W.I.L. Offshore News Digest for Week of September 1, 2008

EUROPE’S TOP 10 BEST PLACES TO LIVE

Old Europe dominates rankings.

Mercer Consulting ranked the world's top places to live and Europe dominated the rankings. The highest ranked city in the U.S., Honolulu, came in at number 28! (See "Rationale behind the rankings" posting below.) What gives?

A couple of posters in this blog posting have some opinions:

(1) "Life is FUN and most enjoyable in European and Australian cities because their zest for life is more pronounced and they simply enjoy a better balance between work and leisure time. ... In general crime is much lower and the crime that occurs is property crime rather than assaults or robberies, so one quickly develops a sense of personal safety lacking in nearly all major USA cities."

(2) "Well, duh, American cities are made for cars, not for people. On an even broader scale, American cities are created for large corporations, not for people. The US is a success at selling, not at social well-being. We have achieved a soul-less, lowest common denominator, parking lot kind of existence. ...

"By the way, many cities not on the list have far more character and inherent interest than these top 12 (e.g., Rome, Rio de Janeiro, New York, Bangkok, Buenos Aires) so general pleasantness isn't everything. Notice how many of the top 12 are good places to live, but are just plain dull to visit?"

So make of all that what you will. Note that political freedom, as measured by, e.g., the government's proportion of the economic pie, was not a criterion in the ranking mechanism.

The Swiss city of Zurich has come top of a list of the best places to live in Europe, with no British cities making the list that was compiled by Forbes.com. Forbes.com said the list was based on an annual survey of worldwide quality of living by Mercer Consulting.

1. Zurich, Switzerland
   
   Zurich's tiny population -- 376,815 at the end of 2007 -- is spoiled with over 2,000 bars and restaurants and a breathtaking view of the Alps and Lake Zurich. Taxes are among the lowest in Switzerland, and residents pay no inheritance tax though its gloomy weather and traffic bring it down.
2. Vienna, Austria (Tie)
   
   The entire city center of Austria's political, cultural and economic capital has been designated a U.N. World Heritage site. It has excellent education and infrastructure.
3. Geneva, Switzerland (Tie)
   
   Over 50% of Geneva's population has a foreign passport, according to the region's statistics office -- not surprising given the heavy presence of U.N. agencies and organizations such as the Red Cross. As a result, the city is geared to be global, with private banking facilities, private hospitals and international schools.
4. Dusseldorf, Germany
   
   Dusseldorf has built up its infrastructure and international transport connections. The city, on the banks of the Rhine, has a plethora of consumer goods and is considered the fashion and shopping capital of Germany. Dusseldorf has a thriving economy, with some of Germany's largest companies.
5. Munich, Germany (Tie)
   
   With a population of 1.3 million, Munich is the largest city in Europe's top 10. Best known for its annual beer festival, the city also enjoys a thriving economy, driven by the information technology, biotechnology and publishing sectors. However, the city has a dearth of international schools and its air is polluted.
6. Frankfurt, Germany (Tie)
   
   The financial capital of Germany has some spectacular architecture, including the opera house and cathedral, and a vibrant cultural scene. The city has excellent hospitals, shops and a thriving economy. The poor availability of housing in the city center and heavy traffic, however, drag Frankfurt down.
7. Bern, Switzerland
   
   Bern, in the German-speaking part of Switzerland, is the world's 2nd-safest city, according to Mercer, with 6 kilometers (4 miles) of shopping arcades. The city may not have a buzzing nightlife, but it does have excellent medical facilities.
8. Copenhagen, Denmark
   
   Living in Copenhagen is pricey but the city boasts 11 Michelin-star restaurants and, according to Mercer, is among the best-served cities in terms of international schools and private medical facilities. However the city's love of bikes means that congestion drags it down the overall rankings.
9. Amsterdam, The Netherlands
   
   Amsterdam's red light district and liberal policy on drug use do not do much for its family-friendly reputation. What does? The city's canals, parks and museums, and the best selection of international schools in Europe. Its ranking is dragged down by a lack of city center housing and air pollution.
10. Brussels, Belgium
    
    The administrative center of the European Union is among the best connected cities in Europe and has a large number of schools serving the expatriate community. It does, however, have a large amount of traffic congestion in the city and air pollution

Rationale behind the rankings.

New York, London and Paris are internationally renowned cities but consultants at Mercer Consulting have picked Zurich, Switzerland, as the best place to live in the company's annual survey.

Consultants rated each city on a variety of factors including the level of traffic congestion, air quality and personal safety reported by expatriates living in more than 600 cities worldwide. In the top 25, U.S. cities such as San Francisco, Boston and Chicago were all edged out by Geneva, Switzerland, Vancouver, Canada, and Auckland, New Zealand. The highest-scoring U.S. city is Honolulu, which came in at #28.

Still, Mercer acknowledges that cities with a high quality of life are not necessarily the most exciting. "There are a lot of 'sleepy' towns that got high ratings," said Rebecca Powers, a principal consultant in human capital for the company. "But if you were to judge them on something like nightlife, there are some that probably wouldn't have rated as high."

The rankings are based on a point scoring index, with Zurich scoring 108 and Baghdad scoring 13.5. Cities are compared to New York as the base city, with an index score of 100. The quality-of-living survey covers 215 cities and is conducted to help governments and major companies place employees on international assignments. The survey also identifies those cities with the highest personal safety ranking based on internal stability, crime, effectiveness of law enforcement and relationships with other countries.

WHEN IS A FOREIGN CORPORATION ENGAGED IN A TRADE OR BUSINESS IN THE UNITED STATES?

Income derived from sources "within the U.S." is subject to reporting and taxation under the Internal Revenue Code. When a foreign entity is constructively engaged in an "effective trade or business in the U.S.," it is taxed by the U.S. on the portion of its income that is "effectively connected" to the U.S.

What constitutes "effective" in practice? As one might guess, there are ambiguities at times. But there is a large body of court cases and revenue rulings that are available concerning this precise matter. This piece from Robert Sommers, a San Francisco-based tax attorney with over 30 years experience and author of the Web-based "Tax and Trust Scam Bulletin Board", is a good starting point for those new to the subject.

The general case considered is where a foreign entity is selling products to a U.S.-based customer. Generally, a sale to a U.S. purchaser does not in and of itself mean that the seller is engaged in an effective trade or business in the U.S. But start adding typical intermediaries such as a U.S.-based sales agent or warehousing subsidiary and suddenly "effective" does become the operative concept. Sommers considers various illuminating example cases.

Note that a business falling under the jurisdication of the U.S. tax code does not necessarily imply that substantial taxes are thereby owed. The business is entitled to the same deductions as those of a purely U.S.-based business.

I. INTRODUCTION

Many foreign corporations which are based in countries that do not have an income tax treaty with the United States, sell products to purchasers located in the U.S. Often, the contracts for the products are negotiated overseas and shipment of the goods is made directly from the foreign corporation to the U.S. customer.

This explanation will discuss, in general terms, how U.S. tax law applies to those sales. In particular, this document will discuss under what circumstances the foreign corporation will be liable for the payment of U.S. income taxes on those sales.

This explanation will consider the following hypothetical situations:

Example I: Parent Corporation (hereafter "Parent"), a foreign corporation based in Taiwan negotiates the sale of computer display screens (hereafter "screens") to Compac, a U.S. corporation based in Texas. All negotiations take place in Taiwan and the contract is signed in Taiwan. Shipment will be made to ACME TRADING (U.S.A), Corp. ("ACME") who will then clear the shipment through customs and place the screens in its bonded warehouse.

Example II: This example is the same as Example I, except that the foreign corporation has a wholly-owned subsidiary (hereafter "Sub") with a fixed place of business in California and has employees located at its business site. Sub’s employees will engage in after-sales service of the screens, will call on Compac to determine its satisfaction with the screens and to make further sales of the screens.

Situation A: In this situation, ACME merely ships the entire order of screens to Compac once the screens have cleared customs.

Situation B: In this situation, Parent will use ACME as its agent to warehouse the screens and will provide Compac with "just-in-time" (hereafter "JIT") inventory of the screens. Under JIT, Compac will either notify Parent or ACME when it needs a shipment of screens and ACME will then ship the screens. Legal title to the screen will remain with Parent until the screens are shipped to Compac.

II. ISSUES TO BE DISCUSSED

Whether Parent will be considered as having engaged in a trade or business in the U.S., and, therefore, be liable for U.S. income taxes on that portion of its income that is effectively connected with its U.S. trade or business, under:

a. Example I, Situation A: When Parent merely ships goods directly to its customer in the U.S.;

b. Example I, Situation B: When Parent ships goods to ACME who will inventory the goods in its bonded warehouse under the concept of JIT inventory; or

c. Example II: When Parent has a U.S. subsidiary with a fixed place of business in which the subsidiary provides sales and services in connection with the sale of the screens.

III. CONCLUSIONS

1. Under Example I, Situation A, Parent will not be engaged in a trade or business in the U.S. and will not file a U.S. tax return.

2. Under Example I, Situation B, the activities of ACME with respect to the JIT inventory of Parent’s screens, where the sale of those screens occurs once Compac decides to purchase the screens, will cause Parent to be engaged in a trade or business in the U.S. and Parent and will have to file a U.S. tax return.

3. Under Example II, Parent will be engaged in a trade or business in the U.S. and will have to file a U.S. tax return. This would be true even if the subsidiary was engaged in a totally separate line of business, such as the sale of vintage wines in the U.S.

Note: Even if Parent is engaged in a trade or business in the U.S. and, therefore, will have to file a U.S. income tax return, the actual taxes may be minimal.

IV. ANALYSIS

A. General Explanation of the Law

Income from sources within the U.S. is subject to taxation under Internal Revenue Code Section 861. Under IRC § 864(b) and (c), when a foreign corporation is engaged in [an effective] trade or business in the U.S. (hereafter "ETB"), it is taxed on the portion of its income that is effectively connected with its trade or business (hereafter "ECI" [effectively connected income]). The tax is computed, in general, in the same manner as a U.S. corporation or individual doing business in the United States. Taxes are computed on a net income basis (gross income less deductions). Corporations generally pay tax on their net incomes as follows:

Taxable Income Rate

No income to $50,000	15%
Over 50,000 to $75,000	25%
Over 75,000 to $10,000,000	34%
Over $10,000,000	35%

Therefore, a foreign corporation with taxable income of $10,000 will pay a $1,500 tax on its income. Distributions of dividends from the Sub to Parent will be taxed at a flat rate of 30% under IRC Sec. 881(a) when the dividend is paid.

In general, a foreign corporation uses the same rules as a domestic corporation to calculate its net book income which is subject to taxation; however, the foreign corporation is subject to tax only on its effectively connected net book income. In other words, income and deductions are determined with respect to the foreign corporation’s U.S. business operation, as determined on its applicable financial statement. See IRC Reg. 1.56-1(b)(6)(ii)(B).

In addition, if the foreign corporation operates a branch in the U.S., rather than a corporation, there could be a branch profits tax of 30% under IRC Sec. 884 (as though a dividend were paid to Parent under IRC Sec. 881(a)), in addition to the regular tax on ECI under IRC Sec. 11. The purpose of the branch profits tax is to equalize the tax treatment between a foreign corporation that uses a corporate subsidiary or an unincorporated branch in the U.S. Therefore, using a branch office in the U.S. will subject the foreign corporation to an immediate double taxation on its effectively connected income.

B. U.S. Trade or Business

A foreign corporation engages in a trade or business in the U.S. when it is involved in a profit-oriented activity within the U.S., either directly or indirectly, or through agents, when the activity is regular, substantial and continuous. CM v. Spermacet Whaling and Shipping Co., 281 F2d. 646 (6th Cir. 1960). The court in Spermacet found that a company that hunted whales on the high seas for sale to a U.S. oil refiner was not engaged in a U.S. trade or business despite close financial links to the U.S.

Sales by a foreign corporation to U.S. customers directly, without the use of an office, agent or employees in the U.S. is generally not a trade or business. U.S. v. Balanovski, 131 F Supp. 898 (S.D.N.Y. 1955). Green Export Co. v. U.S. 285 U.S. 383 (Ct. Cl. 1961); Perry Group, Inc. v. U.S., 1980-2 USTC ¶ 9603 (D.C. N.J. 1980). Use of a sales person in the U.S., however, will cause the foreign corporation to become an effective trade or business. Revenue Ruling 56-165, 1956-1 CB 84

In Example I, Situation A, Parent has no office or employees in the U.S. and is not conducting business through an agent located in the U.S. Consequently, FC is not engaged in a U.S. trade or business.

In Example I, if the FC sells screens and then sends its employees to the U.S. to advise Compac in connection with the screens, the FC will not be ETB, according to Private Letter Ruling 7739023. If, however, the FC sends its employees for the purposes of selling additional screens and if the employees have the power to enter into binding contracts with Compac, then the FC will be ETB according to Revenue Ruling 56-165, 1956-1 CB 849 and Revenue Ruling 55-282, 1955-1 CB 634.

C. Effectively Connected Income from U.S. Sources

ECI is taxed by IRC § 882(a) at graduated rates and a foreign corporation deducts all expenses incurred in earning ECI, just like a domestic corporation. U.S. source income that is not ECI is generally considered "fixed or determinable, annual or periodic" income (hereafter "FDAP") and is taxed at a flat rate of 30%. FDAP income includes, interest, dividends, rents and royalties.

Income that is not FDAP is considered ECI if it comes from sources within the U.S., such as inventory and other property held for sale to customers in the ordinary course. This rule applies, whether or not the income is actually connected with the foreign corporation’s U.S. trade or business. IRC Sec. 864(c)(3). To illustrate this point, Rhoades and Langer in their treatise, Taxation of Foreign Investors, ¶ 2.31[2][a] use the following example (which has been modified by this explanation):

Bettco Company, SA, a Brazilian corporation, engages in business in a number of unrelated fields. For the last few years, it has sold vintage wines throughout the world, including, on infrequent occasions, the United States. Although title to the wine passes upon acceptance of the buyer in the United States with the result that the income is from U.S. sources, Bettco has been properly classified as a passive investor taxpayer because its contacts with the United States are not sufficiently broad to cause Bettco to be doing business in the United States.

Hence, since Bettco is not engaged in business in the United States and since its income from U.S. sources is not FDAP, none of Bettco’s income has been subject to federal income tax under IRC Reg. 1.1441-2(a)(3).

In 1995, Bettco opens an office in the United States for the purpose of assembling and selling certain radio components Bettco manufactures in Brazil. Bettco thereby begins to engage in business in the United States. As a result, even though the sales of wine have nothing at all to do with Bettco's U.S. office, the income from sales of the wine in the U.S. will be taxed at ordinary income rates, despite the fact that the wine sales are not conducted in the U.S. because the presence of Bettco's office in the U.S. makes all U.S. source income (which is not FDAP income) ECI.

Based on IRC § 864(c)(3) as illustrated by the above example, if Parent conducts any business through Sub or branch office, or through an agent, all U.S. source income will be ECI. Therefore, under Example II, Parent will have to file a U.S. tax return by virtue of its operations in the U.S. This result will occur even if the U.S. Sub or branch office was engaged in a business that was wholly unrelated to the sale of screens to Compac.

D. Activities of an Agent

In Situation B, Parent will use ACME as its agent to warehouse its screens and to provide shipment of those screens under the principles of JIT inventory. When a foreign corporation employs an agent to do acts that would be considered an effective trade or business if the foreign corporation had performed those acts through a subsidiary or branch office, the Parent will be considered ETB. Therefore, the agent's acts are attributed to the Parent for purposes of determining whether the Parent is ETB. This is the result even if the Parent has never been physically present within the U.S.

When the agent is employed to sell goods or products in the U.S., the FC generally holds title to the goods until they are sold and, therefore, it is the FC which is ETB. If, however, the agent is acting on behalf of the buyer and title passes outside the U.S., there would be no agency relationship between the FC and agent. Also, if FC establishes a distributorship with its subsidiary under an independent and arm's length relationship, the FC will not be ETB. Handfield v. CM, 23 TC 633 (1955), Private Letter Ruling 7931056.

In Private Letter Ruling 7909063, the IRS found that a foreign corporation which sold goods exclusively outside the U.S., and which formed a subsidiary to maintain an inventory of its goods in a warehouse, provided general accounting operations relating to the inventory, received payments from customers and paid all expenses relating to the operation of the facility, was not an effective trade or business. This ruling determined that the warehousing and accounting of goods in the U.S. was not a material factor in the sale of such goods since all sales occurred outside the U.S. The ruling substantiates the conclusion that operation of a warehouse to maintain an inventory of goods in the U.S. for sale in the U.S., will cause Parent to be ETB and will subject it to U.S. taxation.

In Situation B, ACME's activities with respect to JIT will cause Parent to be ETB in the U.S. This result will occur whether or not Parent has an office or employees located in the U.S. Direct sales made by Parent to its customers in which title to the screens is transferred to Compac outside the U.S., and in which ACME merely clears the shipment through customs, will not cause Parent to become ETB.

E. Observations and Suggestions

1. Use of ACME to perform JIT inventory functions or otherwise operate on Parent’s behalf with respect to the sales of screens in the U.S., will cause any foreign corporation to become ETB and will subject its effectively connected incom to U.S. income tax at graduated rates.

2. If goods are sold by Parent directly to U.S. customers in which title passes outside the U.S. and in which ACME merely provides customs brokerage services to Parent, Parent will not be ETB and no U.S. taxes will be owed.

3. Even if Parent sells goods directly to U.S. customers under Paragraph 2 above, if Parent has an office, employees or uses an agent to represent it in the U.S., it will be ETB in the U.S., and all of its U.S. source income will be ECI, even if the goods sold have no relation to the business activities in the U.S.

4. The payment of U.S. taxes may be minimal since the Parent is entitled to the same deductions as any domestic corporation would receive under the U.S. tax code, and its taxable income will be taxed at graduated rates, starting at 15%. Therefore, if the Sub can generate sales of 20% or more, the U.S. tax will be offset by the increased sales. Also, all the Sub's expenses can be deducted from any taxable income generated by the sales of the screens. Furthermore, the profit attributable to the sale of the screens could be reduced by allocating indirect expenses, such as general overhead, interest costs and R&D costs, to the cost of producing the screens.

5. The transaction might be restructured so that ACME does not engage in significant business activities on behalf of Parent in the U.S. If JIT inventorying of the screens could be performed: (i) In another country (possibly Mexico or Canada, depending on how those countries would treat the warehousing of goods destined to the U.S.); or (2) by ACME, as agent for the purchaser, in which the purchaser took title to the screens overseas, but ACME warehoused the screens for purchaser in the U.S., Parent might avoid ETB status under Example I.

PINNACLE QUEST INTERNATIONAL PRINCIPALS INDICTED FOR CONSPIRACY, FRAUD

Niceville [Florida] residents Mark and Claudia Hirmer have been arrested by federal authorities and charged with conspiring to "impair and impede the Internal Revenue Service."

The Hirmers operated a business called Pinnacle Quest International and charged for memberships that gave customers information to help them get out of paying their taxes, according to a news release from the U.S. Attorneys' Office.

"PQI contracted with vendors, who gained exclusive access to the PQI membership in order to sell their products promoting anti-tax theories, offshore corporate structures, debt elimination tactics and offshore investment opportunities," according to an indicting document.

Claudia Hirmer, 49, and Mark Hirmer, 54, are charged with 11 others in the PQI scheme. The couple appeared before a U.S. magistrate [August 28] and were being held pending a bond hearing ... The U.S. Attorney's Office declined to release the results of the hearing. The other people arrested lived in Florida, Washington, Oregon, New York and Panama.

PQI vendors sold "memberships" for anywhere from $1,350 to $18,750, the news release said. Vendors promoted the offshore trusts they were selling by convincing prospective customers they were buying into a company owned by a non-resident alien. Non-resident aliens are not required to pay U.S. taxes.

This statement is sufficiently misleading to be an error. A non-resident alien does not owe taxes on non-U.S. income and on certain kinds of U.S.-connected income, such as interest on government debt. A foreigner of course (as much as Uncle Sam might like it to be otherwise) cannot be subject to taxes on his/her foreign income. The U.S. has no connection or say-so in the matter. And as befits a country in chronic need of foreign financing, the U.S. offers certain inducements like tax breaks to encourage foreign investment in the U.S. But there are a wide variety of contexts in which a non-resident alien would owe U.S. taxes, i.e., when it received income effectively connected to the U.S. (see lead article above) that was not exempt.

Reports elsewhere indicate that these "offshore" trusts marketed by PQI affiliates were in fact "owned" by a U.S. citizen. Obviously such a trust cannot be construed as a non-resident alien entity under any circumstances, and any representation that they were was fraudulent. It is not explained what "buying into" the trust actually meant (one would not expect such technical details from standard news sources such as Reuters), but we would wager that even if the "owner" -- trustee, presumably -- had been legitimately foreign that the "buying in" would have failed in its tax avoidance purpose as well. An offshore trust with a U.S. person as grantor, trustee, or beneficiary is effectively an onshore trust for tax purposes. If "buying in" meant becoming a constructive beneficiary, e.g., the offshore trust structure could not impart any tax savings.

"Members were misled to believe that vendor-offered products would allow them to legally pay no taxes, become free of debt, accumulate wealth and protect their assets from the U.S. government and creditors," the release stated.

Along with the conspiracy charge, the Hirmers and their co-defendants face charges of conspiring to commit money laundering, wire fraud and tax evasion. They face up to 20 years in prison and fines of $250,000 or more. The U.S. government also is seeking to confiscate more than $50 million and three Northwest Florida residences, the press release said.

"There is no secret formula that can eliminate a person's tax obligations," Eileen Mayer, the chief of the IRS criminal investigation division, said in the release. "Taxpayers should be wary of scams and promises that claim to help avoid paying taxes."

An older article covered the U.S. Justice Department's filing of an injuction against PQI in April. Allegations included that PQI was a successor to the late and unlamented Institute of Global Prosperity, and had been promoting "detax" schemes similar to those that Global Prosperity had promoted. The complaint described PQI vendors as "a Who's Who of notorious tax defiers."

"Tax defiers" is a relatively new IRS term which they apply to those who do not pay taxes based on various theories about why the tax laws do not apply to them. Tax defiers used to be labeled "tax protestors," a term which is apparently now reverting to its former use and being applied to people who refused to pay part or all of their taxes as a protest against, e.g., spending on wars, but who did not dispute the validity or applicability of tax laws per se. Wherever the IRS draws the definitional boundaries, it has announced a "National Tax Defier Initiative" under which it is vigorously pursuing those it deems tax defiers. The PQI injunctions and indictments are evidently among the first major results.

We also note that those named in the earlier suits included a woman who sold an IRS Individual Master File (IMF) decoding service which purports to show how the IRS fraudulently misidentifies the client as operating an enterprise subject to federal excise taxes, implying that if he/she were properly characterized there would be no taxes owed.

HERE WE GO AGAIN?

The parallels between the 1929-32 downturn and the current difficulties are becoming alarmingly apparent.

For all the talk of another depression coming along, how likely is this? Martin Hutchinson compares today's situation with the 1930s and sees too many parallels for comfort.

The 1920s boom was built on a Fed-fueled credit bubble not fundamentally different from the credit bubble of 1982-2006. When things came unglued starting in 1929 the government could have stood aside as it did in 1921, when the U.S. economy went through a very sharp but brief post-war economic adjustment. Instead of standing aside again it faught the post-1929 downturn tooth and nail, and ended up turning it into a worldwide economic catastrophe which directly led to World War II.

And now a fair guess is that we are about to see a manifestation of the adage that if there is anything we learn from history it is that people don't learn from history. Therefore, another depression looks likely.

The echoes of the 1930s in the current situation are not confined to foreign policy. Economically also, the parallels between the 1929-32 downturn and the current difficulties are becoming alarmingly apparent. It must be remembered: the Great Depression became such, as distinct from a garden-variety downturn, though egregious policy errors by decision-makers in a number of countries. Repetition of those errors, all of which would have appeared unthinkable a decade ago, is becoming increasingly likely and in some respects is already happening.

One area where the mistakes of the 1930s are being replayed, although so far piano rather than fortissimo, is in international trade. There is no repeat of Smoot-Hawley on the horizon -- whatever the question marks over the belief system of Barack Obama, it is pretty clear that his flirtations with protectionism during the primaries were no more than populist stunts.

Nevertheless, the Doha round of [WTA] trade talks have been killed stone dead, the South Korean and Colombian trade treaties with the United States seem unlikely to make it though the Democrat-controlled Congress (though there may be some chance of progress after the November election) and further trade treaties have been stymied by the President's lack of a "fast-track" negotiating authority from Congress.

More ominously, world trade has in the last few months reversed its rapid growth since 2000. Indeed if the world economy goes into a prolonged downturn there must be a substantial likelihood of a protectionist backlash, both in the wealthy economies of the U.S., the EU and Japan, but also in the more autarkic emerging markets such as China, India and particularly Russia. Neither China nor India is instinctively committed to free trade. To the extent that they, and not an enfeebled United States and Britain, are steering the world economy, protectionism will surely increase and global trade and prosperity suffer accordingly. There is only a limited probability of a full 1930s trade death-spiral, but the ‘90s optimism about globalization and the peace to which it leads seem equally distant.

A second huge error in the U.S. that made things much worse was the Herbert Hoover tax increase of 1932, which raised the top rate of income tax from 25% to 63%. Even the Republican attack machine cannot paint Barack Obama as committed to quite such a suicidal move, but there is no question that an Obama administration would see considerably higher tax rates on the well-off, if only through allowing most of the provisions of the 2001 and 2003 tax cuts to expire.

Here the main need is for care. While I am as convinced as anyone that the drop in top marginal tax rates from 70% to 28% played a major role in the growth of the 1980s, and that Hoover's increase from 25% to 63% made the Great Depression much worse and more prolonged, it is not clear to me that modest moves in marginal rates have any great effect.

Probably the only George W. Bush tax cut that had a significant economic effect was that reducing the double taxation of dividends, by cutting personal tax on dividend income from 35% to 15%. Like almost all Bush initiatives, this one was botched. A more sensible approach would have been to allow dividends paid to be deductible from corporate income for tax purposes. This would have put the tax shelter industry out of business, and leveled the playing field between debt and equity for capital planning purposes.

Nevertheless, reversal of the Bush tax cuts, a modest increase in social security contributions at high income levels and a reversion of the capital gains tax rate to 20% are unlikely to be too damaging. The key will be not to allow the combined rate of Federal and state tax on any income to rise above 50%, nor to allow dividend tax to be increased, as dividends are already taxed at close to 50% including corporate and personal tax. That suggests that the top marginal rate of tax and social security contributions combined should be no more than 44%, allowing a 10% state income tax (deductible against Federal tax) to bring the overall rate up to 50%. If Obama is cautious therefore, and it seems likely that he will be, the initial effect of the planned tax cuts should be only marginally economically depressing.

The difficulty will arise if the U.S. economy sinks into substantial recession, bringing the almost inevitable $1 trillion budget deficit. At that point, the strong temptation for a President Obama and a majority Democrat Congress would be to increase taxes further on high incomes. This would be highly dangerous for two reasons. First, the actual marginal rate of taxation would climb towards the 55%-60% level at which serious problems of evasion and disincentive occur. Second, the confidence effect of a 15% plus rise in the top marginal tax rate over a short period of time would be considerable, similar to that caused by Hoover's misguided budget-balancing attempt. That could depress the long term rate of U.S. growth, suppressing productivity gains and driving capital out of the country.

In the event John McCain won in November, there would be at most a modest additional tax rise, which would have little effect. The severe danger in this case would be the recession and its accompanying deficit, which would bring a chorus of calls to McCain to engage in swingeing tax increases to balance the budget. Since he appears to have no ideological objection to such increases, and little economic understanding of why sharp unexpected increases would be damaging, the resulting policy might be as depressing as that pursued by Obama.

The third major policy failure that contributed greatly to the Great Depression was the failure of the Fed to loosen monetary policy after the failure of the Bank of the United States in December 1930. Even though interest rates remained low, money supply declined as banks failed and the public lost its deposits. This time around, monetary policy has been extremely loose, so there would seem little danger of a repetition.

However, the principal cause of the Fed's failure in 1931 was the "pushing on a string" effect, also seen in Japan in the late 1990s, where in a period of very low interest rates money supply began to shrink unexpectedly, and new money proved difficult to create. In both cases, autonomous money supply shrinkage was accompanied by economic decline.

We may be seeing the beginnings of a similar effect now. Growth in the St. Louis Fed's Money of Zero Maturity, which had been over 20% per annum in the six months to April, has slowed since then to only 5% per annum, without any rise in interest rates above their current negative real level or any visible tightening in monetary policy. This may indicate a sharp deceleration in the U.S. economy, making money demand inadequate to absorb money supply. The next few months will give us an answer on this, one we may not like.

Overall, however the most disturbing similarity between the present situation and the early 1930s is the revived faith in the ability of government to solve problems. This never entirely went away, of course -- during the cheap "end of history" triumphalism of the 1990s one was aware that the search for a "Third Way" was mere marketing, and that the old faith in government as an all-powerful solver of problems was by no means dead.

This old-time socialist religion has manifested itself in a number of ways. One is the bailout of failing enterprises. In the U.S., since the 1930s the only substantial company to be bailed out had been Chrysler in 1979. This year we have seen bailouts of Bear Stearns, Fannie Mae and Freddie Mac, and it now seems likely that government money in some form will be put into the automobile industry.

As anyone with experience of the British economy in the 1960s and 1970s could tell you, this will not work. British Leyland, the British automobile company, for example, was bailed out repeatedly by the taxpayer, only to lose more and more money until finally in the 1980s Lady Thatcher put most of it out of its misery.

Government bailouts prevent the Schumpeteran process of creative destruction from working, diverting resources from productive taxpayers and bond market investors to the worst losers in the economy. In extreme cases, the economy ceases to work at all, as political pull becomes the only reliable approach to obtaining resources. Increased taxes, environmental controls and the attempt to move towards a state-directed healthcare system are all further symptoms of this trend.

It is here that one can most ferociously blame Messrs Greenspan and Bernanke and their decade of irresponsibly cheap money. By distorting price signals throughout the economy, and producing burst bubble after burst bubble without significant improvement in living standards except at the very top, they have enabled the left to claim that capitalism "doesn't work" so we must bring in government and the unfortunate taxpayer to solve economic problems.

Last time around in the 1930s, economic recovery was almost prevented altogether by government meddling, from Hoover's political-pull Reconstruction Finance Corporation, through Roosevelt's destruction of the private capital market by the Glass-Steagall Act, de-capitalizing investment banking, to the odious creation of the farm subsidy monster, to the fascist-inspired National Recovery Act. The result was an economy in which private enterprise did not recover till the early 1950s, and some of the public sector excrescences are with us still. Only a few of the public sector innovations, notably bank deposit insurance, did more good than harm, even while distorting the market.

John Maynard Keynes believed that the free market economy had died in 1914, and that modern economies were best run by high-minded bureaucrats like himself. As public choice theorists have subsequently definitively proved, this approach depends on a moral purity and economic perceptiveness in the public sector that does not exist. Hence it damages both the economy itself and civil liberties. Nevertheless in Britain and the United States it took us 50 years to get rid of it. Alas, it has now returned, much to the joy of the free market's fair weather friends in organs such as the Financial Times, which had a triumphalist ode to public sector meddling this week.

The other parallel to the 1930s, of course, is the emergence of well armed autarkic states seeking to expand at our expense. However that is only peripherally an economic problem.

Who Will Suffer Least From Depression?

This piece is a bit histrionic for our tastes, but it conveniently helps us reiterate a point we have been making as long as we have been around (W.I.L. was formed over eight years ago now): Tough economic times are a double threat to ones assets. (1) Asset values fall unless you are prepared and adroit. (2) Government attempts to counter the tougher times in time include stealing whatever they can get their hands on. Those tough times are getting close, if they have not already arrived.

Though few may have noticed, the past few weeks may be regarded as a global economic turning point. Evidence is mounting that the United States is entering a recession, with increasing signs that it could morph into a depression. While the current Administration appears resigned to bail out or nationalize large tracts of American commerce, the presidential candidates drift towards Great Society era spending proposals. At the same time, America's principal economic rivals appear to be charting courses that are not in line with U.S. interests.

The Russian invasion of Georgia has revived tensions that have not been seen since the most frigid periods of the Cold War. With the Olympic Games over, China can relax and now exert its muscle without risking any politically motivated boycotts. Between them, these global players hold well over a trillion dollars, or 10% of U.S. government debt, which they can use in as leverage in any strategic, economic or political confrontation with the U.S. There is also evidence that America's economic power is even waning in our own back yard. This week, Honduras, a traditional U.S. ally in Central America, announced that it was throwing its lot in with a Latin American trade bloc dominated by Venezuela and Cuba!

For two years I have warned readers of a severe, real estate led recession and encouraged extreme asset allocations to cash, particularly short-term, hard currency government bonds, and gold. Last year, I urged short positions in financials and U.S. stock markets. ... The financials are currently down some 84%. Apparently, the real estate crash is biting deeper than just about any market "expert" had imagined.

The size of the problem is enormous. A fall of just 20% in U.S. house values, (which is confirmed by the latest Case-Shiller data release) wipes almost $5 trillion from the wealth of American consumers and businesses. This amounts to more than 1/3 of America's GDP and half of the total U.S. Government debt! How could the fallout be anything less than systemic?

Imprudent lending behavior, inspired by the housing boom, placed the security of banks depositors and shareholders at undisclosed and unprecedented risk. The banking problem is so large that failures cannot be allowed. The government has bent rules regarding financial reporting and the Fed's lending criteria to keep the financial ship afloat.

The main focus for now is on government sponsored lenders Fannie Mae and Freddie Mac, who are now understood to be hopelessly undercapitalized. Despite the complete predictability of this outcome, even conservative investors, including many banks, had been persuaded that securities issued by both Fanny Mae and Freddie Mac were risk free. And although shareholders for both entities are likely to be wiped out, corporate bond holders, and those individuals and financial institutions who hold mortgages backed by both the GSEs, correctly assume that the government will back their assets. However, hundreds of billions, perhaps trillions, of Federal dollars will be needed to make whole all who foolishly loaded up on Fannie and Freddie debt. Unfortunately, the Federal cupboards are bare.

This week, the Federal Deposit Incurrence Corporation (FDIC) announced that its problem list had increased from 90 banks to 117. Worse still, the FDIC announced its fund had fallen below its legal deposit ratio, forcing it to increase its levy on member banks. This, just when the net income of its member banks, in desperate need of retained earnings, has fallen by some 86%. As more banks begin to fail, the ultimate cost to the Federal balance sheet is hard to imagine.

But, as the old saying goes, "What's good for the goose is good for the gander." So, if government financial "favors" are granted to reckless investment firms (Bear Stearns) and now mortgage borrowers, what about other economically vital "multiplier" industries like automakers, airlines, credit card and insurance companies, and even corporate real estate lenders? The logical conclusion for this current drift is hyperinflation. In order to make good on its promises the Federal Government will have to resort to the printing press ... with a vengeance.

With America facing severe recession, many regions around the world will suffer. So who will suffer least? Nations that have run relatively prudent economic policies and those who "produce" goods required even in an economically depressed world will continue to prosper increasingly, relative to the U.S.

The differential may become magnified as America's government hyper-inflates. Investors will then increasingly dump dollar paper assets and buy hard currencies, government bonds of "producer" nations and gold. Investors ahead of this depression curve will likely suffer least!

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read Peter Schiff's book Crash Proof: How to Profit from the Coming Economic Collapse.

YOUR MARRIAGE LICENSE, PLEASE

Is your health insurance one of your least favorite products? Here is another reason to stew about it.

This falls under the "Why did it take so long?" category. Companies offering "family" healthcare coverage are finding, when they do a little checking, that ineligible people have been included under the coverage umbrella. With costs so high and economic times tough, more companies are performing audits. GM could end up saving $100 million a year. Unlike the Feds, private companies do not throw you in jail or expropriate your assets when they discover some funny business. They just kick ineligible care receivers off the roles or, in egregious cases, fire the employees who abused the system. How civil.

By the end of the year 12,000 people could be dropped unceremoniously from General Motors' health plan. The automaker just finished auditing 80,000 salaried employees and the 125,000 family members listed as their dependents. The firm doing the audit estimates 10% of these ostensible dependents could be claiming benefits to which they were not entitled. Now GM is taking a close look at 350,000 dependents claimed by 215,000 current and retired union workers. When the dust clears GM's savings from bouncing ineligible health claimants could be up to $100 million a year.

It is hardball time. Checking health plan eligibility is a good way to pinch pennies, since the stakes are large. Often employers find themselves footing health care costs for employees' ex-spouses and adult children who are not in school. AT&T will save $40 million this year by cutting loose 10,000 people who do not qualify for the coverage they have been receiving. Chrysler has clawed back an estimated $50 million in paid benefits from employees who defrauded its health care plan in recent years.

American Airlines finished an audit in 2006 that resulted in almost 10,000 ineligible people losing their coverage. Employees were offered a free pass if they came clean. A handful who appeared to be defrauding the plan were terminated. ...

Rooting out ineligible dependents is nasty work. Employees must share tax forms, birth certificates and marriage licenses to make auditors happy. (One frustrated employee sent an auditor a wedding ring to prove he was married.) As many as 15% of dependents can be bounced because the employee is divorced or because minors, including stepchildren, nephews and nieces, are 18 or older and are not full-time students. A third of those employees are committing fraud, says David Chojnacki, vice president of Budco Health Service Solutions of Highland Park, Michigan, which performs many of these audits.

Some firms assume they are paying to cover people who are ineligible but choose not to pry into employees' lives. General Mills decided an outside health audit would hurt its family-friendly climate, says Chojnacki. (The company says it did its own audit and that family image was not the issue.)

Other companies are at pains not to make too many enemies. Denver telecom Qwest tossed 8,000 dependents off its health plan in 2006, shaving $25 million off its $750 million in annual health care costs. It made the audit less hostile by allowing appeals. "The process was challenging," says Erik Ammidown, director of benefits. "But health care keeps getting more expensive."

INTEGRATING LINUX INTO THE SMALL- TO MEDIUM-SIZED ENTERPRISE

From the foreword: This article summarizes the experiences of one small- to medium-sized enterprise (SME) using a heterogeneous mix of Linux and Windows XP systems. Written by the founder of an international PC distributor, it compares and contrasts various Linux-based distributions, and assesses their suitability for business use.

An extremely detailed walk through the major issues the author confronts in running a business, he ends up providing a very useful view from the front lines for those considering moving from a Windows environment to Linux or a mixed-OS environment.

My Company, NorhTec has tried our share of commercial Linux distributions, including Mandrake, Caldera, Lycoris, ELX, and Xandros. Initially, I saw that the commercial distributions, while often more cosmetically appealing, would be less functional and harder to install software outside their distributions. When I first wrote about Linux on the desktop, I received several critical responses to my praise of Microsoft XP, and statements that Microsoft XP was more mature than the then-available Linux Desktop distributions.

In the Microsoft Windows world, Vista is now the current offering. Microsoft's Vista has received mixed reviews. Despite its supposed security enhancements and additional eye candy, there remain several issues discouraging wide adoption. Among these are:

• Compatibility issues
• Hardware requirements
• Performance issues
• Confusing versions with different feature sets
• Additional centralized control over desktops by Microsoft

Four years ago, I standardized our company on Mepis Linux for our office workers. Our engineers used Microsoft Windows because they needed it to run their CAD/CAM software, and we use CentOS for our server for accounting software and hosting our website.

I have continued to test new Linux distributions. I have held back on reviewing my results because there is always a catch-up from one distribution to another. One distribution will leapfrog another, or a given version of a distribution might not support a critical piece of hardware.

Background

It is important to understand that the differences from one Linux distribution to another are not that great, so far as the user is concerned. The factors that determine which Linux distribution is most appropriate include:

• Compatibility with hardware
• Installation ease
• Repository system
• Performance
• Interface
• Applications
• Stability
• Configurability
• Scalability
• Security

Let us look at each of these areas in detail.

Compatibility with hardware

There have been several times when I have wanted to use or test a given Linux distribution, only to find that it did not work well with my hardware. It can be very frustrating going through a long installation process only to find that a particular printer, scanner, or pointing device does not work. One of the things that makes it easier is the proliferation of live CDs. Live CDs boot into a fully working OS before installing the OS onto the hard disk. Over the years, I have found that Linux distributions are getting much better at detecting hardware.

All in all, Linux distributions have reached the stage where hardware compatibility should not be an issue. In fact, there are many hardware devices that were left behind without driver support from Windows 2000 and Windows 98 that will work well with Linux.

Installation Ease

Installation refers to both installation of the operating system and installation of the applications. When I first started using Linux, some distributions, such as Slackware and Debian, were a bit sparse in the user support given during the installation process. Redhat and Mandrake used Anaconda to hand-hold the user through a pretty friendly installation process.

Today, the Live CD installation process makes it possible to boot a CD, test the hardware, and then install the entire system in less than 20 minutes. I prefer this method.

Most of these distributions allow the user to run a utility that works like Partition Magic called Gparted [see screen shot]. Gparted allows you to set up your hard disk to install Linux on your system. This is particularly useful when you want to adjust the size of your existing NTFS or FAT32 partitions so that you can install Linux on a dual boot system. I have used Gparted on Live CDs of Linux to fix existing Windows installations.

If you are installing Linux on a fresh hard disk, then most Linux installations will automatically partition your system to use the entire disk or the remaining space in an existing partition. For those familiar with installing Windows XP or other version of Windows, they will discover the process of installing Linux easier because when the installation is completed, not only is the OS installed, the applications and drivers are also installed.

Debian-derived and Ubuntu-derived distributions use the apt-get package management system. The user has a list of locations called repositories that they can add to their system, after which the system will look to these locations for new software or updates. The apt-get system then updates the system as the user desires.

I have employees who have been using Mepis Linux for four years. These systems have remained rock-solid, and we do periodic updates through the Internet.

Debian uses deb packages, ending in a .deb file extension. Red Hat derived distributions use the .rpm extension, and RPM packages. A program called Alien allows users to convert from one installation format to another. Some .rpm based distributions have repositories for .rpm applications, much as Debian-based distributions have repositories of .deb packages. PCLinuxOS is one such RPM-based distribution.

From my experience, I would rate the following Linux distributions as superior in terms of installation and updating in the following order:

• Puppy Linux
• Mandriva
• Debian-based
• PCLinuxOS
• Ubuntu-based

Repositories

Almost all Linux distributions today use some sort of package manager system that updates applications over the Internet. Most of these systems either use or emulate apt-get from Debian. Today, Red Hat/Fedora, Slackware, and other distributions offer some procedure to update and install software over the network.

Mepis Linux was originally based on Debian, but decided to change to Ubuntu. Ubuntu is based on Debian as well, but Ubuntu created a repository system outside the standard Debian repository system in order to offer specific versions or faster access to new versions of software.

Freespire and Mepis announced they were no longer using the Ubuntu repository system exclusively. The reason stated was that each release of Ubuntu was almost like a completely new system, and that binaries from one update to another would not work. I have been running the Mepis version 7.0 as well as the Ubuntu based 6.5. From a users perspective, there does not seem to be any difference. However, as a business manager, I can clearly see the desirability of being able to continue to update a system before having to do a complete reinstall for as long as possible.

I have tried several Ubuntu-based distributions. The one that I like the best is Mint. Mint (excuse pun) comes in several flavors. I have tested the XFCE based version as well as the KDE based version. Mint uses the Ubuntu repository features a more complete install than Ubuntu.

In terms of repositories, I would rate the following Linux systems the best I have tried as:

• Debian-based
• Mandriva
• PCLinuxOS
• Ubuntu based
• Honorable Mention -- Slackware-based systems using slaptget or swaret

Performance

There is a small Linux distribution called Delhi Linux that will even run on 386SX based computers. I have recently tested it on our new Vortex86SX based computer, the MicroClient JrSX. The Vortex86SX is a 300 Mhz System-On-Chip (SOC) based CPU. The Vortex86SX offers very high energy efficiency and very low-cost x86 computing. The biggest drawback is that it has no math coprocessor. Deli Linux provides a complete graphics environment with browser that can run on this modest computer. Deli Linux could generate new life into very old desktops and laptops as well as making computer devices costing less than $100 useful.

Puppy Linux offers the best performance I have seen of any OS running on a given computer. Puppy Linux installs all the applications into RAM so that they run instantly. Puppy Linux has no eye candy to speak of, but for sheer performance, it is the best.

I recently installed Mepis 7.0 onto a 1Ghz Celeron M for a new employee. We installed 256 MB RAM on the computer. Our mechanical engineers all use Pentium 4 or Intel Duo Core computers. Most of our other employees use VIA based systems with anything from 600 Mhz up to 1.5 Ghz. All of these run Mepis Linux except for a 1.5 Ghz VIA C7 based system that is using PCLinuxOS.

After installing Mepis onto the Celeron M system, I was quite surprised at the performance. My laptop and my desktop both use 64 bit AMD CPUs. I run Windows XP on my desktop and a dual boot Mepis Linux and Windows XP on my laptop. The performance of the 1 Ghz system seemed to be as snappy as my 64 bit desktop. My desktop has 2GB RAM.

As much as I like PCLinuxOS, we determined that it did not provide us with the level of performance we expected. There is a version of PCLinuxOS called TinyMe that is a small version. TinyMe is quite beautiful. From an appearance standpoint, it makes Puppy Linux look homely. TinyMe might be a very good distribution to host a single RMP based application, such as a POS application. It was a bit too sparse to use as a business system.

Ubuntu-based distributions offer very good performance. I tested Edubuntu on a 500 Mhz AMD Geode LX500 with very good results. It even ran -- though slowly -- on the 200 Mhz MicroClient Jr. Ubuntu also offers Xubuntu, a higher performance XFCE based distribution. Mepis offers Antix as their higher performance version.

Having tested many Linux distributions for speed, we have found that in general, Linux distributions run faster on hardware-constrained systems than Windows XP does. I am sure this is even more true for Vista. I have not tested Vista yet. Puppy Linux is the fastest of all the Linux distributions I have tested, but some ancient computers can even be connected to the web using Deli Linux.

Mepis and Ubuntu based distributions seem to have a performance edge over PCLinuxOS.

Interface

There was a report on Slashdot a few months ago that people prefer whatever interface they are used to, even if that interface is inferior. When I worked for Sun, I became familiar with CDE (Common Desktop Environment), which is very much like XFCE. Each time I tried to use Windows 3.1, I was frustrated when I right clicked the mouse and nothing happened. While some people thought the MacIntosh had the best interface, I could not do anything with a single-button mouse.

I mentioned that we hired a new person recently. The person I hired had extensive experience with Windows XP. In fact, he had worked for a school that taught how to use Microsoft Office. After installing Mepis for him, I asked him on his second day how he was doing.

To me, there does not seem to be much difference using KDE or Windows XP as I use both of them daily. He told me he could not get the hang of using Linux. I sat down at his computer and made some fast modifications. The first thing I did was remove the "Go" Applet which is KDE's "Start" button. I installed KBFX, and added it as an applet to the panel. When I showed him this, his eyes lit up. I then went to KDELook and downloaded a background that looked like the background of Vista. I themed Thunderbird and Firefox with Vista-like themes. After 10 or 15 minutes, he was quite happy.

Nothing that I did actually changed the usability. Every mouse click was the same as if I had not made these changes. However, making the user interface look more familiar was like setting out a welcome mat. I also changed the login screen to look like Windows XP. [See screen shot.] Every time I see him now, he tells me how happy he is with Linux.

I recently tested a version of Puppy Linux called MacPup Dingo. I have been a long-time fan of Puppy Linux. Admitedly, Puppy Linux has been one of the most boring looking Linux distributions available. MacPup provides a Mac like interface for Puppy without diminishing its speed or compactness. [See screen shot.] Ultimately, appearance is important. Users are more likely to accept Linux if it looks polished.

Two of my engineers are big fans of Ubuntu. One of them has even created his own live CD that he uses to replicate his particular installation. I have no reservations reccomending Ubuntu -- particularly for those so inclined to create their own installation disks. However, I believe most companies would prefer to install a Linux Distribution disk and not have to do a lot of customizing to make it completely useful or attractive to use.

Sabayon is a very cool Linux which is probably better suited for the enthusiast or gamer than for the office. However, Sabayon Linux is one of the few that come with Wine-Doors installed. Wine-Doors is the easiest to use and most complete available free tool for running Microsoft Windows programs. It might be worth testing Sabayon simply to see if a given Microsoft Windows application can be made to run on Wine-Doors. Please note that Mandriva allows users to install Wine-Doors from its repository.

With Puppy Linux, I have installed the IceWM and themed it to look like XP. Some Linux users might think that this is bastardizing Linux but for me, it is a simple way of getting my employees more comfortable. To date, I have never hired anyone to give training on Linux for our users. We do not even have an IT staff. Generally speaking, once we install the systems, they pretty much work.

I believe that it would be impossible to give one Linux distribution a higher score based on how it looks out-of-the box. Beauty is in the eye of the beholder and most Window Managers can be easily themed to suit individual preferences.

Applications

I mentioned above that Wine, particularly as packaged with Wine-Doors, can run many existing Microsoft Windows applications. A commercial package, Crossover Linux, allows many Microsoft Windows applications to run reliably. I have used Crossover Office and found it to work very well. However, these days, I find that I really do not need any existing software when running Microsoft Windows. None-the-less, some organizations might want to run existing licenses on Linux to make the transition easier.

One trick that we have been working with is to load Wine onto Puppy Linux. Puppy Linux is quite small and will run on hardware that can not support Windows Vista or Windows XP. We download the Slackware version of Wine. Using a tool that comes with Puppy called tgz2pet, we convert the Slackware version of Wine into a Puppy installable file. This will create an ultracompact as well as free environment that will support many Windows applications. For some applications, the combination of Puppy Linux and Wine can act as a poor man's version of XPembedded.

Every business will have some specialized software that only runs on a particular operating system. However, most businesses probably do not realize how well they can operate using Open Source or free software.

I have been using OpenOffice long before I started my business. I have yet to encounter a serious issue. We use Firefox as our browser, and Thunderbird for mail. Our webmaster, Shafquat Kabir, set up both IMAP and POP mail on our web server that runs on Centos.

Our employees can use IMAP mail on their phones, or using any browser with the SquirrelMail web mail application. He has also set up several homebrew web based applications to track customer orders and to provide real time shipping quotes.

Virtually any Linux Distribution provides the above mentioned core applications. I recently tested OpenSuse 11. Many people have commented on how well-integrated the applications are for this distribution. I agree that OpenSuse provides an excellent work platform. I did not find it any better at recognizing hardware than Mepis or PCLinuxOS are. It took a quite a long time to do the installation compared to Mepis or PCLinuxOS.

When it comes to applications, it would be hard to praise one Linux distribution over another. Some distributions throw in everything but the kitchen sink so you have four email clients, six windowing systems, and four browsers. Other distributions are more tightly integrated.

Puppy Linux is a Linux distribution I have already praised for its compact size and speed. What amazes me about Puppy Linux is how ready it is for prime time given its small size. I have worked with compact Linux distributions that use primitive editors and very basic and non-compatible spreadsheets. Puppy Linux installs a fully functional Microsoft Word workalike called Abiword and a Microsoft Excel workalike called Gnumeric. Both of these applications are very functional and compatible. It is possible to add OpenOffice to Puppy Linux. Personally, I think this sort of defeats the purpose.

It is always possible to use Puppy Linux to get onto the Internet and then access Web-based applications such as AjaxWrite, AjaxCalc, AjaxPresents, or Google Aps.

There are now Web hosted operating systems such as Ghost, AjaxWindows, nivio, or EyeOS. These services promise to provide a full computing experience via a browser. Users do not need to install or upgrade application software on their devices. All services are offered via a browser. These systems promise the option of accessing all applications and services from anywhere, having all backup and administration services managed for you, and the ability to access applications from any device that supports a browser.

Note: I have an AMD 64-bit based laptop. I could not help the temptation to install the 64 bit version of Mepis Linux. While the system is blazingly fast, I suggest that most people avoid the temptation to install a 64 bit version of Linux. There are many applications that are not available yet for 64 bit.

Stability

I already mentioned that I have seen a great deal of stability using Linux in our company. We have 14 employees who are tied to dedicated computers. We also have several laptops. All of our office staff use Mepis Linux. One of our engineers uses PCLinuxOS, two others use variations of Ubuntu. I am now using Mandriva 2008.1 on my laptop.

Most of our employees have trained themselves to trick out Mepis. Most of them have figured out how to play music, download files, use instant messaging, and probably how to play games. Most of our office staff has loaded personal photos for their backgrounds.

We have four office systems that use Microsoft Windows XP. We also have a system that DHL provided us that came installed with Microsoft XP to do shipping. We use MicroSoft XP on a dedicated system to do bar coding and printing of labels.

Microsoft XP and Linux are inherently stable. One of our computers is dedicated to shipping. Our shipping company provided us the computer free to run software they installed to create shipping labels. This computer is not used for anything else other than shipping. It is just as reliable and steady as any Linux system we have running.

Our big stability problem is on the Microsoft XP systems our engineers use. My biggest challenge is to stop them from installing their own software. I constantly check the computers to look for unauthorized software. I always find it, too. It seems we are constantly reinstalling Windows on the Microsoft XP based systems, because of viruses. Experience shows that it is the human factor that is the biggest problem, and the knowledge or lack of knowledge Microsoft users have is the greatest threat.

Most of the problems we have experienced with Microsoft XP are self-inflicted. Our employees load infected software, visit dangerous sites, or fall for various malware schemes. Our Linux users and our Microsoft XP users both have a lot of freedom how they use their computers. Linux is proving to be more stable, for the main reason that Linux itself imposes more control over the users and provides them with less opportunities to get themselves into trouble. Most of our office workers have no idea what the root password on their Linux based system is so they are not able to get themselves into real trouble.

Configurability As I previously mentioned, configurability is a double-edged sword. A system that can be infinitely configurable can become unstable or unusable when improperly configured. A system that is too rigid can be inflexible.

Debian-based distributions such as Ubuntu and Mepis provide a great deal of flexibility, but the administrator can control the degree of flexibility by limiting the repositories available. Most Linux window managers give the user a great deal of flexibility to personalize their desktops. This ability has proven to be my best weapon to get users to accept Linux. I do not spend time showing them how to use Linux. I spend time showing them how to personalize Linux. Each user has their own idea of how they want their system to look. Giving the freedom and knowledge to personalize their desktop environment empowers the user.

Scalability

When I first started the company, I was under a great deal of pressure to use a Windows-based accounting system. Our investors and board members wanted us to use QuickBooks so that we could send them the accounting data in a format they could easily use.

I had worked for Sun Microsystems during a time when their business system refused to scale. Sun had a business system that was designed to operate up to US$100 million, but they had stretched it to US$1 billion. When they tried to do a transition, they found themselves unable to take orders or ship product. Sun eventually fixed the problem, but in the process they learned an important lesson about scalability.

I wanted to build a system that would scale. I wanted a system that ran on a database and could be used by an unlimited number of users. We started using Quasar from Linux Canada. Quasar is open source, but we bought email support. We run the server on a Pentium 4 based Power Server running Centos. The Power Server is set up to support RAID. We then run the clients on each of our desktops. We have two locations so we configured our Linksys routers to create a virtual private network. We are able to access the Quasar system. I have considered the idea of hosting our accounting system on our Web hosting service which is something we might do as our company expands.

Quasar has been the most controversial choice I have made. It is not easy to set up, and it is not easy to use. Nonetheless, we are now managing four separate companies using Quasar. We have seven people who access the system at the same time. Quasar has met my primary goal of scaling. None of our people have received any training or hand holding to use Quasar. We have been using Quasar for five years, and it has allowed us to grow without worrying about our accounting package falling apart. All of the data is stored in a SQL database so we are confident that if we grow to the point of needing an expensive enterprise grade financial package, we should be able to migrate the data easily.

As mentioned before, we host our email on Centos as well. We have Centos running on our web hosting service. We are able to buy more bandwidth, storage, and get other features free. Our webmaster is based in Bangladesh. He has done an amazing job keeping our system working for all these years. All of our employees have email, which we access on a variety of devices.

Our company has been Slashdotted a few times. When this happens, our server will get over a million hits in a day. So far, nothing has crashed.

The way we have set up our systems validates Linux's scalability. Our company has quadrupled our business, but our staff is roughly the same size as before. As we add staff, we can focus on sales, engineering, and other revenue-generating individuals rather than continuing to hire administrative staff. We have managed to handle increased workloads without changing out our hardware or changing out our software.

We are currently hiring people in Africa to do some redesign of our website. We set up a Power Server in Thailand. We have a satellite Internet connection back to Abuja, Nigeria. This connection now allows us to hire people in Africa. Ultimately, we hope to expand this. As a side benefit, Africa is now one of our fastest growing markets. This year, we will generate 5% of our income from Africa, and our goal is to continue to reinvest back to Africa to create high quality jobs.

Security I use MicroSoft Windows XP on my home desktop. I use Mandriva on my laptop. When I go to my factory or office, I use Linux. From my experience, Microsoft Windows XP can be made secure. However, out-of-the-box, Microsoft XP without additional software would become a virus sponge and spyware magnet.

There are free and open source tools that will protect Microsoft XP. Clam Antivirus or AVG provide excellent virus protection for no cost. AVG is free for non-commercial users. Spybot Search and Destroy does a great job cleaning spyware. It is important that users become better educated to avoid infecting their computers by falling for phishing schemes or going to malicious websites.

It is unfair to blame Microsoft. It is the wide use of Microsoft Windows that attracts dedicated attention to exploit vulnerabilities. Microsoft has demonstrated that they are concerned about security and that they are quick to fix vulnerabilities once they are discovered.

Our webmaster tells us that our web server has come under attack. We have also seen our local server running at our factory come under attack. To date, none of our systems have been penetrated. Our webmaster imposes very strict controls and issues very strict passwords. Most importantly, we protect our customers' personal information by deleting it from our server after a fixed number of days so that we never accumulate a lot of sensitive information that would attract any interest.

We use Skype for instant messaging because it provides us with an encrypted communication tool. We use SSL to create secure tunnels and limit our employees, giving them limited access to their systems.

In five years, we have seen that all of our security issues have occurred on Microsoft XP based systems. All of these were caused by users loading unauthorized software or using the computers in unauthorized ways. The Microsoft XP systems that are used for dedicated applications have remained uninfected and secure.

It appears that whether or not Linux or Microsoft is inherently more secure than the other, users themselves are forced by Linux to behave more securely. Individuals have less access to the heart of the system to do dangerous things, and Linux systems appear to be less vulnerable to existing attacks than Microsoft Windows.

Conclusion

The small price to buy Microsoft Windows should not be the main reason to consider whether or not an enterprise chooses to use Linux or not. On the other hand, the large number of applications available for Microsoft Windows should not be the sole reason to choose Microsoft Windows either. Many have claimed that Linux requires better educated users than Microsoft Windows. Our experience tells us otherwise.

At work, I use Linux, at home I run Microsoft Windows on my main desktop. I run Mepis Linux on my laptop. I consider myself knowledgeable and responsible enough to use Microsoft Windows safely. The problem that every enterprise faces is that the enterprise is most vulnerable inside the firewall. Limiting the number of Microsoft Windows systems to those users that require it to do their work has minimized the amount of time and expense other enterprises face cleaning up viruses and other problems.

We have found that our workers are able to complete their tasks using the software that comes preinstalled on Linux. We have found that using Mepis Linux, we can set up a new system or reinstall on an existing system in 20 minutes. I have a policy of never spending too much time trying to fix a problem. We back up the data and completely reinstall the entire system should we experience a problem.

We have not had to provide any special training to new employees that we hire. The only thing we train users how to do is how to decorate their desktop, and we give them full freedom on decorating their system. We do not restrict users from any of the tools on the computer. They are free to use Instant Messaging (IM), music players, VoIP, and web browsers as they like. Our focus is making sure the work that is assigned is done on a timely basis.

We have standardized on four distributions. Mepis Linux is our standard business system. As stated earlier, Mepis has not been updated recently so I have personally started using Mandriva. I am not prepared to switch my entire company over to Mandriva, but it is now my personal favorite. If I were to transition my company to a new Linux, I would either convert everyone to Debian or create our own installation based on Ubuntu. Mint Linux is my favorite variation of Ubuntu. Some of our staff use PCLinuxOS. Our more experienced users like PCLinuxOS because it gives them access to RPMs. PCLinuxOS looks more polished than Mepis Linux.

We install Puppy Linux on our least expensive devices that we sell to customers, and we use it to revive computers that would otherwise be worthless. We can use an old screen, a USB thumb drive, and Puppy Linux to create a guest computer for visitors or roaming employees to get online to use our web based mail or other web tools.

CHARLEY REESE WRITES HIS LAST COLUMN

LewRockwell.com columnist Charley Reese has announced his retirement in a final column. We seldom failed to read his LRC columns. Among other virtues, his columns got to the point quickly, said what they had to say concisely, and then ended. That would not have mattered if he had nothing worthwhile to share. But the articles, embodying Reese's unaffected humility and grace, never failed to provoke. We wish him luck in his retirement.

Years ago, the first time I saw my friend Brother Dave Gardner after he had survived a plane crash, the comedian smiled and said, "The devil like to got me." That is a good explanation for my last trip to the hospital.

I have been running a footrace with piled-up years and bad living habits, and they have pulled even and will soon be ahead. I know it may not seem to normal people that writing three columns a week requires any hard work, but it does require energy to do the research and an alertness of the mind that I can no longer muster. Hence, this will be my last column.

It has been a difficult decision to make. In one sense, I am not sure there is even a Charley Reese without the column, but I would rather quit now than to reach a point where the editors and readers know that I should quit. Those of you who have read my column have made me a sort of guest in your home, and I do not want to overstay my welcome.

I do not intend to croak, but that is not something we can control. I have some tidying up to do. One of the things I have to do is to say a heartfelt thanks to the readers and to the editors. I have stirred my share of controversy, and the easiest solution to controversy is to simply drop the column. I greatly admire those editors who stuck with me. I deeply appreciate the loyalty of my readers. The sales reps and the staff at King Features are the best in the business. I feel honored to have been associated with them. To them, freedom of the press is not a slogan.

I have had a good run. In 1955, when I started as a reporter, newspaper city rooms were full of tobacco smoke, alcoholics, gluepots, steel rulers, copy pencils and typewriters. There was a lot of profanity and an occasional fistfight. Editors excelled in sarcasm. But they taught me how to write clear sentences.

One afternoon when I reported in, I asked an editor if he would like to get a cup of coffee. He glared at me and said, "Reese, I just spent $15 getting a buzz on, and I ain't about to ruin it with a (expletive) 10-cent cup of coffee."

Today's newsrooms look more like insurance offices. Computer keyboards do not make much noise. If the reporters smoke anything at all, it is not tobacco. Instead of greasy grills, most newspapers have salad bars. I am sure H.L. Mencken would have seen salad bars as a sure sign of decline.

John McCain can have the last laugh, since I have said several times that he is too old to be the president. He is, even if he is more durable than I am. There are some who will celebrate my going, and it galls me to give them that pleasure. I was never ambitious, but I have always been competitive and pugnacious.

At any rate, it is a great time to be an American. George W. Bush, who turned out to be a gift to comedians but a blunderer of the first order, will soon be out of office. It is historic and a good sign that a black man, Barack Obama, can win the nomination of a major party. When I started in the business, the South was still segregated, and blacks were invisible both as employees and as subjects of news stories, with the exception of crime stories.

The great advantage of a free society is the capacity to self-correct itself. You would think dictators would have figured that out, but if they are not paranoid when they seize power, they become so trying to hang on to power.

Well, enough random thoughts. My goal as a columnist has always been to stimulate and, if necessary, provoke people into thinking for themselves. If we fail to do that, a free society won't last. I wish you all a fond farewell.

Good Night, and Good Luck, Charley

Fellow Lew Rockwell columnist Tom Chartier writes an appreciative farewell to Charley Reese.

I hate goodbyes. They are sad but an inevitable part of life. However, it is always best to face them with a certain appreciation for what has been and what is yet to come.

After 53 years of journalism Charley Reese has decided to call it quits. I would say a break from three columns a week is well earned. That is a heavy load. Imagine walking into the office one morning in 1955 and not leaving until 2008. That is what it means to write three columns a week ... not that Mr. Reese spent all those years only writing columns. But you get the idea.

While reading a Charley Reese column, one could just about hear the clickety-clack of a typewriter or breath in the smoke of the copy room. He came from an era in journalism where a necktie was required to catch BBQ sauce, not to make the writer look snappy for the televised infotainment show.

As a fledgling hack wannabe writer, and that is what I really am at best, Charley Reese has been one of my idols. His ability to say exactly what he means in such short, concise columns has been an inspiration. Never talking down to his readers, Mr. Reese has always spoken to us in the vernacular of the peasantry. You get the feeling he is one of us. And that he is. You feel like you are hearing sage advice from a trusted friend over a beer.

I have not always agreed with everything Charley Reese has said in his columns but that in itself is a compliment. However, most of the time I have been right with him. Either way, the straight common sense of his writing has been something I have always looked forward to in the morning. When I have opened the home page of LewRockwell.com everyday, if the bi-line is Charley Reese it has been the first and sometimes ... sorry Lew ... the only thing I have read that day. Sometimes real life gets in the way of reading everything. And I would never skip one. One could not help feeling safe with a Reese column. We could depend on him to get his point across without a long bombastic lecture. His columns would always be short and sweet, and no less profound. Often, they were more profound simply because they were so direct and to the point and full of plain old 'Merican English.

Like many of us, I have been to college. I have spent many long hours sitting in lecture halls listening to scholars in love with their own voices as they spewed forth gibberish. I am never too keen on reading the same sort of arrogant hogwash ... even when it is well-researched hogwash. After all isn't what a person says more important than how long he takes to say it or how many five-dollar words he uses?

Thanks to Charley Reese I have learned to view the American South as probably someplace I would really like. This Yankee Boy has grown up with an image of the South as a haven for armed hillbillies, NASCAR and beer. Well ... that may still be true. But now it sounds like a world of humanity without any pretenses. After years of Southern California, Tokyo and Hollywood a good old Southern Three-B Night (bullets, beer and BBQ) sounds like a breath of fresh air. Not to mention the revelation that in the South, not working yourself into a coffin is considered preferable than making heaps of money. Man! That is my kind of world! Pass me a mess of shrimp and a beer! I will get around to fixing that rusty hinge later.

I do not mean for this to sound like a eulogy because it is not. Charley Reese's writings will be missed but there is a whole heap of them to discover and rediscover in his LRC archives. And after all ... he is not planning on "croaking." So consider his story, A Good Hobby. In it he advises people to buy a backyard telescope. I completely agree. Some good stargazing puts everything into proper perspective while we feeble little creatures infest this planet fretting and fussing over our own unimportance. Maybe Charley Reese's own words will be best here.

"... buy yourself a telescope and look at the stars. That will at least teach you not to sweat the small stuff. And all human affairs, compared with the universe, are small stuff."

So even though we have never met, good night, and good luck Charley. You've earned it.

SHORT TAKES

Another Reason Not to Live in Canada

Notwithstanding the weak U.S./strong Canadian dollar of late, consumer goods are an average of 18% higher north of the border -- or so a study found. Looking at the table in the short Forbes piece we see items like a Gucci shoulder bag that are not exactly necessity items. In creating any price index there is no substitute for using quantity weights that correspond to one's own consumption patterns.

For a year now the once mighty American dollar and the lowly Canadian loonie have been worth roughly the same amount. Yet a new report by Douglas Porter, an economist at BMO Capital Markets in Toronto, shows that the average price of consumer goods up north is still 18% higher than in the States. The biggest culprits? Automakers, with an average 30% Canadian markup on suggested prices for luxury vehicles. A $2 billion price-fixing class action filed in Toronto alleges that carmakers are trying to maintain inflated Canadian prices by punishing U.S. dealers who sell to Canadians. Here are some other items Canadian retailers are cashing in on ...

Nobody likes to be tracked – whether by NSA or DoubleClick.

Exhibit B under the "It's for your own good" department: People do not like being studied and tracked unless there is something in it for them. Somehow, being more efficiently target-marketed by the trackers does not qualify.

E-commerce professionals gush over targeted ads, claiming they will make life easier on consumers (I will never have to look at another picture of a baby dusted with diaper powder -- unless I am in charge of grandchildren someday) and will supercharge advertising campaigns. But shouldn't someone ask the consumers how they feel about giving their personal data to companies

Forrester Research has. In results quoted by Search Marketing Standard (a magazine for advertisers trying to improve search engine optimization) they found that hardly anyone is "willing to share personal information" in order to "receive more relevant ads." Only 14% of respondents said they would go along with this kind of intrusive monitoring.

People were more willing to share personal information for other reasons that they saw having a direct benefit to them. Half would do it to receive greater discounts, while around 40% would do it to receive fewer ads (I suppose the advertisers could claim that "more relevant" would reduce to "fewer"), to save time, or to receive free content.

Large institutions, whether in the federal government or big business, tend to dismiss protests by the public about monitoring. I think people in positions of power have deduced that few citizens will take to the streets over it, so large institutions are free to exploit monitoring to pursue their goals, whether to harrass political opponents or to provide a more pleasant web surfing experience.

Forrester shows that people are sometimes willing to share data with the companies they deal with, but they want to keep some control and see some benefit.

So the survey population has spoken: the highest item on their agenda is receiving fewer ads. Of course, a lot of small Web presences are happy with the money they get from ads, and few big ones earn billions through them. But a more educated public will gradually become less responsive to them over time, and this will eventually have to affect funding for websites.

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