Ken Szulczyk's Theory Why Monetary and Fiscal Policies Could Fail during Recessions

I present my theory on business cycles and explain why fiscal and monetary policies can fail during recessions and crises. I wrote, organized, and combined many known economic facts into a cogent, logical story, explaining the impact of economic expansions and recessions upon an economy. I show two characteristics – two and seven – as new deductions while everyone knows the other characteristics well.

As an economy traverses along the business cycle, people, businesses, and government experience good times. Companies are earning profits, and they hire and expand their workforce. Moreover, they invest in machines, equipment, and structures. Consumers are optimistic because they experience growing incomes, job prospects, and feel good about their futures. They spend a large portion of their after-tax income, called the marginal propensity to consume (MPC) and save the remaining portion, called the marginal propensity to save (MPS). Subsequently, banks freely lend to businesses and families. Businesses invest in machines, equipment, and structures while families buy houses, cars, and appliances. Finally, government collects more tax revenue as business activity keeps expanding. Then it usually spends the tax revenue to build roads, to improve infrastructure, to expand government, and so on.

Marginal propensities to save and to consume become the vital concepts. If we would give a person $1 more dollar of after-tax income, then that person saves the MPS part and spends the MPC portion. Moreover, economists believe these propensities remain constant while I believe they vary with the economy's state. For example, households and families raise their savings or MPS and reduce their spending or MPC during a recession or a crisis. Consequently, the changing propensities affect the Keynesian multipliers.

The Keynesian multiplier effect starts with consumers spending most of their incomes in the economy as consumers inject money into the economy. This increased spending causes companies to sell more goods and services, and they earn profits, and expand the labor force. Companies hire additional workers, who earn wages. These workers become consumers who spend a large portion of their salaries in the economy, contributing to economic growth.

The multiplier effect boosts the activity in the economy as the government boosts spending, or businesses raise investment in the economy. For example, a computer company builds a new factory in Small Town, U.S.A. The computer company directly affects the economy by investing $30 million in building the facility and hiring new employees. The construction workers and newly hired employees earn wages. With more income, the employees and construction workers spend more in the economy. They buy new houses, new cars, appliances, and electronic gadgets. Moreover, they dine more at restaurants, watch movies at the cinemas, and frequent coffee shops.

Then the multiplier effect kicks in. These companies serve more customers and make more profits and income. Thus, these businesses hire more workers and work their workers longer. These employees earn greater incomes and increase their spending and savings, and the process continues indefinitely. The $30 million investment in Small Town, USA could generate more than $30 million in incomes as the injection increases the business activity in the economy.

The multiplier effect could create other benefits. For instance, a computer company employs more white-collar workers, and people gain and acquire computer skills. The economy gains a more educated workforce. Furthermore, government collects more tax revenue as a community's income rises. Then government usually raises its spending and provides more services to the community.

The Keynesians, unfortunately, view the savings as leaking from the economy because they treat savings as if people hide their money under their mattresses, or inside the walls while businesses squirrel away their savings in massive, impregnable vaults. However, workers, consumers, and businesses in well-developed countries deposit their savings into banks. Thus, the banks become critical to economic development as they inject the savings into the economy via lending. Banks use the savings to grant loans to businesses, so companies can invest in machines, buildings, and equipment. In addition, the banks grant loans to consumers to buy houses, cars, and appliances. Thus, banks become the first Characteristic of the boom-bust cycle because the banks channel savings into investments in the economy.

Characteristic 1: : A strong banking and financial system lays the foundation of healthy economic growth.

Our economy continues growing and flourishing. Rising incomes fuels consumers' optimism. So consumers continue spending and saving. Businesses experience increasing sales and continually hire workers. Subsequently, the people and businesses continue depositing their savings into banks while the banks lend out the savings. Many economists believe the total savings must equal total investment. However, the banking system as a whole creates and expands the money supply.

For example, a person deposits $20,000 into his savings account and earns a tiny interest rate. The bank puts this money to work. It must retain a small portion of the funds and can lend out the remainder because a central bank imposes reserve requirements. A bank must hold onto a portion of the funds, ensuring this bank has money sitting in a vault or as a deposit at the central bank to meet depositors' withdrawal. In this case, we set the required reserve ratio to 10%. Thus, the bank grants $18,000 home improvement loan and retains $2,000 in the vault.

A homeowner takes the credit and buys $18,000 in materials at a construction store. The store deposits this money into its bank. The bank lends out $16,200 for a car loan to a taxi company and retains $1,800 in the vault. The taxi company uses the car loan to buy a new car at a car dealership. The dealership takes the funds and deposits it in its bank, and the deposit-loan cycle continues.

Similar to the multiplier effect, this deposit and loan cycle becomes an infinite process. Economists focus on the money supply, and the banking system as a whole creates extra money in the economy. However, we can define the home improvement loan and new car as investment. Of course, not all bank loans result in investment. Banks grant credit cards that allow people artificially to prop up their spending.

The banking system could amplify and enhance savings, so one dollar in savings can support more than a dollar in investment, which becomes Characteristic 2. It depends on whether businesses and households use the bank loans to invest in capital or artificially prop up spending. A country such as the United States where most people spend their incomes, the banking system can amplify the meager savings that let banks lend out as loans.

Characteristic 2: The banking system could multiply the investment through the deposit-loan process, causing investments to exceed savings during economic expansions.

The banking system creates a side effect as it amplifies savings. Many businesses and families use bank loans to buy real estate. As the economy continues growing, the banks continue granting loans. Businesses and families create a strong demand for real estate that pushes up property values, which leads to Characteristic 3. As people and businesses continually buy real estate, the bank loans inflate asset bubbles. As people and businesses witness the bubbles, they become exuberant and invest more into the appreciating assets. Even banks join the exuberance and could relax their lending standards. Even if the bank forecloses on a property, they know they can sell the property at a greater price, knowing the bank could come out ahead.

Characteristic 3: A growing economy with a strong banking system automatically creates asset bubbles.

Most companies do well during the expansion cycle while poorly performing companies can hide losses from the investors, banks, and stockholders. These companies can hold on and can convince banks to continue lending to them and convince investors to buy their stocks and bonds. Nevertheless, an event triggers an awareness that leads to shock, and eventually to extreme paranoia. The event could be a plunge in the stock market, currency devaluation, or a wave of massive businesses bankruptcies. Bankers and investors start scrutinizing every company's financial statements more closely. They discover the problems at the poorly performing companies and become horrified at the companies' losses. Then banks and investors stop lending, which becomes Characteristic 4.

Characteristic 4: Banks and investors become fearful to lend and invest during a crisis. Companies and people cannot borrow from the banks while investors stop investing in companies.

The badly performing companies begin contracting and laying off workers. The workers become fearful of the crisis, and they serve a dual role as consumers in the economy because they reduce their spending and boost their savings. Companies experience a decline in sales, and lay off more workers. Thus, we enter a vicious cycle where we have Keynes's Paradox of Thrift. Consumers continually reduce their spending and raise their savings while businesses witness drops in sales. Then businesses lower their production and stop investing into structures, machines, and equipment, which becomes Characteristic 5.

Characteristic 5: Investment falls during recessions and crises as companies become pessimistic of the future.

Consumers and families remain afraid and continue saving. Even if they deposit their savings into banks, the banks are afraid to lend. On the other side, firms and households may not want to borrow especially if they accumulated large amounts of debt during the economic expansion. Thus, savings no longer enter the economy and fuel investment. Furthermore, Keynes's Liquidity Trap strikes the economy. Even if the central bank reduces the interest rate to zero, banks refuse to lend. Then expansionary monetary policy stops working, which becomes Characteristic 6.

Characteristic 6 – Keynes's Liquidity Trap: As a central bank reduces interest rates, banks refuse to lend while businesses and households may not want to borrow. Thus, low interest rates have no effect on the economy, causing expansionary monetary policy to become ineffective.

Many economists believe the investment and government-spending multipliers are constant and equal about two. Thus, for every one dollar in additional investment or government spending boosts incomes in the economy by $2. However, the multipliers vary with people's and businesses' perceptions of the economy. For example, people see friends, relatives, and acquaintances being laid off, and they become nervous and start saving. Thus, people save more and consume less, causing the marginal propensity to save to increase while the marginal propensity to consume to decrease.

During a recession or crisis, people and businesses raise their savings, so the marginal propensity to save becomes high while the marginal propensity to consume becomes low. Economists calculate the simple multiplier by using 1/MPS. Thus, as the marginal propensity to save rises, then the multiplier becomes smaller, leading to Characteristic 7. Consequently, as the government injects more spending into the economy, people earn wages and siphon this spending out of the economy through saving. Even if people deposit their savings into banks, the banks are afraid to lend. Finally, if the government reduces income taxes to spur consuming spending, the taxpayers save this, so decreasing taxes during a recession also becomes ineffective.

Characteristic 7: The Keynes's investment, government spending, and tax multipliers change because they depend on people's and businesses' perceptions of the economy. Thus, the government-spending and investment multipliers vary with the state of the economy.

If the government tries to boost government spending or reduce taxes to expand the economy during a recession, the multiplier stops operating. Thus, government spending or taxes have little influence on the economy during recessions or crisis. Even if the government greatly expands spending and accumulates a massive debt, the economy would respond weakly.

We need three conditions for fiscal and monetary policies to work on the economy. First, people must start spending again to create sales for businesses. Second, companies must become optimistic as they experience increasing sales. Thus, they hire more workers and invest in machines, equipment, and structures. Finally, banks begin lending to families and businesses again that fuels investment into the economy. Thus, these three conditions become necessary to get the economy functioning again.

Most recessions last briefly because the three conditions return to normal quickly. Subsequently, government could restore confidence and faith in the economy by using fiscal policy. If people believe the government's policy to expand spending or reduce taxes, people begin spending again while businesses start investing again, and the banks begin lending.

However, we know fiscal policy had failed in Japan during the 1990s and in the United States after the 2007 Great Recession. I cannot answer for Japan, but the U.S. government created massive insecurity in the economy after the 2007 Great Recession. Many companies do not know how their costs will change with the new federal health care plan. Furthermore, the U.S. government passed the American Recovery and Reinvestment Act of 2009 to inject $831 billion into the economy. However, many experts and economists complained this amount was too small. Thus, the U.S. government has failed to restore the people's, businesses', and banks' confidence in the economy.

People continue to save and reduce consumption. Meanwhile, companies continue to shun investment and refuse to hire workers while the banks refuse to lend. Thus, we have the last characteristic - Characteristic 8.

Characteristic 8: Both monetary and fiscal policies can become ineffective during recessions and crises. Government must use its policies to restore people's, businesses, and bankers' optimism, faith, and confidence. Otherwise, the economy begins stagnating, and the country enters an extended recession.

For fiscal and monetary policies to be effective, they must restore faith and trust. Therefore, people will raise consumption and reduce savings raising the marginal propensity to consume and decreasing the marginal propensity to save. The faith restores the businesses wanting to invest in structures, machines, equipment, and technology, and to hire workers. The faith also restores bankers' confidence to start lending to lend to businesses and households. Then businesses begin borrowing from the banks and financial institutions while the financial markets start lending to businesses and households. As government uses the fiscal policy, the increase in government spending or fall in taxes has the appropriate effect on the economy because everyone in society has restored the Keynesian multipliers.

Paul Krugman and the New Keynesians

I just had read Paul Krugman’s book – End the Depression Now - for the second time. Everyone regardless of political philosophy should read this book. Even though Paul Krugman has become the top spokesman for Keynesian economics, he writes clearly, succinctly, and intelligently for an economist. Perhaps, Paul Krugman should rewrite Keynes’s book. Unfortunately, the world’s two most famous economists, Maynard Keynes and Karl Marx, are incredibly long-winded writers as every sentence overflows with superfluous words, and sentences stretch across pages.

Paul Krugman is correct in many ways but errs in other ways. The world continues to struggle from the Great Recession that struck the world in 2007. Something seriously happened to the U.S. economy, and many people do not get it. Paul and I get it, and I understand why most people do not get it. Everyone grew up during the prosperous times when the U.S. economy plowed ahead and created millions of jobs while the U.S. military and U.S. businesses dominated the world. If someone wanted to work, the person would simply fill out several job applications and wait for the phone call. Then this person had a job. Then this person could apply for other jobs while working, and gradually transition themselves into better positions.

Nevertheless, something had changed. After the 2007 Great Recession, the U.S. economy has become stuck like a truck spinning its tires in the mud. Jobs had become scarce while the unemployment rate gradually falls towards the 5% rate, which we consider normal. However, many smart people know something had broken in the U.S. economy.

Many politicians and leaders view the falling unemployment rate as a barometer on the economy’s health. However, a falling unemployment rate masks two problems. First, the U.S. government does not count discouraged workers as unemployed. Discouraged workers want to work, but they stopped searching for employment because they believe they can’t find a job in the economy. Second, some people found part-time jobs after being laid off during the 2007 Great Recession. However, some of these people want to work full time and not part time.

What had happened? Something struck the economy like the Ebola virus coursing through a healthy person’s body. Of course, I argue the transition from a manufacturing economy to a service-oriented one had replaced many good-paying, full-time jobs with low-paying, part-time jobs. Then we add an overbearing, all-controlling government that further damaged our economy. Now, we arrive at the first rule - just like the socialists and communists, Keynesians accurately describe the poor’s plight and misfortune.

Rule 1: The Keynesians, Socialists, and Communists can accurately describe the plight of the poor and misfortune in our society.

Paul Krugman correctly assessed Europe’s plight. European leaders have fallen into the austerity trap - governments must increase taxes and reduce government programs. If people picked up an elementary economics textbook, they would discover austerity would be a disastrous policy. During recessions, government should increase government spending and/or reduce taxes because the government injects money into the economy, raising consumers' incomes and spending. Similarly, the government could reduce taxes, allowing taxpayers to keep more income, so they can increase their spending and help expand the economy.

Paul Krugman, however, has missed the point. The European countries never used Keynesian economics correctly, which becomes Rule 2. Governments should use austerity during economic expansions that would slow the economy. Austerity helps create budget surpluses to reduce the government’s debt and strengthens a government’s finances. Then during a crisis or recession, government can boost its spending and lower taxes to expand the economy. Unfortunately, European governments reduced taxes and boosted government spending during the economic expansion, weakening their financial resources. As European governments tried to increase government spending during the 2008 Financial Crisis, investors became leery, pessimistic, and fearful. They stopped investing in Greek, Spanish, and Irish bonds. Investors believed these governments had issued too much debt, and the governments would experience troubles repaying the bonds with interest. We know this became true. Remember the Greek haircut? Euphemism for forcing the bondholders to take a 50% loss on their Greek bonds.

Rule 2: For pure Keynesian economics, government reduces spending or raises taxes during economic booms and boost spending or reduces taxes during recessions. Thus, government strengthens its finances to handle downturns in the economy.

Keynesians are biased towards government spending, which becomes Rule 3. Don’t get me wrong. I understand the concept well. Every economy has four broadly defined sectors: Consumers, businesses, governments, and exports-imports. During a recession, consumers and businesses become fearful and pessimistic about the future. Consumers reduce their spending, buy fewer imports, and boost their savings. As businesses sell fewer products or services, companies lay off some of their labor and reduce their investments. Meanwhile, if the recession had spread to a foreign country, then foreigners buy fewer exports from us. Consequently, our economy takes a huge hit from lack of spending. Consequently, government becomes the only entity that can defy the recession and can boost its spending to overcome society's lower spending.

Rule 3: Keynesians have a bias towards government spending. Nevertheless, government can reduce taxes to expand the economy and raise taxes to slow the economy down.

Many Keynesians discourage businesses, government, and consumers from saving, leading to Rule 4. They must spend all their incomes in the economy to buy goods and services, and keep the economic machine turning. Since everyone becomes fearful and saves more during recessions, people remove money from the economy. Thus, Keynesians are correct if people hide their savings under their mattresses while business and government store their money in vaults. On the other hand, if companies and people deposit their funds into banks, then banks can lend out their funds. Consumers borrow to buy houses, cars, and appliances while companies borrow to invest in buildings, machines, computers, and equipment. This explains why the Asian tigers - Hong Kong, Singapore, Taiwan, and South Korea - grew phenomenally. Asians are phenomenal savers who deposit their savings into banks. Then banks could grant loans to businesses that invest in their economies that fuel their extraordinary economic growth rates.

Rule 4: Keynesians are against businesses, government, and consumers from saving. They must continually spend to prop up the economy.

Here is where Paul and I begin to diverge. Keynesians pick certain periods to show Keynesian economics works, which becomes Rule 5. They always point to a particular time such as the U.S. government preparing the U.S. economy for World War II. The U.S. federal government ramped up spending to build ships, trucks, weapons, and supplies for soldiers. U.S. manufacturing went into overdrive and stomp on the economy’s accelerator. Many young men joined the armed forces while many factories hired women to work in the factories. No question, Keynesian economics had worked.

Rule 5: Keynesians choose their times well to show Keynesian economics works. Then they neglect other times when Keynesian economics had failed.

Everyone forgets Franklin Roosevelt, who started his presidency in 1932. The president boosted government spending during the 1930s by creating numerous alphabet soup agencies and sponsored massive public works projects. Did the U.S. economy recover? No - the U.S. economy had entered a recession in 1937. Of course, the U.S. government also raised taxes, which the government should never do during a recession, and the U.S. government encouraged companies to keep paying high wages to the workers. The high wages ensured the workers retained their purchasing power. Unfortunately, people increase their savings during uncertain times and reduce their spending.

Let’s say the Great Depression was an anomaly. I can find another significant failure of Keynesian economics. Japan entered its two-decade malaise starting in the early 1990s. Japan also used Keynesian economics since the 1990s as the Japanese government amassed a public debt to GDP ratio of 200%. Consequently, the Japanese economic engine continues sputtering and struggling along since the 1990s. What makes Japan unique is the Japanese government bonds are held within Japan, and thus, Japan has little risk of foreigners triggering a financial crisis, which I explain later in this blog.

Returning to our side of the world, the U.S. federal government has dumped trillions of dollars into the economy since the start of the 2008 Financial Crisis, and we have witnessed the weakest recovery ever. Of course, Paul Krugman said, if Keynesian economics does not work, then government must scale up its spending, which becomes Rule 6. Using Paul’s analogy from his book, the broken economy represents a car with a defective battery. The government must only replace the battery to get the car running again. Well, the government has spent $700 billion to bail out the financial institutions and another $831 billion for the American Recovery and Reinvestment Act of 2009. Then the Federal Reserve, our central bank, lent about $2 trillion to bail out the banks. Replacing the battery has become expensive while that damn car still won’t start. The U.S. economy measures about $16 trillion, so if government continues boosting its spending, it will dominate and control our society, similarly to the Soviet Union, where the bureaucrats controlled the entire economy.

Rule 6: Communists and Keynesians only differ in their scale of the government's planning.

I do agree with Paul Krugman – government should never decrease government spending or boost taxes during a recession. Nevertheless, I must add one caveat - government must have strong finances to weather the downturn. In his book, Krugman cites Minsky, an unknown economist. Minsky expounded a simple idea. A company with low debt can expand quickly by taking out bank loans, which we call leveraging. The company continues doing well and keeps expanding while banks keep granting the company more loans. Then a crisis happens, and banks start examining their loans. If banks believe the company has too many loans, the bank cuts the company off, which imposes hardship onto the company. The company begins deleveraging by cutting back on spending and repaying its loans. If a financial crisis strikes the company, then the company may nosedive while the bankers, stockholders, and bondholders panic. Subsequently, the company accelerates towards bankruptcy.

For example, Lehman Brothers bankrupted in October 2008. It began with a leverage ratio of 26 to 1 in 2003 that surged to 39 to 1 in 2006. Consequently, Lehman Brothers borrowed $39 for every $1 it had in equity. Equity measures a company’s financial strength by taking its assets and subtracting its liabilities. Investors want a low leverage ratio because they want to recoup their investments if the company bankrupts. Unfortunately, Lehman Brothers borrowed to buy expensive real estate at the height of the housing bubble.

Did you catch the irony? The U.S. federal government has a leverage ratio too. We know the U.S. government has accumulated $17 trillion dollar debt, but we do not know the government’s equity. Although the U.S. government spends about $3.5 trillion per year, this does not represent equity. We must add all the government’s assets, such as military bases, equipment, government buildings, and other assets and subtract its liabilities. I bet the government's current leverage ratio tilts towards the high side. If a government debt becomes too high, investors will stop buying the government bonds, triggering a financial crisis. Then government must deleverage by paying down its debt and selling off its assets. Unfortunately, the U.S. government holds many assets that it cannot sell, such as military bases, weapons, and so on.

Paul Krugman argues the U.S. government could ramp up its spending that would push the U.S. debt to new records. Although a high debt could trigger a financial crisis, a government does not have to deleverage if it experiences financial trouble. A government could force its central bank to buy government bonds. Thus, the central bank prints money to cover a government budget shortfall. However, printing money leads to inflation and weakens a currency. (The Greek, Irish, Italian, and Spanish governments have no control over the central bank. They only have the power to tax, spend, and borrow. Since investors do not want to buy these government bonds, these governments cannot expand government spending or reduce taxes during a recession.)

Here is where Paul Krugman stumbles in his book, which becomes Rule 7. The U.S. federal government cannot weaken the U.S. dollar by forcing the Federal Reserve to buy U.S. bonds because people around the world hold U.S. dollars to save their purchasing power. If the U.S. government weakens and depreciates the U.S. dollar, people will stop holding U.S. dollars. Then many countries will stop investing in U.S. government securities. For example, China holds roughly $1 trillion in U.S. securities. If the Chinese believes the U.S. government will depreciate the U.S. dollars, then those U.S. government bonds and U.S. dollars plummet in value. Thus, China will dump those dollars and bonds that would trigger a financial crisis. Then the world rushes to unload the U.S. dollars and U.S. government securities, and we Americans will truly experience hard times.

Rule 7: Government cannot debase its currency if the world uses the country’s currency as the world’s transaction currency. Thus, the Eurozone and United States cannot devalue their currencies to jump start exports.

I am not anti-Keynesian, and I do not object if a government builds and expands roads, hospitals, schools, and infrastructure during a recession to create jobs. Nevertheless, the government must possess good finances, which becomes the most important rule – Rule 8.

Rule 8: The politicians have butchered Keynesian economics. Most governments did not raises taxes or reduce government spending during good times, so they could reduce their debts and strengthen their finances. Then governments would have the resources to combat the downturns in the economy.

Thomas Piketty, Income Inequality, and the Wealthy

Thomas Piketty, the new red-hot French economist, has taken the world by storm by writing his bestseller – Capital in the Twenty-First Century. He studied income inequality for many nations and summarized them in his book.

Thomas concluded family dynasties control the economy and not the new wealthy. Furthermore, the rate of return on capital exceeds the economy's growth rate. What does this mean? Everyone takes a slice of the economic pie by working and spending in the economy. A growing economy expands the economic pie, so, in theory, everyone in society can take a larger slice. However, the wealthy earn incomes from owning the capital. Thus, their share of the pie grows faster than everyone else. Thus, the rich are becoming richer while the poor are getting poorer. Dr. Piketty has recited Karl Marx with the same twist, which leads to Rule 1.

Rule 1: Every society has a wealthy or privileged class.

Name a society that eliminated their wealthy and made everyone equal? The Soviet Union! Although Vladimir Lenin and his gang seized all the capital – land, buildings, machines, and equipment, they created a new privileged class – the members of the communist party. They called them apparatchiks – the Russian root meaning apparatus. They became the devices of the state, cogs in the bureaucratic machinery, to carry out the communist philosophy. This system had failed.

As the Soviet Union was disintegrating, the top ranking communist party members grabbed the state's assets and became the new businessmen in Russia.

If countries adopting communism are so great, why do these countries imprison their citizens behind barb wire and walls? The military guards and patrols the borders, preventing its citizens from escaping. Communist governments also form large prison camps and incarcerate any dissident or citizen with the slightest inkling of dissent. Reading the wrong book at the library could trigger a life sentence in a political prison camp.

Communists held another tenant - everyone must work. Although the communists freed the workers from the capitalists, the workers became slaves to their new masters – the state via the communists. Societies can achieve great things with slave labor such as building the pyramids of Egypt or harvesting the cotton fields in the southern United States during the hot, humid summers.

That brings Rule 2. China, Cuba, Russia, North Korea, and Vietnam have tried Communism, and all of them had failed. All these countries except North Korea started incorporating market economics and capitalism into their systems. Communism in its pure form does not work and will never work.

Rule 2: No country has ever adopted and used Communism successfully.

As Deng Xiaoping regained power and became president in China, he said, "I have two choices. I can distribute poverty or I can distribute wealth." Then he gradually opened China to free markets. Starting in the late 1970s, he began deregulating the agricultural markets and allowed people to grow and sell their own food. Then he allowed entrepreneurs to start and manage small and medium size businesses. However, the communist party of China still controls the large-scale enterprises.

The communists claim these countries took shortcuts and never adapted Communism correctly. Experts are right. A communist government never adopted the ideas of Communism correctly. If countries cannot adopt it correctly, then why try it? On the other side, if we did adopt communism, whom do you think will be the new communist party members? The same politicians, we have elected into office.

I have read Karl Marx. He never said everyone should earn identical wages, and everyone should receive equal pay. He stated workers should earn the value they contribute to a good. For example, if a worker contributes $500 to a product, then he or she should receive $500 in wages for that work. However, the owners of capital siphon away the worker's contribution and pay the worker a fraction of his or her contribution. Marx never said all workers should earn the same wages.

Then Piketty added the rich inherit their wealth. Did he have to tell us that? Everyone already knew this. How many millionaires and billionaires donate all their wealth to charity after their death? Only a handful of the wealthy such as Bill Gates, Warren Buffet, and Mark Zuckerberg donate large sums to charity. Piketty is correct – the wealthy garner larger shares of the capital, which leads to Rule 3.

Rule 3: Wealthy can easily maintain, expand, and propagate their wealth.

For example, Bill Gates founded Microsoft that successfully copyrighted the software for an operating system. Since then, Microsoft has not developed innovated products. However, when the company sees something new, it buys and assimilates the company into Microsoft. This has been occurring in the U.S. economy during the 20th century. In the early 1900s, the industries for tobacco, cars, beer, soda, and so on had dozens or more companies operating in the market. One hundred years later, two or three large corporations dominate these markets.

Wealth carries a dangerous side effect. Most people do not realize a country with a good legal system and private property rights will protect owners of the property. The wealthy will use the state to help protect them. For instance, I start a new company and introduce a new operating system. People like it and people begin switching from Microsoft's Windows to my system. Subsequently, Bill Gates contacts his friends in Washington, D.C. – the politicians whom everyone hates. The politicians can sic the tax authorities and regulators on me. With the numerous laws and regulations, they will find severe violations and use them to close me down or bankrupt me with massive fines. That leads to Rule 4.

Rule 4: In capitalistic countries with free markets, the government establishes institutions to protect private property. Then the state protects the wealthy who hold and own the property.

Piketty and others clamor a wealth tax or want government to impose more taxes on businesses. He is from France, and France imposes high taxes on everyone. Moreover, it had passed a wealth tax in 2006. Some of the wealthy fled France and moved their wealth to other countries. Although the French government raised $2.6 billion per year in new taxes, France lost about $125 billion in capital as the wealthy fled the country. Thus, all countries must pass the same wealth tax to stop the wealthy from fleeing. Of course, several countries will hold back such as Hong Kong, Monaco, and Singapore, giving the wealthy a haven to flee to.

I have liberal friends who criticize our political leaders. Then they turn around and want the government to tax the rich. Thus, the liberals want the politicians whom they despise to determine how to spend the tax money, leading to Rule 5. Politicians controlling more money can control and manipulate more things in society. As an illustration, just examine President's Obama's Healthcare Plan and the mess it has created.

Rule 5: A tax only expands the state's power and gives the government more control over the economy.

Paul Krugman, an advocate of Thomas Piketty, won the noble prize in economics in 2008. Sometimes, he can be brilliant and raise a good point in his blog and writings while, other times, I wonder if this guy came from a different planet. Sometimes he goes off the deep end, and I wonder if anyone takes Paul Krugman seriously anymore? Hey, hold on. He did propose the U.S. government should use Keynesian economics to build a defense against a Martian invasion. This brings us to Rule 6. Economists isolate themselves from society, and sometimes, they develop policies and recommendations that deviate far from reality.

Rule 6: Most economists come from the upper middle class and higher. If they teach or do research in a university, then they isolate themselves from the world and its problems.

Although I am not a Keynesian and do not want the government to expand taxes, I am also not a Republican. The Republicans can be scarier than their democrat counterparts. After the 2008 Financial Crisis, they began calling the wealthy the job creators. They cleverly spun a new twist on an old word, which becomes easy to dispel. In the last 20 years, what kind of jobs has the wealthy created? The good-paying jobs continue disappearing and being replaced with part-time, low-wage jobs.

I know because I remember growing up in Michigan. When I was a boy, many people worked in the factories producing cars and products for the nation and the world. Factory workers joined unions and earned high wages with excellent benefits. When I entered the workforce, these union jobs had disappeared - the first causality of international trade.

I am not bitter at the wealthy. Who cares about the rich? People who cannot find good-paying jobs should be allowed to create their own jobs, which becomes Rule 7. True capitalism lets anyone become entrepreneurs to create income for themselves. During the last three economic expansions, small and medium size businesses created the most jobs while large corporations created few jobs. As the economy expands, local and state governments also create jobs, hiring regulators to control the economy – the state's apparatchiks. Unfortunately, governments at all levels in the United States must control and regulate businesses.

Rule 7: A society with a good legal system should encourage its citizens to become entrepreneurs. Successful entrepreneurs establish growing prosperous companies that hire workers.

For example, Thailand has a poor legal system, but the Thai government lets its citizen work and support themselves. I walked by a street corner several times with a space of 10 feet by 20 feet on the sidewalk along the curb. In the morning, the entrepreneurs sold t-shirts. Then they transformed this space into an outdoor restaurant in the afternoon and a bar at nighttime. Imagine how many rules and regulations this business would violate in the United States if an entrepreneur tried to do this on any street corner in any U.S. city.

7 Reasons Why Russia Should Take Over The Crimea

The United States and United Nations continue to intervene with Russia taking over the Crimea. They have imposed sanctions on Russia and demand Russia return the Crimea to the Ukraine. However, Russia has 7 valid reasons to assume control over the Crimea.

Reason 1: Russia and Ukraine transferred the Crimea back and forth over their history. Roughly 50% of Crimea residents identify themselves as Russian. Many residents speak Russian as their primary language and share its culture. Although Ukrainians speak a Slavic language similar to Russian, it is not Russian. Furthermore, some Ukrainians harbor a grudge against the Russians for occupying the Ukraine during the Soviet Union.

Reason 2: Russian government stationed its navy at Sevastopol, Crimea. With the Ukrainian economy sinking into chaos, Russia must protect its naval base. The chaos could spread to the Crimea and the naval base, creating problems for the Russian Black Fleet.

Reason 3: Don't people living in a democracy get to choose which state to belong to? Over 90% of Crimeans voted to leave the Ukraine and join Russia. Of course, the caveat is the world must ensure Russia did not manipulate the vote. On the other hand, the United States have always experienced voting troubles. Illegal aliens vote in elections. In the old days, politicians stuffed the ballot boxes with fraudulent votes after the polling stations closed in the south. On election day in Chicago, the dead rise from their graves and vote at the elections. If the world takes away the people's right to vote in the Crimea, then the politicians dictate policy. Thus, the world's politicians eliminated the Crimeans' right to vote.

Reason 4: The economies of Ukraine and Russia differ. Out of the 15 former states of the Soviet Union, Ukraine made the fewest strives towards a market system while Russia adopted some changes during the 1990s to a market economy. Unfortunately, the Russian government started undoing those changes in the 2000s with President Putin being president for many of those years. Consequently, Russia has a better economy than the Ukraine's. Perhaps the citizens of Crimea want to live in an economy with more markets.

Economists developed measures and rankings to determine how free a country's markets. For example, the Heritage Foundation ranks countries on their economic freedom. The measure includes limited government, efficient regulations, taxation level, business investment freedom, and so on. Nevertheless, the ranking only provides a guide because economists have troubles measuring these things. For example, how do you measure efficient regulations or limited government?

Economic freedom differs from political freedom. United States was always ranked in the top 10 for economic freedom in the past, but we have fallen to the 12th spot in 2014. Government at the federal, state, and local are usurping control and accumulating power. Each year, Americans keep losing their economic freedom, but we still have political freedom. We can choose which idiots to represent us in government. However, the U.S., state, and national governments in the United States restrict us from opening new businesses. They regulate our investments and restrict our property rights. Hence, we continually drop in the rankings for economic freedom.

Reason 5: Heritage Foundation ranked Ukraine as 155 and placed it in the same class with Cuba, Burma, Iran, and North Korea. They ranked Russia a 140. Russia has a tad more freedom than Ukraine even though Heritage Foundation ranked it mostly unfree. Consequently, Crimea could gain a little more economic freedom if it broke away from the Ukraine and joined Russia.

Reason 6: Transparency International compiles the Corruption Perception Index for 177 countries. Economists and analysts have even more problems measuring corruption because corruption entails many forms – bribes, extortion, kickbacks, under the table payments, tax evasion, and so on. In 2013, they ranked Ukraine 144 and Russia at 127. Nevertheless, the United States ties with Uruguay at 19.

Businesses experience trouble growing and thriving in corrupt countries. Regulators and tax inspectors shake down companies for bribes, kickbacks, and extortion payments. Business leaders must form friends and pay bribes to the politicians and bureaucracy leaders. Then the politicians and bureaucrats will help and protect the companies. Consequently, Crimea could lower its corruption by joining Russia.

Many people forget history. Over the United States' history, Americans moved onto Indian lands and stole them. They established farming communities and cities. They also formed a territory government. Once the state had become large enough, they petitioned the U.S. government to join the nation as a state. For example, Puerto Rico, Guam, and U.S. Virgin Islands remain territories of the United States. If the residents vote to join the United States as a state, should Russia and other countries oppose the residents' decision? It is a hypothetical question because it would never happen. Citizens living in a territory receive all the benefits from the U.S. government without paying all the taxes and costs.

Reason 7: U.S. government must have another agenda. U.S. government and the world fear a developing and stronger Russia. Hence, they want to restrict its size and power, so the U.S. government can dictate its policies to the world. The real issue is which country gets to control the world, and the United States does not want to share control with another country. Russia as the Soviet Union was the only country large enough to challenge the United States during the cold war.

The United States and United Nations have imposed sanctions on Russia. These sanctions will push Russia into a recession along with Ukraine and Kazakhstan. Kazakhstan, another former Soviet State, has mineral and petroleum wealth. With more countries entering a recession, the stacked dominoes are tumbling across the world as economies begin crumbling. As the dominoes continue falling, it will bring the recession to the doorsteps of the United States. We, Americans, are experiencing the weakest economic recovery, and a world going into a recession will not help. A world in recession will push us back into an extended recession.

Is North Korea being Aggressive?

Political leaders, news reporters, and analysts claim North Korea is being aggressive towards the outside world. However, the U.S. military performs joint military exercises with South Korea. South Korea conducts military exercises near North Korea’s border while the U.S. military flies airplanes near the border. Then the United Nations with the approval of the United States imposed further sanctions on North Korea. When North Korea fired artillery onto Yeonpyeong Island, a disputed territory between South and North Korea, was North Korea being aggressive or sending a message to South Korea and the United States to back off?

The United Nations imposed sanctions on North Korea because North Korea is developing nuclear weapons and missile technology. In North Korea’s defense, a country with nuclear weapons has never been invaded by another country. Unfortunately, nuclear weapons depend on early 20th century technology. They are simple devices that depend on refined uranium 235 or plutonium 239. That is the only complexity of developing nuclear weapons, purifying and refining uranium or plutonium into weapons grade. On the other hand, North Korea could be using nuclear weapons and missile technology as a bargaining chip with the United States. For instance, North Korea could suspend its nuclear program if the United States opens diplomatic relations with North Korea and sends more aid. Unfortunately, both sides refuse to talk to each other.

Many Americans advocate invading North Korea. They believe the war would be quick and decisive. This could be a terrible idea. People had forgotten history. The Korean War (1950-53) ended in an armistice. Both the South and North Korean militaries put their weapons down and stopped fighting on July 27, 1953, and they never signed a peace treaty. Thus, the war ended in a tie with no winner. As the United States sends more ships and troops to the Korean Peninsula while South Korea performs military exercises near the border, North Korea had canceled the armistice in March 2013 as tension between the two sides continues escalating.

Many Americans had forgotten the United States military helped South Korea during the Korean War, and that war ended in a tie. Unfortunately, we have fared no better with our recent military excursions. U.S. military has occupied Afghanistan for over 12 years with no end in sight. U.S. military had killed the top leaders of al-Qaeda, but the U.S. military still controls a land locked country filled with sheepherders, mountains, and rocks. Under these conditions, the U.S. government still has trouble controlling Afghanistan even after the Soviet Union had worn down Afghanistan during the 1990s. Furthermore, the U.S. military has invaded Iraq and occupied the country for 12 years with no end in sight. U.S. military has invaded Iraq twice because the U.S. military had invaded Iraq in 1991 after Iraq invaded Kuwait.

A new war between North and South Korea becomes likely as tensions intensify. Let us say the U.S. military does invade North Korea. Everyone assumes North Korean missiles cannot reach U.S. soil. They only develop technology to fire mid-range missiles that could reach the U.S. military base in Guam. Experts claim North Korea does not have the technology to fire missiles that would reach the continental United States. Does anyone want to gamble on this? Besides, if North Korea does not have the technology to fire long-range missiles, military can mount missiles onto ships and sail them closer to their targets. Moreover, the U.S, military would have problems fighting a war with North Korea because the military would pull troops away from Iraq and Afghanistan. Thus, U.S. military spreads the troops and resources over three battle fronts. Opposition and rebels can rise up and successfully attack U.S. soldiers and bases. Napoleon and Hitler had opened two fronts, and both dictators lost the war.

Why must the U.S. government intervene in North and South Korea’s conflict? Where does the U.S. Constitution state the U.S. government must be the world’s police officer? Subsequently, if the U.S. government triggers a war, it must finance the war and its finances are not healthy as the U.S. government debt clock has ticked beyond $17.1 trillion. U.S. economy remains weak with sluggish, nonexistent job growth. U.S. government should worry about the weak economic recovery within our borders because a weak economy causes weak growth in tax collections. Unfortunately, a weak economy coupled with a high debt converts the debt clock into a ticking time bomb.

United States government is isolating North Korea. If the U.S. government wants to change North Korea, then get the North Korean government to open their economy to free trade. Free trade moves new products, services, and ideas across a country’s borders. After the people taste free choice, consumer products, and new ideas and technology, they will demand their government to open up more. We see this happening in China. Communists still control the government in China, but every day, they open and liberalize their economy more until one day, the government will grant freedom to its people. Forcing open North Korea’s economy would change the system more than the United States and South Korea triggering a war with North Korea. Missiles and bombs would not destroy cities, and no soldiers would die.

Thoughts about the 2010 Affordable Care Act

President Obama and Congress passed the Affordable Care Act to help 48 million Americans gain health insurance. With a population of 300 million Americans, roughly 16% of the U.S. population has no health insurance. Unfortunately, I find this law troubling because, in the old days, people had a choice to buy insurance or not. Insurance was voluntary. People bought insurance because they were preparing for emergencies or unexpected losses. Regrettably, the U.S. government has ignored simple economics, which I explain in this blog.

U.S. government creates a problem by forcing people to buy insurance. Out of that 48 million Americans, how many young people do not want health insurance? Young people believe they are invincible, and few would buy insurance. Usually people who buy insurance expect to use it. Some of 48 million include low wage earners, or the insurance companies had denied medical insurance to people with preexisting medical conditions.

Insurance companies reject applicants with health problems because the companies expect to pay out more in insurance claims as the applicants seek more medical treatment, boosting the insurance companies’ costs. Consequently, the new federal law may help low wage earners and people with preexisting conditions acquire medical insurance. However, the young people will help subsidize the health insurance because most are healthy and rarely seek medical treatment.

Another side effect of the law is insurance companies gain market power. With a population of roughly 300 million Americans, the United States has 38 insurance companies. I listed the companies in Table 1 at the end of this blog. U.S. government has conferred monopoly power to the insurance companies because the government guarantees these companies 300 million consumers. On average, each company would insure 7.9 million people. Consequently, the companies can hike insurance premiums and offer lower quality insurance because consumers cannot choose whether they want health insurance or not. They must choose one of the 38 companies in the United States. Then Aenta, one of the largest insurance companies, announced it plans to exit the health insurance market.

Using a perverse example, we can show how this health care law can limit market power. Let’s say the U.S. government forces all drivers to buy road flares that must be stored in the car’s trunk. That way, a driver with car trouble can pull over and place flares on the road, so another driver does not crash into the car. What would happen if the United States has three companies that made road flares? U.S. government has granted them market power, so they can increase the price and earn massive profits. Subsequently, the companies could funnel some profits to the politicians as campaign contributions, showing their appreciation of the new law.

New health care law shows the problem of pathetic news quality. Since the 1990s, I held a low opinion of the U.S. news and newspapers because reporters never cover news stories in detail as the reporters always skim the important facts. I became angry when the reporters ignore essential facts of the new health care law. Most reporters wrote the U.S. government would fine any person $95 in 2014 for not having medical insurance. That is not completely accurate. Fine is $95 per adult or 1% of a person’s income, whichever is greater. Thus, an adult earning $20,000 per year would pay a $200 penalty for not having health insurance and not $95. Then the penalty rises to $325 per adult or 2% of income in 2015, and $695 or 2.5% of income in 2016 and after.

I listed the penalties in Table 2 for individuals, children, and families. Furthermore, experts claim the IRS has no enforcement powers to collect the tax. When a bureaucrat has a will, he or she will find a way. IRS will devise a method to collect the penalty. Most likely, the IRS would rearrange a taxpayer’s payment. IRS would apply a taxpayer’s money to the penalty first and then demand more money to apply for the actual taxes. Of course, everyone assumes the taxpayers will continue submitting forms to the IRS. People in many countries, such as Italy, Greece, Spain, and Portugal, evade and elude taxes as tax dodging has become a favorite pastime for some of their citizens.

U.S. government created another problem because it had promised the people that they could keep their current medical insurance and current family physicians. Unfortunately, the U.S. government did not anticipate how businesses and people would respond to the law.

1.     Some insurance companies offered health insurance that does not comply with the new law. Consequently, insurance companies had canceled these plans instead of complying with the law, leaving between 7 and 12 million people and families without health insurance.

2.     U.S. government taxes people and families with generous health insurance plans. A tax penalizes an activity or behavior, and government penalizes people with generous health care plans. Hence, insurance companies, people, and families have an incentive to reduce their plan’s benefits to reduce their tax burden.

3.     U.S. government has left some doctors out of the health insurance network. Thus, some families who saw their family doctor for years can no longer see them. This raises a good question – if the government leaves some doctors and hospitals out of the health care plan, will the hospitals close, and the doctors retire? This would reduce the supply of medical services that raises prices for medical services.

4.     Employers do not pay for health insurance if they work their employees fewer than 30 hours per week. Some people have lost hours as their employers switch them from full time to part time. Unfortunately, the people with reduced hours may have to purchase health insurance out of their own pocket if their salary exceeds $10,000 for a person or $20,000 for a family.

As the name suggests, the Affordable Care Act should reduce medical costs. Can you name a government program where government had reduced costs or prices? Every industry and market a government interferes with cause greater market prices. Putting this fact to the side, everyone overlooks one important fact. If the supply of medical services remains the same while people demand more health care because they have medical insurance, the market price always rises. As more consumers compete for the same supply, the consumers bid up the prices. Then I read articles here and there. For instance, the IRS will hire 6,700 agents to enforce the insurance penalty. Then federal and state governments must hire bureaucrats to work in the new medical insurance exchanges. Through my readings, I never read a story where hospitals and clinics plan to hire more doctors and nurses. If the U.S. government wants to reduce the price of medical care, it must expand the supply for medical services. If the market supply grows faster than market demand, subsequently, the market price always falls. As hospitals and medical clinics expand their services, they would lower their prices to attract more consumers to their facilities. On the other hand, I have read several hospitals will close.

The Affordable Care Act does not fix the flaw with the medical industry because the health insurance companies isolate the payments between patients and hospitals. Our current health care system provides no incentives for patients, hospitals, and clinics to reduce costs. Patients pay a fixed price to visit a doctor, usually $20 copay. Patient could request the doctor to perform 20 tests, and the doctor would comply even if he or she thinks some of the tests are unnecessary. Doctor bills the insurance company for the tests and not the patient, thus sticking the third party with the bill.

Healthcare system would change if the patient had to pay a percentage of each test. For example, if the patient must pay 10% of every test cost, the patient would start asking more questions about the tests and would question whether the doctor should perform 20 tests or not. Patient’s bill becomes tied to the number of tests the doctor performs. Furthermore, the doctor may limit the number of test especially if the doctor knows the patient has little income to pay for them.

The Affordable Health Care law creates another problem - intrusiveness. People who cannot afford health insurance or do not qualify for Medicaid or Medicare can buy health insurance through exchanges. Unfortunately, applicants must fill out a government form spanning across 21 pages. Most questions cover financial information and contain little health information. Supposedly, as a person enrolls into an insurance plan, the exchange shares information with other federal agencies such as the FBI, IRS, NSA, et cetera. Our political leaders think similarly to the Soviet planners. Soviet citizens applying for a government program or need a government document had to supply numerous documents to the bureaucrats. I call it the bureaucratic shuffle because a trip to one bureaucracy would lead to multiple trips to other bureaucracies as citizens gathered various documents.

Patients lose their privacy as the state and federal government collect information about them. I tried to research which agencies the health insurance exchange shares information with, but this information had disappeared from the internet. Remember George Orwell’s novel - 1984. Government controlled information and the main character, Winston Smith, worked for the Ministry of Truth. As the government changed and updated information, Winston had to correct every book, newspaper, and piece of information with the new information. I apologize for digressing, but I became surprised this information had disappeared from the internet so quickly. I know I read about the exchanges sharing information with the federal government agencies because people had trouble enrolling into insurance plans. Computer system experienced bugs as it shared information with these government agencies, preventing applicants from enrolling into a plan. Of course, thousands have browsed the exchange website to check rates, but the U.S. government has not revealed how many people it has enrolled. Analysts estimated the U.S. government had enrolled a half million people in mid-November 2013, far below its projections.

Government leaders forget economics is about choices. I liked how Kazakhstan had set up its medical industry. Kazakhs have a choice. They can go to a state hospital or to a private medical clinic. Government supports state hospitals that charge very low prices while private medical clinics charge a market price for its services. Of course, patients receive a lower quality of care in the state hospitals than the private ones. I remember well my trip to a state hospital in Almaty, Kazakhstan. I walked through run down, dirty corridors. State hospital looked more like a factory than a hospital. A nurse yelled at me in Russian. Subsequently, I went to the private medical clinic around the corner from my apartment. Clinic was clean and new with friendly staff. I also received my medical services quickly. That was the thing. Kazakhstan grants its residents the choice which medical services they want. United States could copy this plan. U.S. government could dissolve Medicare and Medicaid and give the funding to the county governments to support state-funded hospitals. Then the government exits the health care business and allows private hospitals and medical clinics to provide services to paying customers. Then Americans can choose which health care system they want.

After examining the Affordable Care Act, I am shocked the President and Congress would offer such a terrible plan. At least the Congressmen did not exempt themselves from the healthcare law. I believe the law requires our Congressmen to enroll in health insurance similarly to everyone else, but the U.S. federal government pays up to 75% of the insurance premiums. In the old days, government passed a program to help people. Instead, the government had passed a program that will cause problems, but it does create two benefits. First, insurance companies cannot deny insurance to people with preexisting conditions. Second, the insurance premiums could be reasonable in the beginning. For example, I looked up the cheapest plan for my state, which was $200 per month. That was not bad, but this was an estimate and not a quote. However, the health insurance costs will continue rising from the following problems.

• Health companies may hike premiums because they gain more market power. Government guarantees them consumers, and consumers can only choose insurance from 38 companies.
• Health insurance companies must cover patients with pre-existing conditions. These patients may require more medical care, and the insurance company would pay these medical costs.
• People may increase their demand for medical services because they have insurance. Consumers bid up prices for medical services (unless the supply also increases).
• U.S. government has left some doctors and hospitals out of the health insurance plan. Consequently, government will reduce the supply of health care and drive up its prices.
• Health care plan expands state and federal government bureaucracies, and the government gains and collects more information about its citizens. Furthermore, bureaucracies grow continually, and hospitals, medical clinics, and insurance companies would pay greater compliance costs as bureaucrats expand the rules and regulations.

Table 1. List of the Health Insurance Companies

Companies	Companies	Companies
AETNA	AFLAC	American Family Insurance
American Medical Security	American National Insurance Company	Anthem Insurance
Assurant, Inc.	Asuris Northwest Health	BlueCross BlueShield Association
Celtic Insurance Company	CIGNA	College Health IPA
Connecticare Inc.	Continental General Insurance Company	Golden Rule Insurance Company
Group Health Cooperative	Group Health Inc.	Harvard Pilgrim Health Care
Health Markets	HUMANA	Insurance Services of America
Intermountain Healthcare	Kaiser Permanente	LifeWise Health Plan of Arizona
LifeWise Health Plan of Oregon	LifeWise Health Plan of Washington	Medica Minnesota
Medical Mutual	Oregon Health Insurance	Oxford Health Plans, Inc.
Principal Financial Group, Inc.	Shelter Insurance	Unicare Health Insurance
UnitedHealth Group Inc.	Vista Health Plan	Walter Jarvis Insurance Services
WellPoint	WPS Health Insurance

Table 2. Penalties for not carrying health insurance

	2014	2015	2016 and beyond
Adult	$95 or 1% of your income	$325 or 2% of your income	$695 or 2.5% of your income
For every child	$47.50	$162.50	$347.50
Family	max. of $285 or 1% of family income	max. of $975 or 2% of family income	$2,085 or 2.5% of family income

The Underground Internet

I have always surfed the Internet since it took off in the early 1990s. I remember the days when the Internet comprised of text messages with no color pictures and graphics. I am even knowledgeable in computers and can write a little code in several languages, build basic websites, and other little stuff. However, I never even guessed a whole, hidden world existed in the Internet that most users would never see. They call it the deep Internet, or a better term is the underground or hidden Internet.

Before describing the hidden Internet, I define the standard Internet. For example, a user types the URL into the web address, such as www.hotmail.com. Many things happen that a user never knows. His or her computer looks the IP address for the URL in the DNS database. IP address identifies the web server’s location within the Internet. It is a unique address similar to a mailbox where people send and receive letters. DNS database lists the world’s websites like an address book, including the user’s Internet provider. IP address comprises of four digits ranging from 0 to 255, and a period separates the digits. Subsequently, the user’s computer connects to Hotmail’s servers. User connects to the Internet with an IP address via his or her Internet provider. However, the user’s computer and Hotmail’s servers exchange IP addresses. As the user’s computer and Hotmail servers exchange information back and forth through routers. Routers read the destination and source IP addresses, so they can send the information to the right places. Consequently, a mailman knows where to deliver the mail. Every letter he delivers has a send and return address. As you probably guessed, law enforcement officers can trace IP addresses and track down users who use the Internet for illegal purposes. Once they know the IP address, they know where the server exists in the real world.

An organization, Tor, developed a unique browser that does not use IP addresses. Thus, users’ computers and websites do not use IP addresses as they exchange information. Then the computers can encrypt all data, so no one intercepting a communication can decrypt it or at least not easily. Consequently, a user can remain anonymous as he browses the Internet. Tor becomes the critical software for accessing the hidden Internet.

A user can download Tor for Windows, Apple, Linux, and Android operating systems. The hyperlink is https://www.torproject.org/index.html.en. Designers use a modified version of Firefox that serves as a browser. Then users can use the browser to surf the Internet like a standard browser such as Internet Explorer, Chrome, Firefox, and Opera. If users take precautions, then they can remain anonymous.

I surfed the Internet and checked my IP address. One minute, my IP address placed me in the Netherlands. Then later, I was in Los Angeles, California. Subsequently, my IP address switched to Germany, and so on. I did find this annoying. When I visited Yahoo, the Welcome Screen was in Dutch. After I had returned, it was in English and then German because Yahoo and some websites personalize webpages depending on the user’s country. They use the IP address to determine the user’s location and country.

I found the technology cool, although the Internet speed crept at a slow pace. I could be wrong in my interpretation, but the metaphor of the mailman still works here. How does a mailman know which house to deliver the mail if he has a letter with no send or return address? Communications bounce from router to router in cyberspace until it arrives at the correct router. As a router receives information, it only knows the previous router that sent the communication and the next router where it sends the communication. After a communication passes through several routers, the sender has no link to the receiver. Do you see the secrecy? How can a policeman or agent track down someone if he or she does not know who sent it, or who receives it?

This technology is legal, and users have legitimate reasons to use it. Some believe the U.S. Naval Research Laboratory sponsors this technology to allow the U.S. government to send communications secretly. Spies, military, law enforcement officers, and delegates can send communications secretly without terrorists and enemies intercepting messages. However, the Tor developers use this technology to defend against government surveillance. We know the NSA is eavesdropping on everyone’s communication. Journalists, activists, dissidents, and whistleblowers can use this technology to send secret information to others and have some protection from an autocratic government.

This technology is not foolproof. Government agents can use malware, hacks, and other techniques to reveal a user’s identity. For example, the FBI exploited a security hole in Firefox that copied malware onto a user’s computer. Malware read the user’s IP address and MAC address and relayed that information to the FBI headquarters in Virginia. IP address reveals the user’s location while the MAC address identifies the unique serial number of a computer’s network card. IP address leads the enforcement officers to a person’s location while the MAC identifies the user’s computer.

As you probably guessed, users can use this technology for illegal purposes. FBI arrested Ross William Ulbricht, the founder of Silk Road. He also uses the alias the Dread Pirate Roberts. Ross created a hidden website called Silk Road, where users and vendors bought and sold a variety of drugs. Ross Ulbricht earned commissions from the sales as buyers and vendors generated 60,000 hits per day. FBI claims he earned between $30 and $45 million in revenue annually, and the Department of Justice seized $3.6 million in Bitcoin – virtual money. Feds claimed Ross hired a hitman through the hidden Internet to murder both a blackmailer and witness. The URL for the Silk Road is:

http://silkroadvb5piz3r.onion/

If you type the URL into your browser, nothing will show. Your browser looks the URL up in the DNS database, searching for that IP address. However, this website does not exist in the DNS database, and your browser cannot connect to it. You would need to download the Tor browser and type the URL into that browser. Then the browser would connect to the Silk Road. Did you notice the word onion in the URL? Onion refers to the onion network, the hidden world of the Internet. When I typed the URL for Silk Road, I saw the message below:

I surfed this underworld to see what I could discover. I found a search engine, called Torch that indexes the hidden sites. When I clicked on the links, less than half the websites would display. I do not know if some vendors temporarily shut down their websites because the FBI seized Silk Road, or this technology is young and unreliable. For the real Internet, the DNS database organizes the Internet world, where the onion network is decentralized. Nevertheless, I became shocked at what several websites were selling. I could buy guns from Europe, marijuana from the Netherlands, buy counterfeit euros and U.S. dollars, order phony driver’s licenses and passports, or hire a hacker to create hell for my enemy. Then I saw another website where I could hire a hitman if the hacker could not create enough hell for my enemy. I listed the snapshots of these websites at the bottom of this blog. I could give you the website addresses, but they mean nothing in the real Internet world. Did you notice the currency? All vendors accept Bitcoin, but they send the products through regular mail or package delivery company.

Bitcoin constitutes virtual money or cryptocurrency. No central bank or government issues Bitcoins, and 11.75 million Bitcoins were circulating in the world in October 2013. Bitcoins’ supply continuously grows until 2140, stopping at 21 million Bitcoins. Cryptography plays a key role in Bitcoins. Every Bitcoin has a unique, encrypted number. A person opens an account or wallet and can buy Bitcoins from online vendors. A person can store his Bitcoins on his computer or cellphone or use an online wallet. Of course, a person does not show his identity. Then he or she can settle transactions by sending the other party his account information. As a buyer completes a transaction, software encrypts that person’s private key into the transaction along with the Bitcoin number. Ensuring people do not spend the same Bitcoin for multiple transactions a miner clears the transaction. Miner is not the proper terminology. It functions more as a bank or clearinghouse. A miner decrypts the transaction and records it in a ledger. Then it re-issues the Bitcoin to the seller.

Think of a Bitcoin where you send a check to the seller, and he deposits the check into his account. Once the bank receives the check, they change numbers in their ledger by deducting the check amount from the buyer’s account and adding it to the seller’s account. A miner can earn transaction fees and receives newly created Bitcoins by clearing transactions.

This sounds complicated, but do you remember the old days? Rich people could take a suitcase of cash to a Swiss bank and open an account. They get a numbered account that contains no personal information. Then they can use the account to settle transactions secretly. For example, a rich person pays a Congressman a bribe. Rich person contacts the Swiss bank and asks the bank to transfer the bribe amount from his bank account into the Congressman’s bank account. Rich person gives the banker a code (or private key for Bitcoin) to approve the transfer. Transaction remains secret because no one has revealed his or her identities. Consequently, Bitcoin brought the secrecy of banking to the regular people.

I did not think Bitcoins would succeed because the system has several flaws. First, people who deposit their savings into banks have deposit insurance. If their bank fails, FDIC guarantees the depositors will not lose their money up to $250,000. However, no government agency insures Bitcoin or protects people from losses. Second, hackers broke into online wallets and stole the Bitcoins. Since all transactions are electronic, they erased history. Third, the price of Bitcoin fluctuates greatly between $80 and $220. Refer to the chart below: For people to use and accept money, money must retain its value. Some people view Bitcoins as an investment, hoping to buy at a low price and sell for a high price. Finally, a limited number of sellers accept Bitcoins as payment. This was true until I had discovered the hidden world of the Internet, where Bitcoin has become the means of payments.

I became puzzled when the U.S. Department of Homeland Security shut down Mt Gox, the largest Bitcoin operator in the United States in May 2013. U.S. law requires all money exchangers to register with the Financial Crimes Enforcement Network. Feds even seized its bank accounts. I thought the U.S. government was petty because Mt Gox converted government-backed securities into Bitcoins and Mt Gox did not participate in illegal activities.

I thought Bitcoins had no future until I discovered how criminals can use two methods for Bitcoins. First, criminals can launder money using Bitcoins. For example, they buy Bitcoins in the United States utilizing money from illegal proceeds and spend or convert the Bitcoins in any country circumventing government controls on transferring money abroad. Russian government has banned Bitcoins for this reason. Second, criminals use Bitcoins on the hidden Internet. Feds believe that if they can shut down the money, they would kill the black markets operating in the hidden Internet. Feds have one severe problem. A person can use Bitcoins anywhere in the world. It sounds as if the U.S. government has started another war that it cannot win. (I find this amusing, but the sellers send the products through the mail or package delivery companies. I guess the U.S. government does not have enough agents to check all that mail).

I found this technology incredible as it opened a new world before my eyes. I became amazed after I had read the instructions to setup a hidden website. I could convert my laptop into a website server and use my Internet connection to allow users to connect to my website. (It appears most vendors pay a company to host their websites). Then I could submit my URL to Torch search engine so users could find me unless I did not want to be found. Instead, I could pass my URL by word of mouth if I were doing no good. Of course, I am not doing anything illegal, and I have no need for any of these products or services. So I have no real need for this technology unless the U.S. government starts banning books and restricting free speech of professors. Then I could use this technology.

Samples of websites I found after surfing the hidden Internet within fifteen minutes. I do not condone or recommend using these products and services.