Offshore News Digest for Week of December 20, 2004

GLOBAL BUSINESS

U.S. ROGUE NATION IMAGE HURTS DOLLAR IN ASIA

Being an American overseas these days can be a surreal experience. Virtually everyone, it seems, seeks that 10-minute why-I’m-upset-with-the-U.S. conversation. Recent stops in Bangkok, Hanoi, Kuala Lumpur, Singapore, Mumbai and Vientiane, Laos, featured myriad such moments, leaving little doubt that anti-American sentiment -- or more to the point, anti-Bush-administration sentiment -- is intensifying in Asia. And is all this negativity manifesting itself economically? Yes, argues Joseph Quinlan, chief market strategist of Banc of America Capital Management in New York. It will not make him many friends in Middle America, but Quinlan thinks the U.S. image as a “rogue nation” is a key force behind the dollar’s decline.

“The message from the foreign exchange markets” of late “seems to be simply this: The free ride for the rogue nation is over,” Quinlan argues. “No more guns and butter, or wads of foreign cash for a nation deeply enmeshed in the Middle East, heavily indebted at home and seemingly disengaged -- some might say -- from the rest of the world.” The sinking dollar, Quinlan says, “could be a sign that the world is no longer willing to underwrite the designs of U.S. foreign policy. To a large extent, we believe a rebound in the U.S. dollar could hinge on a revamped foreign policy.”

Why should Treasury officials care that the U.S. has a growing credibility gap In Asia? Because central banks in the region have a huge say in whether the U.S. continues living beyond its means or plunges into crisis. Asian monetary authorities hold more than $1 trillion in U.S. Treasury securities. If they pull that plug, the U.S. is in big trouble.

PANAMA CANAL TOLLS GOING UP FOR CONTAINER SHIPS

How much will the market bear when it comes to Panama Canal tolls? If you listened to the warnings of certain people in the shipping industry over the past several years, that point was passed a while back. If you judge it by the tonnage of cargo that passes through the waterway, the toll increases did not prevent the canal from breaking its 2-month tonnage record this past October and November. There are alternatives to the Panama Canal and as the world’s port, railroad and highway facilities grow --- not to mention the possibility of other waterways opening --- there will be more of them. It would be imprudent indeed to presume that the Panama Canal could raise its tolls to any level without running the risk of pricing itself out of the market.

But so far the canal’s toll structure has not driven away its most important customers, and now the Panama Canal Authority (ACP) administration is planning a series of toll hikes and betting that it will increase revenue without driving shipping to other routes. The proposed increase, for container ships only, would change rules and methods of measurement, effectively raising tolls by two-thirds over three years. If things go as proposed, starting in May shippers would pay an extra $11 each 20-foot container (or its industry standard TEU equivalent) that transits the canal. Container ships would be charged according to the on-deck capacity to accomodate containers, whether or not that capacity is used. In instances where containers on the deck partly obstruct the view of the pilot on the bridge, a second pilot would have to be employed at the shippers’ expense. If the new container rate structure goes into effect as expected --- the cabinet has never rejected or reduced an ACP rate hike request --- the canal expects to boost its revenues by some $40 million per year.

COSTA RICA GROWS ORGANIC

Tomatoes, lettuce, corn, broccoli, onions, squash, basil, oregano --- these are just some of the vegetables and aromatic herbs being grown chemical-free on small plots of land at Montes de Oro in the Aranjuez River Basin of Costa Rica’s Central Pacific region. Here, Leonel Sibaja, an agro-conservationist, has succeeded in transforming his unproductive field into a plot of fresh, fertile land, brimming with colors, smells, and tastes all which provide his family’s sustenance. Leonel’s family, along with another 52 campesino families, have benefited from the introduction of new conservation techniques promoted by the Aranjuez Agro-ecological Association.

This initiative is sponsored by the Worldwide Fund for Nature (WWF) and the Kenco coffee firm, founded in 1923 by a group of coffee growers and now one of the UK’s leading coffee brands. For the past four years, farmers, teachers, students, and housewives have all benefited from this project to promote sustainable production techniques in an area of some 605,600 acres (940 square miles) in the middle and upper basin of the Aranjuez River, which drains into the Gulf of Nicoya on Costa Rica’s Pacific coast. Historically, this area has been long affected by soil erosion, water pollution, monoculture, unemployment, and land under-use and over-use. The project, which has benefited some 3,000 people, has brought about a change in local attitudes and in their relationship with the countryside.

“I was a beginner, I didn’t know where to start, but they gave me a hand and now I have one of the most exemplary farms in this area,” explained William Cubero, who is very proud of how he has transformed a site that was totally degraded by cattle ranching into a fertile organic coffee farm. Now, coffee, often referred to as “green gold”, grows prolifically thanks to practices such as shade manipulation and spring water harnessing, as well as using windbreaks and hillside ditches to help filter the water and control excess runoff. But the success of William Cubero’s harvest does not only lie in the application of these techniques. Like other local farmers, Cubero displays modesty, enthusiasm, and drive, combined with a clear vision of the need to conserve the beauty of the natural landscape.

PRESIDENT OF CHINA WARNS HONG KONG’S LEADER TO DO A BETTER JOB

President Hu Jintao of China publicly urged Hong Kong’s leader to improve his management of the semiautonomous Chinese territory, a comment widely seen as a rebuke. In an unscheduled event at the end of a two-day visit here, President Hu abruptly stepped forward while being photographed with Tung Chee-hwa, Hong Kong’s chief executive, and other Hong Kong officials in a briefing hall lined with tall red curtains. Turning and standing about two yards in front of Mr. Tung, the president started by saying that he believed that Hong Kong was “moving in the right direction.” But he went on to warn Mr. Tung that he should “sum up experiences, identify shortcomings, sharpen administrative abilities and continue to raise the quality of governing.” While Mr. Hu has been urging improved government in speeches across China, the reference to shortcomings was unusually blunt by the standards of Chinese political discourse. It was especially critical in tone for a comment about Hong Kong, where Chinese leaders have been reluctant to interfere in conspicuous ways.

The seven years since Britain returned Hong Kong to Chinese rule have been difficult. The territory’s problems have turned a democracy movement once limited to a few hundred advocates into an important social force able to bring hundreds of thousands of people into the streets. The next demonstration is planned for Jan. 1. The economy has stagnated and property prices have plunged, although both have finally been improving this year. Last year, severe acute respiratory syndrome, or SARS, sickened or killed more people in China, relative to the population, than anywhere else in the world, and many have blamed the government’s slow initial response to the disease.

Mr. Tung’s administration has repeatedly tried to force through unpopular initiatives -- like filling in part of the harbor to make way for a highway -- by saying that it understands the territory’s long-term needs better than the public does. In the latest embarrassment, a legal challenge by a 67-year-old welfare recipient forced the indefinite postponement of a plan to sell $2.7 billion worth of shops and parking spaces within public housing projects. Mr. Hu’s comment late Monday morning caused a furor in Hong Kong.

BUSH STANDING BY RELATIONS WITH PUTIN

President Bush said that he will not allow anti-democratic developments in Russia and Moscow’s interference in the Ukrainian election to damage his relationship with Russian President Vladimir Putin. Mr. Bush cited his criticism of Mr. Putin’s move earlier this year to appoint regional governors instead of allowing the voters to elect them directly. He noted that Mr. Putin disagreed with the war in Iraq. “I’ll continue to express my belief that ... balanced government, the sharing of power amongst [branches of] government will lead to stability in Russia,” Mr. Bush said. U.S. and Russian officials said later that the two leaders will meet in Slovakia on Feb. 24 during Mr. Bush’s European trip aimed at improving relations with traditional allies.

The Bush administration has warned against government control over the Russian media -- which helped Mr. Putin win re-election this year -- and Moscow’s treatment of the business community, but such criticism has been restrained. Asked about the sale of the Russian oil giant Yukos’s main production unit to a mystery buyer in a forced auction this past weekend, State Department spokesman Richard Boucher chose his words carefully. “We think the case has eroded Russia’s reputation as a place to do business and eroded confidence in Russia’s legal and judicial institutions,” Mr. Boucher said.

In the case of the Nov. 21 Ukrainian runoff election, in which the declared victory of the pro-Russian candidate was overturned by the Supreme Court because of massive fraud, U.S. administration officials said being on opposite sides with Moscow will not affect the overall relationship. The policy reflects the views of Condoleezza Rice, Mr. Bush’s national security adviser and secretary of state-designate, who advocated a hands-off approach to Russia’s internal affairs in articles and interviews long before moving to the West Wing.

ROBUST GROWTH PROJECTED FOR THE CARIBBEAN, SAYS NEVIS PREMIER

The Premier and Minister of Finance in the Nevis Island Administration, Mr. Vance Amory, said that Caribbean countries are likely to achieve more robust growth in the future, stemming out of the projected growth in the world economy, and the economies of the region’s trading partners. He observed that this should alleviate current account imbalances and increase primary fiscal positions, adding that with sound macro-economic policies, the outlook for the region looks more favorable for 2005.

With the world economy rebounding and the region’s most important trading partners projecting robust GDP growth in 2005, he said that the time was propitious for significant expansion in the Nevis economy. According to the Minister of Finance, “the offshore sector [in Nevis] is showing signs of recovery after the debilitating effects of the actions of the [FATF] and the [OECD].”

Nevis’s recurrent revenue for fiscal year 2005 has been estimated at EC$82.8 million, representing a projected increase over 2004 budget by 8.2%. Recurrent expenditure is estimated at EC$80.9 million, resulting in a projected surplus on the recurrent account of EC$2.0 million. He pointed out that Nevis’ debt stood at EC$246.3 million and while the Administration was meeting its debt obligation, he articulated that there was no doubt that the situation needs remedial action.

HOW BIG SHOULD A COUNTRY BE?

The world is getting smaller. The Internet, cheap transportation, the spread of free and open markets, and surging education of the masses are steadily eroding the last vestiges of economic autarchy. This increased integration presents a fundamental practical challenge to the sovereignty of nations. Policies that are possible in an isolated island state can be impossible in our new and mostly democratic world of nomadic capitalists. This metamorphosis has created heightened demand for international cooperation, a demand that has been the midwife to the birth of organizations that are rapidly becoming a haphazard world government.

At the birth of the United States, Alexander Hamilton wondered whether men “are forever destined to depend for their political constitutions on accident and force.” Today, it is not reason, but accident and force that are carving the contours of the global political environment. The feckless and corrupt actions of the United Nations in recent years provide a case study in how harmful attempts at world government can be when they go wrong. It is necessary that citizens and leaders of the U.S. develop a theory of international cooperation that can provide a guide to future global associations. This theory must address several specific questions. What areas of human endeavor are likely to require international cooperation in order to enable efficient outcomes? What types of international organizations should the U.S. join, and when should it be willing to partially cede its sovereignty to such bodies?

Two strands of economic research provide a natural starting point for this discussion. First, the public choice literature has examined extensively which services should be offered by local governments and which should be offered by national ones. The extension to world governments is straightforward. Second, specialists in industrial organization have developed a quite broad understanding of the functioning of cartels. Coalitions of countries often face the same challenges that coalitions of firms do. A synthesis of these two literatures provides a valuable guide to the problem of world government.

An international body with a wide agenda and authority will inevitably be a tempting takeover target for countries with welfare and regulatory states that are so large that they could not prosper under global competition. The best defense against such an outcome is to spread the global authority as thinly as possible. Absent rational design in our global government, we may stumble into a world that poorly provides valuable international public goods because the global agencies pursue both worthy and questionable objectives. As the world becomes smaller, the promise of competition rises, as does the threat of government cartels.

TAXES

IS THE IRS “SHAM TRANSACTION” LINE OF ATTACK ON CORPORATE TAX SHELTERS TAKING ON WATER?

In October, the Maryland U.S. District Court handed corporate taxpayers a victory when Judge William Quarles ruled against the IRS in a case involving a Black & Decker Corp. tax shelter. In essence, the court ruled that a tax shelter can be valid if it has “economic substance” even when the company’s sole motivation for entering the transaction is tax avoidance. The decision seemed to stun everyone except the B&D lawyers who had argued for it, as it shot down one of the IRS’s favorite arguments: Transactions solely motivated by tax avoidance lack economic substance and therefore must be discounted on the basis that they are “shams”.

The precise details of the B&D transaction might affect only certain companies. In 1999, the year after B&D used the tax strategy, Congress in effect shut down the shelter. But the court’s “novel views” with regard to the issue of economic substance as a gauge of a valid tax shelter will have “huge implications” for corporations in the future, noted Robert Willens, a tax specialist with Lehman Brothers Inc.

Historically, courts have used a two-pronged test based on the 1985 Rice’s Toyota v. Commissioner decision to determine whether such transactions are shams. One part of the test requires that arrangements have a non-tax-related business purpose. The other requires that they have economic substance. Courts have defined “economic substance” as a material economic effect on the parties involved in the transaction. (In Maryland’s fourth U.S. district, where the case was decided, the definition hinges on the “reasonable possibility of profit,” according to the judge’s decision.)

Many jurisdictions have held that a transaction has to clear both test hurdles to get a tax break. Quarles and other judges, however, have opined that passing either prong of the test is enough to sanction the transaction as valid for tax purposes, rather than deeming it a sham. “It might not be right in light of past cases, but [the Maryland U.S. District] court read Rice’s Toyota to mean that a transaction had to fail both prongs of the test” to be considered a sham, according to Christopher Rizek, a tax attorney with Caplin and Drysdale.

TAKING ADVANTAGE OF A ONE-TIME TAX BREAK, U.S. CORPORATE CASH HEADS HOME

Thanks to a provision in the corporate tax law enacted in October, Congress is giving multinationals the chance to repatriate profits earned before 2003 and held in foreign subsidiaries at an effective 5.25% tax rate. To qualify for that rate, the money has to be brought back to the U.S. before the end of 2005, and spent in ways that stimulate job creation and the economy. As a result, economists are expecting as much as $300 billion to come washing ashore next year, as companies seize the chance to lock in at the ultralow tax rate. Outfits as varied as Intel, 3M, and Heinz expect to repatriate gobs of cash, potentially using it for everything from refurbishing aging plants and shoring up balance sheets to launching acquisition sprees. And while the injection is not expected to produce many jobs, it should provide a nice jolt to the economy and a lift for the stock market.

For the most part, companies are being cagey about their plans, because they are not sure what they will be allowed to use the cash for. As one congressional aide points out, the law “was deliberately sloppy” to give companies as much leeway as possible in how they spend their hoards. Execs say they are waiting for the IRS to release final rules in coming weeks that will spell out exactly what types of transactions qualify for the low tax rates. In the end, analysts believe companies will have great latitude to spend as they please.

Companies are hinting about what they plan to do. Stock buybacks seem to be high on the list. Standard & Poor’s chief economist David A. Wyss believes such foreign-fueled buybacks could boost per-share earnings for the Standard & Poor’s 500-stock index by two percentage points, to 7%. “It’s coming at a time when the dollar is already down, so companies will be eager to recognize foreign profits,” he says. Others will use the money to get their fiscal houses in order. A J.P. Morgan survey of 28 multinationals revealed that 13 of them plan to use their proceeds primarily to clean up balance sheets. Dealmakers believe that any moves to clean up balance sheets could lead to mergers.

Moreover, some will do the opposite of cleaning up their balance sheets to take advantage of the tax holiday. Since many companies have already sunk past profits into illiquid investments such as manufacturing plants, Wall Street pros expect them to borrow funds against those assets to qualify for the ultralow rate. But Michael Levesque, a senior analyst at Moody’s, warns that abruptly cutting cash holdings -- even in a foreign subsidiary -- could trigger a downgrade among companies with shaky finances. For tech and pharmaceutical companies especially, the new cash could shore up R&D budgets. And what about using some of the money to expand payrolls -- the stated intent of the law? Don’t bet on it.

U.S. DROPS TAX LAWSUIT AGAINST SAN DIEGO FIRM

The Justice Department has withdrawn its lawsuit against a San Diego financial services firm that it said sold questionable tax shelters to thousands of doctors and dentists. The firm, Xelan, is still the subject of a criminal federal grand jury investigation, and the I.R.S. is continuing to seek reimbursement of hundreds of millions of dollars that it says is owed by users of Xelan investment and insurance plans. But last Friday, without making a public announcement, the Justice Department withdrew a civil complaint against Xelan from federal court in the Southern District of California. The complaint had sought to shut down Xelan operations that it had called questionable and had demanded the payment of taxes and penalties.

The withdrawal comes after an earlier defeat of the Justice Department’s tax division in its case against Xelan. On Dec. 3, a California federal judge declined the division’s request to extend another judge’s restraining order that had temporarily frozen $500 million in assets owned by 4,000 doctors and dentists who participated in Xelan-sponsored insurance and investment programs. In the Dec. 3 ruling, the judge said that the government had not yet proved its case that eight Xelan affiliates, part of the network of Xelan companies, were actually selling abusive tax shelters that were not valid for legitimate tax deductions.

The Xelan case was one of the Justice Department’s highest-profile efforts to combat what it considers abusive tax shelters. The temporary restraining order freezing the assets was one of the largest actions of its kind, and its later undoing surprised Justice Department attorneys. Xelan is a privately owned group of about a dozen companies that sell financial planning, investment and insurance through a nationwide network of offices. Four units of the company filed for bankruptcy protection in July as the government’s investigation intensified. A Justice Department statement said the agency’s tax division had decided to press its case against Xelan through other channels, including through I.R.S. efforts to collect unpaid taxes and penalties against the firm in bankruptcy court.

Xelan, whose full name is Xelan, the Economic Association of Health Professionals, had in recent years set up several types of plans aimed at helping doctors and dentists lower their tax bills. The government had turned its attention to two of them, one involving a charity administered by Xelan and the other a plan for disability insurance that the company said would allow investors to defer taxes on income for seven years. The government had attempted to argue that both of those plans were nothing more than illegal tax dodges by the medical professionals who bought them. Xelan has maintained that its investment and insurance programs are legitimate.

ASSET PROTECTION

DOLLAR DOLDRUMS TURN EYES OVERSEAS

Whether politically motivated or profit-driven, investors have been paying more attention to overseas opportunities since the reelection of President Bush. Regardless of feelings about the direction of the country in the next four years, the direction of the dollar is causing many to examine foreign strategies. And the lifting of the federal debt ceiling in early November by $800 billion has only sharpened the focus. “The Bush government isn’t terribly concerned about budget deficits in the short and long term,” said Michael Kitces, a financial planner in Columbia, Maryland. “That could result in higher interest rates, possible inflation and a weaker dollar.”

Kitces described the phenomenon as “shorting the dollar”. When investors believe American bucks hit a nadir, people will likely buy the currency while selling out of foreign positions. But for now, “I would look to having cash invested in many countries,” Kitces said. “If you had to pick one place, try the euro or investments in other stable countries.” Other timely strategies include mutual funds that hold assets in foreign denominations, plus exchange-traded funds (ETFs) representing non-U.S. currencies and companies -- Barclays’ iShares dominates this type of ETF business.

“Investing in international equities right now is a bet against the dollar rather than a bet on stronger foreign countries and companies,” said Dean Harman, a financial planner in Woodlands, Texas. “It might even make more sense to invest in U.S. multinationals.” Harman periodically fields questions from high-net-worth clients about much riskier offshore strategies: transferring assets to locales considered to be tax havens. Forming a foreign corporation legally shields money from taxation in the U.S., although the federal government still expects such entities to pay up for any income earned in America. The IRS levies taxes on repatriated funds, and often audits them, as well.

“Generally, when you have money in other countries, it’s hard for the IRS to find out how much you’re earning outside the U.S.,” Kitces said. “But the larger the amount of money involved, the harder it becomes to explain if it ‘disappears’ from your next tax return.” U.S. citizens are taxed on capital gains on foreign investments; to avoid the likelihood of double taxation, so-called tax treaties exist with individual countries. Since each nation has specified different terms, sorting out taxes can be complicated when multiple countries are involved.

Laws vary from one jurisdiction to the next, and the respective governments also hold U.S. investors to a higher standard for compliance. “Most foreign nations know the U.S. is good for its money, so they expect us to be better at compliance and paying taxes than their own residents may be,” Tony Santos, a partner at the international law firm Rojas Santos Stokes & Garcia in Miami, said. Less-developed countries tend to have fewer regulations, which may leave investors without recourse should fraud arise.

PRIVACY

NATIONAL ID RED ALERT!

The year 2005 is now less than two weeks away. It might be the year what is left of Constitutional government in America faces its greatest test yet. The specific day most likely to live in infamy in 2004 was December 7. That was the day our ex-Trotskyite controlled Congress passed the so-called National Intelligence Reform Act of 2004 (S.2845) -- also called the Intelligence Reform and Terrorism Prevention Act of 2004 -- another of those multi-thousand page tomes all but unread by the vast majority of those who signed it. The Intelligence Reform bill was put together ostensibly in response to recommendations by the 9/11 Commission. One thing we can be sure of: this horrid bill contains things those in power have wanted for years, the things Claire Wolfe once called “land mine legislation”, some of which were beaten back by public outrage in the pre-9/11 world. A de facto national ID card, for example.

That is right. The National Intelligence Reform Act orders the Department of Homeland Security to begin issuing “uniformity regulations” requiring that all driver’s licenses and birth certificates meet certain federalized standards, along with biometrics for “security” purposes. The provisions can be found in subsections 7212 and 7211 of the bill respectively. States will be ordered to include personal information about every individual, and this information will be used to build a huge federal database -- giving unelected federal bureaucrats access to your information. What is left of your privacy will become a thing of the past in 2005. The bill directs the Department of Homeland Security to establish separate standards for national ID used to board airplanes. It is just possible that as a result of this legislation, the feds will see themselves as having a green light to begin setting up road block check points. Below we will encounter reason to believe an “internal passport” to travel freely in this country is in the works. If this runaway train is not stopped, be prepared to have to “show your papers”, just like the cannon fodder that populated the former Soviet Union and Nazi Germany.

The only sensible measures in the bill were the ones that were dropped. These were measures that blocked states from issuing driver’s licenses to illegal aliens and limited appeals for illegal immigrants facing deportation. I have long believed that our porous borders are a recipe for disaster on multiple fronts. I will wager money that if another terrorist attack occurs on American soil, we will be able to trace the perpetrators’ movements back to our Southern border. The basis for questioning the sincerity of our political class in wanting to protect the American public from terrorism is actually quite solid.

The National Intelligence Reform Act is not specific in what it is requiring Homeland Security to do. So we do have some wiggle room, and it is at least conceivable that a massive outcry might yet thwart our headlong rush into Sovietization. This places a large onus on the American public. Unless you want your children to look back on 2005 as the year the “old America” simply ceased to exist.

No to national ID.

Congress’s recent passage of the intelligence reform bill created a de facto national ID through a uniform driver’s license standard. This profoundly bad scheme is fraught with privacy pitfalls and high costs. Furthermore, this provision opens the opportunity for a more un-American scenario: an actual national ID card. Arizona Republican Sen. John McCain warned of this potential: “The issue of driver’s licenses has to be discussed and debated because we are heading down -- in a little straight talk -- we are heading down a path toward a national ID card.”

The federal Transportation Department will dictate to states what information is required on a driver’s license. Failure for a state to make the transition means its driver’s licenses will not be recognized by the federal government. This would make it impossible for people to do a good many things, including board a commercial flight. Future driver’s licenses will include digital photography and tamper-proofing, as well as a means for the license to be machine readable to scan records that include unspecified “defined minimum data elements”. Developing machine-readable licenses should shake up any citizen interested in maintaining the current level of privacy. As so chillingly pointed out by Washington editor Sylvia Smith, the technology “makes it much, much easier to harvest your personal information”.

A national ID brings to mind totalitarian regimes, centralized governments distrustful of the people. A national ID is what is expected of people who walk the streets of Pyongyang, not Fort Wayne. It is doubtful that a uniformity of driver’s licenses or even a national ID could have prevented the 9/11 attacks or even avert a future attack. How long then before Congress decides the safest measure is for everyone to be photographed, finger-printed and indexed? Let us hope the 109th Congress ends the post-9/11 perversity of curtailing freedom in order to preserve it.

New ID rules cause worries over privacy.

After years of failing to overcome staunch opposition from some state officials and civil liberties groups, advocates of tighter controls on driver licenses have finally succeeded. Congress passed the first national regulations for issuing licenses and other IDs as part of the intelligence overhaul which President Bush then signed. The little-debated rules, which are supposed to make it harder for terrorists to obtain IDs, would require licenses and state-issued identification cards to include digital photos and “machine readable identity information” that some privacy advocates fear could be used to create a national database.

“By standardizing the driver’s licenses at the federal level, what you are doing is creating a national ID card,” said Marv Johnson, legislative counsel for the ACLU. “It allows the government to essentially track you wherever you go.” The law’s supporters insist such concerns are overblown. They say the federal standards can be devised to make fraud more difficult and protect privacy. While the law does not explicitly order the states to follow the regulations, licenses and IDs that do not meet the standards will not be accepted by federal agencies for such things as boarding airplanes and getting passports.

The issue has been debated since the Sept. 11, 2001, terrorist attacks highlighted the many different procedures used by states to issue driver licenses and other IDs, some of them more stringent than others. Seven of the 19 hijackers, for instance, fraudulently obtained driver licenses in Virginia by taking advantage of that state’s then-lax rules for certifying their identities and addresses. Driver licenses are often referred to as “gateway documents” that allow people to open bank accounts, obtain credit cards, rent cars and board airplanes.

The cards must have features that include a digital photograph and “common machine-readable identity information”, which could mean card-swipe technology. Those requirements raise the most concerns among privacy advocates. “The whole purpose for this standardization is going to eventually be some sort of database. It just didn’t pass in this particular legislation,” said the ACLU’s Johnson. Johnson said the ACLU fears the rules will require licenses to carry data chips that can be read from a distance. Such chips will soon be added to U.S. passports, and some states, including Virginia, have considered them for driver licenses. “You do’t even need to swipe it. They can be read up to 30 feet away,” Johnson said. “All you need is somebody with a reader and they can read your data just as you’re walking down the street.”

EUROPEANS CAN REGISTER THEIR CARS OFFSHORE IN VANUATU

A small island nation in the South Pacific Ocean, Vanuatu is an independent republic that was called New Hebrides when it was an Anglo-French colony prior to independence in 1980. Just north of New Zealand, Vanuatu is a tropical nation with a predominantly Melanesian population of around 200,000, which is spread through the volcanic chain of islands fringed by coral reefs and rich blue ocean. So how is this idyllic, untouched paradise going to help you? Already an established provider of IBCs, Vanuatu also offers European clients the ability to register their vehicle under the local Vehicle Registry. Registration is possible for most types of passenger vehicles, including small trucks and motorcycles. Requirements are very simple and vehicles may be registered under your personal name, or the name of a Company. The plates are unique and will be the talk of many who spot them.

In most European Jurisdictions, you will need to cross an international Boarder at least 4 times per year to comply with regulations pertaining to foreign registered vehicles. There are many reasons why people may choose to register their car offshore, often it is due to the vehicle that they are importing, being unable to comply with local vehicle requirements for registration, despite the vehicle being in safe working condition and with minimal engine emissions. Regulations in some countries require expensive compliance testing on all imported vehicles, and even more costly inother jurisdictions are the VAT or Import Duties due on imported vehicles upon first registration. Vanuatu’s annual fees are similar to what you would expect to pay for a locally registered vehicle, but there are no Road User Charges, VAT or any other taxes payable.

QUESTIONS AND ANSWERS ON THE FORTHCOMING U.K. IDENTITY CARDS

The identity cards bill was outlined in the Queen’s speech last month and the new home secretary, Charles Clarke, has thrown his weight behind the scheme pioneered by his predecessor, David Blunkett. The main points of the controversial initiative and explained. British citizens will be enrolled in the scheme when they renew their passports. David Blunkett said he wanted parliament in 2011 or 2012 to consider whether to make card ownership compulsory. Foreign nationals, who arrive in Britain and plan to stay for more than three months, will have to register for ID cards from 2008.

LAW

CITY OF LONDON ATTACKS FINANCIAL SERVICES AUTHORITY OVER REGULATORY COSTS BURDEN

The cream of the City lined up to lambast the FSA, accusing the regulator of forcing ever-heavier compliance costs on them. The financial watchdog’s regime placed “too great a burden” on firms, prevented the offering of new products and services and was detrimental to consumers, the Financial Services Practitioner Panel, an FSA monitoring body, concluded. No fewer than 29% of all City firms, including banks, brokers, advisers and fund managers, complained that compliance now accounts for more than 15% of their total costs, according to a survey commissioned by the panel, which comprises 14 senior City figures. Smaller retail firms were even harder hit, with 36% of them saying that compliance expenses had breached the 15% level.

More than half of all firms said they had reduced the nature or type of business they conducted because of costs. Accountants and solicitors were especially put off. Concern over costs and other frustrations overshadowed more positive findings from the survey of 3,100 firms, the majority of which reckoned their relations with the FSA had improved in the past two years. On costs, firms were not so much concerned about the levy imposed on all City firms as the level of investment in staff and systems to ensure they were compliant. The majority said the cost was “excessive” and only one firm in ten thought the expense was reasonable.

Scottish bank to restrict foreign workers’ accounts.

Thousands of foreign seasonal workers are to be prevented from opening accounts with a major bank in Scotland after recently introduced anti-money-laundering legislation. From next year, the Royal Bank of Scotland (RBS) will require letters from employers stating that employees have a minimum of a one-year contract in Scotland, or they will be refused a bank account. The move has been strongly criticized as a deterrent to the thousands of foreign seasonal workers who come to the country each year and who are vital to the tourism industry and other sectors such as fish processing and fruit-picking.

Although RBS is the first bank to tighten rules on new accounts, others may follow suit if a current review of guidelines on money laundering by the British Bankers’ Association (BBA) recommends more stringent controls for new customers. Many other countries encourage foreign workers to open bank accounts, even if they are only in the country for a few months. A Citibank account designed specifically for travelers is available in Australia, for example, with visitors encouraged to set up the account and transfer funds from their home country before they travel. In Britain, the rules were tightened significantly by the Proceeds of Crime Act 2002, introduced by David Blunkett, then home secretary.

The legislation was designed to prevent money laundering by terrorists and fraudsters but has been heavily criticized by the banking industry, including Fred Goodwin, RBS chief executive, who described it as “draconian”. In 2002, RBS was fined £750,000 by the Financial Services Authority (FSA) for its “inadequate” money-laundering controls. Jean Urquhart, a councillor and proprietor of the Ceilidh Place Hotel in Ullapool, regularly employs staff from places such as Poland, the Czech Republic and Slovakia, and is outraged by RBS’s decision to refuse bank accounts to short-term seasonal workers. Insisting the bank’s stance would be detrimental to the tourism industry, she said, “We have never had any problem before. Scotland depends on these people coming here every year.”

Warning over new guidelines on money-laundering in Jersey.

Tough new guidelines on anti-money-laundering are likely to spark “the mother of all consultations” when they are issued next year, say specialists. The debate got under way at a seminar organized by KPMG to discuss the probable content of the Handbook for the Prevention and Detection of Money Laundering and the Financing of Terrorism, as it will be known. On the panel were several members of the anti-money-laundering guidance notes steering group, who for the past two years have been working on the update with the Island’s regulator.

Although there are likely to be further changes at the start of next year, it is known that the handbook will be proposing a broadly risk-based approach. It will apply to all Jersey firms involved in financial services, as well as overseas branches, and for the first time will require boards of directors to take responsibility for anti-money-laundering policy and practice. There will also be a requirement for every company to have an anti-money-laundering compliance officer, as well as a reporting officer, although those roles could be taken on by the same member of staff. Key staff will also be screened to make sure they are fit and proper for the post.

Janice Drum, head of KPMG’s governance and regulatory compliance unit in Jersey, explained that “politically exposed persons” such as heads of state, senior politicians and close associates and relatives would be considered high risk. “Nobody is saying that you can’t do business with them, but it will be up to you to show how you mitigate that risk,” she said. Mrs. Drum said that with the growth in non-face-to-face business such as internet banking, there was a higher risk and the handbook would suggest additional checks.

A SYSTEM BEREFT OF JUSTICE

While enjoying Christmas, good food and drink with family and friends in the warmth and comfort of your home, take a moment to remember the falsely imprisoned. Think about how your own family would handle the grief, because wrongful imprisonment can happen to you. In a just published book, Thinking About Crime, Michael Tonry, a distinguished American law professor and director of Cambridge University’s Institute of Criminology, reports that the U.S. has the highest percentage of its population in prison of any country on earth. The U.S. incarceration rate is as much as 12 times higher than that of European countries.

Unless you believe that Americans are more criminally inclined than other humans, what can explain the US incarceration rate being so far outside the international mainstream? I can think of the following reasons: In order to prove that they are “tough on crime” politicians have criminalized behavior that is legal elsewhere, and many innocent Americans are in jail. There is enormous evidence backing up both reasons. America’s privatized prisons have to be fed with inmates in order to maintain their profitability. Prosecutors need high conviction rates to justify their budgets and to build their careers. Taken together these two facts create powerful incentives to put people away regardless of crime, innocence or guilt.

Government routinely breaks the laws. So says Judge Andrew P. Napolitano in the current issue of Cato Policy Report and in his book, Constitutional Chaos: What Happens When the Government Breaks Its Own Laws. Judge Napolitano reports on cases of torture, psychological abuse, and frame-ups of innocents that he discovered as the presiding judge. Any American naïve enough to trust the police and prosecutors should read what Napolitano has to say. Torture has become routine in American prisons. The goal of the torturers is guilty pleas and false testimony against innocent defendants. The torturers succeed. Napolitano reports that “fewer than 3 percent of federal indictments were tried; virtually all the rest of those charged pled guilty.” Does anyone seriously believe that the police are so efficient that 97 out of 100 people indicted are guilty?!

The cherished code, “you are innocent until proven guilty”, no longer holds in America. You are guilty when charged. You will be tortured or abused and threatened with more charges until you agree to a plea bargain. The U.S. criminal justice system is bereft of justice and accountability In America, criminal “justice” operates like a Stalin-era street sweep in which hapless citizens instantly became “enemies of the people” simply by being arrested.

SURVEY FINDS SUPPORT FOR RESTRICTING MUSLIM-AMERICANS’ FREEDOMS

Nearly one in two Americans believe the U.S. government should restrict civil liberties for Muslim-Americans, according to a nationwide Cornell University poll on terrorism fears. The survey also found respondents who identified themselves as highly religious supported restrictions on Muslim-Americans more strongly than those less religious. Curtailing civil liberties for Muslim-Americans also was supported more by Republicans than Democrats, the survey found. The amount of attention paid to TV news also had a bearing on how strongly a respondent favored restrictions. “The more attention paid to television news, the more you fear terrorism, and you are more likely to favor restrictions on civil liberties,” said Erik Nisbet, a senior research associate with Cornell’s Survey Research Institute who helped design the survey. Researchers queried 715 people in a random nationwide telephone poll conducted between Oct. 25 and Nov. 23. The margin of error was 3.6 percentage points.

“It’s sad news. It’s disturbing news. But it’s not unpredictable,” Mahdi Bray, executive director of the Virginia-based Muslim American Society, said of the survey results. “It’s not the first time in this country’s history we’ve seen sentiment for restricting the civil liberties of a group of people. It’s a sign of the times. The nation is at war, even if it’s not a traditional war. We just have to remain vigilant and continue to interface,” Bray said. The Washington-based Council on American-Islamic Relations, meanwhile, responded by calling on the nation’s elected officials to “recognize that Islamophobia is a growing phenomenon in American society that must be urgently addressed.”

The survey also found that when asked about the reason for the U.S. war on terror, 42% said it was to prevent future terrorist attacks on the country, while another 12% said it was to bring peace and democracy to the Middle East. While researchers said they were not necessarily surprised by the overall level of support for restrictions, they were startled by the correlation with religion and exposure to television news.

BANK ACCUSED OF SHUTTING ACCOUNTS OF SOME OF MIDDLE EASTERN DESCENT

After three years as an AmSouth Bank customer, Imad Aleithawe got a one-page form letter telling him his account had been closed. The bank refuses to explain why, citing confidentiality and a broadly written customer agreement allowing accounts to be shut down at any time, “for any reason”. Aleithawe, a civil engineer with the Mississippi Department of Transportation, says that without answers he is left with only the lingering suspicion it has something to do with his Middle Eastern heritage.

At least three other Mississippi residents with Middle Eastern backgrounds -- including a university instructor and business owners -- have also had their accounts closed. Those affected say others with Middle Eastern ties have complained to them about closed accounts but were unwilling to go public. American Civil Liberties Union officials say the cases are hardly isolated. Nationally, the organization has received more than 1,000 discrimination complaints from people of Middle Eastern descent since the Sept. 11 attacks -- and dozens of those complaints involved financial institutions.

“It’s become increasingly difficult for average people, who just happen to be Muslim or Arab, to live everyday, normal lives,” said Dalia Hashad, an advocate at the ACLU headquarters in New York. “You have people who are unable to do simple things like wire money, open a bank account, close a bank account, transfer funds.” Hashad said part of the problem is confusion over the flood of banking regulations that have been put into place as part of the federal Patriot Act.

The former AmSouth depositors say they wonder if the bank’s recent reporting troubles have led to a broad approach in dealing with potential depositor problems. In October, AmSouth was ordered to pay $40 million to the federal government in an agreement with prosecutors over its failure to report a money laundering scheme that bilked investors in four states. The bank was cited by the Financial Crimes Enforcement Network and the Federal Reserve for not filing accurate, complete and timely Suspicious Activity Reports.

BANKS SCREEN OUT UNWANTED CLIENTS, WORKERS

A UBS bank executive once deliberately gave bad service to a client in South America, mailing him incorrect statements and refusing his phone calls in the hope he would close his account. The Swiss bank had discovered the client ran an illegal business and feared direct confrontation would give him a chance to cover his tracks. It kept up the atrocious service for six months. “In the end, he was so annoyed, he moved his account to one of our competitor banks. Ten minutes after he moved it, I called up the anti-money laundering man just to let him know,” said John Cusack, Zurich-based managing director of group compliance at UBS.

Banks face fines and jail for officials if they are found to have done too little to stop money laundering or financing of militant groups. They are now developing elaborate screening systems to check on clients, and on their employees. Some banks such as J.P. Morgan Chase Bank have established elaborate systems for screening. Others are fast putting them into place, and industry minds have been further concentrated by the embarrassing experience of the world’s largest financial services firm, Citigroup. In September, Japanese regulators revoked Citigroup’s private banking licence, citing manipulative sales and lending practices, and lax controls against money-laundering. The bank fired three top New York executives over the scandal, including vice chairman Deryck Maughan.

J.P. Morgan Chase has a global team that screens the background of its 200,000 employees worldwide, and performs a similar audit on vendors and business partners. Every month the team trawls through the biographical data of hundreds of people, their spouses and business partners, checks litigation records, bankruptcy filings, criminal records, media reports, regulatory filings and other human resource databases. “It is very important in this day and age to know exactly who’s working for you, working with you or doing business with you,” said Singapore-based Tim McNulty, head of a 30-member Asia-Pacific Global Corporate Security team at J.P. Morgan.

ANTI-MONEY LAUNDERING LAWS MAY IMPEDE SPENDING OF U.K. BANK THEFT PROCEEDS

Stealing more than £20 million in the United Kingdom’s biggest bank robbery may have appeared easy. Laundering and spending the cash will prove to be much more difficult. The reward for the conviction of the gang and the recovery of the cash could be as much as £2 million -- 10% of the loss is the standard rate set by insurance companies and informers will be keen to cash in. The gang will need to be discreet, disciplined and well-organized to prevent infiltration and to live to spend the cash.

In the past five years laws against laundering have been tightened so that banks, building societies and professionals such as solicitors and accountants must report unusual cash transactions. Investigators say that the best way may be to smuggle the cash abroad, feed it into a tax haven and then bring it back to the U.K. The robbers appear to have been thinking of how to get rid of the cash before deciding which banknotes to steal. The money stolen is said to consist of a variety of used notes, including some Bank of England sterling, and euros.

LAWSUIT ABUSE FROM RHODE ISLAND TO THE HAWAIIAN ISLANDS

At this week’s “White House Conference on the Economy” President Bush and his top advisors hosted a series of panels to discuss the economic challenges facing the United States and the steps needed to ensure our economy will continue to grow, create jobs, and meet the needs of American workers. President Bush sat on two panels, including one titled “The High Costs of Lawsuit Abuse,” bringing national attention to this important issue. President Bush made it clear that reforming the legal system is a high priority. According to Yale Law and Economics Professor George Priest “we’re by far the most litigious society that there has ever been.”

The panel of experts went on to discuss America’s runaway legal system and the burdensome costs it imposes on workers, consumers, small and large businesses and health care. The numbers were startling. According to Secretary of Commerce Don Evans, tort lawsuits cost over 2 percent of our GDP, or over $250 billion in tort costs to our economy. He broke that down to the individual level, saying this amounts to a “tort-tax” of $809 per person per year, a number confirmed by a study from Tillinghast-Towers Perrin. The panelists were in agreement that a civilized society must have a way to compensate those injured by medical mistakes and harmful products, but questioned whether the current system is providing Americans this service in the best way possible.

With the cost of torts rising from just over 1% of GDP in 1973 to double that today, one might expect to see a similar increase in causes for such suits, such as doctors making more mistakes or businesses making more dangerous. But this is not the case. Instead, trial lawyers pushing questionable suits and winning exorbitant awards from juries are the driving force behind this cost increase. In one famous example of class action gone awry, a settlement against the Bank of Boston awarded $8.64 to each class member, but then charged each of those members $90 in trial lawyer fees. Similarly, in a case against Blockbuster, the attorneys took home over $9 million in fees. The harmed plaintiffs each got a $1-off coupon for future video rentals. And the list goes on.

In addition to the tort-tax this puts on consumers, it also costs jobs and has damaging consequences for the health of Americans. Putting all these lawsuit-related pieces together makes for an ugly picture. A family in a state like Rhode Island first pays a $809 tort-tax each year, then potentially sees the company providing jobs in the town close shop, quickly followed by the family doctor leaving town, looking for a state where his or her services are more welcome.

OPINION & ANALYSIS

WHAT YOUR GOVERNMENT IS DOING FOR (TO) YOU

In a recent article I discussed the $388 billion spending bill passed by Congress without anyone in Congress reading it. There are hundreds (if not thousands) of pieces of pork residing in the $388 billion Omnibus Spending Bill. Since I am convinced that the federal government could operate easily (and more efficiently) on much less than $100 billion per year -- with much better national defense than we have now, the spending bill is by itself at least four times larger than the entire government should be.

Of course, this sort of profligate spending has been going on for years. How did it get started? The seeds of today’s runaway government were planted when it was decided that government should help those who cannot help themselves. From that modest, compassionate beginning to today’s out-of-control mega-state, there is a straight, unbroken line. Once the door was open, once it was settled that the government should help some people at the expense of others, there was no stopping it. If the coercion of government can endow one person with property he has not earned, then everyone will want to use government to get something he wants. So it is not surprising that, over the past two centuries, more and more people have concluded that they deserve government’s help.

“Helping those who can’t help themselves” is a paraphrase of Karl Marx’s famous dictum, “From each according to his ability, to each according to his need.” And once that principle is adopted, more and more people will want to be part of the needy, rather than part of the able -- because nearly everyone prefers to be on the “to” side of transfers, rather than the “from” side. You cannot limit government’s coercion to just those transfers you believe are fair, because you cannot give government the power to force good on the country without also giving it the power to force enormous evil on the country -- in fact, to do anything it wants. It becomes a tool for obtaining whatever anyone cannot get on his own -- an instrument for every frustrated ambition. So it was inevitable not only that the government would grow and become more powerful, but that the growth would accelerate -- perhaps imperceptibly at first, but then faster and faster.

And since politicians are not legally liable for the harm they do, there is no point at which they have a reason to stop expanding their own power and wealth by expanding the government. Thus it is no surprise that after stripping us bare, they continue on and mortgage our children’s future to pay for further expansion. And it is no surprise that there is not a single area of our lives that Congress would be reluctant to legislate and regulate. And it should be no surprise that every attempt to reform government simply makes it worse. Government is a scam. And like any other scam, it can be exposed for what it really is.

“RESPECT MON”

I can thank Hurricane Ivan for the opportunity to learn the meaning of that expression. Aside from being one of four major hurricanes to batter Florida in 2004, Hurricane Ivan practically wiped Grand Cayman Island off the map. Grand Cayman got battered by Ivan’s 150 mph sustained winds, was drowned by a sea surge of 8–10 feet and was pounded by 20 to 30 foot waves. The highest point on the Grand Cayman island is only 62 feet. At the height of the storm, the sea met across the island cutting it in half. All of the foliage was either uprooted and blown away or bent over and stripped, while 70% of the island’s buildings received severe damage and 9,000 people were left homeless. Multimillion-dollar homes had waves crashing straight through the ground floor. Grand Cayman is now rebuilding. One result of Ivan’s devastation is that the disaster has brought segments of the community closer together that might not have met up otherwise.

My wife works for a company whose owners spent a fortune of their own money to evacuate their employees to safety and then proceeded to house them until it was safe to return. Neither was their effort a petty cash operation nor was it limited to the brass and elite. That company flew all of us, who wanted to go off the island to safety, including family and pets. During post-storm relief operations I shuttled many of the Jamaican and Caymanian field workers around so they could replace some of their lost possessions. As a result I got to know them quite well.

My role in the relief operation changed from courier to an unofficial Human Resources Psychologist. My duty was to be liaison between management and the field works trapped in the Tedium Condos. Most of the field workers were Jamaicans. I made some good friends. And it was on The Brac after Hurricane Ivan, that first I heard the phrase, “Respect mon”. In Jamaican culture this phrase says heaps. They use it when we Americans might say “hey, thanks buddy.” But it means something much more than thanks. It means, “you have treated me as an equal out of respect, you have done what you can to make my life more manageable out of respect. And for this, you have my respect.”

What a novel concept. It is something too many people in the U.S.A. have not learned to acknowledge or to express. As a people, America would do better if we had more respect mon for each other and for humanity in general. In fact, are America’s current problems in the Middle East not the result of our lack of respect for decades? They are.

IT CAN’T HAPPEN HERE, RIGHT?

In 2002 I asked my House colleagues a rhetorical question with regard to the onslaught of government growth in the post-September 11th era: Is America becoming a police state? The question is no longer rhetorical. We are not yet living in a total police state, but it is fast approaching. The seeds of future tyranny have been sown, and many of our basic protections against government have been undermined. The atmosphere since 2001 has permitted Congress to create whole new departments and agencies that purport to make us safer -- always at the expense of our liberty. But security and liberty go hand-in-hand. Members of Congress, like too many Americans, do not understand that a society with no constraints on its government cannot be secure. History proves that societies crumble when their governments become more powerful than the people and private institutions.

It may be true that average Americans do not feel intimidated by the encroachment of the police state. Americans remain tolerant of what they see as mere nuisances because they have been deluded into believing total government supervision is necessary and helpful, and because they still enjoy a high level of material comfort. That tolerance may wane, however, as our standard of living falls due to spiraling debt, endless deficit spending at home and abroad, a declining fiat dollar, inflation, higher interest rates, and failing entitlement programs. At that point attitudes toward omnipotent government may change, but the trend toward authoritarianism will be difficult to reverse.

Those who believe a police state cannot happen here are poor students of history. Every government, democratic or not, is capable of tyranny. We must understand this if we hope to remain a free people.

U.S. ELECTIONS: THE ULTIMATE SINKHOLE

George W. Bush received endorsement from a meager 28% of the nation’s voting-aged population, while his challenger, John F. Kerry, was backed by some 27% of eligible voters. The guy with the higher number runs the country and more. What was the cost connected with this result? The Campaign Finance Institute estimated total outlays to the two major parties to total some $685 million, of which $30 million came directly out of the pockets of taxpayers. This is only the seen cost. All decisions bear within them quantifiable expenses and revenues, those resource outlays and profits that one may measure cardinally, and the unmeasurable benefits and costs, the fruits of subjective valuation of the individual actors. In the realm of sacrifices associated with a decision are opportunity expenses and costs, namely the foregone revenues and benefits that one would have realized by acting on the next best alternative.

Thoroughly evaluating the presidential election in the context of these largely unseen results is the only way in which to gauge the burdens the process places on the shoulders of market participants, who, in the end, involuntarily finance much of the procedure. Of these explicit expenses, one may ponder what implicit opportunity expenses accompanied these expenditures. In other words, what could this money have done otherwise? For example, within the labor market, all that was spent on the election could have hired nearly 34,000 employees at $7 an hour for full-time work for a year, an especially interesting inquiry given both of the candidates’ fervor for producing jobs. One might also attempt to estimate by how much the “economy” would “grow” had the financial resources pumped into the election process been saved, invested, or even spent on consumption in the market, another concept that the candidates seemed to fancy in their campaigns.

The point here is not to estimate actual growth or employment rates, but rather to depict the toll that the election took on the market. Namely, finances went to non-productive uses, “rent-seeking”, lobbying, and campaigning, rather than to producing wealth by satisfying the demands of consumers and investors alike. The costs of the election process include not only alternative uses of money, such as the investment, spending, and savings that would have taken place in the private sector, but also consist of the depletion of other resources that were devoted to campaigning and the election throughout the last few years.

The end consequences are the same as those of all government consumption: prices are bid-up for private parties because there is less of the good remaining, as, all the while, these same private parties are flipping the bill either through a greater direct tax burden in the short-run, or suffering the repercussions of inflation, the disguised tax, in the long-run. It is difficult to fathom the magnitude of effort put forth by the legions of individuals whose focus was diverted away from solving problems and producing for trade. These human costs are so detrimental because man's productive nature, creativity, and reason are indeed the sources of all of the goods and services made available for the satisfaction of wants. The human capital expenditure in this case is not merely nonproductive, as it would be when sedentary for a time or partaking in leisure, but it is indeed counter-productive having been expended on perpetuating a cause that actually robs from productive capacity -- the political process.

LIBERTARIANS AND THE WARFARE STATE

When I was a fledgling libertarian, I came to realize how lucky I was to live in America. Of all the places and times I could have been born, I was born in one of the freest, wealthiest, most harmonious of settings in all of world history. I scoffed at those leftists who wanted to burden America with such programs as a socialist healthcare system. Never in America, I thought. Not in my free country! I also defended libertarians against my leftie schoolteachers, who branded us as paranoid extremists. We libertarians had a baseless fear that the government was out to get us, I was told, and we had an unfounded aversion to anything governmental. If I dared to say that the War on Drugs was turning America into a police state, I would quickly be told that I shouldn’t use the phrase so lightly. I would be reminded that America is still the freest country on earth, and that we had a ways to go before we would have military tribunals, searches of persons and property without a warrant, or significant erosions of the most basic of human rights. This was no Argentina, after all. I disagreed back then, saying that the Drug War, gun control, creeping economic socialism, Waco, and the war in Kosovo were all signs that we were losing our freedoms, however slowly.

I must admit, at times I feel that he overestimated the libertarian movement, or at least many of those people who consider themselves part of it. Throughout the 1990s, libertarians warned about the dangers of consolidated government. They warned about the gradual erosion of the Bill of Rights, the deterioration of free markets, the taxation, gun laws, asset forfeiture, and other symptoms of the social-democratic US government that would, slowly but surely, turn America into a nightmare. Unfortunately, a good number of these people jumped ship once the nightmare came. The warfare state is the greatest enemy of liberty. To have to write this again, when it has been affirmed and repeated by every great thinker of the classical liberal tradition from Thomas Jefferson to Ludwig von Mises, is a frustrating reality. But it must be repeated, again and again.

Warfare employs and magnifies every single state crime that libertarians claim to oppose. Taxation, domestic spending, civil liberties encroachments, speech suppression, private property destruction, state propaganda, torture, mass murder, and, often, involuntary servitude, are introduced in times of war in ways we rarely, if ever, see in times of peace. It is not good enough for libertarians to champion the Bill of Rights and yet forgive the communist-style star chambers for designated “enemy combatants”. It will not do for libertarians to oppose taxation for the purpose of wealth redistribution but to excuse it for the funding of aerial bombardment of cities. It is pathetic for libertarians to oppose the concept of totalitarianism and yet accept its emergence in America so long as it is done in the name of war.

We see many such people, claiming to play the role of freedom’s defender, supporting the Bush administration, all for the satisfaction they somehow get knowing that Bush has killed tens of thousands in the name of “self defense”. This “self-defense” charade makes me sick to my stomach. The Iraq War is so far removed from any correct understanding of self-defense, I never become used to hearing the two conflated. I often wonder if the pro-war libertarians really believe that the warfare state is all it’s cracked up to be -- if they have indeed fallen for the Big Lie that the state’s projects of mass killing keep them safe. For some of them, I think they do. For others, I think they simply are not aware of what’s going on.

But I think something else is coming into play here. Most of the vocal pro-war libertarians are not libertarians at all, and many of them never have been. The warfare state is a difficult thing to oppose. Pro-war libertarians think of those of us who oppose the warfare state as deluded, pacifist, even cowardly. This is not the case, however. If the gulags ever do come, we will not have an easy out. The idea some of them cling to, that it is more dangerous and brave to speak out against foreign enemies than your own government, is simply nonsense. Another argument I hear from the pro-war crowd is quite ludicrous. If we libertarians do not unite behind the warfare state, mainstream America will not take us seriously. Even if this is completely true, I see no point in being a libertarian if our only goal is to be accepted, our principles be damned. Unfortunately, the pro-war libertarians are quite loud, doing a greater disservice to liberty than many other political activists, for they defend the complete negation of all our principles.

The warfare state provides us libertarians with a challenge but also an opportunity. For years we have all been warning against the encroachment of our liberties, and have been jealously defending our wealth and freedoms from the ravages of government. Now that the stakes are higher than they have been in a long time, we must reaffirm our commitment to liberty and opposition to the state. Now is the time for the true defenders of liberty to stand up, and repeat the self-evident truth that war is the health of the state and the principal scourge on civilization.

GLOBAL WARMING GLOBALONEY?

A prime piece of evidence linking human activity to climate change turns out to be a product of poor mathematics, says Richard Muller, physics professor at the University of California, Berkeley, where he teaches a course called “Physics for Future Presidents”. Progress in science is sometimes made by great discoveries. But science also advances when we learn that something we believed to be true is not. When solving a jigsaw puzzle, the solution can sometimes be stymied by the fact that a wrong piece has been wedged in a key place.

In the scientific and political debate over global warming, the latest wrong piece may be the “hockey-stick”, the famous plot, published by University of Massachusetts geoscientist Michael Mann and colleagues. This plot purports to show that we are now experiencing the warmest climate in a millennium, and that the earth, after remaining cool for centuries during the medieval era, suddenly began to heat up about 100 years ago -- just at the time that the burning of coal and oil led to an increase in atmospheric levels of carbon dioxide.

Unfortunately, discussion of this plot has been so polluted by political and activist frenzy that it is hard to dig into it to reach the science. But now a shock: Canadian scientists Stephen McIntyre and Ross McKitrick have uncovered a fundamental mathematical flaw in the computer program that was used to produce the hockey-stick. In his original publications of the stick, Mann purported to use a standard method known as principal component analysis, or PCA, to find the dominant features in a set of more than 70 different climate records. McIntyre and McKitrick obtained part of the program that Mann used, and they found serious problems. Not only does the program not do conventional PCA, but it handles data normalisation in a way that can only be described as mistaken. Now comes the real shocker. This improper normalization procedure tends to emphasise any data that do have the hockey-stick shape, and to suppress all data that do not.

McIntyre and McKitrick first submitted a critique of Michael Mann’s study to Nature, the monthly scientific magazine, in January this year. After extensive discussion, last March, Nature asked them to revise it from its original length of 1,900 words down to 800 words. This was resubmitted on April 9. They did not hear back from Nature, but when they inquired about delays in publication, were told that Nature had not heard back from its reviewers. On August 4, Nature advised that their shortened submission would not be published. The main reason was that the issues raised were “too technical” to resolve in the now 500-word space available. The authors commented, “Readers may share our surprise that the matters raised are ‘too technical’ for consideration in a science journal.”

WHAT WOULD JESUS DO?

In a week that brought forth the single deadliest attack on American soldiers in Iraq, President Bush also launched a public effort to support the troops. In between giving Medals of Freedom to the three “Wise Men” of the Iraq war and getting down to the business of spending mo’ money in Washington, he is publicizing the new Defense Department website called “America Supports You”. The website is about how we can help our serving soldiers, and presumably those returning from Iraq in pieces, or missing pieces. Thus far, the site is oriented more towards ordering hats and bumper stickers rather than towards seriously addressing the real help needed by our men and women in uniform, and their families. It is simply criminal that the injured and recently discharged remain largely invisible to the Department of Defense, the Administration, the American media and to all of us.

At this time of year, we take time to remember the importance of humility and love for our brothers and sisters, even in the face of hate or contempt. We think about Jesus’s radical command to turn the other cheek, his rejection of the old law of “an eye for an eye”. Americans are citizens of a nation created with Saint Augustine’s distrust of human government foremost in mind. This time of year, we should thankfully recall the primitive Christian message that one’s devoted public service to the state is not the same as one’s quiet individual service to God. In the American vernacular, one might say that Ground Zero for Christmas is the Holy Land. This week’s events in Mosul and elsewhere in region mock the season and sadden us all.

The American invasion of Iraq was based on lies, as has been the continued American occupation of her major cities. The lies put forth by the administration ought to remind Christians of those lies the Devil told Jesus up on that mountain in the wilderness. Promises of peace, whispers of wealth, visions of total control of the earth. At this time of year, we also look for answers. It is truly difficult to know what to do in Iraq, whether you are the President, the Secretary of Defense, his military leaders, the soldiers and Marines in the field, their families or just a single individual who cares. Something tells me we should leave Iraq to the Iraqis, and try to help that country by first demilitarizing it. Such a solution would require great humility, a turning of the other cheek, and a reexamination of the correct level of American devotion to the state and its propaganda.

The horrendous pain this war has already delivered to Iraqis, as well as American and British troops, needs healing. America has a lot to think about, and much to do. Physically and mentally wounded soldiers, already almost 900 motherless or fatherless children, a bureaucratic Veterans Administration system that is largely broken and at best incompetent, thousands of recently handicapped young men and women who will need a lifetime of respect, physical and spiritual care, education and employment. In the spirit of celebrating the extraordinary life of Jesus, one wonders if we ought to go ahead and break a few old rules for the sake of the innocent.

ROASTED CHESTNUTS IN JULY

One of the most popular of all Christmas songs was written by one of America’s great pop singers, Mel Tormé. It begins, “Chestnuts roasting on an open fire. ...” It is called The Christmas Song. It was written in 1945 and was turned into a seasonal classic in 1946 by Nat “King” Cole -- in my book, the greatest of America’s pop singers.

That song illustrates entrepreneurship: the ability to forecast the future of supply and demand, and then buy low now and sell high later. You spot the opportunity when your competitors do not. You can therefore buy low. You sell into rising demand at the peak of the market. I can think of no song that better illustrates the art of entrepreneurship. Here is the story of that song, as written by Tormé. It began with a trip to the home of his song-writing partner, Bob Wells. “One excessively hot afternoon, I drove out to Bob’s house in Toluca Lake for a work session. The San Fernando Valley, always at least ten degrees warmer than the rest of the town, blistered in the July sun.... I opened the front door and walked in.... I called for Bob. No answer. I walked over to the piano. A writing pad rested on the music board. Written in pencil on the open page were four lines of verse:

Chestnuts roasting on an open fire
Jack frost nipping at your nose
Yuletide carols being sung by a choir
And folks dressed up like Eskimos.

When Bob finally appeared, I asked him about the little poem. He was dressed sensibly in tennis shorts and a white T-shirt, but he still looked uncomfortably warm. “It was so hot today,” he said, “I thought I’d write something to cool myself off. All I could think of was Christmas and cold weather.” I took another look at his handiwork. “You know,” I said, “this just might make a song.” ...

THE ECONOMIC LESSONS OF BETHLEHEM

At the heart of the Christmas story rests some important lessons concerning free enterprise, government, and the role of wealth in society. Let us begin with one of the most famous phrases, “There’s no room at the inn.” This phrase is often invoked as if it were a cruel and heartless dismissal of the tired travelers Joseph and Mary. Many renditions of the story conjure up images of the couple going from inn to inn only to have the owner barking at them to go away and slamming the door.

In fact, the inns were full to overflowing in the entire Holy Land because of the Roman emperor’s decree that everyone be counted and taxed. Inns are private businesses, and customers are their lifeblood. There would have been no reason to turn away this man of aristocratic lineage and his beautiful, expecting bride. In any case, the second chapter of St. Luke does not say that they were continually rejected at place after place. It tells of the charity of a single inn owner, perhaps the first person they encountered, who, after all, was a businessman. His inn was full, but he offered them what he had: the stable. There is no mention that the innkeeper charged the couple even one copper coin, though given his rights as a property owner, he certainly could have.

It is remarkable, then, to think that when the Word was made flesh with the birth of Jesus, it was through the intercessory work of a private businessman. Without his assistance, the story would have been very different indeed. People complain about the “commercialization” of Christmas, but clearly commerce was there from the beginning, playing an essential and laudable role. And yet we do not even know the innkeeper’s name. In two thousand years of celebrating Christmas, tributes today to the owner of the inn are absent. Such is the fate of the merchant throughout all history: doing well, doing good, and forgotten for his service to humanity.

It was because of a government decree that Mary and Joseph, and so many others like them, were traveling in the first place. They had to be uprooted for fear of the emperor’s census workers and tax collectors. And consider the costs of slogging all the way “from Galilee, out of the city of Nazareth, into Judea, unto the city of David,” not to speak of the opportunity costs Joseph endured having to leave his own business. Thus we have another lesson: government’s use of coercive dictates distorts the market.

Moving on in the story, we come to Three Kings, also called Wise Men. Talk about a historical anomaly for both to go together! Most Kings behaved like the Roman Emperor’s local enforcer, Herod. Not only did he order people to leave their homes and foot the bill for travel so that they could be taxed. Herod was also a liar: he told the Wise Men that he wanted to find Jesus so that he could “come and adore Him.” In fact, Herod wanted to kill Him. Hence, another lesson: you cannot trust a political hack to tell the truth.