Lawson for Congress

We had a standing-room crowd at the I.O.U.S.A. premiere in Raleigh, North Carolina this evening. Two auditoriums were sold out — both the one sponsored by our campaign, as well as the regular showing. The movie provided an excellent overview of the “fiscal cancer” that David Walker, former head of the Government Accountability Office (GAO), has been courageously discussing for the past several years. The discussion about addressing these issues, however, is just beginning — and will be much more controversial.

If you missed the movie, there are some key excerpts available on YouTube, such as David Walker’s descriptions of our four deficits:

As an example of leadership deficit, consider how Congress has been abusing the trust of our senior citizens by raiding the Social Security trust fund every year:

So how big is our “fiscal hole”? David Walker explains:

After the movie, we watched a live Town Hall discussion from Omaha, Nebraska, moderated by CNBC’s Becky Quick and featuring panelists Warren Buffett, CEO of Berkshire Hathaway; William Niskanen, chairman of the Cato Institute; Bill Novelli, CEO of AARP; Pete Peterson, senior chairman of The Blackstone Group and chairman of the Peter G. Peterson Foundation; and Dave Walker, president & CEO of the Peter G. Peterson Foundation and former U.S. Comptroller General.

The best part about the event is that we had a solidly bipartisan crowd. As such, there was room for everyone to be offended: For example, some Republicans were offended that the Clinton years were painted with such a glowing brush, as spending restraint coupled with a growing economy caused the federal debt to decrease for a change (unless you count the fact that Congress spent the Social Security surplus, of course). Some Democrats were offended by the movie’s downplaying the effects of allowing the Bush tax cuts to expire — such a step will only deal with 10% of our fiscal hole.

There is, however, bipartisan agreement on two critical points:

• We need change in Congress. The biggest applause in our theater during the Town Hall discussion was after Pete Peterson’s assertion that our founders never intended a government run by career politicians. (David Price, take note. After 22 years in Washington and accumulating a healthy Congressional pension, you are a career politician.) Bill Novelli, CEO of AARP, also received resounding applause for his comment that our two party system is “toxic”, and partisan bickering is one of the biggest impediments to meaningful dialog.
• We cannot keep doing what we are doing. Current trends for public debt, private debt, foreign trade balances, and Medicare/Social Security obligations are unsustainable.

The second point was driven home by the movie, and clearly emphasized by David Walker during the Town Hall discussion. In fact, the oddest moment of the entire evening was when Warren Buffett began his comments by complimenting the movie as well-done, and then stating he was going to provide a more optimistic “Pollyanna” perspective. He then proceeded to make the claim that our overall situation is not that serious, since our massive future obligations can be paid for through “the pie getting bigger.” In other words, we can “grow our way out” of the problem.

At that point, the theater’s cognitive dissonance was so thick you could cut it with a knife, and it was clear that a showdown was just around the corner. David Walker did not disappoint, and adroitly yet diplomatically smacked down Warren Buffett’s erroneous assertions. After noting that he has tremendous respect for Mr. Buffett, Mr. Walker reminded everyone that the projections of looming bankruptcy discussed in the film already take GDP growth into account. Assuming traditional growth rates, we cannot grow our way out of this problem. Of course, if growth does not meet projected expectations, things could be worse, and sooner.

Importantly, the Town Hall discussion did attempt to spark some debate about how to fix these problems. Where debate did arise, however, its outcome was entirely too predictable. For example, William Niskanen, chair of the Cato Institute, proposes privatizing a portion of Social Security so that individuals can control their own retirement savings and seek higher returns than our insolvent Social Security system will provide. At the same time, he wisely counsels us to stop government bailouts — the government cannot, and should not, prevent businesses or individuals from making bad investments and losing money.

The counterpoint was provided by Bill Novelli of the AARP. He’s against privatizing Social Security — how do we prevent newly empowered savers from putting their nest egg into Freddie Mac, Fannie Mae, Bear Stearns, and Lehman Brothers stock? While Mr. Niskanen is wisely advising us to stop relying on the government to “bail us out,” how can the average American truly “save” when deposit rates don’t keep up with inflation, and beating inflation requires paying the financial services industry for the privilege of putting our savings at risk in volatile markets that have turned into casinos for the highly-leveraged and well-connected?

So how can we cut the Gordian knot? I can envision three ways to proceed:

First, we could try to address the problems within the confines of our existing money system and expected ongoing budget deficits. As David Walker pointed out, the government has no money. It can take money from you in taxes, only to provide benefits to you somewhere else. It can borrow money, but that condemns us to pay the money back, plus interest. It can print money through the Federal Reserve, but simply printing money to meet obligations didn’t work for the Weimar Republic, and isn’t working for Zimbabwe. Within our current framework, we need to cut spending, cut entitlement benefits, and raise taxes to more punitive levels.

Alternately, we could stop and immediately seek debt counseling: end deficit spending, enforce a balanced budget, and fund our entitlement programs by refinancing our existing federal debt over a longer period of time while being more intelligent about what promises we honor, to whom, and when. You can think of this as a self-imposed and somewhat-negotiated “bankruptcy plan” where we tell our creditors that the rules are changing a bit.

A well-documented plan of this type has been proposed by Texas CPA Davis Jackson. The summary videos below are worth watching:

There is a third path to consider, however, in addition to the above. Given the severity of our situation, it is worth asking some questions about our money system itself, its history, and who benefits from preserving the status quo. I was impressed that the movie provided some education as to the nature of our money system, and the role of the Federal Reserve’s monopoly in “managing” the money supply. Most importantly, the selected clip of John Stewart’s interview with Alan Greenspan provided a rare (if deeply embedded) moment of clarity:

Watch the segment from 2:25 to 4:33. John Stewart asks the key question — if we say we live in a “free market economy”, why do we need a Federal Reserve to set interest rates? Greenspan waxes poetically about the gold standard for a while, and then answers: “To the extent that there is a central bank governing the amount of money in the system, that is not a free market.”

So, then, I ask a rhetorical question that’s often at the heart of the “liberal” versus “conservative”, or “left” versus “right” debate. If our money, which is the foundation of almost every economic transaction, does not exist in a “free market” but is instead managed by a monopoly acting in its own best interest, can we claim that any part of our economy is actually free?

That question, briefly glimpsed during the movie, has been asked before. In fact, a hundred years ago the “money question” was a topic of active discussion. The following quotation is from the book High Cost of Living by Thomas Cushing Daniel, published in 1912:

I urge all voters to apply this crucial test to their representatives before supporting them.

Make them commit squarely and unequivocally to these questions. Do you believe Congress should exercise its sovereign power as provided in the Constitution of the United States to create money and regulate the value thereof and control the circulating medium in the interest of the whole people? Or do you believe this sovereign power should be transferred to Banks of Issue?

Their answers will prove conclusively whether they are with the people or against them.

Or do you believe that Banking Corporations should issue a credit substitute and through it control the money and circulating medium of exchange of the people of the United States in their own interest?

Watch your presidential candidate carefully and see that he commits himself clearly on this vital question. It will be a true test of his honesty and fitness for office. Admitted ignorance on the monetary issue should not excuse him. The subject is as old as our government, and if he does not know enough about it now to answer these test questions, he is not qualified to fill the position he aspires to, and should not ask your votes.

Asking basic questions about our money system opens up additional possibilities to advance prosperity and liberty. Most importantly, it gets us moving in a direction towards following the Constitution, and having a government that honors its commitment to serve the people as opposed to special interests.

Solving this dilemma will not be easy, but it is possible. Pete Peterson noted that despite best intentions and claims of “bipartisanship” and “compromise”, someone will be hurt as we work to address these imbalances. To advance a just and sustainable future, we need principled leaders in Washington who will advance a Constitutional government that levels the playing field, and repairs broken systems that punish average Americans for the benefit of a few.

What are your thoughts on the challenges, and potential solutions?

There has been much discussion about the use of the rebate package passed by Congress and signed by the President to stimulate the economy. B.J. recently covered the topic in his post, “Shiller vs. IMF,” laying out the arguments of those who favor using it and those who oppose it. As with most government initiatives, success is best measured by its unintended consequences:

President Bush Boosts Porn Industry With Economic Stimulus Plan, According to AIMRCo

NEW YORK, July 2 /PRNewswire-USNewswire/ — An unforeseen and surprising beneficiary of the Economic Stimulus Plan, a plan that George Bush contends will “boost our economy and encourage job creation,” has surfaced this week. An independent market-research firm, AIMRCo (Adult Internet Market Research Company), has discovered that many websites focused on adult or erotic material have experienced an upswing in sales in the recent weeks since checks have appeared in millions of Americans’ mailboxes across the country.

According to Kirk Mishkin, Head Research Consultant for AIMRCo, “Many of the sites we surveyed have reported 20-30% growth in membership rates since mid-May when the checks were first sent out, and typically the summer is a slow period for this market.

Jillian Fox, spokeswoman for LSGmodels.com, one of the sites reporting figures to AIMRCo, added, “In a June 15, 2008 survey to our members, thirty two percent of respondents referenced the recent stimulus package as part of their decision to either become a new member, or renew an existing membership.”

The economic stimulus plan, which includes a check for up to $600 for individuals and $1200 for married couples (among other benefits), is the product of an agreement between House leaders and the Bush Administration, focused on reviving a struggling economy in the wake of flagging economy.

Fox also added, “Getting more people to buy porn was probably the last thing Bush had on his mind when he came up with his ’stimulus package,’ but we’ll take it.”

One might reasonably question if the money we borrowed to pay for these “rebates” are going to spur capital investment and wealth creation. Or do these data suggest that we’re simply seeing “Congressmen Gone Wild”?

It appears our incumbent Representative and others in Congress who supported this legislation have succeeded in seeking a short-run economic boost to satisfy their constituents and facilitate their re-election while ignoring — and in fact exacerbating — very serious fundamental and long-run challenges.

Long-run economic growth results from a number of fundamental factors, which include the accumulation of physical capital (which is a function of personal saving in a healthy economy), human capital (which is a function of education), technological advancement, protection of property rights, and a strong legal system. The accumulation of high debt by government necessitates that resources in the future must be redistributed from investment in these productive forces to paying the bills we’re stacking up now, which crushes long-run economic growth.

Furthermore, the building of a large government debt has a number of negative by-products in an international economy. Absorbing private domestic saving necessitates reliance on foreign saving for domestic growth, as well as possibly on foreign purchasing of government bonds to finance deficit spending. When foreign investment decreases and/or leaves the country, which may occur for a number of reasons (market insecurity, a decline of the value of the dollar due to inflationary monetary policy or payment of foreign debt… either of these sound familiar?), then with it goes the source of growth. At this point, interest rates increase with high government borrowing, and the central bank is in a tough spot. It can either inflate to lower interest rates, which will hurt consumers, increase costs for businesses, and decrease returns of investors; or it can do nothing and allow high interest rates to lead to a recession.  In any of these situations, economic growth is either stagnant or significanlty negative in the end. Thus, “stimulus” spending ultimately gives no real economic boost at all.

By creating more debt to “stimulate” the economy, Congress is attempting to rebalance a house of cards and delay its eventual collapse, even at the cost of potentially worsening it. We are delaying action on making hard choices that must be made today to shore up the country’s financial future and are making the these choices much harder for ourselves down the road. A $9.4 trillion national debt — with more hundred-billion deficits and skyrocketing interest payments expected down the road — and $53 trillion in present value of unfunded liabilities are absolutely nothing to ignore. These are phenomena that will wreck the economy much more powerfully than any near-term recession that may come, and they will not go away on their own nor by creating a significant amount of new debt.

Finally, we should note that the “stimulus packages” being in the form of rebates implies somehow a lessened burden of taxation for now to achieve a change in some economic variable. Real tax cuts are cuts in the burden of government on the taxpayers, and as such, they are long-term commitments that allow us and our communities to keep more of their resources.

Cutting taxes in the short-term and continuing deficit spending in no way represent a tax cut, as the government has one of two options to finance remaining spending. It can borrow and accumulate debt, which necessitates either a future tax increase to pay off the debt or a stalling of long-term growth and decline in opportunities available to the future. Or, the government can print money to finance deficits, which causes price inflation that squeezes consumers. As Milton Friedman would say (paraphrasing), “A tax cut is not a tax cut at all without a spending cut.”

Paige Michael-Shetley is the Volunteer Coordinator and Youth Coodinator for Lawson for Congress. He is a Senior at the University of North Carolina at Chapel Hill and is majoring in Economics and Math.

I have just read a policy brief submitted by the Congressional Budget Office (CBO) to Rep. Paul Ryan, the Ranking Member of the House Budget Committee. The brief, written by CBO Director Peter Orszag and prepared by his staff, discusses projects of our current fiscal path, its impact on our economy if left unresolved, the impact of slowing the growth of the deficit, and the impact of financing the deficit completely with tax increases. Here are some significant points in this very sobering brief.

On the rise of the amount of spending and the federal debt (not the total national debt) as a percentage of GDP:

In December 2007, the Congressional Budget Office (CBO) published The Long- Term Budget Outlook, which presented a long-term projection of the budget under an alternative fiscal scenario,” representing one interpretation of what continuing today’s underlying fiscal policy would mean. CBO projected that, under that scenario, spending on Medicare, Medicaid, and Social Security would rise rapidly, and federal outlays excluding interest (primary spending) would climb from about 18 percent of GDP in 2007 to 28 percent in 2050 and to 35 percent in 2082 (see Table 1).2 Because the scenario also assumes that revenues as a share of GDP would not increase much over the 75-year period, CBO projected that the federal budget deficit and federal debt held by the public would rise sharply. By CBO’s reckoning, federal debt under that scenario would climb from about 37 percent of GDP in fiscal year 2007 to more than 290 percent in 2050—a large figure by any standard (see Figure 1). Since the founding of the United States, federal debt surpassed 100 percent of GDP only for a brief period during and just after World War II (see Figure 2 on page 4).

On the economic impact of staying this course:

According to CBO’s simulations using that model, the rising federal budget deficits under this scenario would cause real gross national product (GNP) per person to stop growing and then to begin to contract in the late 2040s (see Figure 3).4 By 2060, real GNP per person would be about 17 percent below its peak in the late 2040s and would be declining at a rapid pace. Beyond 2060, projected deficits would become so large and unsustainable that the model cannot calculate their effects.

Despite the substantial economic costs generated by deficits under this model, such estimates greatly understate the potential loss to economic growth under this scenario. In particular, they are based on a model in which people do not anticipate future changes in debt; as a result, the model predicts a gradual change in the economy as federal debt rises. In reality, the economic effects of rapidly growing debt would probably be much more disorderly and could occur well before the time frame indicated in the scenario. If foreign investors began to expect a crisis, they might significantly reduce their purchases of U.S. securities, causing the exchange value of the dollar to plunge, interest rates to climb, consumer prices to shoot up, and the economy to contract sharply. Amid the anticipation of declining profits and rising inflation and interest rates, stock prices might fall and consumers might sharply reduce their purchases. In such circumstances, the economic problems in this country would probably spill over to the rest of the world and seriously weaken the economies of the United States’ trading partners.

On slowing the growth of the deficit:

Under the target path, federal outlays excluding interest (that is, primary spending) would rise from 18 percent of GDP in 2007 to 20 percent in 2030 and then decline to 19 percent in 2050 and 13 percent in 2082. For almost all years, revenues would remain at 18.5 percent of GDP. Under those assumptions, the budget deficit would gradually increase to about 6 percent of GDP in 2040 but then would decline to almost zero in 2075. By 2082, the target path would generate a budget surplus of about 2 percent of GDP. The primary budget (that is, the budget excluding interest on the public debt) would reach balance around 2050. With possible economic feedbacks not included, federal debt held by the public would increase to a peak of 120 percent of GDP around 2060 and then would decline to 64 percent in 2082. Thus, compared with the alternative fiscal scenario, the target path would substantially reduce future budget deficits and federal debt.

The target path provided by the Committee staff would be economically sustainable. Under that target, real GNP per person (in 2007 dollars) would continue to grow over the entire projection period, rising from about $45,000 in 2007 to about $165,000 in 2082 (see Figure 4). The economy would be considerably stronger under the target path than it would be under the alternative fiscal scenario. By 2060 (the last year for which it is possible to simulate the effects of the alternative fiscal policy using the textbook growth model), real GNP per person under the target path would be about 85 percent higher than that under the alternative fiscal scenario.

On the impact of raising taxes to finance all projected spending:

… tax rates would have to be raised by substantial amounts to finance the level of spending projected for 2082 under CBO’s alternative fiscal scenario. With no economic feedbacks taken into account and under an assumption that raising marginal tax rates was the only mechanism used to balance the budget, tax rates would have to more than double. The tax rate for the lowest tax bracket would have to be increased from 10 percent to 25 percent; the tax rate on incomes in the current 25 percent bracket would have to be increased to 63 percent; and the tax rate of the highest bracket would have to be raised from 35 percent to 88 percent. The top corporate income tax rate would also increase from 35 percent to 88 percent. Such tax rates would significantly reduce economic activity and would create serious problems with tax avoidance and tax evasion. Revenues would probably fall significantly short of the amount needed to finance the growth of spending; therefore, tax rates at such levels would probably not be economically feasible.

If federal outlays excluding interest did not rise to their 2082 share of GDP (35 percent), but instead were stabilized at the share of GDP projected for 2050 (28 percent), simulations can provide some guidance about the possible economic effects of financing additional spending with a proportional across-the-board increase in all personal and corporate tax rates.6 (The increase would apply to the regular rate schedule, the rates under the alternative minimum tax, and the preferential tax rates on dividends and capital gains.) To carry out the analysis, CBO used two different models of economic behavior—the textbook growth model and what is termed a stochastic overlapping generations model—to reflect the range of opinion among economists about how people respond to taxes. Both models take into account the dynamic effects of
higher tax rates on the economy and how those changes in the economy would in turn affect revenues. However, both models are simplified representations of the economy and therefore provide only a rough guide to the potential effects of the tax scenarios on the economy.

In the textbook growth model, economic output depends on the number of hours of work supplied by workers, the size of the capital stock, and total factor productivity (in simple terms, the state of technological know-how). The labor supply response is projected by CBO’s tax microsimulation model, which, for a sample of taxpayers, provides a detailed representation of individual income taxes. The textbook growth model assumes that households do not explicitly consider expected future policies when they make plans—that is, the model incorporates no forward-looking behavior. Moreover, the model does not account for the way that changes in marginal tax rates on capital income might influence investment, though it does account for the effects of budget deficits on investment.

In the stochastic overlapping generations model, households are forward-looking and their members decide how much to work and save in order to make themselves as well off as possible over their lifetime.9 They face uncertainty about future wages and the length of their life and may be subject to borrowing constraints.

Before accounting for economic feedbacks through the models, CBO estimates that individual income tax rates would have to be raised by about 90 percent to finance the projected increase in spending between 2007 and 2050. The lowest tax rate on individual income would have to be increased from 10 percent to 19 percent; the tax rate on incomes in the current 25 percent bracket would have to be increased to 47 percent; and the highest statutory rate would have to be raised from 35 percent to 66 percent. The top corporate income tax rate would also have to increase from 35 percent to 66 percent. Those estimates of tax rate changes are meant to be illustrative; official estimates of tax rate and revenue changes for any specific proposal would be prepared by the Joint Committee on Taxation.

Under this scenario, real GNP per person in 2050 could be between 5 percent and 20 percent less than what it would be if revenues and spending in 2050 were the same shares of GDP as in 2007. Those economic effects could be substantially reduced if the tax policies used to finance the additional spending did not distort economic behavior as much as increases in income tax rates would. In particular, tax policies that relied less on proportional increases in marginal income tax rates could have substantially smaller effects on the economy. For example, raising revenues by broadening the income tax base and eliminating various tax preferences (such as the deductions for mortgage interest, state and local taxes, and health insurance) would have a smaller effect on real GNP than would a proportional increase in tax rates.

This is a very sobering account of our nation’s financial status prepared by one of the most well-respected public finance economists around in Orszag, who could hardly be considered a free market libertarian/conservative alarmist given his previous history with the Brookings Institute, a left-leaning think tank. While Dr. Orszag implores that we must slow the growth of deficits, which is surely true, he also states that the damage due to deficits is likely underestimated because the model used does not account for forward-looking and panicky behavior of agents that is unquantifiable and would likely lead to more disastrous consequences. As Orszag’s report demonstrates, we cannot simply tax our way out of this problem, as the tax increases necessary to fund these increases in spending will certainly cause disastrous economic effects and likely wouldn’t even generate enough revenue to fund th spending, given the negative revenue impacts of the economic crash that apparently are not dealt with by the model.

For an additional sobering account of our nation’s long-term finances, I invite all of you to view these two videos by David Walker, the just recently retired Comptroller of the Currency.

As an economics and math major at UNC, and someone with an interest in, well, working and making money in the future, these assessments by respected financial analysts scare me. The bottom line is that if we want to ensure that this absolutely crushing financial burden of our government does not come to pass, we must do the work now to cut spending, eliminate the deficits quickly, and greatly restrain the long-term growth of entitlement programs. We cannot tax our way out, and we cannot grow our way out.

To do this work, we need to have a responsible Representative of the 4th District in Washington who demonstrates a thorough concern for and understanding of this problem and who will is willing to exercise courage in telling the truth about an issue when it may not be politically expedient to do so. Voting for a Concurrent Budget Resolution that plans to add $2 trillion in debt over the next five fiscal years, and then calls the Resolution “fiscally responsible,” does not demonstrate the type of responsible representation that is needed to tackle this problem. Clearly, based on this alone, David Price cannot be trusted in representing our district to address this issue.

It is time for a true Revolution. It is time for a change in Washington and in the seat held by the people of the 4th District of North Carolina. To address this issue, we need a Representative who has the experience of starting, owning, and operating a business from scratch and growing it into a financial success that allowed he and his family to emerge out of their own hefty burden of debt. We need a doctor who has made a career in the medical sector who understands why costs in health care, a major contributor to the projected financial burden of the federal government, are increasing so sharply and how we can abate them. If we as a district want to tackle this grand challenge head on and preserve a bright economic future for our country and for future generations, we must elect Dr. William “B.J.” Lawson to be the next Representative of the 4th U.S. House District of North Carolina.

For more insight into our nation’s fiscal troubles, I would like to recommend two books to all of you. The first is Running on Empty by Pete Peterson, a former U.S. Secretary of Commerce and co-founder of the Concord Coalition, an organization advocating fiscal responsibility and spending restraint in Washington. This is the book I read that really opened my eyes to how bad our fiscal situation, explaining well we got into the mess, the consequences of maintaining the course, and why both Democrats and Republicans are to blame.

The second book is The Coming Generational Storm by Lawrence Kotlikoff, a very well-renowned and respected public finance economist at Boston University. This book is newer and a bit more updated, and the tone is more academic, but it is equally as sobering and powerful.

It’s time for a little exercise. I’m going to cite a recent article from a couple of months ago, and I’m going to have you all guess the name of the author. Let’s see just how good you guys are. Ready? Go!

Nearly 16 years ago in these very pages, I wrote that “‘one-size-fits all’ rules for business ignore the reality of the market place.” Today I’m watching some broad rules evolve on individual decisions that are even worse.

Under the guise of protecting us from ourselves, the right and the left are becoming ever more aggressive in regulating behavior. Much paternalist scrutiny has recently centered on personal economics, including calls to regulate subprime mortgages.

With liberalized credit rules, many people with limited income could access a mortgage and choose, for the first time, if they wanted to own a home. And most of those who chose to do so are hanging on to their mortgages. According to the national delinquency survey released yesterday, the vast majority of subprime, adjustable-rate mortgages are in good condition, their holders neither delinquent nor in default.

There’s no question, however, that delinquency and default rates are far too high. But some of this is due to bad investment decisions by real-estate speculators. These losses are not unlike the risks taken every day in the stock market.

The real question for policy makers is how to protect those worthy borrowers who are struggling, without throwing out a system that works fine for the majority of its users (all of whom have freely chosen to use it). If the tub is more baby than bathwater, we should think twice about dumping everything out.

Health-care paternalism creates another problem that’s rarely mentioned: Many people can’t afford the gold-plated health plans that are the only options available in their states.

Buying health insurance on the Internet and across state lines, where less expensive plans may be available, is prohibited by many state insurance commissions. Despite being able to buy car or home insurance with a mouse click, some state governments require their approved plans for purchase or none at all. It’s as if states dictated that you had to buy a Mercedes or no car at all.

Economic paternalism takes its newest form with the campaign against short-term small loans, commonly known as “payday lending.”

With payday lending, people in need of immediate money can borrow against their future paychecks, allowing emergency purchases or bill payments they could not otherwise make. The service comes at the cost of a significant fee — usually $15 for every $100 borrowed for two weeks. But the cost seems reasonable when all your other options, such as bounced checks or skipped credit-card payments, are obviously more expensive and play havoc with your credit rating.

Anguished at the fact that payday lending isn’t perfect, some people would outlaw the service entirely, or cap fees at such low levels that no lender will provide the service. Anyone who’s familiar with the law of unintended consequences should be able to guess what happens next.

Researchers from the Federal Reserve Bank of New York went one step further and laid the data out: Payday lending bans simply push low-income borrowers into less pleasant options, including increased rates of bankruptcy. Net result: After a lending ban, the consumer has the same amount of debt but fewer ways to manage it.

Since leaving office I’ve written about public policy from a new perspective: outside looking in. I’ve come to realize that protecting freedom of choice in our everyday lives is essential to maintaining a healthy civil society.

Why do we think we are helping adult consumers by taking away their options? We don’t take away cars because we don’t like some people speeding. We allow state lotteries despite knowing some people are betting their grocery money. Everyone is exposed to economic risks of some kind. But we don’t operate mindlessly in trying to smooth out every theoretical wrinkle in life.

The nature of freedom of choice is that some people will misuse their responsibility and hurt themselves in the process. We should do our best to educate them, but without diminishing choice for everyone else.

So, who wrote this article? I’ll give you guys three guesses.

John Stossel, perhaps the most visible libertarian media personality in America? Wrong.

How about Ron Paul? Good thought, but not this time.

How about (insert third guess)? (Most likely) Wrong.

This article, titled “Freedom Means Responsibility” and appearing in the Wall Street Journal on March 7, was written by none other than George McGovern, former Democratic Senator from South Dakota and 1972 Democratic Presidential Nominee. Obviously, this does not quite sound like the same guy who, in his ‘72 acceptance speech, called for Nationalized Health Insurance, enforcing laws against drugs, and guaranteed income for everyone. It certainly appears as though Senator McGovern has had a change of mind on many issues, if not a sea change in philosophy. This is quite welcome from my vantage point, and I of course completely agree with everything that he states in his article.

Senator McGovern’s column, more broadly speaking, demonstrates that the concept of individual liberty isn’t just a libertarian idea, as I’m sure that Senator McGovern would not define himself as a libertarian (he did support Hillary Clinton for President, after all). Freedom is a desire that we all have as individuals and, as such, is the concept that unites us all across the boundaries of political affiliation, religion, race, and sexual orientation. It’s the principle that united us in forming this country and repelling the tyranny of King George I. It is the ideal that united us when we repelled and defeated fascism in World War II. It is the desire that unites, through our history, the slaves and abolitionists who toiled to end this oppression, the women who struggled for their right to vote, and the courageous protester who refused to yield her seat on the Montgomery City bus. It is when the discussion turns to taking away liberty that we become divided, as the coercion of that fundamental human desire necessitates that one exercises it (through freedom of action in government) while another loses the ability to exercise it. We are never as divided as we are when we tax income and argue over how the revenues should be allocated; take away people’s freedom of speech and association with whom they want, or to do with their bodies as they wish; start wars without aggressive provocation; or to directly subjugate people.

But as Senator McGovern states, freedom means that we all as individuals are responsible for the consequences of our own choices. We are not responsible for making choices for others in how to spend their money and live their lives or for saving people from themselves, and even if try, transactions costs are so high that we would never be able to enforce this code of conduct on the entire society. Even within small private associations, it is nearly impossible to control the actions of others, be it a friendship, a marriage, a business partnership, or a team. We have all had experiences in which our friends, family, and loved ones have made decisions which have hurt them, and it is a natural human reaction to feel pain for them. But people are people, and people have free will; they exercise it to their benefit and to their detriment. We must understand this, accept the consequences of our own actions and others’ actions, and learn from them if we are to progress as individuals and as a society.

Furthermore, given the imperfection of human nature and the fact that we will all make mistakes during our lives, we are hardly qualified to determine through the central planning mechanism of government what are the “good” choices we should impose on others and the “bad” choices we should prevent others from making. This does not mean, as Senator McGovern suggests, that we do not try to educate people and give them advice about their choices. Certainly we should do this, and a education system, both private and public as well as academic and non-academic, is a vital precondition to successful lives , economic growth, and the functioning and maintenance of a free society. We gain experience from life and expertise in whatever field of industry we pursue, and this is valuable information we should pass on to others and to future generations so that they may have models of success and failure on which they can base their actions. But we cannot be so sure about our own thoughts about what decisions are right and what decisions are wrong that we mandate them as law for everyone.

Freedom also means that pursuing our own actions means that we are also responsible for the consequences of our actions that coerce others’ liberty. When firms and individuals pollute, they damage the private property of others through direct physical property damage, decreasing property values, and harming individuals’ health (thus decreasing their productivity and garnishing their incomes). When one party in a contract violates the terms of it, they violate the right of others to enter into and participate in an association with trust and honor. When someone smokes a cigarette, the second-hand smoke from the action often leads to others’ developing lung cancer. In cases such as these, it is our responsibility through the government’s enforcement of property rights and contracts to punish the violation of other peoples’ liberty and establish justice, which can be accomplished through the mechanisms such as statutory financial penalties, property and contract law, and litigation in the court system.

We are at a crossroads in the history of this country. While the government could always have afforded and preserve more liberty for the people throughout our history, there has been a very disturbing and gradual trend over nearly a century toward a society where freedom is not only coerced more and more by government, but it is understood and appreciated less and less by people. With the arrival of the internet and other new mass communications technologies, we now have the ability to disseminate information in a matter of fractions of a second and to communicate and organize with others. If we are fully prepared to understand and cherish the tremendous benefits of liberty as well as accept the responsibilities it entails, then we can join the likes of Ron Paul and George McGovern to reclaim the path toward living the dream of our founding fathers that inspired them to sacrifice so much give us this great country of ours. If we do not act now, this dream may forever be lost.

A poster child for bad legislation is H.R. 2419, the Food and Energy Security Act of 2007 — better known as the Farm Bill.

In a rare feat of bipartisanship, the House and Senate passed the final version last week by a veto-proof majority. Amazingly, details of this legislation are still coming to light. Given that the bill itself is 673 pages long, it’s not surprising that there wasn’t time to read it between horse trading in conference committee and the final votes.

I have four objections the Farm Bill, besides the simple fact that it is an unconstitutional disruption of our nation’s food supply, with negative global implications.

The first concern is the premise behind agricultural subsidies. We’re all familiar with rising grocery bills, and we’re feeling the impact of global commodity prices near all-time highs. The Farm Bill essentially “locks in” these high prices by setting subsidy payments for 2009 based upon today’s record levels:

Since the amount of the subsidy for 2009 is tied to recent record prices, farmers could reap a windfall if prices drop suddenly.

“I don’t think many people on the House side who voted for the farm bill realized there were $16 billion in potential higher costs in there,” said Deputy Secretary of Agriculture Charles F. Conner. “The budget exposure is tremendous.”

A blog item posted Monday by the agricultural magazine Pro Farmer described the new program, known as Average Crop Revenue Election (ACRE), as “lucrative beyond expectations,” and said it is a “no brainer” for farmers to sign up for it.

The Agriculture Department estimates that subsidy payments to corn farmers alone could reach $10 billion a year if prices — which have been $5 to $6 a bushel — were to drop to $3.25 a bushel, a level seen as recently as last year. The $10 billion figure assumes most farmers would participate in the program, a view disputed by key lawmakers.

Think about it — the government has locked in today’s high prices so that we’ll be borrowing and printing money to subsidize farmers even if prices were to decline to year-ago levels. Does that make sense?

But that’s just the impact on our country. What do these farm subsidies do to the rest of the world, and the ability of other nations to feed themselves?

LAST week, both Houses in the United States Congress passed a Farm Bill that continues the present system of high agricultural subsidies, rewarding big farmers that have already gotten much richer because of the recent hike in food prices.

This is a real pity, even a scandal, because the US farm subsidies are the main cause (together with the subsidies in Europe and Japan) of the greatest distortion in world trade.

The subsidies enable high-cost farmers and food companies to sell their products at below the cost of production and unfairly beat off the products of farmers in developing countries that don’t have the same kind of money to subsidise.

Many developing countries around the world have been importing artificially cheapened imported rice, wheat, corn, and chicken from the US and Europe.

Their own small farmers, which are often more efficient than those in the rich countries, have been displaced by these subsidised imports – one reason why agriculture has fallen in many developing countries, making them vulnerable to the present crisis of food shortages and high prices.

While our subsidies might benefit foreign consumers when prices are low, as prices have risen rapidly, developing nations’ lack of domestic agriculture leaves them exceedingly vulnerable to supply disruptions.

My third objection is Department of Homeland Security’s slipping in an unrelated power grab to bring Foot and Mouth Disease research onshore, and taking control of that transition from the Department of Agriculture:

Lawmakers on Wednesday tentatively agreed that national security officials should fully control the expected transfer of research of highly contagious foot-and-mouth disease from an offshore laboratory to the U.S. mainland near livestock.

The Bush administration requested the legal change, which would erode the traditional role of the Agriculture Department in deciding the safest location to research one of the world’s most contagious animal viruses. The virus does not infect humans but could devastate livestock herds.

House and Senate conferees, negotiating a major farm bill, agreed to the administration’s wishes to place the Homeland Security Department in full control of the transfer, according to two Senate sources who demanded anonymity because conferees were not ready to announce their agreements.

I object to moving this research in close proximity to agriculture and large population centers from its current island-based location. Regardless of my opinion, however, it is a controversial issue that deserves to be debated separately. Here’s one more reason to embrace the One Subject at a Time Act.

The final problem with the Farm Bill is the pork:

Individual lawmakers, mostly senators, slipped several dozen “earmarks,” or pet causes, into the $290 billion bill that have at best tentative connections to the tilling of the land. There’s tax breaks for horse owners, water for Nevada desert lakes, aid for the Pacific Coast salmon fishery industry and a crackdown on puppy trafficking.

Rep. Jeff Flake, R-AZ, a leading opponent of earmarks, complained that some had been “airdropped in” at the last minute. “If you dig into them, you might find something untoward. You might not, but the fact is we don’t have time to do that.”

Note Rep. Flake’s frustration about not even being able to read the bill. As a physician, if I sign off on a report or study without reading it, I could easily be sued for malpractice. Congress routinely passes legislation that is not read, nor even readable in the time provided. Congress desperately needs some help in this regard — I support the Read the Bills Act, which would require that Congress actually read legislation before voting.

The Farm Bill is expected to cost $300 billion. Our Rep. David Price voted Yes — perhaps he didn’t read it, or perhaps he erroneously believes we can afford it.

We may not be able to sue Rep. Price for malpractice, but we can certainly express our desire for change in November.

Many of our friends have commented on poor customer service provided by our two local communications monopolies, Time Warner Cable and AT&T (formerly Bell South). Over the past few years, we have increasingly resented the monthly cable and telephone bills, and last month we finally took the initiative to do something about it.

We have long been displeased with cable television, and the fact that we pay $120 per month to have hundreds of garbage-ridden channels pumped into our house so that we can access the six or seven we occasionally watch. We’d heard reports that AT&T was going to be offering individual channel pricing for television service, and had been waiting for the opportunity to switch over the past year.

However, that promised offering from AT&T never materialized, so we had settled for just eliminating our landline telephone, and signing up with Time Warner digital phone and a downgraded cable plan to keep our overall cable bill the same. That would save us about $40 per month, and eliminate one source of poor customer service.

I spent 48 minutes on a telephone call with Time Warner trying to accomplish that switch, and finally was able to get a package worked out that met our financial goals. The customer service representative scheduled us for their first available phone installation, about two weeks later. However, after hanging up the phone, we found that our cable and internet service had been cut off. I then spent another 52 minutes on the phone, transferred through various levels of technical support, only to find out that the first Time Warner representative had canceled our existing service in setting up these changes.

So after two hours of phone menus, hold music, and staring at the ceiling, all I had accomplished was disconnecting our cable and Internet for the next two weeks. There had to be a better way, and Time Warner wasn’t it.

A friend then mentioned a wireless broadband provider named Clearwire. Since quality customer service is so important to us, I wasn’t going to commit to their service blindly over the Internet. Fortunately, we have a friendly wireless store around the corner, Future Wireless. I called them up, and they happily provided a demonstration unit to validate that Clearwire would work in our house.

Briefly, Clearwire uses cellular towers to provide high-speed wireless Internet access. For less than we were paying for our cable modem, we received a simple antenna with five lights that show the signal strength. I picked up the demonstration unit, placed it next to a window, plugged it into a wall outlet and our wireless router, and we were instantly live with high-speed Internet. It couldn’t have been easier.

For us, it’s been a perfect solution. I’ve spoken with a few folks since who did not have good reception with Clearwire, so I highly recommend working with friendly folks such as Jody and Rob at Future Wireless on NC-55 to try before you buy. We then added Internet phone (VOIP) from Packet8, which gives us unlimited local and long distance calling for $200 per year (prepaid).

Honestly, we haven’t missed Time Warner or AT&T at all. Telecommunications, like medicine, is about as far from a free market as you can imagine, and the slowly-eroding monopolies providing local service have little incentive to care about their customers.

The best way consumers can fight back against these monopolies is not to press for more regulation — that just makes the problem worse, as customers ultimately pay the compliance costs for bureaucratic mandates. The best way we can fight back is to advocate for more choices and competition, and to stop empowering businesses that don’t earn your business. Pull the plug — you’ll discover that you can survive, and thrive, without cable television.

One of the themes in my “stump speech” is the rising cost of food. We have three children, but their growing appetites haven’t damaged our food budget nearly as much as rising food costs themselves. Take milk, for example. Regular milk now costs around $4 per gallon. Organic milk is now up to $5.50 per gallon, although we can find it for $5 if we’re careful.

There are many reasons for rising food costs. Here are just a few:

• Increased commodity demand on international markets: With Asia’s rapid growth and advancing standard of living, the price of various “inputs” such as energy, protein for feed, and food itself has risen.
• Our government’s own misguided effort to subsidize corporate agriculture with ethanol subsidies: Paying agribusiness to divert corn into energetically-questionable ethanol production raises the cost of feed and food for everyone, and subsidizes irrational investment in an ethanol industry that makes no economic or environmental sense.
• Debasement of our currency: This factor is the most painful to contemplate — it’s not just food, all commodities have gotten more expensive, and especially over the past five years. It’s not that the commodities are rarer or more “expensive”, our U.S. dollar just buys less stuff since we’ve printed and borrowed so much money in this age of fiscal insanity.
• Highly-regulated and anticompetitive markets: This factor is probably the most damaging to farmers, yet most within our reach to address.

Let’s take the milk example a bit further. A friend forwarded this Connecticut article that notes how dairy farmers are being squeezed out of business: while our retail milk prices are rising, revenue received by dairy farmers is actually declining! Even worse, given how dairy farmers’ costs are rising, more of them are being forced out of business as razor-thin margins are disappearing completely. This article from the University of Florida’s Institute of Food and Agricultural Sciences provides even more quantitative data on the similar dynamics in Florida:

The Dairy Business Analysis Program (DBAP) is a cooperative effort of the Universities of Florida and Georgia, Southeast Milk Inc., and Southeast (Dairy Herd Improvement Association) DHIA. This project annually surveys participating dairy farms about their revenues, expenses, and investments. The average of participating DBAP dairies (2005 data) showed a slightly positive net farm income of $0.09 per cwt., 4% return to invested capital and 1% return to equity. Revenues were somewhat ($0.50 per cwt.) lower than 2004, while expenses continued an upward trend inherent since 1999 and $1.00 per cwt. higher than 2004. The cost of inputs continues to squeeze producer margins. Labor costs in 2005 were an all-time high at $3.53 per cwt., 17.4% of total expenses. Feed costs were $7.50 per cwt, in 2005, 37% of total expenses and are expected to move higher in 2006 and 2007. These Dairies that participated in DBAP averaged 1,091 cows and sold, on average, 18,474 pounds of milk per cow. Assets per cow were $6,518, debt per cow was $1,862, and equity per cow was $4,032. Equity growth rate was 0.9%, slightly lower than the 1.1% annual average since 1995. Asset turnover rate was 0.8, lower than the 0.88 average of the eleven-year period of this continuing survey (1995-2006).

• Since revenues have increased more slowly than costs, it follows that margins have decreased. In fact, the average net farm income per cwt. was $1.22 for years 1995 thru 1999, but $0.73 from 2000-2005, a 33% reduction.
• Reasons for declining profit margins are several but one statistic that stands out from the others is capital investment. Total assets employed in the business on a per-cow basis clearly show that investments have risen substantially. In the years 1995-1997, total assets per cow averaged $3,721 compared to $4,357 in years 1998-2001 and $6,086 in 2002-2005.
• Since margins have decreased over time, yet producers have increased the assets of their businesses, the data suggest that assets are being used less efficiently. If this is true, the dairy farms would have had increased difficulty paying for new assets. Financial data supports this conclusion. Debt per cow averaged $1,381 in years 1995-1997, $1,400 in years 1998-2001 and $1,853 in years 2002-2005. Producers have leveraged their futures to provide new assets.
• Asset turnover rate (ATR) is another statistic that provides another method of analysis of the same effect (declining ability of dairy farms to pay for investments in new assets). ATR is total annual revenues divided by total assets. Thus, ATR indicates the ability of a business to efficiently utilize assets to generate revenues. DBAP average ATR in years 1995-1997 was 1.03, 0.99 in years 1998-2001 and 0.67 in years 2002-2005.

A 1% return on equity? Rising debt burden with shrinking margins? Talk about a miserable business. How can this happen in a “free market”?

Hint: the market is not free. This Web site, keepmilkpriceslow.com, details what independent dairy farmers have been doing to fight back against our government, agribusiness, and its food cartel. Put yourself in a dairy farmer’s position for a moment — imagine that the price you can charge for your product, in this case milk, is out of your control. There is really only one massive “cooperative” who will buy your milk, and just one massive bottler that will take your milk and put it into stores. The federal government tries to “help” by setting minimum prices at a level to “protect” you, but those prices are set artificially and can’t adapt to fluctuations in feed, fuel and labor costs.

What would you do? Most people would give up and sell the farm, which is an all-too-common occurrence. Thus small farms become a new strip mall or subdivision, or perhaps swallowed up by a bigger farm that still has the “economies of scale” to maintain its thin margins. A courageous minority of farmers, however, are trying to stay in business the old-fashioned way — by bringing a good product directly to the customer.

Think about it — the Connecticut article from January 2007 records a retail price of $3.92 per gallon, with just $1.28 paid to the farmer. Could you profitably put milk in bottles, pasteurize it, and get it to the store or a consumer for less than the $2.64 that the bottler, distributor, and store are currently charging? Of course! Should you be able to try? Why not?

Hein Hettinga is an an independent dairyman who built a business that allowed him to compete against the established corporate interests by bottling and distributing his own milk directly to stores. As a result of his success, Hein was rewarded by efforts to regulate him out of business and made to play by the same “rules” that keep the “dairy cartel” in power. Spend some time reading this Web site, as well as the commentary from the University of Florida article and other state/regulatory agencies. Ask yourself if the government is helping the people, or corporate interests.

When you’re ready to ask more questions about the role of government in the food industry, check out this interesting blog post from Pittsburgh where farmers’ attempts to differentiate their product are being squelched by a bureaucrat with an apparent conflict of interest. Finally, this article from Acres U.S.A. is classic, yet tragic.

We’re fortunate to have a local dairy that is breaking the mold and distributing its own milk. It’s not less expensive, but for some reason I’ve always thought milk tastes better out of a glass bottle.

The most recent Energy Bill contains a most interesting provision: elimination of “inefficient” incandescent bulbs by the year 2012. Yes, that’s right: Thomas Edison’s invention will be outlawed (or, at least “inefficient” versions, as declared by the government) by 2012 in favor of the Next Big Thing: compact fluorescent (CFL) bulbs.

Don’t get me wrong, I like CFL bulbs. They’re handy for places where it’s inconvenient to change a bulb, and they generate a lot less heat. But there’s a downside, as well. CFL bulbs contain mercury, which makes a replacing a broken bulb a hazmat exercise. You can just choose not to worry about it, and one broken bulb isn’t going to kill you, but what happen when bulbs are breaking and/or being thrown away instead of properly recycled by careless homeowners all over the country?

Why is it the federal government’s job to replace an inefficient but environmentally benign light with an efficient but environmentally hazardous one? Who stands to benefit from the switch? Is this environmentalism, or is this corporatism? Well, this New York Times article quotes CFL bulbs as costing six times more while lasting six times as long as their incandescent cousins. That’s handy from the perspective of the light bulb manufacturer — with those cost and lifespan numbers, a nation switching to CFLs should be at least revenue neutral. And given the greater likelihood of bulbs breaking during their much-lengthened lifespan, one could reasonably expect even more revenue from CFL bulbs, since fewer will make it their entire useful life before breaking.

So the next question deals with profit, as opposed to just revenue. Which bulb do you think has higher profit margins: a widely-commoditized incandescent, or a sophisticated CFL with fewer manufacturers? I’d love it if someone had some statistics to share on this point, but common sense suggests that CFLs will be more profitable than incandescents, depending on the R&D and upfront manufacturing costs. It seems that CFL manufacturers could have much to gain from this legislation.

So am I against CFLs, or progress in energy efficiency? Not at all. I am, however, against the federal government taking sides in an economic decision that is best left to the consumer. Not everyone can afford the up-front costs of replacing incandescents with CFLs, and not everyone is going to understand the need to manage the 4mg of mercury in a CFL in an environmentally responsible way. Are people now going to need to test mercury levels before buying a home, in the event bulb breakage was a frequent occurrence? Or should we empower the FBI (in this case, the Federal Bureau of Illumination) to take charge of replacing and recycling the nation’s CFL bulbs under penalty of law?

I also don’t think CFLs are the end of line — they are a just rest stop before light emitting diodes (LEDs) will completely revolutionize lighting for homes and businesses. LEDs have none of the environmental hazards of CFLs, can potentially be tuned to even more desirable light wavelengths, can last essentially forever, and will be even more efficient/generate less heat. Hopefully this little experiment in social engineering will be rendered moot by advancing semiconductor technology. Despite our legislators’ best attempts to hurt us, we are sometimes capable of defending ourselves through non-legislative means.

This morning I had the pleasure of visiting a retired Duke general surgeon, Dr. Joseph Moylan. Dr. Moylan was a highly respected attending when I was in residency at Duke, and I hadn’t seen him for years when we recognized each other at a local coffee shop last month. After reintroducing ourselves, Dr. Moylan shared his new “job” since retirement: founder and president of Durham Nativity School.

I’ve had a long fascination with education. My wife taught fourth grade in Durham while I was in medical training, and four of her five years were at E.K. Powe Elementary on Ninth Street. Powe had a diverse student population with lots of social challenges, and every year we agonized over the difficulty of reaching children whose home situations included hunger, homelessness, physical and substance abuse, absent parents, and a general apathy towards education and basic social skills.

The limitations in public education are such that my wife’s optimism as a first-time teacher gradually gave way to pragmatic realism, and at some point we realized that her eight hours per day the classroom (plus the typical assortment of before- and after-school care) was not enough to raise a child successfully in the absence of engaged and concerned parent(s). While some still believe we can “outsource” social problems to governmental institutions, the harsh reality is that government has never proven to be an effective parent.

The model at Durham Nativity School is different, and worth celebrating. From the moment Dr. Moylan walked me around the halls, things immediately stood out. All the boys were neatly attired in shirts and ties, with real knots. I wasn’t tying a tie in the sixth grade, so these young men were already ahead of me. He introduced me to two of the students, and each reached out his hand, looked me straight in the eye, gave me a firm handshake, and said, “Welcome to Durham Nativity School. My name is …”.

At that point, I was floored. My wife and I have noticed how rare it is for children and young adults to look us in the eye nowadays, and the message of insecurity and duplicity communicated by those who refuse to make eye contact is a sad commentary on self-image and self-confidence.

Then I watched them change classes. The bell rang, and instead of a mad scramble between classrooms and lockers, there was an orderly movement of young men culminating in each class lining up outside its respective door for the next class. The teacher then appeared at the door, also dressed in business attire, and each student received a handshake and a greeting while entering the classroom. Dr. Moylan then shared with me that the Headmaster greets each child at the main door upon arriving in the morning with — you guessed it — a handshake, welcome, and shared commitment to do one’s best during the course of the day.

We then sat down in Dr. Moylan’s office so I could ask some tough questions about how this place really worked. The office wasn’t much — no Herman Miller Aeron chairs, just furniture that reminded me of my startup days when we furnished our office with used dorm furniture from the Duke surplus store. Clearly, chairs and desks for the President are less important than the educational mission. That’s a good sign.

Dr. Moylan shared some lessons learned, and perspectives on the curriculum, that reflect seven years of iterative improvement on an established model. There are over 40 Nativity Schools in the country, and all of them focus on identifying and serving children who would otherwise fall through the cracks of the public educational system. Admission criteria include academic potential (even if the student is currently “underperforming”), as well as financial hardship. Graduating fifth-grade applicants are then taken through a orientation/screening program starting in February and lasting through the summer, when the new sixth-grade class is identified.

After seven years, their record is remarkable. They take incoming sixth graders functioning at a 4-5 grade level, and graduate eighth graders functioning at a 9.5-10.5 grade level. Their graduates earn scholarships at private high schools such as Cary Academy, Durham Academy, Ravenscroft, or even boarding schools like the Asheville School. While transitioning from an underprivileged background into competitive and often wealthy private schools has its own challenges, the challenges of upward mobility for both students and parents were deemed preferable to the social challenges of public high school.

While they initially experienced more attrition than other Nativity Schools, with classes of 15 dropping to 10 at graduation, they objectively studied their performance and identified the home situation as the root cause of most attrition. As a result, their program now includes a dedicated social worker who works not in the school, but in the homes with the parents. They’ve also discovered the value of engaging the parents directly in the school through volunteer activities and mentoring opportunities.

The final critical variable is their curriculum. It’s an extended day program, from 8am to 6pm with a heavy focus on language arts, mathematics, and faith-based, character building activities. Students spend one-half day per week performing community service, and learn that no matter how challenging their situation, there are those who are even less fortunate. Mentors and volunteers from the community also play a critical role, and on average 40 volunteers give one hour to the school every week.

Not only are the days long, but the curriculum is year-round, as well. Camp experiences and field trips during the summer take the students out of often hazardous neighborhoods during peak times of gang activity. A recent trip took them to Washington D.C., where they had the chance to meet Colin Powell:

So how much does all this goodness cost Durham and North Carolina taxpayers? Nothing. How about American taxpayers? Nothing. Durham Nativity School receives no federal or state funding. The students receive a $66,000 education over three years, and a chance at a radically different future, thanks to the devotion and generosity of highly-motivated staff and private donors. To whom much is given, much is expected, and the motto for Durham Nativity School says it all: “Educating tomorrow’s community leaders.”

Durham Nativity School accepts 15 students per year. Last year, they only had 38 applicants for these 15 positions. If you know of an at-risk young man who would benefit from this unique opportunity, he has nothing to lose, and everything to gain, from applying. The application process for next year has already started, so interested students, parents, and guardians should contact the school as soon as possible.

Finally, if you’re looking to make a charitable or time contribution that will be highly leveraged for maximum impact, I strongly recommend Durham Nativity School. Isn’t it great that the government does not have a complete monopoly on education?

The White House cheered the markets last week with a plan to ease the mortgage crisis by delaying planned interest rate resets on certain borrowers’ adjustable rate mortgages. Specifically, interest rates for certain subrprime borrowers will have a five-year interest rate freeze, instead of large rate increases that would otherwise be expected.

So how are we supposed to react to this latest news? Well, if you bought mortgages as an investment, you might be upset. On one hand, you were sold a security with an expected level of risk and an expected return. Now the government is telling you that you will not be getting your expected return, because they are freezing interest rates at a lower level.

So did this government intervention effectively seize your property? Perhaps… but on the other hand, if the rate increases cause massive foreclosures as expected, then holders of these mortgage loans will get no income and have a worthless security since they will be stuck with empty houses that are declining in value. So, the owners of these mortgage debts are being forced to take Henry Paulson’s word that the government’s intervention to reduce their investment return is preventing an all-out collapse of that investment. Thanks, I guess.

On the other side of the equation, one must ask how this unilateral government intervention is going to work. What are the specifics behind freezing interest rates for “some” borrowers, holding “some” subprime mortgages? One thing that’s clear about government programs — it’s always fun and exciting to game the system:

One of the main criteria for qualifying for a reset freeze is the FICO score, which measures how well a borrower has repaid debts in the past (the higher the better). Borrowers’ income does not have to be checked. See analysis of program.

To qualify for the fast-track program, borrowers must have a FICO score of less than 660 and it can’t have increased by more than 10% since they took out their original subprime mortgage.

Because income isn’t checked, some experts worry that borrowers who might otherwise be able to afford higher payments will try to lower their FICO score to qualify for a rate freeze.

“The message here is to get your FICO score down,” Mark Adelson, a structured finance expert, said. “Don’t pay some bills, but keep up with mortgage payments.”

Excellent! Just skip a few electric and telephone payments, maybe go a few months late on the credit card, and enjoy a five-year rate freeze on your housing payments!

But will this latest government intervention really solve the problem? Available evidence suggests that “subprime” is just the tip of the iceberg. The coming market adjustment will be memorable for everyone, and will teach us (yet again) that it is impossible to create “wealth” by borrowing and printing paper money:

Sub-prime aren’t the only kind of loans imploding. Second mortgages, hybrid intermediate-term ARMS, and the soon-to-be infamous Pay Option ARM are also feeling substantial pressure. The latter three loan types mostly were considered ‘prime’ so they are being overlooked, but will haunt the financial markets for years to come. Versions of these loans were made available to sub-prime borrowers of course, but the vast majority were considered ‘prime’ or Alt-A. The caveat is that the differentiation between Prime and ALT-A got smaller and smaller over the years until finally in late 2005/2006 there was virtually no difference in program type or rate.

The bailout we are hearing about for sub-prime borrowers will be the first of many. Sub-prime only represents about 25% of the problem loans out there. What about the second mortgages sitting behind the sub-prime first, for instance? Most have seconds. Why aren’t they bailing those out too? Those rates have risen dramatically over the past few years as the Prime jumped from 4% to 8.25% recently. seconds are primarily based upon the prime rate. One can argue that many sub-prime first mortgages on their own were not a problem for the borrowers but the added burden of the second put on the property many times after-the-fact was too much for the borrower.

The mortgage mess illustrates the fundamental problem with a dishonest, inflationary monetary system: it’s impossible to tell just one lie. Once you tell a single lie, additional lies are inevitably required to try and cover up or obfuscate the original one. In the end, what might have seemed like a harmless and expedient half-truth turns into a fragile web of lies that collapses under its own weight.