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Governor Cuomo Gets It, Sort Of. So Does The Donald.

New York Governor Andrew Cuomo is mad as hell, and he is not going down without a fight. The object of his ire is the recent federal tax reform, which sharply limits the deduction for state and local taxes (“SALT”) to $10,000. As the Governor notes, the reform hits hardest in states with disproportionate numbers of high-income earners, high tax rates, and high property values. They’re all blue: New York, New Jersey, Massachusetts, Connecticut, Illinois, California. The tax reform is an “economic civil war,” the Governor says, and he has filed a lawsuit to the effect that it is unconstitutional. That will go nowhere. It’s a distraction from the Governor’s main point. And in fact, he has one.

The Power to Tax, and Spend

Why should red states effectively subsidize the blue spendthrifts’ high-tax experiments, by way of the SALT deduction? That excellent question, Cuomo & Co respond, has it backwards: blue states are subsidizing red states by way of transfer payments. Their federal “balance of payments” (tax dollars to Washington, where they spend an expensive night on the town; remaining federal dollars back) is consistently negative; that of red states (Texas and a few smaller states excepted) is positive, and some red-state moochers make out like bandits. The end of the SALT deduction makes an unfair situation worse.

The reply is correct, as far as it goes. While there are various ways to run the calculation, the list of payor states is always the same, as it has been for many decades. One well-executed study by the Rockefeller Institute concluded that in 2015, New York had a net payment of $48 billion—a whopping $2,425 for every wretched soul in the Empire State.

What to do about it? Not make things worse: got that, Governor. But the blue-state balance of payment was consistently negative even with the SALT deduction. It’s driven primarily by above-normal tax payments, not below-normal transfer payments. (New York receives, and spends, federal Medicaid dollars like nobody’s business).  The imbalance has worsened as the federal income tax has become a lot more progressive. The only real fix is a rip-roaring tax cut for the hedgies, an option that isn’t high on the Dems’ agenda. (They yapped even about the modest cut in the recent reform.) Although, come to think of it, that’s the real-world constituency on whose behalf Governor Cuomo has filed his preposterous lawsuit.

From here to eternity, then, wealthy blue-staters will continue to do what they’ve done all along: pay to support social services and other stuff in other states. You wonder how that could ever be a stable arrangement. Part of the answer is that states don’t pay taxes. Taxpayers do, and they don’t think in balance-of-payment terms. (Nor do the recipients of federal largesse.) In many ways that’s a much more natural perspective. But you’d think that some blue-state politician would propose to terminate the intergovernmental transfer system and to run, say, Medicaid or education with domestic dollars, for the home folks only. With the interstate cross-subsidy gone, it’ll be much cheaper—no?

No. There is no way that New York or California or any other state would tax itself to support social services at remotely the current price level: rich people would exit at an even faster clip. You can’t have socialism in one country. If you’re a blue-state politico you desperately need a federal transfer system even if it plays your own citizens for suckers—not because you want to be nice to Alabama but because you need (a) a source of funds that taxpayers can’t escape by moving and (b) a fiscal illusion.

The transfer system creates that illusion by lowering the perceived tax price both at the federal level (“we’re getting a lot for our money because the states pay for most of the program”) and at the state and local level (“look at all the federal funds we’d lose if we did not expand Medicaid”). The SALT deduction helps, or rather helped, to further obscure the transactions, to jack up state tax capacity, to ramp up the demand for government everywhere, and to dampen state tax competition.

It’s easy to see, then, why Cuomo & Co denounce the reform as an assault on the blue-state model. But there’s more to this.

Energy and the Executive

If you’re a blue state politico and you don’t want wealthy and productive people to head for the hills, you need the feds to create fiscal illusions and to supply implicit subsidies. But you need them for something else: impose burdens on red states that makes their business model less attractive. Economists call this strategy “raising rivals’ cost.” Policy dorks call it the Clean Power Plan. And the Methane Rule. And the Waters of the United States Rule (WOTUS). And 500 other impositions that make it way more difficult for red and especially energy-producing states to exploit their comparative and competitive advantages.

Lo and behold: with the change in administration, much of that is gone. The Clean Power Plan is dead, or will soon be. The Dakota and Keystone pipelines have been or will be built. A new WOTUS will bring relief to farm states. Included in the tax reform was a telling piece of real estate management: we will drill, baby, in Alaska. Anti-fracking rules are being relaxed or yanked back. Vast tracts of Utah desert have been declared safe for bipeds. And so on, for so long as Mrs. Rao, Mr. Pruitt, and Mr. Zinke remain in their respective offices.

To be sure: you can (and I would) defend America’s splendid Energiewende on independent grounds that have nothing to do with political calculations or the red-state/blue-state divide—just as you can (and I would) proffer such arguments for ending the SALT deduction. Still, it is striking that in both cases, the costs and benefits of the recent policy changes fall along totally predictable state lines. Pure coincidence? I think not.

Economic Civil War?

We’re not going to re-fight or re-argue Grant v. Lee. But the Governor’s larger point is correct: as I observed in these pages eons ago (2012), American federalism has again become sectional, and the divide now runs along parallel economic, ideological, and partisan lines. The federal government has enormous control over the distribution of costs and benefits across the country; and in a sharply polarized environment, partisan calculations will come to dominate. For the most part, moreover, what matters is control of the presidency. The SALT deduction repeal required congressional action; not much else does. Herewith, then, some safe predictions:

The major free-trade deals will survive.  The President may or may not be a stable genius, but he is not sufficiently dumb to hammer the farm states. On a less happy note, ethanol subsidies will continue to gush. An infrastructure package, should it materialize, will be structured so as to allow the Executive to steer the benefits to friendly or crucial “swing” states (as was done under President Obama’s “Stimulus” bill). Major benefit programs will be restructured. The GOP’s American Health Care Act would have revamped Medicaid in a way that was plainly calculated to benefit states that had declined to expand the program under Obamacare—all of them (except Virginia) deep-red. That bill failed, but the same result or something close to it can be achieved by executive order or connivance. That shoe will drop.

In short, the SALT assault is but one piece of a broad-scale policy agenda that puts enormous pressure on the blue-state model and in particular on its principal beneficiary: public sector unions. They are taking it on the chin in several ways. The net payor, now-SALT-less states are by and large also the ones with the most under-funded pension plans, and that fiscal dilemma will be fun to watch. Further, the major federal benefit programs (Medicaid, education) don’t really fund the poor and the sick: they fund their unionized providers, and federal retrenchment can’t be good for those groups. All that, mind you, before we learn what Secretary DeVos might come up with.

I confess that I am of two minds about this. I remain persuaded, as I was even before the creation of this splendid site, that sectionalism—a deep divide among state blocs, on a vital issue of politics—is just about the only hope for limited government in a federal system; and we should count ourselves blessed that it’s economics, not race, that now defines the divide. Surely, too, it’s past time to wring the union and provider rents out of the system. Then again, it is mildly alarming that the Executive so dominates the system. The grim prospect is profound corruption—not Mickey-Mouse emoluments, but the sort of “corruption” the Founders feared: the executive use and abuse of the governmental apparatus for purposes of systematic favoritism and oppression.

That’s what you fear, Governor—right? Let’s think about who and what brought us to this point.

Reader Discussion

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on January 11, 2018 at 06:32:30 am

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Image of Governor Cuomo Gets It, Sort Of. So Does The Donald. | Top 100 Blog Review
Governor Cuomo Gets It, Sort Of. So Does The Donald. | Top 100 Blog Review
on January 11, 2018 at 07:16:18 am

Welcome back, Michael. Great piece. Meta meaty.

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Image of Mark Baughan
Mark Baughan
on January 11, 2018 at 07:17:49 am

Excellent piece! On many levels!

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Image of Paul Binotto
Paul Binotto
on January 11, 2018 at 08:58:16 am

Wait, I thought Dem's considered paying taxes an act of patriotism, the higher the taxes the greater the patriotism!
Oh, I see: that admonition was just for OTHER FOLKS, deplorable types.

Maybe Cuomo can drafta New York Resolution modelled after T Jeff's Kentucky Resolution. While there is no Senate Dem with anywhre near the brain-power of John C. Calhoun (or his apprecaiation of federalism's importance in the Founder's plan,) the DNC desperately needs a Doctrine of Nullification and a Doctrine of Interposition. Perhaps they can farm out the drafting to Big Law, say one of those firms that considers it pro bono publicum to argue that Guantanamo Bay terrorists have constitutional rights. Or maybe the drafting of the Nullication and Interpositin Doctrines could be done by Elite Law Prof, Inc, say Chemerinsky.

Democrats on this latest of their "Blue State Tax Subsidies for Democrat Profit" are back to their roots, back to their ante-bellum and post Civil War sociopathic ways: slavery for Democrat profit, for Democrat profit "light out for the territories" (to quote Huck Finn out of context,) secession and Civil War for Democrat profit, Jim Crow for Democrat profit, Know-Nothing immigration laws for Democrat profit, anti-Catholic school/ tax measures for Democrat profit.

Now, Democrats for their profit are proposing tax fraud and evasion. Who woulda thunk that dim Dem's could be so creative in pursuit of tax subsidies!
Wall Street, watch and learn!
https://www.washingtontimes.com/news/2018/jan/10/democrats-look-tax-loopholes-gimmicks-cut-federal-/?mkt_tok=eyJpIjoiTVdWa01ETXhObVJpTkROaCIsInQiOiJqVTZtRzdyRTcrUDJZQnc1cjEzMlBMRjlhVnJneVk4MzMrUjdpZ09LM2N3M3E4T2tPRzlzcFJOSm5MRWlveWZzN1lEK0xwV2V2XC9rbk5qcTNnK3FpdVhrWDZkSlRFYzlxZlgxakZGMFkwU2ZnY0lVMFRTV284R3kyUGg0Tlwva3lSIn0%3D

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timothy
on January 11, 2018 at 10:34:02 am

Timothy:

You are underrating their "creativity" and their desire to "raise their rivals costs" as evidenced by that dim(er than dim) Mayor Deblasio's much heralded efforts to raise new funds:

https://townhall.com/tipsheet/cortneyobrien/2018/01/10/new-york-city-to-sue-oil-companies-to-cover-climate-change-cleanup-n2432651

Then again, they can always raise the soda tax as Seattle has now done - that also works well:

https://hotair.com/archives/2018/01/10/new-soda-tax-seattle-working-well-chicagos/

Yep, that will work as well. I have it on good authroity that the Seattle Clonwcouncil will deem the soda tax a "voluntary contribution" to the cause of childrens health (and City coffers, they wrongly presume).

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gabe
on January 11, 2018 at 10:46:00 am

Implicit here is the observation that large segments of the "subsidiary" government levels (mostly classed as "Blue'),have decome established **ADMINISTRATIVE STATES ** with ever expanding functions requiring legislation for rules of organization and operations. Those functions have become facilities for the expansions of functions of the **FEDERAL ADMINISTRATIVE STATE** (which scholars like James Buckley have described). That is how Federal expansions have occurred without commensurate increases in Federal employment - and those "states" are basically "subsidiaries" of the Federal fisc. In short - centralization of "purposes" and means (which overwhelm the ends) in a particular format of "illusions."

Sadly, the "grim prospect" also includes *INCOMPETENCE* which may return to greater effect than corruption. Centralization is the great, safe, harbor of both. The demonstrations of incompetence are likely out of the Great Conceit that there is sufficient knowledge in the 535 Federal "Brain Trust" (together with their satrapy of "staffs') and in the pale imitations of the subsidiary governments.

Taxation changes have punched some holes below the water line of the Ship of State and in the bottoms of some of its dinghies; but damage control will begin. Still, thanks be that Cuomo (and others of his like) were not my skipper in WW II.

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Image of R Richard Schweitzer
R Richard Schweitzer
on January 11, 2018 at 10:49:29 am

Thank you so much.

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aez
on January 11, 2018 at 10:52:39 am

Prof. Greve (as always) hits it on the head. Drop the mic, Professor!!!!

He is correct and insightful on so many fronts in this essay from the sectionalism, rivals costs, fiscal illusions AND most notably the interplay of public sector unions with the need for both high tax receipts and the expectation of *federal* funds from a *cooperative* federal system.

The thought occurred to me while reading this essay that a significant change has occurred since the wheeling and dealing (disbursement of federal funds) during the FDR regime. Curiously, FDR used federal fund allocations, not to reward loyal states, but rather to entice "bribe" New Deal holdout states into the New Deal Coalition. As an example, with the Democratic South, being expected to vote overwhelmingly for the Dopey Dems, Hopkins and Farley directed funds AWAY from the South (proportionally, of course) to western states, not yet part of the Coalition.

I submit, and i think it is an undercurrent of Greve's essay, that such a selective disbursement of funds is either no longer possible nor likely to succeed as the schism is too far advanced. In one sense, this does not portend well for the polity AND YET as Greve notes, it may very well be the only remaining weapon in the arsenal of Federalism.

Just a thought, folks!

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gabe
on January 11, 2018 at 10:55:47 am

Cuomo is reported to have sunk a child's sailboat in the pond at Central Park. Deblasio immediately created a commission of experts to investigate.

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gabe
on January 11, 2018 at 12:35:20 pm

thanks for the kind words. To answer Gabe's question: he's right about the early New Deal programs. That ended with the creation of entitlement programs (entitlements FOR STATES) because all the institutional actors insisted on more regularity.

The contemporary pattern is still that discretionary grants (FEMA, ARRA etc) end up disproportionately in big swing states. And as a number of such states has declined, the target accuracy has increased. But all the studies (e.g.. Hudak, Presidential Pork) are about those types of grants--not big entitlement programs. We don't know very much about the political distribution of that stuff and it would be hard to find out in a non-anecdotal way. You can't just trace the money flows--you can also make the deals more attractive by relaxing or not enforcing grant conditions. One of my hunches is that it makes a difference whether the Prez is Dem or GOP. Under a Democratic Prez sectionalism drives up the total cost because red states have a higher reservation price--and the Prez needs them to take the money. (The Obama administration was unbelievably generous to fence-sitting states in the Medicaid expansion.) A GOP Prez doesn't have that problem.

I've seen a few studies on this but wouldn't want to put them past my econ colleagues. It would take a really good econometrician to get a handle on it. If there's something out there that I haven't seen I'd be grateful for references.

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Mike Greve
on January 11, 2018 at 15:45:32 pm

Perhaps Cuomo and Deblasio can set up government trusts to receive a portion of residents' tax payments as tax-deductible charitable contributions to be held for the benefit of Planned Parenthood, with the stipulation that the government trusts would be reimbursed by Planned Parenthood with income from the sale of baby body parts.

Obama's IRS would have approved that.

Might run into trouble now.

But, get the tax plan in front of an Obama US District Court Judge and........

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timothy
on January 11, 2018 at 16:09:33 pm

And I have two quick thoughts about Deblasio's shakedown of Big Oil for "climate change cleanup costs":

1) NYC residents not only elected that Psycho, they applaud his every threat. He's like actor Tony Perkins playing pastor Jim Jones, except it's not a movie. The big knife and the vat of Kool-Aid are real. NYC is Jonestown, Guyana; NYC'ers are Deblasio's apocalyptic disciples. Can't end well.
2) Big Oil (Chevron, Exxon) responded to the shakedown the way Big Corp responded to Jesse Jackson's incessant shakedowns in the nineties, not by kicking the extortionist in the teeth but by apologizing for the behavior he accused them of.

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timothy
on January 11, 2018 at 16:15:29 pm

In the "bigger picture" we began to see (as far back as Ted Kennedy) a recognition of the need to shift from a political course of allocating funding to the allocating of **costs** (with a sort apogee in the PPACA at the individual level) .

Consider the number and kinds of programs that require (mandate) state funding for implementation or operation of Federally determined policies or "directives." Then there are "degrees" to which the Federal fisc "contributes" or "defrays" which vary by political effects.

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Image of R Richard Schweitzer
R Richard Schweitzer
on January 11, 2018 at 17:49:00 pm

I recently read that the whole net payments / receipts issue is skewed by using corporation taxes paid as well as individual payments and receipts. So states with a lot of large corporations will always seem to be paying more to the federal government than they are getting back. There needs to be another metric for doing perceived cost/benefit analysis for the states versus the federal government.

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Margaret
on January 11, 2018 at 23:34:30 pm

Margaret,

There are several observations that Mr. Greve's essay calls to mind:

1.) Healthcare policy does not determine who gets care, it determines who gets rich;

2.) You cannot eliminate poverty by giving people money;

3.) Progress and growth both require innovation; and

4.) Government programs tend to become ossified and lethargic as they age.

The concept that runs through each of these is that of risk. Consider, for example, that the purpose of "entitlement programs" is not to produce wealth but to reduce risk' risk of starvation, untreated disease, homelessness, etc. Consider also that people are willing to explicitly spend money to reduce risk; that is what insurance is. Government policies can be divided into two classes: those that affect the allocation of some risk and those that do not. Very briefly, some illustrative examples:

1.) Crony capitalism is a way for favored corporations to reduce competitive risks in exchange for supporting political leaders;

2.) Who bears the risk that the Illinois public employee retirement funds will be insolvent, the public employees or the taxpayers?

3.) Housing finance policies created unperceived risks that were not widely appreciated until the 2008 financial crisis, leading to significant political consequences.

There are dozens more, from the role of how The U.S.'s contribution to NATO affected the defensive risks, and subsequent budget priorities of Western Europe to the ACA's mandate that required citizens to purchase insurance against health-related expenditures. The basic point being that risk is a political commodity, and if a politician can reduce the risk of some outcome that is of concern to a political constituency, he can turn that into votes. Now consider:

1.) When you buy insurance, you are buying something that can be thought of as anti-risk; i.e. it mitigates exposure to risk. What politicians trade for votes is not money for the masses (just giving folks money does not eliminate poverty) it is anti-risk. This is largely why politicians engage in fear-mongering: to convince the population that it needs that anti-risk.

2.) A small and discrete set of interests can monetize this political anti-risk and become fabulously wealthy. This wealth then buys political favors.

3.) As bureaucracies age they become more risk averse. The same is true of "experts," academic administrators and other overpaid chair warmers. Eventually, the output of these bureaucracies becomes risk aversion, rather than wise policies that maximize the benefits of liberty.

4.) Distortions in the just allocation of risk lead to corruption, and the extraordinary magnification of risk.

So what does this have to do with Professor Greve's essay? Blue state politicians traffic in anti-risk , which in itself is not improper. They like the security blanket that the government checkbook provides. They actually benefit from a scenario that results in a net tax payment to the federal government, because it allows the peddling of anti-risk at home, much like an individual is willing to pay for life or homeowner's insurance. When public employee benefit programs, state safety net programs, or educational systems become insolvent; these same politicians will argue that federalism is really just some time of mutual insurance program. Something will be too big to fail. Bailouts will be expected, lips will be bitten and hands will be wrung in feigned concern, and we will all be told how unfair it is that a politically-mutated risk blew up in somebody;s face.

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z9z99
on January 12, 2018 at 03:41:30 am

Slap a 70% estate tax on billionaires' estates (taxing the last dollar). Trump can't move land. lmpose a 20% corporate tax, based on street income and apportioned on the basis of sales. Plenty of things the blue states could do.

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Alana
on January 12, 2018 at 09:30:30 am

Plenty of things the billionaires can do, too.

Perhaps move out of that state - Oops, it appears that many are doing so. Look to California, Illinois and Connecticut - and this benefits precisely whom? Surely not the residents of that state or the employees of the companies that choose to move.

Then again, if taxation works so well - Why not simply TAX AT 100% - after all these egregious greedy buggers must already have enough, right?

Then again, we could tax academics, the media and other social justice types at 100% as they appear to believe that high taxes solve everything. Stand up, brainiacs and do your part.

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gabe
on January 12, 2018 at 13:39:52 pm

Z:

Absotively! good take as always.

Let me add one more (purported) risk that politicians, in their haste to secure the goodwill of (envious) voters, have sought to mitigate while at the same time providing Missy alana with an explanation of "un-intended" consequences of her proposal.

One risk, apparently perceived from the outset of the Republic, was that associated with inherited wealth and the possibility of a form of American nobility arising / dominating the Republic. Over time, this perceived risk grew to the point that it was determined that it must be reduced. Consequently, rather high inheritance taxes.

Question: How has this worked out?
Are the oligarchs gone?
Do these *greedy* billionaires no longer have access to, or control of, their wealth?
Have the "People" benefitted from this risk mitigation?

The answer to those questions is a resounding NO!!!!!!!

In fact, such taxes have served only to enhance the power of those so "taxed" as they have made use of various foundations, charitable structures, to increase their influence, and I may add that this influence now extends well beyond the life of the oligarchs life, that of his children and grandchildren. Think the Ford or Rockefeller Foundations.

Moreover, the transfer of this productive capital from industry into (allegedly) charitable channels has had the effect of reducing the available capital pool (to a certain extent giving investment options available to the foundations) for productive, growth generating industry. Additionally, one must consider the lost opportunity costs for employment, wages, research, etc when productive capital is removed from the market.
How many fewer jobs are available when capital otherwise intended for either industrial, medical, scientific development is removed?
As one example, look to Warren Buffett. He initially made his fortune, and his bona fides, by buying out numerous family owned small companies that were unable to pay the inheritance tax. He also did the same with numerous farms. Buffett became rich off this strategy - we all know the rest. (Is it any wonder Buffett, although placing his wealth in tax protected trusts, still supports the inheritance tax.)
What of all the workers disposed of by this transfer to the Great Sage of Omaha? One could go on but.....

Now for another [un]intended consequence of the transfer of funds from productive sectors to the *charitable* foundation regime. (Of course, one need only look to the Clinto Crime foundation - but we will skip that here).

It has been said that any organization not specifically "conservative" will transform itself into a Progressive organization. Let me amend that: Any organization not CONTRACTUALLY conservative will become Progressive.
Again, think FORD / ROCKEFELLER Foundations. Can anyone imagine either Henry Ford or John D Rockefeller endorsing the positions or actions of the Foundations bearing their name? Hardly!

No, as V.I. Lenin and his cronies advocated, the "Long March Through the Institutions" will inevitably result in a Progressive organization, one that operates with a guiding philosophy that is diametrically opposed to the intentions of the founders. (Not unlike our own government).

I use "brackets" on unintended because this phenomenon has become so prevalent that one must assume that, as is true with governmental organizations, the Progressives know AND EXPECT that these foundations will ultimately fall under their ideological sway. Thus, the "thinking" Left may very well continue to push inheritance tax knowing full well that the end result will be a transfer of funds from the productive economy to a putatively charitable organization OVER WHICH THEY, AND THEY ALONE will exercise control. As many of these foundations are sympathetic to government, with exceedingly similar aims, the capital may just as well have been transferred to the government via taxes.

Now as for the Missy alana typoes, I do not credit them with sufficient insight to understand and / or deploy this tactic. Rather, many of this ilk are motivated by pure ENVY of those who have accomplished and CREATED much. Of course, it is also true that these *experts*, these "highly intelligent" ones, resentful that the skills at which they excelled in school, rote regurgitation of intellectual and philosophical pablum, wordsmithery, and a modicum of intellectual curiosity, do not provide the same measure of either wealth or public approbation as do those skills successfully deployed by the industrialist, must, perforce give expression to their envy. There will be no change, no satisfying these types until the poor stupid, ignorant masses recognize both their brilliance and their inestimable contributions to the polity.

Once again, I am reminded of Anthony Hopkins, in the cabin scene: "SCREW-'EM" said he!

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gabe
on January 12, 2018 at 15:23:05 pm

Gabe,

A useful challenge when discussing solutions for public policy problems, is to try and propose solutions that do not involve "banning," "mandates,""taxes," or any other coercive concept that eventually requires a government official with a firearm. It is true that "when all you have is a hammer, the whole world looks like a nail," and as regard progressive policy, perhaps the real problem is not what they propose to hammer, but the fact that all they have is a hammer.

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z9z99
on January 12, 2018 at 16:49:54 pm

"... but the fact that all they have is a hammer [and sickle]" as they do fancy themselves as the peoples harvest.

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gabe

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