Belize has a much larger and more varied land area with many more natural resources, including gas and oil, and some rich agricultural land that Cayman lacks. Both have nice beaches, but Belize has the second-largest barrier reef in the world after Australia and also has Mayan ruins. Yet Cayman, with fewer points of interests, has done more to attract tourists. Back in the early 1970s, Cayman was as poor on a per capita basis as is Belize today. Both countries had ambitions to be tourist and financial centers. Cayman succeeded and has about six times the real per capita income of Belize. What did Cayman do right and Belize do wrong?

Despite pledges to cut spending by the new Republican House majority, it appears spending during the current fiscal year (FY2012), which ends on Sept. 30, will actually be greater than in fiscal 2011. The House Republicans were filled with good intentions, but they got snookered by President Obama and Senate Majority Leader Harry Reid. Fool me once, shame on you. Fool me twice, shame on me. The Tea Party crowd and other Americans who believe in fiscal responsibility are unlikely to be tolerant of and re-elect Republicans who are so incompetent that they cannot reduce federal spending and continue to fund programs that most of their voters oppose. The Constitution is clear. Article I, Section 9 states, "No Money shall be drawn from the Treasury but in Consequence of Appropriations made by Law." That is, only Congress can authorize the spending of money. The House Republicans can insist on reductions in overall spending and, particularly, get rid of unpopular and nonessential programs as a price for passing any of the necessary appropriations bills.  They didn't.  Why should they be reelected in November?

Last week (12/28), the Financial Times announced, "China has again outshone the U.S. as the top venue for IPOs, initial public offerings." How is it that since 2008, a self-proclaimed communist country raises more capital and has more new firms going public than the great bastion of free-market capitalism, the United States? Answer: Members of Congress have been killing the U.S. financial markets because of hubris, incompetence and a lust for power and money. The official Washington line has been that it was "Wall Street" that caused the Great Recession. Thanks largely to the tireless efforts of a former general counsel of the Treasury, Peter Wallison, and his American Enterprise Institute colleague Edward Pinto, we now know the financial crisis would not have occurred but for government housing policy implemented principally through Fannie and Freddie and the Department of Housing and Urban Development (HUD). And that government housing policy was created by Democrats in Congress.

Even though some are predicting the end of the world in 2012, there is a possibility it could turn out better than 2011 (a low bar). Many people who are not part of the political class continue to advance civilization and make things better for us -- like the late Steve Jobs. Potential good news is that not all members of the political class are unprincipled, self-serving, ignorant and shortsighted. We are seeing a growing band of smart, responsible and knowledgeable people being elected to Congress and other political bodies. One example is Rep. Paul Ryan, Wisconsin Republican, who is chairman of the House Budget Committee. In democratic countries, many politicians get themselves elected by making promises for spending programs that the citizens cannot or are unwilling to pay for. The result is persistent deficit spending that ultimately spirals out of control. The good news is that some democratic countries have learned how to avoid the spending/deficit trap, and those countries can serve as examples for the less prudent majority. (See chart below.)

Do increases in government spending increase or decrease the number of jobs? Conventional wisdom is they will increase jobs, and a few left-wing economists, such as Paul Krugman of the New York Times, frequently are trotted out by reckless politicians and some in the news media to argue that we need more government spending in order to create jobs. If this were true, we should be able to see it in the historical evidence, so let's look at the numbers. Government spending grows each year, but what is relevant is whether it is increasing or decreasing as a percentage of gross domestic product (GDP) and how it relates to the percentage of the adult labor force at work. As can be seen in the chart below , since 1929 there is an inverse relationship between increasing the size of government and job creation.

The financial crisis in Europe has resulted in the appointment of new prime ministers in both Greece and Italy, by in reality the Germans and French, rather than through the ballot box in Greece and Italy. This raises the question, "Is it possible to have both a bureaucratic welfare state and a democracy that protects individual liberties?" In the United States, as well as most other countries, the people are increasingly governed and regulated by unelected bureaucrats who create "administrative law." The rise of the Bureaucratic State, at least in the U.S., is only about 80 years old. The number of federal employees grew slowly over the first hundred years of the American Republic so by the time of the first Grover Cleveland administration in the 1880s, there were still fewer than 100,000 federal civilian employees. By 1925, the number had grown to about a half a million, and now there are almost 3 million civilian federal government employees, plus another 17 million state and local government employees. There are two fundamental reasons for this trend:

President Obama said last week that we need to increase tax rates on the wealthiest Americans to obtain an extra $100 billion in tax revenue, and he blamed the failure of Congress' supercommittee on the unwillingness of the Republicans to increase tax rates. Do you agree? If you think increasing tax rates on the "rich" is the correct economic policy, then you also need to believe the following seven fantasies, each of which is like believing in the Tooth Fairy:

Last week (11/16), the Cato Institute held its annual monetary conference. Speakers included high-ranking officials from the Federal Reserve and monetary experts from the academy, think thanks and financial institutions. There was unanimous agreement that the world monetary system is in deep trouble, which is obvious to anyone who keeps up with the news. It is easier to observe the problem than to come up with a solution. The problem is that the major world governments are in the process of destroying the value of the money their citizens hold.

Shanghai.  "Air in many China cities remains highly polluted." No, this is not a headline in the Onion (satirical newspaper), but the front-page lead headline in the Shanghai Daily on Nov. 8. Shanghai is a city of 23 million people, which at first glance appears to be the most modern city on the planet. The architecture is spectacular and varied, with some of the new edifices exceeding 100 stories. It looks prosperous - nicely dressed people; wide, tree-lined streets; well-maintained flower beds; and the world's newest auto stock on its many crowded expressways. To a lesser extent, the same thing can be said about Beijing and other Chinese cities. China, arguably, has today more people with a middle-class or higher standard of living than any European country and even Japan, only trailing the United States. However, more than 80 percent of its people have yet to enjoy most of the fruits of this prosperity. It is a bit ironic that a country that calls itself communist has, perhaps, the greatest income disparity on the planet. China is both rich and poor at the same time.

How much pressure would it take before you would sell out your intellectual integrity? Those who are given responsibilities for developing and promoting sound public policy are subject to never-ending pressure by those in the political class to serve them rather than the public. An extraordinarily well researched and provocative paper has just been released, tracing how the Organization for Economic Cooperation and Development (OECD), a major international organization, descended from promoting trade- and job-creation policies among the nations of the world to one that is supporting job-destroying tax cartels for the benefit of the high-tax countries. What we are seeing is the growth of international, non-elected bureaucracies that hack away at our liberties and economic freedoms, destroying jobs and opportunity, all in the name of redistributionist and "tax-fairness" schemes. But international organizations aren't the only ones that are destroying jobs and economic opportunity in the name of tax fairness. The U.S. Treasury and Internal Revenue Service are considering regulations that could cost Americans millions of jobs.

If only we had followed his recommendations, the United States and the rest of the world would not be in the present mess. On Oct. 26, the world lost one of its wisest, most competent and principled economists, William Niskanen. Bill did his undergraduate work at Harvard and earned a doctorate from the University of Chicago, where he studied under Milton Friedman. He then taught at a couple of leading universities, was a high-level official at the Office of Management and Budget and the Defense Department, served as chief economist of the Ford Motor Co., was a member and, ultimately, head of President Reagan's Council of Economic Advisers and finally, served for more than two decades as the chairman of the Cato Institute. For four decades, Bill Niskanen worked for a tax-and-spending-limitation amendment to the Constitution. In January 1995, in only 125 words, he presented his proposed constitutional amendment to the House Budget Committee, "consistent with the crisp and majestic language of most of the Constitution." Here is his amendment. After reading it, ask yourself how much better off the nation would be today if the body politic had passed what he proposed:

Should the Federal Reserve be abolished as Rep. Ron Paul and others have demanded? The Republican presidential candidates have agreed that they would like to replace Ben S. Bernanke as chairman of the Fed, and many have been equally critical of former Fed Chairman Alan Greenspan. The view that both Mr. Bernanke and Mr. Greenspan have done poor jobs is also shared by many economists and financial writers. But, if not Mr. Bernanke, who? And if not the Fed, what? It turns out however that the basic problem is not a central bank like the Fed, or who in particular runs it.  The basic problem is that governments have insisted upon having a monopoly in money, an idea that has been supported by most economists. The Austrian school economists, most notably the late Nobel Laureate F.A. Hayek, were skeptics of this view.

The real villains in our economic crisis are those in the political class who pandered to the voter by promising more in benefits to be paid for by others.  As more and more people lose their jobs, the demand for government payments grows, making the situation worse and worse. The U.S. government is spending roughly 40 percent more than it is taking in. The simple fact is that the amount of explicit and implicit debt that the United States and other governments have incurred cannot and will not be paid back in full. The political class will try to cure the debt mess with inflation, price controls, tax increases and confiscation, but it will only make things worse. As more and more jobs and homes are destroyed by the debt crisis, the ranks of the revolutionaries will grow until, finally, the new "peasants" realize that the rich are gone and it is the political class who is responsible for the mess. As Mr. Obama and many liberal Democrats embrace the Wall Street protesters, I wonder if they have not only forgotten (or ever knew) good economics, but also the lessons of history. Maximilien Robespierre, a great orator, most certainly did not intend for himself to be guillotined as he and his colleagues unleashed the Reign of Terror during the French Revolution.

Imagine what life would be like if you did not have a bank account and a credit or debit card. It would be much harder to pay your bills, take trips on airlines (which normally require a credit or debit card), and receive payments, just to start. The shocking thing is that more than one-quarter of all American households are unbanked or underbanked and that this number is rising, not falling, largely because of ill-thought-out financial regulation and policies. The term "unbanked" refers to people who have neither checking nor savings accounts. "Underbanked" refers to people who have either a checking or savings account but rely on alternative services such as non-bank money orders and check cashing, payday loans, pawn shops, refund anticipation loans, etc., at least once a year. These alternative sources usually are much more costly than banking services. Banking services to lower-income people have become increasingly expensive directly because of unthinking government regulators.

Istanbul, Turkey. How free is Turkey? Turkey is almost entirely Muslim but lacks most of the repressive characteristics of many of the Arab Muslim countries. It has a largely free market with a high rate of economic growth. But it ranks in the middle among other countries in terms of economic freedom and per capita income. It also has less religious freedom and freedom of speech than is common in most of Europe and the United States and, thus, less liberty. The Mont Pelerin Society, most of whose members are economists and other scholars who were inspired by the great economist and philosopher F.A. Hayek, is holding a meeting here in Istanbul to discuss the nation, the state and liberty. The discussants are drawn from many countries and cultures, resulting in a very stimulating debate, some of which is summarized here, along with my own observations and thoughts.

Many on the political left are quick to recognize that tax rates affect behavior when applied to behaviors they do not like, such as smoking. They want to have high taxes on certain foods, such as candy, drinks containing sugar, and transfats, to discourage their use. But when it comes to labor and capital, those on the left often argue that those taxes have little effect on the willingness of people to work or invest in productive enterprises, despite both the empirical evidence and good economic theory. President Obama, you assert that it is fair for the rich to pay more, but you never define ‘fairness' or how you derived this undefined concept. Why? I have asked the White House to provide the answer but have received no response. We know from previous experience and from good dynamic economic studies that higher capital gains taxes will result in fewer new jobs and even less tax revenue. How is that fair, Mr. President?

President Obama's speech this past week (9/08)should have been labeled, "Believe what I say, not what I do." All too much of the speech was devoid of reality. At one point he said, "And I agree there are some rules and regulations that put an unnecessary burden on businesses at a time when they can least afford it. That's why I ordered a review of all government regulations. So far, we've identified over 500 reforms, which will save billions of dollars over the next few years." The reality is far different. There are thousands of new regulations that have either been implemented or are under consideration that have not been subject to meaningful or rigorous cost-benefit analyses.   The reality is that millions of Americans are without jobs solely because of the president's regulatory incompetence or worse.

Did you know that in Denmark, the poorest 30% pay 14.1% of all taxes and the richest pay 48.7%  -- while in the United States, the poorest 30% pay just 6.1 % of all taxes and the richest 30% pay a whopping 65.3%? The surprising thing is not that the richest pay most of the taxes but that the U.S. has nearly the most progressive tax system in the world, while the Scandinavian countries have about the least progressive tax systems, contrary to commonly held belief. The above facts, along with hundreds of other useful tidbits, are found in a compelling new book, Government Versus Markets: The Changing Economic Role of the State (Cambridge University Press, 2011), by one of the world's most highly regarded economists, Vito Tanzi.   It, and one other book, should be required reading for Washington dummies.

It is widely recognized that excessive regulation is unnecessarily killing jobs. The question has been what to do about it. The president is telling us he is trying to do everything possible to create jobs. Members of his administration have acknowledged that regulations that do not meet a cost-benefit test cost jobs - as everyone with a basic understanding of economics realizes. Yet the cost-benefit studies that are done by these regulatory agencies are little more than jokes, with grossly incomplete and incompetent analyses.  Here's a simple way they can be done for real.  How about it, Mr. President?

Can an amendment to the U.S. Constitution fix the deficit problem? Polls show most Americans think we need a balanced-budget amendment. Yet serious scholars of the issue understand that the deficit is merely a symptom of the problem, namely, that people want more benefits from government than they wish to pay for. Various forms of balanced-budget and tax-and-spending-limitation amendments have been proposed. Almost everyone realizes that an amendment must be flexible enough to deal with national emergencies, such as a major war. But if the amendment is too flexible, politicians will quickly find ways around whatever limitations on spending, taxing and deficits are imposed. And the more tightly drawn any proposed amendment is, the more difficult it will be to pass it because an effective amendment will limit the powers of the very people who are required to vote for it. As we struggle to try to devise a constitutional fix to the structural problem of destructive debt, spending, regulation and taxation, it would be useful to consider the following.  Call them Rahn's Three Requirements for A Constitutional Fix:

If you were canoeing with a friend and you believed, based upon reading the maps, that you were within five minutes of going over a massive and perhaps lethal waterfall, while your math- and geography-challenged friend believed that you had another 15 minutes before going over the falls, would you compromise by agreeing to go another 10 minutes before returning to shore? It is delusional to agree to compromise in such a situation. Sometimes it makes sense to compromise -- other times it can be fatal. President Obama claims that the Republicans are being irresponsible in not wanting to close "tax loopholes" for private jet owners and oil companies. As long as the government continues to grow faster than the economy -- as it has been doing -- there is no tax increase that can solve the problem. It is delusional to think that the kind of tax increases the president has talked about would do anything serious to solve the debt situation, and would not make the unemployment problem worse.