When I was reading this article at the Library of Law and Liberty on the challenges that income inequality poses for our constitutional system, this passage leapt out at me:

Early in The Federalist, for example, John Jay argued that the then existing homogeneity of the US suggested “one connected country” fitted to “one united people”: “[A] people descended from the same ancestors, speaking the same language, professing the same religion, attached to the same principles of government, very similar in their manners and customs . . . To all general purposes we have uniformly been one people . . .”

My ancestors—mostly Irish, Swiss, and Germans Catholics—certainly didn’t fit into that “one united people”. Different religions denominations, different languages, different customs, manners, and expectations. How was “one people” preserved?

The answer is that my ancestors adopted English, changed the way they dressed, ate, and behaved, and abandoned traditional religious practices in favor of those of the people who had preceded them here. My ancestors arrived here mostly from 1820 to 1840 with the latest immigrating in 1865.

Their children spoke only English, were largely irreligious, and were as American as the WASPs they lived among if not more so.

Can we have income equality with millions of low-skilled immigrants with very different “manners and customs” from the bulk of the population, who speak little English and don’t feel as much pressure to adopt it as my ancestors did? Can our constitutional order be preserved in the absence of a high degree of social cohesion? We’re conducting a vast real world experiment to find out.

I couldn’t get past the caption of this Washington Post op-ed, “Most countries have given up their colonies. Why hasn’t America?” for the simple reason that it isn’t true. The following countries all continue to have colonies:

• Australia
• China
• Denmark
• France
• The Netherlands
• New Zealand
• Norway
• Portugal
• Spain
• United Kingdom
• United States

That’s not an inclusive list. There are probably more. They may call them “territories”, “commonwealths”, or a variety of other terms but they’re colonies. Mostly, these colonies are a dotting of islands in the Pacific and Caribbean.

We’re just not unusual in this regard.

Here’s the question. This stuff isn’t that hard to check. Why did the WP run the op-ed?

The editors of the Washington Post don’t like the outline of tax reform as construed by the Trump Administration one bit:

TAX REFORM was supposed to attract wide, bipartisan support. Lower rates would be fully offset by cutting unneeded deductions and loopholes. The benefit would be a simpler, more efficient tax code. But the idea has moved steadily toward just another irresponsible GOP tax cut, paid for with magical thinking, that would erode the nation’s fiscal health and burden future generations. Republicans who know better must resist this path.

President Trump released a tax reform framework Wednesday, promising that “historic tax relief” would result in higher wages and a “middle-class miracle.” That’s about as likely as it sounds. In fact, the plan is packed with giveaways to the wealthy and threatens to add even more to the debt.

One of the many problems with the tax code as it stands is that as long as you’re only considering the income tax just about any lowering of the marginal rates will be a “tax cut for the rich” because 45% of people pay no income taxes and most of those aren’t rich. That’s by definition. “The rich” are the top 1% or .1% of income earners, depending on whom you ask.

The non-rich pay substantial federal taxes, too, but it’s mostly in the form of payroll taxes.

Now that President Trump has told us his ideas on tax reform we’re being inundated with a heated discussion in various states of dissociative fugue of what constitutes real tax reform. I won’t try to tell you what real tax reform is or is not but I can offer some thoughts on what prudent tax reform would look like.

Prudent tax reform would

• Be more efficient than the present system
• Be simpler than the present system
• Make the U. S. tax system more like those of other OECD countries
• Be no more regressive than the present system

The corporate income tax is the least efficient of our taxes. It should be eliminated or reduced. At the very least our corporate income tax marginal rates should be brought into line with those of other OECD countires.

Politics being what it is over time the tax system becomes increasingly complicated. We’re between ten and twenty years overdue for a major rewrite of the tax code.

The truly prudent thing to do, incorporating efficiency, simplicity, and making our tax system more competitive with other OECD countries would be to eliminate the income tax entirely and impose a VAT, preferably one that includes a prebate to reduce its regressivity.

When they controlled the Congress, the Democrats inexplicably chose to make our overall tax system more regressive. It’s time to reverse that but we can’t accomplish that without bringing payroll taxes and substantial Social Security and Medicare reform into the discussion.

And that’s why tax reform is hard.

Now that it looks as though the Affordable Care Act is here to stay, it’s high time that we paid more attention to the graver problem in health care—its increasingly unaffordable cost. How unaffordable? Consider this report from eHealth:

• In 47 of 50 cities surveyed, the lowest-priced plan would be officially unaffordable under Obamacare affordability standards for families earning 401% of the federal poverty level (about $82,000 per year in the contiguous US, making them ineligible for Obamacare subsidies).
• In these cities, the average three-person household would need to earn an additional $28,939 per year before the lowest-cost plan becomes affordable according to Obamacare rules.
• Government subsidies are generally made available to persons earning up to 400% of the federal poverty level, but middle-income households earning 401% or more of the federal poverty level are not eligible for subsidy assistance

In other words health care is sapping the economic strength of every other sector of the economy. You can only spend the same dollar once. Every dollar spent on health care or health care insurance isn’t spent on housing, food, clothing, saving, and so on.

To gain a better understanding of how basic the problem is, consider the graph above, something I stumbled across in this article at Bloomberg from a few months ago on the same subject.

As you can see health care spending is outstripping the growth in U. S. GDP, incomes, and inflation by a multiple but, even though it’s difficult to believe, that understates the issue. GDP, median income, and inflation all include health care spending, incomes in health care, and health care cost increases.

A better comparison would be to compare health care spending with the increases in GDP exclusive of health care, incomes exclusive of within the health care sector, and inflation of non-health care goods and services. I believe that what it would reveal with respect to the actual relationship between health care and inflation, for example, is that health care is responsible for about half of inflation.

But health care unlike, say, clothing or food is heavily dependent on government spending. Between half and three quarter of all money spent on health care comes from government at one level or another. That in turn means that health care needs a strong and growing non-health care economy and that’s just not the case.

The Affordable Care Act always attacked the wrong problem (as I’ve been saying for the last seven years). It did so presumably making the incorrect assumption that extending coverage would reduce the growth in the rate of cost increases in health care. Now it’s time, well past time really, to address the graver problem. The increase in health care costs must be restrained to the same rate as the non-health care economy. That will require decreasing utilization, decreasing wages in the health care sector, or both.

In his most recent Washington Post column Robert Samuelson considers the decline of American entrepeneurialism:

Just recently, the Census Bureau released its latest figures for business start-ups, and they paint a picture strikingly at odds with the conventional wisdom. Instead of a boom in business start-ups, there has been a long-term decline. In 2015, start-ups totaled 414,000, “well below the pre-Great Recession average of 524,000 startup firms,” as the Census Bureau puts it.

To be sure, the slump reflects the lingering adverse effects of the recession. Venture capital firms, which provide funds for new businesses, “are more risk-averse,” says economist Robert Litan. But that’s not the whole story. A 2014 study by Litan and Ian Hathaway found that the start-up decline dates back to at least the late 1970s, affects all major industries and has been present in 365 out of 366 metropolitan areas.

There is little doubt that the propensity to start new companies has declined just as there is little doubt that new companies are responsible for most new job creation. Factors behind the decline which Mr. Samuelson considers include cultural change, ongoing economic doldrums, the ability of large companies to discourage startups, and reduced government-sponsored research and development.

There are all sorts of misconceptions about entrepeneurs. Most new businesses aren’t started by young people. They’re started by people in their 40s and 50s. Additionally, most startups aren’t financed via venture capital of bank lending. They’re financed from savings and borrowing from friends and family. Consequently, to Mr. Samuelson’s explanations for the decline in startups I would add stagnant wages, reduced savings, and the high and increasing cost of health care.

To cite my own experience I became a lot more risk averse in my 60s than I had been in my 40s or 50s. That’s why I went to work for somebody else rather than running my own business as I had for decades. Now I’m earning a multiple of what I did. Reduced rewards and higher risks. You really don’t need to look any farther for why people aren’t starting new businesses at the rate they used to.

I see that defense analysts are beginning to catch on to something I’ve been warning about for decades. The United States’s ability to wage a Third Generation War (the kind we fought in World War II) is extremely limited. From Breaking Defense:

CAPITOL HILL: Is the arsenal of democracy out of business? Probably not, but America’s “increasingly brittle industrial base” may not be able to sustain our forces in a protracted war, the Chairman of the Joint Chiefs, Gen. Joseph Dunford, warned the Senate in a written statement this morning. It’s a problem a lot of people are wrestling with, from Dunford’s subordinates on the Joint Staff to academics and a White House-commissioned task force. There are solutions, a panel of experts said this afternoon on the Hill – if we just invest enough to research and develop them.

The article focuses on aerospace but there’s an even simpler example: RAM memory. We produce little RAM memory in the United States any more and we do need a continuing supply to prosecute war in the way to which we’ve become accustomed. The biggest producers of RAM memories are China, South Korea, Taiwan, and Japan.

The article is largely a pitch for additive manufacturing but I doubt that as a society we’re capable of the sort of sustained crash program that led to producing 400,000 airplanes a year and turned typewriter plants to manufacturing machine guns.

There’s an interesting article on Joseph Schumpeter’s theory of creative destruction at Bloomberg by Justin Fox:

In a 2012 paper for the Ewing Marion Kauffman Foundation from which I got much of the data for my Fortune 500 chart above, startup and technology researchers Dane Stangler and Sam Arbesman also question whether the kind of turnover we’re talking about here really is all that reflective of economic change and progress. Departures from and additions to such lists are often driven by waves of mergers and acquisitions that are more about rearranging corporate assets than creation or destruction. “Turnover is less a broad economic trend,” they write, “than a discrete temporal and sectoral phenomenon.” They also cite historical research showing waves of corporate churn in the 1920s and the turn of the 20th century that seem to have been at least as disruptive as those of the 1980s and 1990s.

So yes, modern capitalism produces and probably requires a lot of creative destruction. But this isn’t a relentless, ever-accelerating process. It goes in waves. For about 15 years now we’ve been in a lull, and it’s not at all clear when or how it will end.

There are some things that I think he misses in his piece. One of them is that creative destruction is creative. It results in greater efficiency which in turn leads to more jobs and higher incomes. Another is that there’s a lot more ferment in newly developing sectors than in old, established sectors.

There are multiple reasons for that including that established sectors are much better equipped to harness the force of government in their favor. In my view we missed a prime opportunity a decade ago to foster creative destruction rather than impede it by propping up General Motors and the big banks.

We should be much more closely focused on helping people hurt by the inevitable creative destruction and much less focused on helping companies or even business models.

In their op-ed this morning the editors of the Wall Street Journal rail against the Financial Stability Oversight Council empowered by Dodd-Frank:

odd-Frank empowered the Financial Stability Oversight Council (FSOC), which is comprised of 10 regulatory heads, with deciding whether nonbanks are “systemically important financial institutions.” The Sifi label imposes bank-style liquidity and capital requirements, among other compliance burdens, in return for an implicit taxpayer guarantee.

While the law outlined myriad criteria that FSOC could consider, Dodd-Frank left enormous discretion to regulators to write and enforce the rules. After a formal rule-making, FSOC in 2012 identified six factors it would use to assess a nonbank’s vulnerability to financial distress and how its potential instability could affect the broader financial system.

Yet in its analysis of MetLife, an insurance company that isn’t a bank, FSOC considered only the risks to the financial system. It failed to weigh MetLife’s liquidity risk or leverage, both of which showed financial strength. The council provided no explanation for why it departed from its guidance, nor did FSOC calculate the costs of its designation.

Metlife sued, and last year federal Judge Rosemary Collyer issued a scathing rebuke of the council’s “arbitrary and capricious” designation. In addition to rapping FSOC for not evaluating MetLife’s vulnerability, Judge Collyer explained that the council “never projected what the losses would be, which financial institutions would have to actively manage their balance sheets, or how the market would destabilize” if MetLife failed.

FSOC “hardly adhered to any standard when it came to assessing MetLife’s threat to U.S. financial stability” and “purposefully” refused to consider the costs of its designation in flagrant violation of administrative law, she wrote. A cost-benefit analysis, she noted, might have shown that the designation could have made MetLife more vulnerable to stress.

Richard Cordray, chief of the Consumer Financial Protection Bureau appointed by President Obama and still holding the job, is a case in point for my objections to technocracy. What qualifies him for the job? He’s a) a lawyer and b) a Democratic Party apparatchik. He’s never run a bank or insurance company or any other “systemically important” enterprise. He’s a consumer but it’s my understanding that there are a lot of those around so that can’t be it.

In theory “technocracy” means “rule by experts”. In practice it means “rule by the connected”, a particularly noxious form of aristocracy.

I don’t object to government regulation. I think it’s a necessity. I do object to ever-increasing government power being handed over to your friends and flunkies. That’s not conducive to good government.

After reading the editorial I still don’t know whether MetLife reasonably falls under the Financial Stability Oversight Council’s authority. I’m less confident in either it or the CFPB than ever. I continue to think that companies that are too big to be allowed to fail are too big to be allowed to exist. IMO the lesson of the last decade is that we should have allowed the big banks to fail and provided aid for the ordinary people hurt by their failure rather than propping up recklessly run and insolvent institutions. We’d probably be better off than we are now and we wouldn’t have a bunchy of big, insolvent banks sitting around.