A Day Without a Fed

Like the "No Pakistanis" version of "Get Back," the "Imagine no Bernanke" verse from "Imagine" has been lost to history. But the always excitable list-maker Michael Snyder helps fill in this gap in our cultural history by imagining no Federal Reserve Bank.

Snyder lists ten ways the U.S. economy would be different had the Fed had not been created 98 years ago. Some of them aren't totally convincing. I'm not sure for example why the absence of a Fed would eliminate the absurd annual "debate" over raising the debt ceiling. (I wonder how the current one will turn out?) But some of these are worth giving a think:

#4 If the U.S. government could issue debt-free money, it is conceivable that we would not even need the IRS.  You doubt this?  Well, the truth is that the United States did just fine for well over a hundred years without a national income tax.  But about the same time the Federal Reserve was created a national income tax was instituted as well.  The whole idea was that the wealth of the American people would be transferred to the U.S. government by force and then transferred into the hands of the ultra-wealthy in the form of interest payments.

#6 If the Federal Reserve did not exist, the big Wall Street banks would not have such an overwhelming advantage.  Most Americans simply have no idea that over the last several years the Federal Reserve has been giving gigantic piles of nearly interest-free money to the big Wall Street banks which they turned right around and started lending to the federal government at a much higher rate of return.  I don't know about you, but if I was allowed to do that I could make a whole bunch of money very quickly.  In fact, it has come out that the Federal Reserve made over $9 trillion in overnight loans to major banks, large financial institutions and other "friends" during the financial crisis of 2008 and 2009.

#7 If the Federal Reserve did not exist, it is theoretically conceivable that we would have an economy with little to no inflation.  Of course that would greatly depend on the discipline of our government officials (which is not very great at this point), but the sad truth is that our current system is always going to produce inflation.  In fact, the Federal Reserve system was originally designed to be inflationary.  Just check out the inflation chart posted below.  The U.S. never had ongoing problems with inflation before the Fed was created, but now it is just wildly out of control….

#10 If the Federal Reserve had never been created, the American people would be much more free.  We would not be enslaved to this horrific national debt.  Our politicians would not have to run around the globe begging people to lend us money.  Representatives that we directly elect would be the ones setting national monetary policy.  Our politicians would be much less under the influence of the international banking elite.  We would not be at the mercy of the financial bubbles that the Fed has constantly been creating.

I can't show you all ten because violent eliminationist conspiracy theories like these are just the kind of thing that will make you shoot a member of Congress. Also because thinking about the history of central banking and the nature of money makes my head hurt. If Fed policy turns the currency into debt in some way that didn't apply before the Fed's existence, where did all the debt come from to run the Civil War, build the infrastructure of Ohio and purchase the Louisiana Territory during the on-again/off-again central banking days of the 19th Century? If the greenback were competing with the notes of private banks again, wouldn't bad money drive out good, in accordance with Gresham's law? Shouldn't the massive expansion of the monetary base be causing people to reduce their savings rates (rather than saving slightly more), since Say's Law argues against money hoarding? And what of Cole's Law ("The number of side options increases in inverse proportion to the price of the Blue Plate Special")?

One thing we can be sure of: If promoting full employment and low inflation were either boxing or the America's Cup, the Ben Bernank would be Gerry Cooney and Sir Thomas Lipton rolled into one.

My brief case for ending or at least auditing the Fed: It's not the conspiracies; it's the incompetence.

Comments

[Old Mexican]

If Fed policy turns the currency into debt in some way that didn't apply before the Fed's existence, where did all the debt come from to run the Civil War, build the infrastructure of Ohio and purchase the Louisiana Territory during the on-again/off-again central banking days of the 19th Century?

http://www.investinginbonds.co.....6&id=2

There.

Shouldn't the massive expansion of the monetary base be causing people to reduce their savings rates (rather than saving slightly more), since Say's Law argues against money hoarding?

http://www.msnbc.msn.com/id/11.....e_economy/

There. It does indeed reduce people's savings rate.

[Tim Cavanaugh]

Yeah, except that MSNBC story is five years old and was inaccurate at the time it was written. Personal savings have not been negative on an annual basis since the 1930s Depression. On a monthly basis they only went negative in September 2001 -- a month when there was some big event in the Wall Street area that old timers may remember.

[tkwelge]

Wait wait wait, if we are talking about the effect of the federal reserve on savings, shouldn't we be comparing the pre central bank savings rate to the post central bank savings rate? IT doesn't make any sense to make an opinion on the Fed's effect on savings by comparing 2002 to 2010. I don't really know what the savings rate was pre fed, but I do know that bank reserves were higher.

[tkwelge]

Yes, the expansion of the monetary base does cause people to reduce savings, but we are playing by slightly different rules right now. People have been so battered by the economy and an easy credit culture that they are now starting to realize that they must save and not borrow for the near future. The savings rate might even be higher than it was when the fed was printing less money, but it would be even higher if the fed wasn't printing money at all. Kind of like how 1% inflation isn't "low inflation" when the real inflation rate should be -3%. The savings rate is abysmally low if you compare it to what it would be in the absence of loose monetary policy, but it is higher than it was just a few years ago when less money was being printed, because people had not yet been burned by the easy credit delusion.

This really isn't that hard if you think about it for 5 seconds....

[Old Mexican]

If the Federal Reserve did not exist, it is theoretically conceivable that we would have an economy with little to no inflation.

The price of goods and services was constantly falling during the golden years of the Gilded Age - i.e. NO inflation.

[Jimmy McMillan]

well the exploitation of woman & child labour had a teensee-weensee to do w that

[Fluffy]

Not really. Real wages grew all through the 19th century.

Being a low-skill worker wandering the streets of London in 1801 was markedly different from being the same worker wandering the streets of New York in 1899.

[joshua corning]

One might argue that poeple grew concerned about women and children being exploited because they were rich enough to actually give a shit.

Kind of hard to care about factory workers when you are starving and freezing to death.

But all indications are that Jimmy is a critical theory nut that thinks the kuznets curve is some sort of right wing conspiracy. So I am probably wasting my time.

[Old Mexican]

Re: Jimmy McMillan,

well the exploitation of woman & child labour had a teensee-weensee to do w that

And now that supposedly women and children are not being "exploited", we have inflation?

Care to explain that theory of yours?

[tkwelge]

The average wage for the unskilled worker increased by about 1.4% in real terms annually from 1870 to 1900.

The unskilled wage hasn't grown at all in real terms since 1980.

You might argue that the labor market is more internationally competitive today than it was back then, but the world economy was actually fairly integrated. Also, there was no minimum wage, almost no immigration restrictions, and people were popping out kids left and right during a period of no child labor laws. You might also argue that the high tariffs of the 1800's were responsible for the wage growth, but most of the real wage growth occurred due to deflation. The actual wages themselves didn't go up at all. Sure, it's a complicated issue, but arguing that the 1800's were a period slavery and exploitation is nonsense. Sure, technology was inefficient, so from our perspective it seems backwards and harsh, but these people experienced a constantly improving quality of life.

[Hugh Akston]

Imagine there's no Fed
It's just a small detail,
The people won't be bled,
Banks allowed to fail...

[fresno dan]

http://www.zerohedge.com/artic.....ange-rules

You know, I saw a old Frontline show on Bernie Madoff. Makes you wonder about all those years that "investors" though Bernie was the cats' pajamas (which I guess means good - I actually have no idea that cats have pajamas, and why that should be good).
Everybody was very, very happy with Bernie till it turned out most of the money in the fund was an illusion....makes one wonder

[Fluffy]

Shouldn't the massive expansion of the monetary base be causing people to reduce their savings rates (rather than saving slightly more), since Say's Law argues against money hoarding?

The "savings rate" increase is largely the result of rates of indebtedness dropping. And most of that decrease has been involuntary.

[tkwelge]

thank you +10

[Charles 3E]

Andy Jackson is on my list of most over-rated presidents. He thought democracy was more important than liberty, strongly supported slavery, and was terrible on Indian policy.

[robc]

Im willing to overlook a lot for destroying the 2nd Bank and nearly paying off the debt.

[generic Brand]

I agree here. Plus, it's not like the Indians didn't have it coming.

[Mo]

He was also the OG imperial president. Say what you will about presidential power grabs in the past few administrations, but if Obama had reacted to the SCOTUS decision of Citizens United or Bush had reacted to Hamdi with, "They have made their decision, now let them enforce it," we'd be sitting through impeachment trials.

[P Brooks]

But about the same time the Federal Reserve was created a national income tax was instituted as well. The whole idea was that the wealth of the American people would be transferred to the U.S. government by force and then transferred into the hands of the ultra-wealthy in the form of interest payments.

If this guy shows up looking to purchase a Glock with an "assault-style large capacity clip" I would advise you to direct him to take his custom elsewhere.

[hmm]

Possible the best libertarian alt text ever.

[hmm]

referring to jekyll Island.

[P Brooks]

Shouldn't the massive expansion of the monetary base be causing people to reduce their savings rates

Depends on your definition of "saving"; there seems to be some concern about a "bubble" in commodity ETFs, these days.

[P Brooks]

Everybody was very, very happy with Bernie till it turned out most of the money in the fund was an illusion

No kidding; none of those people went to the SEC to complain about their "excessive" rate of return.

[Liberal]

I can't show you all ten because violent eliminationist conspiracy theories like these are just the kind of thing that will make you shoot a member of Congress.

Something something "Fire" in a crowded theater something.

[tkwelge]

Gresham's law only comes into effect when the government artificially values one form of money over another allowing for international arbitrage that causes Gresham's Law to come into effect in the domestic economy. If you let people pay taxes and debts in gold and silver (that fluctuated at actual market values) along with dollars, the dollar would quickly fall out of use, since the only thing propping it up is the fact that other currencies have been removed from competition.

Have you read ANY Rothbard, sir? I mean, at all?

[creech]

In a free economy, good money drives out bad right? It is only when bad money is the only form of legal tender will it drive out good money. (Assuming perfect knowledge of what the assets are behind the money.)

[tkwelge]

Yes!

[R C Dean]

If Fed policy turns the currency into debt in some way that didn't apply before the Fed's existence,

Technically, bank notes are promissory notes, which is to say, debt, so the issuance of a bank note is the issuance of debt by the issuing bank. So, yes, Federal Reserve Notes = our currency = debt.

Gold and silver coins are not debt, so if you are using them as your currency, your currency is not debt.

Now, gold and silver certificates are something of a hybrid. They are paper money, but they are redeemable for specie. As a paper claim, they are still debt, but at least their worth is directly tied to an independently valued commodity.

Back when federal reserve notes were gold and silver certificates, they were, so to speak, secured debt. Current federal reserve notes are more in the nature of unsecured debt.

where did all the debt come from to run the Civil War, build the infrastructure of Ohio and purchase the Louisiana Territory during the on-again/off-again central banking days of the 19th Century?

I believe the feds issued bonds, and did not have the luxury of financing their endeavors simply by printing unsecured central bank notes.

[joshua corning]

The problem with the theory of the deflationary spiral is that poeple first off need things. They need food and shelter and other shit.

They also want shit. ipods are cool they like to read and watch movies and take the family out on the boat.

You need things to satisfy your needs and wants. money has no utility. Things do have utility. In order to do anything you have to part with your money.

Anyway the biggest falsifying fact is the PC market. Every year they get cheaper and better. Under the theory of the deflationary spiral the PC market should be in a perpetual depression. But the fact is it is not.

The PC market proves that people are more then willing to part with their money to get what they want....even if they know that next year what they can get with less money will be better then what they buy today.

[joshua corning]

Fuck...

I thought i was responding to RC Dean's comment below.

Say's Law says that, since the value of money is also perishable, rational economic actors will not hoard money.

I blame the squirrels.

[robc]

The problem with the theory of the deflationary spiral is that it is obvious bullshit. We have come out of every single deflationary period in US history.

[Fluffy]

You know what's funny?

In his article about the euro crisis, Krugman states point-blank that the reason to have a fiat currency is because it allows you to steal from workers and savers via currency devaluation.

So apparently, writing "The Fed and the entire fiat currency system exists to steal from savers and workers - and that's bad," means that you are insane and believe in conspiracies.

But writing "The Fed and the entire fiat currency system exists to steal from savers and workers - and that's good," means that you deserve the Nobel Prize.

[Pro Libertate]

Giving people credit cards that are paid off by other people is never a good thing. Well, except for the people spending other people's money.

[Government Retiree]

What?

[cynical]

We should distinguish between the institution of the Fed, and the power that the Fed wields. It isn't the Fed's independence from politics that is the problem; it probably kept us from going full retard like Zimbabwe. The problem is the solitary counterfeiting power that the Fed wields, which should be cast into the fires of Mount Doom and destroyed. Transferring the power of the Fed to the Feds will just make matters worse.

[Paul]

The problem is the solitary counterfeiting power that the Fed wields, which should be cast into the fires of Mount Doom and destroyed.

So the Fed is responsible for the Giffords shooting. I knew it! Loughner supposedly went on and on about "infinite currency". Bernanke might as well have pulled the trigger himself!

[Bernanke]

Bwhahahahahahahahahaha

[WDIK]

"If Fed policy turns the currency into debt in some way that didn't apply before the Fed's existence..."

I believe you have this backwards. Fed policy turns debt into currency, through fractional reserve banking, not the other way around.

[R C Dean]

Just so. Bank notes are what fractional reserve banks have to issue, because they don't have enough specie on deposit to fund their loans.

The classic bank run was when too many banknote holders went to the bank and demanded specie.

[R C Dean]

Say's Law says that, since the value of money is also perishable, rational economic actors will not hoard money.

The modern view is that you have to have inflation to avoid the liquidity trap (that is, people hoarding money). Spend it while its worth something, in other words.

However, the massive injections of new money have not yet manifested themselves as inflation perceptible to most people. Rather, they have been used to buy out bond investors, bail out banks, and otherwise try to prop up various asset bubbles. The new money is either frozen in place at the institutions who have been bailed out, or is being converted by large investors into other assets. This process of conversion puts the money into circulation, and is starting to turn into inflation, though - the commodity markets and certain foreign markets are showing it right now.

[robc]

The chart for #7 on a log-linear graph will be more telling.

[Mo]

If the U.S. government could issue debt-free money, it is conceivable that we would not even need the IRS. You doubt this? Well, the truth is that the United States did just fine for well over a hundred years without a national income tax. But about the same time the Federal Reserve was created a national income tax was instituted as well. The whole idea was that the wealth of the American people would be transferred to the U.S. government by force and then transferred into the hands of the ultra-wealthy in the form of interest payments.

http://en.wikipedia.org/wiki/Revenue_Act_of_1861

Tim,

Please don't reprint obvious b.s. it makes Reason looks bad.

[robc]

it was explicitly temporary, specifying termination of income tax in "the year eighteen hundred and sixty-six"

If was also found unconstitutional, IIRC.

But anyway, 1787 to 1913 is 126 years. Subtract out 5 years for 1861 to 1866 and that leaves 121 years. Which is "well over 100". I dont see any BS at all.

[Mo]

It was replaced by a progressive income tax. Later on, there was the Wilson Gorman Act. Pollock only rules that dividend and taxes on income from property were direct taxes, taxes on wages were still considered indirect taxes for purposes of apportionment.

[robc]

If by "replaced", you mean one was created 28 years later.

If Im reading Pollock right, it still thru out the entire income tax portion (despite distinction made for taxes on wages), Im assuming due to lack of separability in those sections.

So that takes 1894-1895 off the list too, so 1 more year gone. Still leaves 120.

[Mo]

No, I mean the revenue act of 61 was replaced by the revenue act of 62.

It doesn't matter how many years of existence the US was around the causal link, Fed = Income Tax, is false. There were multiple federal income tax laws passed prior to the creation of the Fed.

Also, as attractive as old income taxes were, tariffs were abusive in comparison to today. The average tariff in the late 19th century was 40-50%, now it's less than 5%.

[robc]

True on the tariffs.

BTW, it was the revenue act of 62 that put the deadline of 66. The act of 61 didnt have that.

The fact that multiple passed previously doesnt mean that the 1913 amendment wasnt related to the Fed. I dont think it was causal so much as the progressive movement that led to one also led to the other.

[robc]

Not really sure how progressive it was. I know I would favor changing the current tax code to a 2% tax on all income over $88,100 (4k converted to 2010 dollars). I doubt progressives would support it.

Heck, I doubt there would be too much bitching over the loss of the mortgage interest deduction at that point.

[hmm]

While I agree the Fed is a disgrace. Do you actually see giving Congress more power over it via an audit as not having a mountain of unintended consequences?

[joshua corning]

Our politicians would be much less under the influence of the international banking elite.

OH SHIT!!!

He did not just say that!!!

Virginia Postrel at this moment is getting her pen ready to write:

"International banking elite is code for Jew."

The upside is that great comedy will ensue.

[Fluffy]

Bank notes are what fractional reserve banks have to issue, because they don't have enough specie on deposit to fund their loans.

A fractional reserve bank doesn't have to issue bank notes.

You could do business entirely in specie and still conduct fractional reserve banking, simply by virtue of the fact that most demand deposits aren't demanded every single day.

[robc]

Exactly.

I dont get the whole anti-fractional reserve banking cabal.

[R C Dean]

Fractional reserve banking is loaning out multiples of what you have in deposits. You can't do that unless you are issuing bank notes.

In a specie-only world, a bank (with a death wish) could loan out 100% of the gold deposited with it, but no more, because it can't hand out gold coins it doesn't have. In a fractional banking world, the bank is going to be loaning much more than 100% of the deposits it has taken in. To do that, it has to issue bank notes.

[robc]

I deposit $100 in gold.

Bank puts $15 in gold in safe and loans out $85 in gold.

If claims that it has $100 in demand deposits even though it really only has $15 in gold sitting around. Fractional reserve banking - no bank notes needed.

[R C Dean]

This is true, and I think its Olde Schoole fractional reserve banking. My understanding is that fractional reserve banking as practiced for quite some time involves loaning out more than you have taken in as deposits, but man, am I rusty on this.

[robc]

Lets consider that, using the existenece of the Fed:

I deposit $150, you put all $150 in the vault. You then borrow $850 in FRNs from the Fed and loan them out. Same ratio as my previous example, no problem with bank runs, as the entire demand is in the bank (alhtough you get out of balance if too many loans fail and/or too much is withdrawn). However, Im pretty sure that is not the way it works. Even with the Fed it works the way I suggested (I think), the borrowing from the Fed is overnight loans to meet ratios when things get out of balance.

I could be wrong though.

In the days of bank issued notes, however, I could see this happening. Have $150 in gold and issue $850 in bank notes that get loaned out. The problem being, those are payable in gold immediately and the person you loan them too spends them, then someone cashes them and you need to fork over more gold than you have.

Im pretty sure fractional reserve only works the way I suggested. You loan out a large fraction of the deposit and count on all the demand deposits not withdrawing at once.

[JoshINHB]

The money multiplier effect happens when the loaned funds are deposited in your bank and a fraction is then loaned out again.

http://en.wikipedia.org/wiki/Money_multiplier

[R C Dean]

Caveat: My banking studies are more than 20 years old. Hardware and software degradation has been noted during that time. Banking is a bizarrely counter-intuitive business. I may have this all fucked up.

That is all.

[hurly buehrle]

Well, it's sort of a moot point. It's technically true that banks can't lend out more than some proportion of their reserves (by law). But with the Fed supplying banks with new reserves at such low rates the distinction becomes meaningless.

[IceTrey]

So you think that all of the leaders of the Fed,graduates of some of the finest schools in the world, successful businessmen, hailed as some of the greatest minds in economic theory, are all incompetent rather than conspiratorial? Seems pretty unlikely to me.

[Trespassers W]

I don't think anybody's saying they're incompetent as humans. But there are some jobs that can't be done competently no matter how smart you are, what experience you have, or what school you went to.

"Grand Poobah of the Economy" is one.

[IceTrey]

Attempting to do an impossible job isn't incompetence, it's hubris.

[Charles Manson]

Like the "No Pakistanis" version of "Get Back"...

Wow, man. Tucson. Jo-Jo. grass. The Beatles foresaw the whole thing, man.

[Sarah Palin]

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Another Isolated Incident

Posted on January 13, 2011, 3:26PM | Radley Balko

Spring Valley, New York:

A village resident said that police conducting drug raids early this morning targeted the wrong house where they roused his family out bed, pointed a machine gun at his 13-year-old daughter and threatened to shoot their poodle...

David McKay said he, his wife, 13-year-old daughter and his brother-in-law were sleeping at 5:30 a.m. when they heard banging on the door of their townhouse at 36 Sharon Drive. When they went to open the door, at least 10 police officers forced their way into the home, he said.

"Their guns were drawn, they were screaming 'Where's Michael, Where's Michael,' " McKay recounted hours later in a telephone interview from Nyack Hospital, where he took his terrified daughter for treatment after she had an asthma attack and fainted following the ordeal.

McKay said he was still groggy from sleep but tried to explain that there was no one named Michael in the house.

"They pulled me outside in the freezing cold in my underwear, manhandle my wife, point a gun at my daughter and they won't even tell me what they are doing in my house," said McKay. "It was terrifying and humiliating beyond belief."

It was part of a broad joint federal/local drug sweep for pot involving more than 200 cops from at least 13 different government agencies. More:

McKay said the officers forced his wife, Jamie, and daughter out of their beds. The family's dogs were barking and police threatened to shoot them, McKay said.

McKay said he was uncertain how long the police were in his home at 36 Sharon Drive, but at one point he heard them discussing a nearby residence. When he took the dogs out for a walk a short time later, he saw police in front of that home, located on the same side of the street.

When the police were preparing to leave, McKay and his bewildered family asked them again what they were doing and why they entered the house.

"They wouldn't say," he recalled. "All they would say was 'You'll read about it in the paper tomorrow.' "

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Supreme Court To Decide If Smell of Pot, Suspicious Sounds Merit Warrantless Entry

Posted on January 13, 2011, 3:15PM | Radley Balko

Yesterday the U.S. Supreme Court heard oral arguments in Kentucky v. King. The facts: Police lose sight of their suspect after he sold drugs to a confidential informant. The cops enter the breezeway to an apartment complex and conclude the suspect entered one of two apartments. They smell pot coming from one apartment. They knock, and hear what they say were sounds of people possibly destroying evidence. They kick the door down and find some pot, cocaine, and drug paraphernalia.

But as it turns out, they got the wrong apartment. Their suspect went into the other one. So the question is whether "exigent circumstances" permit police to enter a residence without a warrant even if the circumstances were created by lawful police actions.

The Washington Post write-up of the oral arguments includes this from Justice Scalia:

Justice Antonin Scalia said the police did nothing wrong. When they knocked on the door, the occupants could have answered and told police that they could not come in without a warrant.

"Everything done was perfectly lawful," Scalia said. "It's unfair to the criminal? Is that the problem? I really don't understand the problem."

Law enforcement, he said, has many constraints, "and the one thing that it has going for it is that criminals are stupid."

And this from Justices Sotomayor and Ginsberg:

Some justices seemed troubled by the prospect of police wandering halls - "They go to the apartment building and they sniff at every door," Justice Ruth Bader Ginsburg proposed - to find cause to search.

Justice Sonia Sotomayor worried that agreeing with Farley would mean that police could always enter without a warrant if they thought drugs were being used on the other side, because police could always say they feared that the evidence would be destroyed.

I suppose it depends on how broadly the Court rules in favor of the police in the case, assuming that it does. But we've seen a similar phenomenon in no-knock raid cases. The exigent circumstances exception to the knock and announce rule, for example, has been used by police to justify forced entry both when a suspect doesn't respond to a knock at the door within 10 seconds or so (he's destroying evidence), and when the suspect immediately turns on a light or makes noises toward the door as police approach, which police have argued are indications that their cover has been blown, which then puts them in danger. The net result is that they're taking down your door, and there isn't much you can do about it either way.

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The Medicaid Mess

Posted on January 13, 2011, 3:12PM | Peter Suderman

Stateline notes that state governments have had to cover $400 billion in budget shortfalls over the last four years. "In most states around the country," the article says, "it's hard to imagine how the budget situation could get any worse." But in many cases, the worst is still to come. Stateline says the coming fiscal year is "is likely to be the hardest year yet in what already has been the most difficult budget period in modern history."

And one of the biggest problems for states is Medicaid, the joint federal-state health program for low-income individuals. Between 2008 and 2009, spending growth on the program nearly doubled, growing from 4.9 percent to 9 percent. At the same time, in 2009, new enrollment totals came in at their highest in 40 years.

State governments have been feeling the fiscal pain. In Massachusetts, Governor Deval Patrick called for $9.6 billion in Medicaid spending last summer. That was a record sum, but it still wasn't enough. Since then, Patrick has gone back to the legislature twice more to look for almost $600 million in extra funds.

The Bay State isn't the only state with a budget threatened by Medicaid expenses. Here's the situation in Connecticut:

In Connecticut, Gov. Dannel P. Malloy said he's weighing all his options for dealing with an exploding Medicaid tab.

In October, the Department of Social Services released a preliminary budget request that projected a nearly $1 billion increase in Medicaid costs starting this July. (The federal government provides a 50 percent reimbursement to Connecticut for its Medicaid expenses.)

"Medicaid in Connecticut represents the largest single increase in projected expenses going into the next fiscal year, in excess of $500 million in a state that's going to experience about a $3.5 billion deficit," Malloy said during a visit to Washington last month, before he was officially sworn in. "So that kind of tells you what the scope of the problem is."

In Kansas, incoming Governor Sam Brownback recently said that reforming the program will be a top priority, although he's provided few details on what that might mean:

Gov. Sam Brownback in his first State of the State address pledged that his administration will shrink state government and "remake" the state's Medicaid program.
Medicaid, the second biggest draw on the state treasury after education spending, accounts for about 18 percent of the state general fund. The program covers about one in 10 Kansans with most of the money spent on providing medical or nursing care for the frail elderly or disabled. Medicaid also provides health insurance for children in low-income families.

"The program is growing faster than the economy," Brownback said. "Additional commitments required of us by Washington have set us on a path of unsustainable spending and lower-quality care. Rather than receiving dictation from Washington, I pledge to fight for Kansas solutions for Kansas health care needs."

New York is yet another state facing a massive overall budget shortfall; it's expected to grow to $17 billion. And a big reason for that shortfall is the state's massive Medicaid program, the most expensive in the country. As the Cato Institute's Michael Cannon has argued, the best way to fix the Medicaid problem is to transform the program from one that matches state spending with federal dollars to one that hands out capped block grants.

But despite the focus on health policy reform over the last few years, that idea hasn't gained much real political traction. Indeed, as Cannon points out, last year's health law made it more difficult for states to manage the explosion of Medicaid costs:

The health-care bill's Medicaid mandate forces states to expand eligibility, to enroll more people who were already eligible, and gives states less flexibility to eliminate abuse. Should Gov. Cuomo fail to comply, New York will lose more than $26 billion in federal funds.

Even still, in Arizona, the Medicaid program is so strapped that some state legislators have proposed dropping 300,000 people from the program?despite the fact that doing so would mean disqualifying the state from $7 billion in federal health funds. Officials in charge of the state's program say the move won't happen, but it's not clear how the state will close its budget gap while maintaining current enrollment levels.

Last week, 33 states asked for waivers from this requirement. Those states may be somewhat better off if they get the exemptions, at least in the near term. But despite the Obama administration's recent fondness for health care policy waivers, they're obviously not much of a solution.

Meanwhile, the fiscal problems mount in statehouses across the country. Thanks to Medicaid, understanding how state budgets could be worse doesn't take much imagination at all.

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Cookie Gilchrist, RIP

Posted on January 13, 2011, 3:12PM | Matt Welch

"I thought Buffalo was mad at me"Who was this Cookie (we'll leave for later why we don't nickname people "Cookie" anymore)? Nation sportswriter Dave Zirin tells the tale:

Gilchrist, the 1962 American Football League MVP, died the day before a remarkable anniversary not exactly celebrated by the world of professional football. On January 11th 1965, Gilchrist led an African American boycott of the AFL All Star game, which was to be played in New Orleans. In 1965, an informal Jim Crow system ruled the Crescent city and African American players talked among themselves about their inability to get cabs, be served in restaurants, or stay at certain hotels. Gilchrist organized all 22 African American All-Pros to approach AFL commissioner Joe Foss and make clear that unless the game was moved, they wouldn't be playing. White players also announced that they would stand in support of their Black teammates. Foss had no choice but to accede to their demands, and moved the game to Houston's Jeppesen Stadium. [...]

Gilchrist spent his retirement utterly unapologetic about his outspoken ways. He was offered enshrinement in the Canadian Football Hall of Fame, and Gilchrist became the first person to simply say no. He said that the racism and financial exploitation he suffered in the CFL could not simply be forgotten. He also for years refused induction in the Bills Ring of Honor because of his life-long conflict with Ralph Wilson, still the Bills owner today at age 87.

"I was surprised"But late in life Gilchrist softened his stance, after receiving an outpouring of love from Buffalo when the news being public that he was battling cancer. Even Ralph Wilson wanted to reconcile and spoke to Cookie the weekend before his death. "I have a whole box of cards and letters," Gilchrist said. "I was surprised; it brought tears to my eyes. I thought Buffalo was mad at me."

Whole thing here.

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Reason TV: Former LA Mayor Richard Riordan on Schwarzenegger, Unions, and Bankrupt Cities

Posted on January 13, 2011, 3:00PM

"Throughout the country, 90 percent of cities and states are going to go bankrupt within the next five years, many of them sooner." So says former Los Angeles Mayor Richard Riordan.

Reason.tv's Tim Cavanaugh sat down with Riordan to discuss state and local budget crises, public-sector unions, and why Riordan recently became a fan of current LA Mayor Antonio Villaraigosa.

Approximately 9:40 minutes.

Shot by Zach Weissmueller, Paul Detrick and Alex Manning. Edited by Detrick.

Go to Reason.tv for downloadable versions and subscribe to Reason.tv's YouTube channel to receive automatic notification when new material goes live.

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Reason Writers on the Tube

Posted on January 13, 2011, 2:59PM

Tune in to the Thom Hartmann show on RT tonight to see Managing Editor Jesse Walker appearing live via Skype from his Baltimore basement. The time: about 7:30 eastern. The topic: the Fairness Doctrine.

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A Gun That Can See Into Your Soul

Posted on January 13, 2011, 2:50PM | Jacob Sullum

National Review associate editor (and Reason contributor) Robert VerBruggen offers some tips to leftish columnists who want to write about guns without sounding like idiots, including "don't assume criminals follow laws," "don't forget about self-defense," and "when you think about mental health, think about due process, too." A few of the credibility-undermining bloopers he notes:

Alan Webber complains in the Washington Post about "semi-automatic handguns that serve only one purpose?to shoot and kill innocent people." The New York Times's Gail Collins refers to Loughner's gun as distinct from a "regular pistol," the kind "most Americans think of when they think of the right to bear arms." Semiautomatic handguns are "extremely easy to fire over and over" and can carry 30-round magazines, she explains.

Perhaps the most egregious example of this came from someone who knew better: the Brady Campaign's president, Paul Helmke, who in Collins's column is quoted claiming that 9mm semiautomatics are "not suited for hunting or personal protection" and that "what it's good for is killing and injuring a lot of people quickly." If 9mm Glocks aren't suited for protecting oneself and others, someone should tell the nation's police departments, many of which use them.

VerBruggen attributes such errors by journalists to ignorance: a lack of "firsthand knowledge of guns or gun culture" and a lack of familiarity with the relevant criminological literature. I think that explanation, though hardly flattering, is too charitable. How much gun expertise do you need to recognize that a firearm cannot be designed to do nothing but "shoot and kill innocent people"? I mean, how exactly would that work? Some highly sophisticated artificial-intelligence component that can peer into people's souls? More generally, even someone who has never handled a gun or read anything on the subject that was not published by the Brady Campaign should be able to understand that an instrument of lethal force can be used for good or bad purposes, and that features improving its effectiveness for self-defense would also tend to improve its effectiveness for criminal violence.

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Adventures in Drug War Incompetence

Posted on January 13, 2011, 2:04PM | Radley Balko

Last week, police in Ottawa raided a man's house after mistaking a skunk's stench for a marijuana grow. That might have been my favorite mistaken-for-pot raid yet, had it not been for a raid this week in the U.K., in which cops mistook two Guinea pigs for a major marijuana operation.

A partial list of living organisms that have triggered mistaken drug raids here the U.S. of A: tomatoes, sunflowers, fish, tomatoes again, elderberry bushes, kenaf plants, tomatoes again, hibiscus, ragweed, and . . . tomatoes again.

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Rent Control for the Rich, From NYC to Hanoi

Posted on January 13, 2011, 1:42PM | Stephen J. Smith

We didn't start the fire!Rent control is an idea that has, thankfully, mostly fallen out of favor in America. The crumbling buildings and raging fires in the South Bronx and throughout New York City in the '70s went a long way in convincing people that perhaps landlords should be allowed to collect enough rent to cover maintenance costs, and it's one of the few issues on which economists of all stripes largely agree.

But there's at least one person who remains utterly unconvinced: New York State Assembly Speaker Sheldon Silver (D-Manhattan). For years Silver and his friends in the NYC-dominated Assembly have tried to limit landlords' ability to decontrol units occupied by wealthy renters, but the state Senate, which is controlled by suburban and upstate interests, has kept the Assembly's statist impulses in check.

That is, until now. Gov. Andrew Cuomo (D) is trying to make good on his campaign promise to cap property tax increases, and the New York Daily News reports that Silver has moved to hold the proposed legislation hostage by linking it to strengthened rent control laws?a tactic the pols are scrambling to deny.

The New York Times explains what the proposed rent control law would mean in practical terms:

About one million apartments in the city's five boroughs, roughly half of all rental units, are covered by the existing laws, which sharply limit landlords' ability to raise rents and keep many apartments, particularly in Manhattan, renting at well below market value. Currently, apartments become deregulated when the rent reaches $2,000 and total household income of the tenants is at least $175,000 annually for two years.

Mr. Silver said he would like not only to preserve those protections, but also to expand them, by raising the income and rent thresholds.

"You want to preserve people making $210,000, $225,000 a year, living where they're living," Mr. Silver said.

Perhaps Shelly could take some advice from Nguy?n C? Th?ch, former foreign minister of the Socialist Republic of Vietnam, who saw the perils of rent control in his own country as early as 1989:

Addressing a crowded news conference in the Indian capital, Mr. Thach admitted that controls...had artificially encouraged demand and discouraged supply...so all the houses in Hanoi had fallen into disrepair.

"The Americans couldn't destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy," he said.

More Reason on rent control here.

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A Day Without a Fed

Posted on January 13, 2011, 1:34PM | Tim Cavanaugh

One of these places is the home of bloodsucking ghouls; the other is the set of "The Munsters." Like the "No Pakistanis" version of "Get Back," the "Imagine no Bernanke" verse from "Imagine" has been lost to history. But the always excitable list-maker Michael Snyder helps fill in this gap in our cultural history by imagining no Federal Reserve Bank.

Snyder lists ten ways the U.S. economy would be different had the Fed had not been created 98 years ago. Some of them aren't totally convincing. I'm not sure for example why the absence of a Fed would eliminate the absurd annual "debate" over raising the debt ceiling. (I wonder how the current one will turn out?) But some of these are worth giving a think:

#4 If the U.S. government could issue debt-free money, it is conceivable that we would not even need the IRS. You doubt this? Well, the truth is that the United States did just fine for well over a hundred years without a national income tax. But about the same time the Federal Reserve was created a national income tax was instituted as well. The whole idea was that the wealth of the American people would be transferred to the U.S. government by force and then transferred into the hands of the ultra-wealthy in the form of interest payments.

#6 If the Federal Reserve did not exist, the big Wall Street banks would not have such an overwhelming advantage. Most Americans simply have no idea that over the last several years the Federal Reserve has been giving gigantic piles of nearly interest-free money to the big Wall Street banks which they turned right around and started lending to the federal government at a much higher rate of return. I don't know about you, but if I was allowed to do that I could make a whole bunch of money very quickly. In fact, it has come out that the Federal Reserve made over $9 trillion in overnight loans to major banks, large financial institutions and other "friends" during the financial crisis of 2008 and 2009.

#7 If the Federal Reserve did not exist, it is theoretically conceivable that we would have an economy with little to no inflation. Of course that would greatly depend on the discipline of our government officials (which is not very great at this point), but the sad truth is that our current system is always going to produce inflation. In fact, the Federal Reserve system was originally designed to be inflationary. Just check out the inflation chart posted below. The U.S. never had ongoing problems with inflation before the Fed was created, but now it is just wildly out of control?.

#10 If the Federal Reserve had never been created, the American people would be much more free. We would not be enslaved to this horrific national debt. Our politicians would not have to run around the globe begging people to lend us money. Representatives that we directly elect would be the ones setting national monetary policy. Our politicians would be much less under the influence of the international banking elite. We would not be at the mercy of the financial bubbles that the Fed has constantly been creating.

Mister, we could use a man like Andrew Jackson, or even Chuck Heston, again.

I can't show you all ten because violent eliminationist conspiracy theories like these are just the kind of thing that will make you shoot a member of Congress.

Don't let that stop ya Tim...RELOAD!

[Sarah Palin]

Whoopsie Daisy!

[Larry Hastings]

When will Cavanaugh finally give in and take his borscht-belt act on the road? The Catskills--and Branson--await!

[framer]

i dont understand #4. ive frequently heard the argument that wealth is transferred to the wealthy through the income tax. but i dont understand it. can anyone point me somewhere for a concise argument of this?