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Richard Rahn

THE BRITISH TWO-FER OF POVERTY AND A POLICE STATE

Warning to tourists - it is now illegal to take a photo of a London policeman or "bobby." The time-honored tradition of tourists having their pictures taken with London cops is being dealt a silly death blow by those who control the British nanny-state. The British are not only losing their economic prosperity, but their civil liberties as well. Will Britain again become the "sick man of Europe"? A quarter-century ago, Margaret Thatcher led Britain out of an economic wilderness and enabled it to have the fastest-growing economy among the four big countries in the European Union. Today, however, under Gordon Brown's Labor government, Britain is rapidly rushing backward with pre-Thatcherite economic policies.  At the same time, civil libertarians on both the left and right are increasingly concerned that Britain is drifting toward becoming a police state.

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WHY WE’RE HEADED FOR STAGFLATION

Do you understand why well-known economists, including Nobel Prize winners, are on opposite sides of the debate about the stimulus package and what should be done about the recession? Not only Americans, but people everywhere are confused, largely because the economists who are writing and speaking about what should be done have such fundamental disagreements. There are two main schools of thought. One group is under the broad umbrella of the Chicago or Austrian school economists who are heavily influenced by the teachings of F.A. Hayek (1899-1992) and Milton Friedman (1912-2007).  The economists of the Reagan White House were of this school. The members of the other group are commonly known as Keynesians, who accept many of the teachings of John Maynard Keynes (1883-1946) and his disciples.  Mr. Obama's economists belong to this school. Both schools offer reasonable explanations for what causes and what solves recessions.  But there is one outcome for which Keynesians have no solution:  stagflation.  It turns out that's just where we're headed.

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THE WAGES OF WAGE CONTROLS IS SOCIALIST DEATH

Do you agree with President Obama, who has just limited the pay for executives in some, but not all, of the companies receiving government bailout money to $500,000 a year? One could argue that $500,000 is too much, given that the president only makes $400,000 a year in a job with more responsibility and a larger budget than any other job in the world. Since there were plenty of would-be takers for that job, and some were arguably even qualified, why should we pay anyone more? Many people who rely on the taxpayers, both in the United States and elsewhere, make far more than the president of the United States.  It turns out that the highest pad pubic employees in America are football coaches at taxpayer-funded public universities.  Should their salaries be capped just like Wall Street execs?

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THE RUSH TO REGULATE AND FINANCIAL DISASTER

If you knew -- "a few weeks ago, the federal government had to commit several hundred billion dollars for a guarantee of Citicorp's assets, though examiners from the Office of the Comptroller of the Currency (OCC) have been inside the bank full-time for years, supervising the operations of this giant institution, under the broad powers granted by the Federal Deposit Insurance Corporation Improvement Act of 1991 to bank supervisors" -- what would you think about the effectiveness of U.S. bank regulation? The above quote comes from a thoughtful and important new paper, Regulation without Reason, by Peter J. Wallison, former general counsel of the U.S. Treasury and now a fellow at the American Enterprise Institute. Mr. Wallison warned for years - in books and articles - that Fannie Mae and Freddie Mac were headed for disaster, and now he is taking on the ill-thought out proposals to increase regulation of the financial industry, both by politicians and people who should know better. The frightening thing is that many of the same intellectually and financially corrupt politicians - e.g. Rep. Barney Frank and Sen. Chris Dodd - whose actions directly helped bring on the present crisis, have now been put in charge of the hen house and are tasked with "making reforms."

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EMPIRICAL EVIDENCE AND THE SIZE OF GOVERNMENT

If you knew economic growth and new job creation begin to slow when total government spending is larger than about 25 percent of the economy, and you knew total government spending in the United States is about 36 percent of gross domestic product (GDP) - would you propose policies to make government larger or smaller to create more jobs and boost economic growth? Over the last few decades, many economists have done studies on the "optimum" size of government. A new study just completed shows the optimum size of government is less than 25 percent of GDP. Optimum is defined as that point just before government becomes so large as to reduce the rate of economic growth and job creation. Rather than increasing the size of government, the empirical evidence shows that sharply reducing taxes, regulations, and government spending down to at least 25 percent of GDP would do the most to spur economic growth and create more jobs over the long run. There is virtually no empirical evidence - in the United States or anywhere else - to support the belief of economists of the Keynesian school that a big increase in government spending will make matters better, rather than worse. 

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TAXPAYERS ARE CHUMPS

You work hard, take care of your family, and pay all the taxes the government says you owe as is typical of honest, upright citizens. But what happens to your tax money? It is now going to "bail out" firms that pay their senior executives millions of dollars a year. Congress also intends to spend your tax dollars on an $825 billion "stimulus program" filled with many dubious projects and plain old-fashioned "pork." Many good economists who have looked at the details of the stimulus package believe it has much more "de-stimulus" than stimulus in it and will make the American economy worse off rather than better off. While you may have thought you are required by law to pay taxes on all your income, you learn the "important" folks in Washington seem to think paying taxes is optional - for them.

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THE VIEW FROM 2013

April 1, 2013.  Unemployment is approaching 25 percent, inflation is close to 40 percent, major portions of the U.S. are having power "brownouts," and Americans are forced to go to foreign countries for timely and quality medical care. How did the world's largest and most prosperous economy fall into such a morass in only a very few years? Collapse of the American economy in 2013 began with several major policy mistakes by the Fed, the "Bush 43" administration, and Congress in the years from 2004-08, which were compounded with even greater policy mistakes by the Obama administration, Congress and the Fed from 2009 thereafter. After promises of "change," the new Obama administration, the Democrat Congress and the Fed only made changes for the worse.

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ARE CONGRESSMEN WORTH WHAT WE PAY THEM?

Members of Congress each will receive a $4,700 pay raise this month, which will give them a salary of $174,000 per year. Do you think they are worth it? Most of us would like to be in the position of voting for our own pay raises from an employer who has almost unlimited access to money, so when many others are taking pay cuts or losing jobs we would not have to worry. Given that members of Congress were in a large part responsible for the current economic mess, it is hard to see how they can justify a raise, which they claim is merely a cost-of-living increase. Part of the problem is that they give themselves pay raises based on the rate of inflation. If these increases depended on the rate of change (increase or decrease) in real per capita disposable income (i.e., after taxes) of the average citizen, Members of Congress would have an incentive to maximize economic growth rather than encourage inflation. In the next few weeks, members of Congress will have an opportunity to pass a "stimulus package" that enhances economic growth or one that makes things worse.  Which do you think they will choose?

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WHAT NEEDS TO BE DONE AND WON’T

Many had warned, but few who were in a position to act even tried to avoid the very predictable economic calamities of 2008. This was the year that proved Ronald Reagan's old adage, "The government is not the solution; it is the problem." As we enter the New Year, the question is again, "Will those in charge do what is necessary to avoid the very obvious new economic wrecks coming?" The U.S. government has now explicitly said there are financial institutions (and other companies - autos, etc.) that are "too big to fail." If that is (arguably) true, then they must be more highly regulated than the smaller institutions, particularly in terms of capital adequacy. The reason is quite simple. If the government guarantees the debt of big companies, those institutions will have a much lower cost of capital than their smaller competitors, which is not only unfair but will destroy new and smaller companies, thus killing much of the job and productivity creating innovation in the U.S. economy. So far, the Washington governing class has failed to even discuss this disastrous consequence of the bailouts, let alone figure out a solution.

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INVESTING IN IRAQ

Baghdad, Iraq.  Would you invest in Iraq? Many people think it is crazy to even ask the question. But strange as it may seem, there may already be some good investment opportunities in Iraq, and chances are there will be many high-yielding investments in the country in the next few years. When you arrive at the international airport in Baghdad and are greeted by a security company that puts an armored vest on you, and then loads you into a highly armored vehicle manned by tough guys with automatic weapons, just to get you to a hotel, you are thinking, "This is the last place where I would ever invest." The good news is that much of Iraq, other than Baghdad (outside the Green Zone and other high-security compounds) and a few other places, is returning to normal and is safe, and parts of it, such as the Kurdish region, are actually booming. This means there are increasing potentially profitable private investment opportunities, on a risk-adjusted rate of return basis. This past week, the Washington-based Center for International Private Enterprise (CIPE) hosted a conference in Baghdad where about 100 representatives of 15 of the 18 Provincial Investment Commissions (PICs) came to discuss how they more effectively attract foreign investment. If the Iraqis didn't think things were getting more peaceful and normal, it is unlikely they would waste time traveling some distance to Baghdad by automobile to learn how they might obtain more private foreign investment in their provinces. 

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THE FRAUD OF ECONOMIC STIMULUS

How much should the U.S. government spend on an economic stimulus program? If you have trouble answering the question, it is because it is the wrong question. The United States (and the world) economy is (or at least has been for the last few months) in decline with rising unemployment rates. It is widely believed the government must "do something." The political and media classes, and even many economists, call for an "economic stimulus program." But what do they mean by "stimulus," and will it do any good? The argument is made that many Americans are suffering from a decline in income, and thus the government should give them money so they can buy more and put others back to work. Sounds good - but where does the government get the money? It must either tax someone else now or borrow more money, which diverts productive saving to current consumption. Either way, it is less than a zero-sum game.

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THE FED – GET RID OF IT

Should we abolish the Fed? The Federal Reserve Bank, or "The Fed" as it is commonly known, is the central bank of the United States. It was created by Congress in 1913 as the direct result of the Panic of 1907 (recessions or depressions were previously called panics, and they tended to be short lived and self-correcting). The United States had been without a central bank since the closure of the Second Bank of the United States in 1836 by Andrew Jackson. A major goal of the Fed was to stop bank panics which had occurred with some regularity from the Founding of the American Republic. The Fed also was charged with maintaining a stable price level and full employment. When considering whether the Fed should be kept, or at least kept in its present form, it is always useful to look at the data. Specifically, what happened in the 94 years prior to 1914 (when the Fed became operational), and what happened in the 94 years since 1914?

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WILL OBAMA TELL OUR SOLDIERS AFRICA IS WORTH DYING FOR?

The recent drop in oil and other commodity prices makes it almost a certainty that some unstable commodity-exporting nations will reach a crisis stage in the next few months. The only question is, which countries are likely to erupt first? The Middle East is always a safe bet for an explosion, but there is a very good chance the next eruption will be in Africa, with the most likely location being Congo, followed by Sudan. In Latin America, Argentina is headed for another debt default and financial meltdown, and Venezuela continues to rapidly deteriorate. And there is Russia, which is likely to react poorly as its once booming economy goes into to a sharp recession. But -- pressures will mount on the United States to become involved, particularly in Africa, as mass killings begin again.

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DEMOCRAT CONTROL OF CONGRESS IS BAD FOR THE STOCK MARKET

Does the value of your stock market holdings depend on which party controls Congress? There is overwhelming evidence it does. As can be seen in the accompanying chart, over the last quarter of a century when the Republicans controlled both houses of Congress, the stock market rose by an average of about 20 percent per year. When the Democrats controlled both houses of Congress, the stock market only rose at an average annual rate of 6.9 percent for the Dow Jones and a tepid 5.1 percent for the Standard and Poor 500.

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YOU LOSE, SOROS WINS

Have you ever wondered why billionaires like George Soros financially support politicians who say they will "increase taxes on the rich"?

The answer quite simply is that the tax increases are most often put on people trying to become rich, not those already rich. Hence, the rich, big government advocates can gain far more by "buying" the politicians. The "bought" politicians then provide them with confidential information about administrative decisions, which these donors then use to place big bets in the market, making themselves much richer. If you have deep financial pockets and inside information, you can make huge amounts of money when markets drop.

Mr. Soros, the Democrats' financial angel, is often referred to as the "man who broke the bank of England" in the 1992 Sterling crisis. During that episode, he made $1 billion in one day at the expense of British taxpayers. The relevant question is, did Mr. Soros bet a couple of billion dollars on mere guesses of what the German, French and British officials would do, or did he have inside information?

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LESSONS FROM GEORGIA

Tbilisi, Georgia. Despite having been invaded two months ago by a country 30 times its size, the Republic of Georgia appears to be dealing with that crisis far better than the United States and other major governments are dealing with the international financial crisis, and thus the question is, "Why"? The answer quite simply is that the Georgia leaders are not so arrogant to think they know better than markets, and hence they are relying on the market to solve most of their problems. The prime minister, Lado Gurgenidze, was both educated and spent considerable time in England and clearly was influenced by Margaret Thatcher. I asked him if he was concerned that the pressures to grow the size of government because of the invasion would undermine Georgia's reforms (note: history shows governments almost always grow in relative size versus the private economy in the time of crisis, such as wars or financial instability, even if governments create the crisis). The prime minister replied that the Georgians have not retreated from their reforms, including shrinking the size of government, and they fully understand any retrenchment would be very damaging.

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LESSONS FROM BULGARIA

Can you name a country that has a flat 10 percent income tax on both personal and corporate income, and that is also running a budget surplus of 8 percent of gross domestic product (the equivalent of the United States running a budget surplus of more than $1 trillion)? The surprising answer is Bulgaria, formerly one of Europe's most backward countries. Most of the former communist countries of Eastern and Central Europe have instituted flat-rate income tax systems. Estonia was the first, and Bulgaria is one of the most recent, having only moved to the 10 percent flat rate at the beginning of this year. It's one of several lessons America and the politicians she elects could learn from Bulgaria.

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DON’T THE POLITICIANS WHO CAUSED THIS CRISIS BELONG IN JAIL?

If government agencies pressure banks to give loans to people who are poor credit risks, do you view this as a failure of capitalism or a failure of government? A number of left-wing politicians and commentators have made the assertion that the financial crisis is a result of too much deregulation under the "capitalistic" policies of President Reagan. Those who make the assertion are either ignorant of the facts or being untruthful. What we have seen is not a failure of free-market democratic capitalism, but another failure of a government that destroyed the normal market mechanisms for dealing with risk. There have been many calls for the "greedy" to be punished, but the political "greed" for power and money is even more dangerous than excesses practiced by occasional business people.

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SURPRISED BY THE OBVIOUS

Are all too many in the global political class doltish, or do they just appear that way? The current financial meltdown has revealed an amazing number of revelations from people who were surprised by the obvious. For years, liberal Democrats in Congress and some Republicans pushed for banks and other institutions to make home loans to unqualified borrowers, and suddenly we find many of these people cannot repay their loans. The reaction from members of Congress, like the "surprised" Speaker Nancy Pelosi, is to demand investigation of "greedy bankers," while ignoring the fact that it was her left-wing colleagues who created the Community Reinvestment Act (CRA) that required the banks to lend to people who were poor credit risks in the name of "housing rights." A Chicago "public interest" lawyer named Barack Hussein Obama was active in this movement.

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CONGRESS AND THE ECONOMY

If Sen. Barack Hussein Obama is elected president of the United States, do you know what will happen to federal tax rates and government spending? If you answered "yes," then you have not been paying attention, because Mr. Obama and his advisers keep changing what they say they are going to do. Even more importantly, under the U.S. Constitution, Congress has the sole power to tax and appropriate funds, not the president. Congress always rewrites presidential tax and spending proposals, even when the president and congressional majority are of the same party, and hence no president gets to dictate fiscal policy. The questions we should be asking are: What changes is Congress likely to make in the tax law, the level of spending, and energy policy if Mr. Obama is elected, and likewise if Sen. John McCain is elected?  This table shows what happened to the economy during the past quarter of a century when each party controlled (or shared control of) Congress:

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WHY DO POLITICIANS ALWAYS CONFUSE INCOME WITH WEALTH?

Which of the following families is "richer"? The first family consists of a wife who has recently become a medical doctor, and she makes $160,000 per year. Her husband is a small business entrepreneur who makes $110,000 per year, giving them a total family income of $270,000 per year. However, they are still paying off the loans the wife took out for medical school and the loans the husband took out to start his business, amounting to debts of $300,000. Their total assets are valued at $450,000; hence, their real net worth or wealth (the difference between gross assets and liabilities) is only $150,000. The second family consists of a trial lawyer who took early retirement and his non-working wife. They have an annual income of $230,000, all of it derived from interest on tax-free municipal bonds they own. However, their net worth is $7 million, consisting of $5 million in bonds, a million-dollar home with no mortgage, and a million dollars in art work, home furnishings, automobiles and personal items. The second family is clearly far better off financially than the first family, yet many in the U.S. Congress, including Sen. Barack Hussein Obama, want to increase taxes on the first (and poorer) family and not on the wealthier family.

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THE CORPORATE INCOME TAX AND BLUSTER BRAIN POLITICIANS

Rank the following taxes from best to worst: individual income taxes; payroll taxes, corporate income taxes, sales or consumption taxes, and residential property taxes. The vast majority of economists would rank the corporate income tax as being worst and the sales tax and residential property tax as the best. Unfortunately, the corporate income tax is often the favorite tax of fiscally irresponsible politicians because it is not easily seen.   In fact, the corporate tax is paid by workers in lower wages and fewer new jobs, by consumers in higher prices and by savers and investors in lower rates of return. Last week, the U.S. Government Accountability Office (GAO) released a study that showed 28 percent of large companies paid no corporate income tax in 2005 almost always because they had made no profit. Rather than thoughtfully considering whether the corporate income tax should be reduced or abolished, several bluster brains in the U.S. Congress used the report as an excuse to attack corporations.

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CONGRESS AS THE CAUSE OF THE COST OF GAS

There are hundreds of years of oil supplies (at present and projected consumption levels) if oil in oil sands and shale is properly included in reserves.   And it can be produced at a cost of $35-$50 a barrel. Does it seem a bit odd that the current price of oil is between two and three times the cost of producing all the oil the world presently needs and will need long into the future? The reason the price is so high is that the supply has been artificially constrained by governments. Take our Congress.  Some politicians there argue that even if the U.S. government started to allow increased production, that it would be seven to 10 years or more before there would be additional output. This is nonsense. Yet the very same politicians who claim we cannot increase oil production quickly are often the same ones who tell us we need to move to alternative forms - windmills and solar, etc. - without seeming to understand these desirable technologies will take far more time to meet the goals of "energy independence" than ramping up oil production.

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REPLACING INCOME TAXES WITH AN UNDER 10% NATIONAL SALES TAX

Tax increase advocates argue we must increase taxes to reduce the deficit. The problem is that tax increases slow economic growth, resulting in diminished growth in the tax base while, at the same time, increasing the pressure for more government spending. If Congress were to act responsibly (yes, an oxymoron), it would hold down the growth of spending, as was done in the late 1980s and late 1990s, and eliminate those government programs that do not meet a reasonable cost-benefit test. As has been shown before, such actions would quickly eliminate the deficit. The good news is that the actual numbers show that it is possible to responsibly develop a program to eliminate the income tax and replace it with a relatively low-rate (less than 10 percent) sales tax. Not the 23 or 30% proposed by "Fair Tax" advocates, but under 10%.  Here's how.

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POLITICIANS ALWAYS BLAME THE PROBLEMS THEY CAUSE ON OTHERS

Two of the following three news stories are true and one is not. Which ones do you think are true? Story No. 1: "A new commission appointed by Norway will investigate ways of putting a stop to the huge flows of money into tax havens. Tax evasion and corruption are believed to cost poor countries at least $50 billion a year (according to an estimate by Oxfam International)." Story No. 2: "A new commission created by several small low-income non-oil producing nations was established to seek ways of forcing oil rich nations to share their oil revenue with poor nations." Story No. 3: "Senators declare war on offshore havens. Congressional scrutiny of the offshore vehicles used by companies, investment funds and wealthy individuals is increasing."

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GOOD NEWS AND CRITICAL QUESTIONS FROM TUSCANY

Villa Santa Colomba, Sienna, ItalyRobert Mundell, who was awarded the Nobel Prize in economics in 1999, has been holding a small, annual conference here in Tuscany at an exquisite castle he purchased several decades ago and restored. His wife, Valerie, is a charming hostess and an accomplished organizer of the conferences. The castle is the family's principal residence, though Dr. Mundell continues to teach one semester each year at New York's Columbia University, where he is a professor of economics. To get fresh ideas about the current global economic problems of the day, Dr. Mundell invites not only academic economists to his conferences but also central bankers and other financial and business professionals to obtain a variety of perspectives. Some of the questions discussed at the conference will be found below, and you may wish to think about them yourselves. But first, the good news is that...

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CONGRESSMEN WITHOUT A MIRROR

Are you aware that without speculators, most food and physical products would cost a whole lot more? Because many members of Congress don't possess a mirror, they have been looking for the villain who is causing gasoline prices to soar. A large number, mostly but not exclusively Democrats, have decided that speculators, or at least "greedy speculators," are the villains. Many members of Congress make up "solutions" to things they do not understand and cause problems where there are none or make real problems worse, which explains the current run-up in gasoline prices.

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FEDERAL PROSECUTORS AS INTERNATIONAL THUGS

Imagine a fellow who lives in a dry county in Mississippi (where alcohol is not sold or served) goes to New York and has a drink at a bar where he knows the bartender. Shortly thereafter, the bartender visits his friend in that dry county in Mississippi. The local sheriff arrests both the bartender and his friend for an act committed in New York. Most people, quite properly so, would argue the Mississippi sheriff has no business arresting people for a legal act committed in New York, even though it would have been illegal if committed in Mississippi. Unfortunately, some prosecutors in the U.S. federal government are now acting like the rogue Mississippi sheriff described above when it comes to gambling, securities and tax laws in foreign countries.

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GLOBAL WARMING AS AN INTELLIGENCE FAILURE

What do you think was the most costly intelligence failure of all time?  No, was is not the world's leading intelligence agencies' failure to notice that Saddam had few, if any, weapons of mass destruction. It was the failure of many leading climate model builders to be modest enough about their predictions, and the politicians' and media's failure to ask the tough questions of these climate experts. As a consequence of what we now know was an overblown global-warming scare, everyone on the planet is paying substantially more for food and fuel than is necessary.  And Democrats in Congress are doing everything they can to keep it that way.

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ACHIEVING REAL SOCIAL SECURITY

Berlin, Germany. If you were asked to name one person who has enabled more people to gain wealth and security than any other person on the globe, who would you name? In 1881, here in Berlin, Otto von Bismarck started the world's first modern pay-as-you-go social security system which served as the model for the U.S. Social Security system and that of many other countries, including setting the retirement age at 65. No, Bismarck is not the answer to the opening question.   The answer is a fellow named José Piñera , for he has made life more secure and prosperous for millions, and with luck it will soon be billions of people. Here is how.

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