Do you remember the "Prisoner's Dilemma?" The classic game of philosophy and economic game theory involves 2 "players" who have a choice to make. Imagine our players are both being held (separately) on suspicion of a crime. The District Attorney makes each prisoner an offer: "Confess to the crime, and if your accomplice remains silent I'll let you turn state's witness and go free while your accomplice does the time." If both players confess, both will do time; however if both players remain silent, the prosecution will have nothing and both will serve minimal time on reduced charges.

The dilemma the prisoner's face is that either one will likely do better if they choose to confess, yet both will do better if they cooperatively remain silent. Unable to communicate however, neither player necessarily trusts the other and is likely to act in their own self interest, rather than the cooperative self interest and as such receive a worse outcome.

The Israelis and Palestinians seem to be locked in a Prisoner's Dilemma of their own right now over the governance of the Palestinian Authority. Both have a choice to make: work together and peacefully build a solution to one of the most vexing problems in the Middle East, or act alone and hope the other side stays silent. Like the prisoner's dilemma, each side has an advantage with their own constituencies if they choose to go it alone, but face huge difficulties if the other side chooses the same. Though working together will likely yield the most promising result, neither side trusts the other and as such is most likely to choose their own (temporary) self-interest at the expense of the better cooperative outcome.

Take for example the recent internecine fighting among the Palestinian factions. Hamas and Fatah, the two most important groups within the Palestinian territories have recently been clashing, violently, over ostensible control of the Palestinian authority. Currently Fatah, in the form of Mahmoud Abbas, controls the presidency of the PA and as such is seen to be Yassir Arafat's political heir. Hamas, however controls a majority in parliament and the Prime Ministership, and as such is currently seen as the rulers of the PA. Neither side has been willing to work with one another and have been involved in killing senior operatives of the other's faction in order to try to gain the upper hand. Clashes between Hamas and Fatah gunmen have killed 130 Palestinians since May, and cease-fires have repeatedly broken down. The latest fragile truce came Sunday, after four days of fighting killed 30 people.

In an attempt to end the factional fighting, King Abdullah of Saudi Arabia arranged a summit meeting in Mecca (overlooking Islam's holiest shrine) between the three major players in Palestinian politics: Fatah's Mahmoud Abbas (Authority President), Hamas' Ismail Haniyeh (Authority Prime Minister), and Khaled Meshal, the exiled terrorist running Hamas from Damascas. The three agreed to a power-sharing agreement for the authority that should end the fighting, for now, however Abdullah's goals were more far reaching: He aimed to end the International embargo on financial aid to the Palestinians and thus gain recognition for the Hamas government.

Financial sanctions were imposed after Hamas failed to adhere to the main tenets of the Mid-East quartet. The quartet (The U.S., E.U., U.N., and Russia) have repeatedly stated that the Palestinian Authority must a. Renounce violence b. Recognize Israel, and c. abide by past Palestinian authority agreements. None of these basic tenets were agreed to in Mecca. Just prior to the summit, Islamic Jihad sent a suicide bomber into a bakery in the Southern Israeli resort town of Eilat, killing 3 innocent civilians. "A spokesman for Hamas praised the bombing as a natural response to Israeli military policies in the West Bank and Gaza Strip, as well as its ongoing boycott of the Hamas-led Palestinian government. 'So long as there is occupation, resistance is legitimate," said Fawzi Barhoum, a Hamas spokesman in Gaza.'" As for recognizing Israel, Nizar Rayyan, a Hamas spokesman, was explicit. "We will never recognize Israel," he told Reuters in Gaza. "There is nothing called Israel, neither in reality nor in the imagination." Lastly, with regards to abiding by past PA agreements, "The platform agreed to Thursday says the new government pledges to "respect" previous deals, instead of "abide by" them, as Abbas initially demanded. It makes no reference to recognizing Israel or renouncing violence."

What Hamas is saying is that it wants International money aimed at easing the suffering of the Palestinians, however that it doesn't agree at all about how that suffering should be alleviated. While the world community has sought a peaceful two-state solution to the Israeli/Palestinian conflict, Hamas sees only one possible end to the violence: one Islamic state encompassing the current Palestinian territories and the whole of Israel. Any accommodations they might make in exchange for gains on the road to that aim are merely temporary. They are willing to "respect" past agreements for now, if it means an accommodation with Fatah and perhaps a resumption of International Aid, but as Fathi Hamas, a Hamas leader in Gaza's Jebaliya refugee camp told a few thousand supporters: "Our battle with the Israeli enemy is still on." He then urged militant groups to resume attacks against Israel, and denied that Hamas would respect past peace deals. 'We will be the spearhead of jihad ... to defend Palestine and Arab and Muslim nations,' he said."

The Prisoner's Dilemma has two implicit assumptions: 1.) That the players are unable to collude (ie. communicate) and that 2.) The players have the same goal (ie. to minimize incarceration). Clearly the Israelis and Palestinians have been able to communicate. In game theory, this would mean that the players would choose the cooperative course every time in order to maximize their benefits. The Palestinians have chosen to miss virtually every opportunity at cooperation, whether rejecting 97% of the pre-1967 lines at Camp David with Bill Clinton in 2000; by firing hundreds of Qassam missiles into Israel after it withdrew completely from the Gaza strip in 2005; and now by choosing not to abide by the very agreements with Israel that created the Palestinian Authority in Oslo in 1993. Unfortunately, as Hamas has made clear many times, its goals are not the same as for the Israelis. While Israel would like to see an endgame where a Palestinian state lives with it side by side in Peace, Hamas states clearly in its charter that "Israel will exist and will continue to exist until Islam will obliterate it, just as it obliterated others before it." That is an entirely different sort of dilemma.

In his state budget proposal this week, California Governor Arnold Schwarzenegger proposed one of the most ambitious and sweeping changes ever in the state's social welfare system by proposing universal health care coverage for everyone in California. Modeled somewhat after Governor Mitt Romney's program in Massachusetts, the California scheme similarly mandates insurance for all, but differs significantly from the Mass. model in how it will be paid for. While both governors should be lauded for bringing the problems in the health care system to the forefront of public attention, the plans need to be examined very carefully so that they don't do more harm than good.

Schwarzenegger's plan is based on three major platforms: A.) Prevention, Health Promotion, and Wellness B.) Cover All Californians C.) Affordability and Cost Containment. Each of these platforms is based on a real deficiency in the current system, however many of the proposed plans to solve these deficiencies have some major flaws that need to be addressed.

In his bid to increase prevention, health promotion, and wellness, the governor proposes "structuring benefits and providing incentives/rewards to promote prevention, wellness and healthy lifestyles" through public and private programs. He also advocates "establishing a national model for the prevention and treatment of diabetes; preventing medical errors and health care acquired infections; reversing obesity trends; and continuing the battle against tobacco use." All of these sound like good things, however his proposed budget allocates $150m in state funds to accomplish all this and expects the federal government to match the rest (a theme often repeated in the estimated budget for the proposal). Furthermore he wants insurers to be "required to offer a health benefit package that includes incentives/rewards programs, including premium reduction."

The governor's wellness programs are aimed at reducing the overall cost of health insurance by increasing the fitness of Californians, however their efficacy would take decades to determine while the costs of the programs would be borne immediately. The aim of keeping costs down to ensure the longevity of health care programs and their availability are admirable but likely highly optimistic.

The central pillar of the universal health care plan is the goal of covering all Californians. According to the UCLA health care survey, of approximately 36 million Californians, there are an estimated 6.5 million people uninsured at any one time. The same study, however claims that of these, 1.5 million people are insured within 4 months, which means that they are likely to be between jobs. Of the remaining 5 million: 2 million are those who have the financial means to purchase insurance and choose not to; 1 million are in the US illegally; and 1 million are those who are just above the state limits for Medi-Cal and cannot afford insurance on their own. The governor's plan would make health insurance mandatory, imposing penalties for those who do not purchase a plan and subsidies for those who want to but cannot otherwise afford it.

The issue of affordability and cost containment is the last major component of the plan and it is here where things get the most murky. The governor estimates that his plan will cost approximately $12 - $15 Billion dollars and will save approximately $10 Billion in costs that are already in the system but accounted for out of the general fund. This is mostly payments to hospitals for emergency services provided by law but not paid for by patients, something the governor's office calls the "hidden tax on all Californians." Even if the governor's numbers are accurate and not wildly optimistic, his tax proposals to pay for them only account for about $5.5 billion with the rest to be made up by Federal and local governments.

The problem with this plan is that in attempting to propose a "bold new initiative," many details that are either highly unrealistic or potentially disastrous have been seemingly overlooked.

The governor estimates that only about 1 million Californians are uninsured and here illegally and expects the cost of insuring them to be about $2 billion. The funds to cover this are supposed to be split evenly between Federal and local governments, neither of which have made any commitment to provide these funds. Even if the money were budgeted, it is extremely likely that far more than 1 million people would line up to take advantage of free government health care and the figure certainly doesn't take into account potential increases in the number of undocumented workers.

As for the majority of the plan that is to be funded by the state, Schwarzenegger proposes three new taxes (actually fees in order to avoid the 2/3 vote necessary in the legislature for new taxes) as follows: Doctors will be required to pay 2% of gross revenue (not profits), and hospitals 4% of gross revenue. Businesses with 10 employees or more will be required to offer their employees health insurance, or pay the state 4% of their total payroll in lieu of insurance. The problem here is that both the taxes on doctors and hospitals will be passed on to the health care consumer thus making the cost of care immediately higher. Businesses having to decide what to do about insurance for their employees will be faced with some difficult choices: If a company is just above the 10 person threshold, it might make sense to simply let go of a few employees rather than face exorbitant health care costs. Larger companies who pay significantly more than 4% of payroll towards better health care might find it cost effective to simply pay the tax and shift the health care burden entirely to the state. This will likely become even more attractive as health care costs continue to rise year to year. It would be ironic if in attempting to increase employee health insurance, the state actually ends up causing many California businesses to drop their insurance plans altogether.

Another potentially major draw back from this plan is the likelihood that care could be adversely affected by it. The reason for this is Economics 101: Supply and Demand. The governor's plan establishes a series of caps on insurance costs including a 15% maximum on administration, reduced premiums for those in his wellness programs, and caps on what can be charged for services. On the other hand, many of his proposals significantly increase the cost of care: Mandating that insurance companies accept everyone including the old and infirm, forcing insurers to pay more to out of network providers, and providing low-income individuals affordable coverage. This has the effect of significantly increasing demand (universal coverage) while keeping price points artificially low (caps). Any first year economic student can tell you that this would effectively reduce the amount of available supply (care providers). Rather than ensure that more hospitals will stay open and more care would be available, it is far more likely that this scheme will lead to fewer doctors practicing in the state (as their compensation would be lower) and that wait times for care in the hospitals available would likely increase significantly. Far from simply an academic exercise, this is precisely what has happened in most countries that have tried socialized health care or universal health plans.

The California plan has many positive aspects to it. Insuring all Californians increases the actuarial pool among the healthy and the sick thereby spreading the risk throughout the entire population. While this will necessarily raise the total cost of insurance, it should decrease the per capita cost significantly. Furthermore, if everyone necessarily has insurance, hospitals will be spared the enormous costs of paying for emergency care for the uninsured. Of course, these costs are already subsidized by the taxpayer so shifting the cost to insurance will simply be another way to account for the same money. The benefit will be if people actually use their insurance for preventative care and thus save on necessarily expensive emergency care.

Rather than presenting his plan as a fait-acompli, Schwarzenegger wisely stated that "My proposal is a beginning. I look forward to a vigorous and open debate. Everything will be on the table and I want to hear from everyone. If we have the will - and I believe that we do - we can heal our broken system." The plan as currently presented has some major flaws, but its goals are noble and potentially solvable. Whether or not we have the will -- or the political stomach -- to accomplish a workable universal health care system remains to be seen.

One of the most useful bits of mathematics I ever learned was imparted, almost in passing, by a Cal Engineering professor I studied with. He was constantly checking his work on the back of loose envelopes on his desk by jotting down approximations of formulas. He called this method "Back of the Envelope Calculation," and I have been using it ever since to check whether or not certain things make sense.

For example, let's say you're trying to decide whether to lease or buy a new car. You know the car will cost you $30,000 new but the salesman enticingly offers a $500 a month lease. Looking at the terms of the lease you realize that it's for 48 months. Quick back of the envelope calculation shows you that the lease will cost approximately $24,000 (500 x 48), and that buying it will cost approximately $625 a month (30,000 / 48). Is the extra $125 a month worth it? Well that depends on a lot of other factors, but now you're comparing apples to apples.

The other day I received my yearly property tax assessment from the Los Angeles County Tax Assessor and I started doing some back of the envelope calculations of my own. Most Americans take it for granted that we pay far less in taxes than many of the "socialist" European countries. Most of our taxes, however, are somewhat hidden in the form of fees and other "built-in" costs. I started thinking: Just how much of our income do we pay in taxes?

"Back of the Envelope" calculations are all about keeping things simple so that you can calculate quickly and get a basic idea of what's going on. There will always be details and subtleties that you will not compute, but they are usually irrelevant to the big picture. In order to keep things simple, let's take a look at an above average couple living in Los Angeles and earning approximately $100,000 a year (median joint income in California is $61,084).

Our couple will expect to pay approximately $18,115 in Federal Income Taxes (~ 18.1%), and approximately $9,300 in California state income taxes (~9.3%). Add to that another approximately $7,650 in Social Security and Medicare Taxes (~7.65%).

If our couple owns their own home, they can expect the following: The median home price in Los Angeles in 2005 was $540,000. In West L.A. that number jumps to $837,000. Let's use an easy number in the middle: $700,000. Californians pay 1% of their home values in property taxes, however bond measures and special assessments have virtually doubled that to between 1.5% to 2% depending on your district. At 2%, our couple will expect to pay approximately $14,000 in assorted property taxes, or an additional 14% of their income.

For those of you keeping track, our erstwhile couple has now allocated about 49% of their income to the 4 largest taxes and we haven't yet begun to talk about the smaller taxes. In L.A., sales tax on any goods you purchase (after being taxed on your income and property) is an additional 8.25% on practically everything you buy. Add additional taxes for your car(s), cigarettes, alcohol, gasoline, road tolls, and any government permits you might need and you've got quite a bit more. Rounding to make things even, it's fairly safe to say that about 60% is spent on assorted taxation.

So our quick "back of the envelope calculations" tell us that our couple that earned $100,000 actually kept about $40,000 (or $3,333 a month) to pay for their mortgage, home owner's association fees (another tax?), food, entertainment, etc. If they've managed to save or invest any of that left over money, that is taxed again either as income or capital gains. Of course, anything left over at the very end of the day will be taxed again as "estate tax" before it can be willed to children or any other dependents.

Using our earlier figure of $700k for this couple's home, if we assume they put $200k down (a rather optimistic 28%) and mortgaged $500k, then they can expect to pay approximately $3,000 a month in mortgage (for a 30 year fixed at 6%), leaving our couple with less than $350 a month to live.

Sound unrealistic? Back of the envelope calculations are necessarily approximations. There are, of course, certain things that we left out like a fairly substantial home mortgage deduction from income tax. For our couple this actually amounts to a deduction of about $19k a year, putting an additional $5k back in our couple's pockets, but even that only helps with about $400 more a month. Clearly our "above average" couple cannot afford their "average" home.

So back to our previous question of do Americans pay far less in taxes than our European counterparts? The answer is a resounding "No." The average European tax rate in the original EU-15 counties was approximately 52.4%. This is supposedly as compared to an average American tax rate of 34.6%, however that only takes into account Federal taxes and not the state and local taxes. As we have seen from our previous calculations, those state and local taxes can easily be as much as our federal taxes, especially in urban areas of the country.

This did not used to be true. The current American system of taxation by payroll deduction and then a yearly "filing for refund," was not instituted until World War II and was the brain child of the Nobel-prize winning economist Milton Friedman. Prior to that time, Americans were quite literally sent a tax bill in the mail each year. Imagine our couple receiving a tax bill for $60,000 in April? In fact, prior to 1913, it was unconstitutional in the United States to tax individual incomes at all. That was changed with the 16th amendment to the constitution and the Federal government grew significantly in importance with it.

Are we being overtaxed in America? Perhaps we are, and perhaps we are not. The answer to that question depends on how well you think your tax money is being spent and how well you think the burden is distributed on the population (two interesting questions in their own rights). With mid-term elections coming up all over America in the next few weeks, you need to ask yourself these questions when asked to approve the litany of tax hikes, fee increases, and bond measures (hidden tax hikes) that pepper your ballot. Hopefully some quick "back of the envelope" calculations of your own can help you make a more informed choice.

We have become a society of freeloaders. In an ever increasing attempt to make life better for the indigent in our communities, we have created a welfare state that has not only failed to reduce poverty, it has actually in many cases made things worse. One of the reasons for this is one of the most basic principles of economics: People respond to incentives. When you provide "money for nothing" there will always be long lines of people ready to take it.

While our economy has grown to be the envy of the world, some disturbing trends have emerged. One of the most basic is that approximately 20% of the population pays almost 80% of Federal Income Tax. Of course that statistic is only part of the story, the top 10% in the US also control almost 70% of the total wealth. Why have things become so skewed?

First the obvious: Working and earning a living is difficult. If money is offered to people so that they can survive without needing to go through the trouble of finding, keeping, and working a job then rest assured, many will do just that. Worse, the "crutch" provided by this assistance serves as a disincentive to work and serves to exacerbate the number of poor. Rather than functioning as temporary assistance, these programs become welfare for life.

Alexis de Tocqueville, the French author and statesman that famously traveled and commented on American life in 1831, wrote a "Memoir on Pauperism" arguing against "the trap" of public relief. Chief among de Tocqueville's concerns are the unforeseen consequences of the good intentions that inspire any system of large-scale state-sponsored relief to the able-bodied poor. He argued that the "entitlement" to public charity ultimately traps its claimant in a degrading system, that it produces an overweening and oppressive bureaucratic state, that it weakens the poor's incentive to work, and that it severs the essential moral ties between giver and receiver that exist in private charity.

Though de Tocqueville's work was written 175 years ago, it reads remarkably prescient today. Prior to the 1930's and the Great Depression, there was practically no expectation by an individual that "government" would step in to help if things got tough. The choices were simple: 1.) Pick yourself up, get a job and survive on your own. 2.) Rely on family to help you out 3.) Private and religious charities ran services for the poor. Either way, America had a culture of self-reliance, not a culture of entitlement. Today, it seems that many of America's urban poor believe that they do not have to work and that government will take care of them regardless of the poor choices they make.

One of the most egregious examples of people becoming dependent on government handouts is the department of Housing and Urban Development (HUD)'s Section 8 rental assistance program. In 1996, Section 8 made up 26 percent of HUD's budget. By 2004, it accounted for 55 percent, a growth rate of 18% a year!" Today, HUD subsidizes nearly 5 million housing units, of which 1.4 million are through section 8. If this trend continues unabated, HUD will very soon simply be an agency that only pays rent and will no longer have any resources to achieve its goal of making housing more affordable throughout the country.

So what can be done to reduce "entitlement" and dependence on government charity without giving up on the poor? The answer is simple, even if its implementation would be complex: We must require certain responsibilities in exchange for assistance. We simply must change the culture of entitlement to a culture of service.

Imagine how things might look different if anyone receiving a dollar from the government was required in turn, to give something back to society? In exchange for assistance during a tough time in one's life we could require a period of military or civil service. Need help with this month's rent? No longer can you rely on Section 8 for the rest of your life, instead you'll need to spend 15 hours a month volunteering as a local fire fighter. Need help with the groceries? Here are some foodstamps, and please sign up for your 10 hours of volunteer teacher's assistance.

We already have successful examples of incentive structures that work this way. The Army's GI bill grants money for college in exchange for military service. Why not extend this principle to many other forms of federal grants?

John F. Kennedy famously asked at the end of his inaugural address "Ask not what your country can do for you -- ask what you can do for your country." If we change the incentive structure of government transfer payments, we could achieve the dual goal of reducing dependence on transfer programs while at the same time creating more involvement within our communities. Why not change the system so that getting public money is no longer an entitlement? Why not demand that able-bodied people receiving assistance provide some assistance back to society?

Currently the only "price" associated with public assistance is the price paid by the taxpayer to fund it -- a price paid by fewer and fewer in order to support larger and larger groups of relatively unproductive citizens. By putting a price on this assistance directly to the recipient in the form of required service, we effectively shift the incentive structure and no longer provide "money for nothing." It is time to change our culture of "rights" and "entitlement" to a culture of "service" and "responsibility" and we will surely see the income gap shrink as more of society is welcomed into the ranks of the productive.

Last week's column about the Federal debt in the United States drew an interesting response challenging that debt levels perhaps are not that far out of line when compared against GDP. The nation's gross domestic product (GDP) is a number that estimates the total domestic output of the entire economy. According to the Congressional Budget Office, this figure was about $12.5 Trillion dollars in 2005. So how does our current debt stack up with our nation's history?

First of all a disclaimer about budget numbers coming from the federal government: Despite popular notions to the contrary, the Social Security trust fund is running a surplus, and has been since the 1980's. All working people who receive W-2's, pay into social security through a special payroll tax. This tax is supposed to go into a Social Security Trust Fund where it is to be used exclusively for social security payments. The reason this fund has been in surplus is that while baby boomers remain at work, there are more people paying into the fund than people drawing from it. We know, however, that as baby boomers begin to retire, this demographic reality will start to shift and social security will begin to run deficits.

The problem is that Social Security is not a trust fund at all. We have been using the surplus in order to pay for items in the general budget and thus making our deficits seem smaller then they really are. For example, the reported deficit number for 2005 is $318 Billion, however if you include the $173.5 Billion Social Security surplus that was spent in the budget, the real deficit was actually $493.6 Billion. This little deception of accounting goes virtually unnoticed while the surplus continues, but when Social Security goes into deficit, it will make things look much worse. Furthermore, the money we have spent from Social Security is actually money we borrowed from ourselves. The treasury calls this number "intra-governmental holdings" and as of March 30, 2006 it is about $3.5 Trillion.

So what is really going on? The official public debt for 2005 is $4.592 Trillion. If you include the intra-governmental holdings, the actual 2005 debt was $7.932 Trillion. As we know from the last column, Congress just increased the debt ceiling in 2006 to approximately $9 trillion (which includes both types of debt). So answering our reader's question, how do these numbers stack up?

If we choose to ignore Social Security (the way the congressional budget office does) then the debt level in 2005 as a percentage of GDP was 37.4%. This is pretty much in the middle of the historical numbers provided (between 1962 and 2005) which range from a low of 23.9% in 1974 to a high of 49.4% in 1993. The problem is that if you factor the intra-governmental (social security) debt back in, then you have a (projected) 2006 debt of approximately 72% of GDP. This is the highest level of debt as a percentage of GDP in US history (excepting a brief period during World War II).

It wasn't always this way. If you look at the public debt levels before 1969, the year in which Lyndon Johnson started including Social Security numbers "on budget," the public debt levels were around one third of GDP. Of course most of that debt was held by US bond holders at that time while much of our debt today is held by foreign governments. These numbers are most alarming because they show that the government has routinely borrowed money from itself that was supposed to be for Social Security and effectively almost doubled our debt level.

As for interest payments as a percentage of GDP, the interest on the public debt in 2005 was approximately $352.4 Billion. This amounts to approximately 2.8% of GDP or just over the 2.7% we spend on Medicare. This means that Uncle Sam paid out, on average, about 4.3% interest on our outstanding debt. Unfortunately, much of this debt that used to be in 30 year treasury bonds was refinanced during the 1990's into 10 year treasury notes meaning that our interest payments are sure to go up as interest rates rise.

Interestingly, the CIA keeps information on public debt as a percentage of GDP for many countries. The United States ranks 36th on the list with 64.7% debt to GDP (2005 estimate). By contrast, Great Britain is 63rd with 42.2%, France is 34th with 66.5%, Spain is 53rd with 48.5%, Germany is 31st with 68.1%, and Israel is 10th with 101%.

So now that you have seen the numbers for yourselves, why should you care about our alarming rise in debt? The simple answer is that as the debt grows, the money we must spend to service it necessarily comes from somewhere. The more we borrow the less we have available to pay for things we care about the most. Right now we spend more on our debt then we do for all of Medicare. Our debt spending is equivalent to 70% of our entire defense budget. If we continue to let this debt grow increasingly out of control we will necessarily forfeit a great deal of our economic and military might.

Our politicians spend so much time arguing about the many programs that affect our lives as Americans, yet the cost of these programs are literally dwarfed by the debt and the cost of servicing it. We must begin to get a handle on our own borrowing and to do so we must first become aware of just how bad it has become.

As if to illustrate this point, the Economist recently wrote about the US desire to pressure China into revaluing its currency, the Yuan, which it believes to be significantly undervalued and therefore contributing to the enormous trade deficit between the two countries. Unfortunately, in order to do so, China would have to significantly drop the amount of US Treasury Bills it currently buys from us. The problem is that it is precisely the purchase of these Treasury Bills that allows the US to continue its deficit spending. Therein lies the dilemma: The US increasingly is in a position where we must act against our own national interests in order to secure our creditors' ability to continue lending us money. How much longer will we continue to dig ourselves into this hole?

Let's talk about debt, baby. Let's talk about you and me. Let's talk about all the problems, and the bad things that may be...

Alright, so perhaps that isn't exactly how you remember that song from the 80's, but unlike "Salt 'N Pepa," this problem is here to stay for a while.

Last week the US Senate voted to increase the federal debt limit by $781 billion, raising the debt ceiling to nearly $9 trillion. Soon thereafter, the congress passed a $2.8 trillion budget including $92 billion in additional war spending and hurricane recovery funds.

Let's take a second and let those numbers sink in. The United States owes about $9 Trillion. That's more than 3 times the budget we just passed for next year. There are about 300 million citizens in the US. Quick arithmetic shows that each and every man, woman, and child in this country is now in debt around $30,000 to cover this. Congratulations, I guess we all just bought new cars (yes, including the baby).

Anyone curious can actually see the current government debt, to the penny by looking at the Dept. of Treasury's website. The interest expense on this debt is also available from the treasury. This shows the interest payments for 2005 to be just over $352 billion or about 16% of the 2005 budget ($2.15 trillion).

In order to get a clear picture from these statistics, let's generalize for a moment. Imagine the federal budget as a large round pie. Now slice that pie into 3 nearly equal thirds. The first third represents the part of the budget eaten by defense. The second third represents the "entitlement" or non-discretionary spending of the United States (Medicare, Social Security, etc...). The last third represents everything else, all the discretionary spending from highways and parks, to education and housing. Now take this last third that represents all the government programs that are so dear to many voters and cut it clean in half. Take one of these halves and give it to your lender for that represents the interest we are paying on our debt.

Unfortunately for all of us, every single one of these "slices" is growing and the tax revenue from the economy is not keeping up. The difference, of course, is what we are borrowing to make ends meet and that is the federal deficit ($318 billion in 2005). Every time the deficit is a positive number, we have just borrowed more money and are increasing our debt. Every increase of the debt requires more interest maintenance leaving less and less for discretionary spending.

Of course, like our own families, the government can't continue borrowing money forever. In the short term, increased debt means higher interest costs to borrow more. We are already seeing this take place as real interest rates have risen dramatically over the last two years. In the long term, we simply cannot have our entire discretionary budget be eaten up by interest payments so something needs to be done. What can be done? Just like we all need to decide for our own family budgets, there are really only 3 options: 1.) Make more money (raise taxes) 2.) Spend less money (cut programs) 3.) Continue borrowing at higher and higher cost.

President Bush inherited a surplus when he took office in 2001 and has run deficits ever since. Politicians naturally prefer to borrow more money, as opposed to raising taxes or cutting programs as there is far less fallout in the short term from voters. California is a particularly poignant example of this policy. The problem is that they are simply delaying the problem (and making it much worse) for the next officeholder. Whoever wins the next presidential election will likely have no choice but to combine cutting spending and raising taxes, a sure-fire approach towards short term economic shrinkage. In real terms, this means that our standard of living is likely to drop in the future to pay for the spending-spree we've been "enjoying" over the last few years.

In reality, tax cuts, two wars, high energy prices, homeland security spending, natural disasters, and a major expansion of Medicare have left us in need of vast amounts of money that much of the rest of the world have so far been happy to offer us in exchange for higher interest rates. As most of us realize at home, it's easy to spend money, especially borrowed money. It's much harder to pay it back. We, as a country, have managed to spend ourselves into a pretty deep hole that will require some painful discipline to extricate ourselves from.

One of America's greatest poets, Ralph Waldo Emerson once warned "A man in debt is so far a slave." The United States used to be world's largest creditor, now we are the world's largest debtor. While much of our debt is still to ourselves in the form of privately held government bonds, we are increasingly beholden to foreign powers lending us money. If we are to retain our place as the world's greatest economy and wish to set our policies according to our own interests and not that of our creditors, we absolutely must start putting our own financial house in order.

According to the California Association of Realtors (CAR), California ranks last in the US in housing affordability.  Read differently, this means that California has the highest housing prices -- on average -- of anywhere in the United States. This is certainly no surprise if you are a resident of California.  CAR reports that "as a whole, only 18% of California residents could afford to purchase the median-priced $495,400 home, down 3% from a year earlier, and buyers had to earn $115,910 annually to qualify for a standard mortgage loan."

Using some quick, back-of-the-envelope type calculations: A couple earning $115,910 (the figure CAR says is needed to buy the Median home in California) takes home about $6,300 per month after taxes. A $400,000 mortgage, fixed at 6% for 30 years would require a monthly payment of approximately $2,400. Add to that the roughly 1.8% in property taxes and Mello-Roos that most new home buyers have to pay and you need an additional $800 per month.

This means that a couple earning $115k per year would be spending about half their income on mortgage and property taxes. But wait a second, according to the California Dept. of Finance, the median California household income is $49,320 or 42% of what is necessary to buy the median California house.  In fact, according to The Hoover Digest, if your household makes more then $100,000 in California, you're in the top 11% of income earners!  Of course, this is also assuming that you can come up with the $100,000 or so you need for a down payment.

Few first time buyers have the $100,000 necessary for a down payment for a traditional 80% mortgage.  What can a family in this position do?  If you listen to the mortgage advertisements you find out that you can take a 0% down loan!  What does this mean?  Essentially that you take a traditional loan for 80% of your home's value and a "second" mortgage for the remaining 20%.  Of course, interest rates for "seconds" run about 2 points higher than firsts and tend to amortize over 15 years, not 30. Therefore, taking a "second" for that $100,000 you need approximately an additional $1,000 a month.  This brings the monthly maintenance for mortgages and prop. taxes for a "median home" up to about $4,000 before the family even begins to spend money on utilities, food, fuel, cars, HOA's, etc...

So a family in the top 11% of income earners in the state needs to spend about two thirds of their income on housing in California?  No wonder housing is completely unaffordable to most in this state.  Worse, as more and more families take 0% down loans, or interest-only loans (where principal is never paid back) the risk of default increases dramatically.

Imagine if interest rates go up a mere 2%. Short-Term interest rates are already 2% higher then their lows and mortgage rates must "catch-up" eventually.  The same family who needed $4,000 in maintenance a month, now needs more than $5,000 a month.  What was already a "stretch" to begin with suddenly becomes completely unaffordable and many families may begin returning their homes to the banks.  If this happens en masse, it will make the Savings and Loan crisis of the 1980's seem like small potatoes (and that cost about $1.5 trillion).

Unfortunately, the real effects of the housing problem are much harder to measure.  Young people are living with their parents longer.  Couples are waiting much later to have their first children.  Mothers are increasingly unable to stay at home, needing to provide a critical second income.  Fathers often have to work two jobs to make ends meet having less and less time to spend with their children.  Society increasingly has to foot the bill in programs such as Section 8 (housing assistance) which accounted for a full two thirds of the entire Federal Housing and Urban Development (HUD) budget in 2005.

So what can be done about this problem?

First, California tax codes need to be reexamined.  Although a savior for many, California's famed Proposition 13 is having the unintended consequence of forcing young home buyers (who can least afford it) to subsidize the property taxes of older residents who have owned their homes longer.  Taxes on builders and Mello-Roos are passed on to homeowner's dramatically increasing the cost of home ownership.

Second, examine housing regulations that markedly increase the cost of homes.  According to a UC Berkeley study, average housing regulation in California adds over $40,000 to the cost of each home. In my neighborhood, the installation of "methane monitoring and diffusion" systems which were mostly a political compromise rather than a necessary safety issue, added approximately $25,000 per unit to the cost.  Many of these regulations are wasteful and unnecessary.

Third, build according to reality, not fantasy.  Housing development is not keeping up with demand in California.  This is by far the biggest reason for the run-up in housing costs as supply and demand dictate price.  There are many reasons to block housing development on environmental, overcrowding, quality of life, traffic and other grounds.  While the nuisances of development are all valid, the net result is that not enough building is occurring and that is causing prices to soar.  In places like Los Angeles, some higher density neighborhoods are starting to appear, but many more will be necessary to keep up with demand and curtail urban sprawl.

These steps may begin to reverse a trend of un-affordability that has grown steadily since the 1980's but really taken off in the 2000's.  We don't have a choice.  The alternative is to see California get older and older as young people are priced out of the market and to other states.  The only people owning homes will be those who managed to "get in" before the huge run ups and protected by Prop. 13.  The high-tech and entertainment businesses that California's economy depends on will find it increasingly more difficult to retain qualified young people as they simply cannot afford to live anywhere near their jobs (or commute on the countries most congested roads).  In short, if California doesn't start paying more attention to our "Housing Crisis," it may soon have a whole host of new crises we can scarcely afford.

Globalism has become something of a politically charged term. From an economic perspective, globalism is the movement towards world-wide free trade, or the erosion of protectionist barriers between nation-states. For any trade to be "free" it needs to exhibit 4 properties: 1. Free movement of goods 2. Free movement of capitol 3. Free movement of labor 4. Legal enforcement of contracts. The trend towards these free markets, indeed globalization, has indisputably been lifting millions of people out of poverty and has been responsible for decades of economic growth. Yet with all of the benefits of globalization, there is an increasing movement away from and regression towards protectionism. How can this apparent contradiction be possible in a rational world?

The simple answer is that the world is not rational. While free trade brings with it greater personal and national prosperity, it tends to bring with it a host of other things such as the free flow of ideas, economic and social liberalism, and demands for accountability from government and societal elites. These forces can be very positive if you are poor and are given the opportunity to climb into the middle class. At the same time, they can be very destabilizing for the entrenched ruling classes in many countries. Leaders who are used to ruling through the subjugation -- both political and religious -- of their people, see the forces of globalization as a threat to their power and prosperity. They counter this threat through age old tools of persecution, fear, piety, and bigotry.

The United States is unrivaled as the world's largest and most prosperous economy. How did we get here from our fragmented, isolated, colonial past? In joining together to counter eighteenth century British tyranny, American colonists unwittingly created the world's largest free trade zone. For the first time, goods, capital, and labor could flow freely between states and an effective legal system was built to unify the system. America could have easily gone down the European route and formed 50 small nation-states rather than one United States. Instead, the power of free trade and the free market encouraged innovation and developed into the world's preeminent economy.

During the cold war, political scientists divided the global map into three worlds: The first world were the free Western, capitalist counties. The second world were communist countries and those allied with the old Soviet Union. Finally the third world were the poor, undeveloped countries that were largely unaligned with Cold War politics. Ever since the cold war, the "second and third worlds" have been trying to catch up to the first. Some have managed this process rather successfully: Singapore, South Korea, Israel, Brazil, and others have all created largely Western markets that have vaulted their economies and people into modern prosperity. Some of the world's most populous countries such as China and India are quickly trying to do the same and in the process are transforming the world's economy.

Ask most people in any of these countries and they are bound to tell you that the opening up of markets for their products has been almost universally positive. Paradoxically, use the term Globalization and you will likely be met by frowns. The reasons for this lie mostly in the periphery of what was once the third world. The countries most poised to join the prosperity of globalization are also often the most repressed politically. The convergence of modern technologies and liberal ideologies with entrenched monarchies and theocracies has often led to violent turmoil.

As globalization is far from complete, the 4 requisite properties are highly unevenly distributed in many countries. Even in the United States where goods and capital flow freely within a strong legal framework, labor flows from Mexico and elsewhere have led to much political friction. In severely restricted economies such as those of most Arab countries, petro-dollars have created markets with fairly free flowing goods and capital, however labor (people) are highly restricted and the legal system is often at the whim of the local dictator. This uneven distribution necessarily leads to new "have's" as well as "have-not's."

In the US and Europe, labor unions threaten anarchy as many manufacturing jobs move to Asia where labor is much cheaper. In the Arab world, riots and "jihads" are called to prevent pluralist ideas and religious diversity from "tainting" conservative populations. Populist fury at corrupt officials and lack of political expression are often violently redirected to perceived enemies, such as Israel. In China, Communist ideology slowly erodes as Capitalism booms in local economies, while increasingly anxious government officials still rule with an iron fist.

All over the world, the effects of globalization can be felt. As we increasingly become tied together in one, interdependent economy, those that learn to work with the system become increasingly prosperous. Those that can't deal with the new reality are increasingly marginalized, and often lash out violently. As with technology, the forces of economic globalism can hardly be turned back. Now that the world has begun to trade with each other, they are not simply going to stop.

Trying to stop globalism is like trying to re-close Pandora's box. People who have seen how Western societies live are not likely to abandon all that the West has to offer. This is not to say that every Western ideal will be embraced -- far from it. Freedom and prosperity, however, are human desires, not just Western desires. As long as freedom and prosperity are denied people by despots, autocrats, and theocrats, the more they are likely to rebel. Perhaps today they rebel against the West, however eventually their anger will turn inward. Globalism may be increasingly considered problematic, however the world is desperately in need of more.