Rise Up and Take a Stand

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Economics Lessons for Liberals: Inflation

This past week, the Federal Reserve announced that it’s going to buy $300 billion worth of long-term Treasury bills over the next six months, and $750 billion of mortgage-backed securities, to try to loosen up credit and lower mortgage rates. It was also announced that they’re not going to raise taxes to come up with this additional trillion-plus dollars (on top of the recent bailouts and stimulus bill). Instead, they would just crank up the printing presses and print up the money.

How many things can you find wrong with this picture?

Wasn’t it loose credit that created the current financial crisis they’re purportedly trying to get us out of? Aren’t mortgage-backed securities the “toxic assets” that precipitated the collapse of all those banks and financial institutions that we’re already bailing out with our tax dollars? These are the very building blocks of the biggest Ponzi scheme in economic history, but the Fed, in its infinite wisdom, sees fit to gamble 3/4 of a trillion dollars of our money on the most discredited and dangerous financial instrument ever concocted to dupe unsuspecting investors. Only, at this point, they can hardly be said to be unsuspecting.

We’re supposed to be placated by the fact that, this time, they’re not using our tax dollars, but are printing up the money on their little printing presses. So, therefore, it doesn’t cost us anything, right? That would seem to be what they expect us to believe.

Economics for Liberals, Lesson #4.* When the Fed prints new money, it devalues all the money that’s currently in circulation. Printing more money literally dilutes the value of everybody’s savings, investments, salaries, and retirement funds.

Currency has no intrinsic value; it’s merely symbolic of the value of goods and services that can be exchanged. The only way to increase the total value in a system is to increase the production of goods and services that somebody wants to consume. The sum total of the currency in a system represents the sum total of the real value in the system (goods and services produced). The value that each unit of currency represents is the ratio of the total units of currency to the total actual value in the system. When the actual value (goods and services produced) remains stable, but the total units of currency are increased, each unit of currency represents less of the total actual value and, consequently, has less purchasing power. That’s what’s known as inflation.

Inflation is simply another type of taxation. Instead of taxing you on each incremental unit of value you produce, the Fed simply dilutes the value of everything you currently have, as well as every dollar you will earn in the future. It’s an invisible tax, because you don’t see the government taking it away from you. You see higher prices for everything you buy, and you blame the producers. But the producers are paying higher prices for everything they have to purchase to produce what they sell to you.

So everybody’s stuck paying higher prices for everything, but they don’t have any more money. So everybody’s purchasing power is reduced, making everybody, in real terms, poorer than they were before the currency was diluted. That’s because the money that was printed up by the government was not distributed to the people whose currency lost its value, but rather was used to buy whatever the Fed buys with it. — In this case, toxic assets that they know are overvalued.

How do I know with such certainty they are overvalued? Because, if they were not overvalued, they’d be able to be sold on the free market. The very fact that government has to buy them up indicates they’re not worth the price at which the government is buying them.

Economics for Liberals, Lesson #5. The value of an investment is based on the ratio of risk to potential reward. If the risk is greater than the potential rewards, the investment is overvalued and nobody will buy it unless the risk is reduced or the reward potential is increased. In many investments, the risk is simply the risk of losing what you invested, so the risk can be reduced by lowering the price. When a balance is reached between risk and potential, buyers can be found on the free market who are willing to assume the risk.

But, when the government assumes the risk, the people making the decisions aren’t risking their own money. They’re risking the taxpayers’ money, either directly (through taxation) or indirectly (through inflation). In this case, the Fed is cranking up the printing presses and diluting all of our savings, investments, salaries, and retirement funds to purchase investments that are known to be bad before they buy them. If any corporate CFO were to behave that way, knowing what we all know today, they would be fired.

And, to add insult to injury, they think we’re stupid enough to believe it isn’t costing us anything because they aren’t raising our taxes — yet. But the biggest irony of all is that the purpose used to justify this devious machination is to perpetuate the very circumstances (loose credit and easy availability of mortgages) that got us into this economic crisis in the first place.

Just how stupid do they think we are? Just how stupid are we?

*Lessons #1-3 are posted in Economics Lessons for Liberals: Minimum Wage.

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Evil Oil Companies?

Oil companies are evil. We all know that. They make billions of dollars a year. How could anyone make billions of dollars a year and not be evil?

However, the actual dollar amount of profits is not as relevant as the ratio of profit to expense, which includes the costs of research and development as well as the ordinary costs of doing business. Overall, oil companies have a slightly higher than average profit margin, but not nearly as high as some other industries, like pharmaceuticals, banks, financial services, telecom, software, and the food and beverage industries. According to U.S. News & World Report, “if you exclude the financially troubled auto industry from that analysis, the oil industry actually appears less profitable than most manufacturers, which were earning 9.2 cents on every dollar of sales.”

Also, if you look at oil profits over the course of several decades, you’ll observe that it’s a cyclical industry, with booms and busts. The chart below, from TaxFoundation.org, tracks oil industry profits from 1977 to 2004, as well as the gasoline taxes levied by the federal and state governments for each of those years. It’s interesting to note the boom-bust cycle for oil industry profits. The profits in the mid -2000’s are comparable to the profits in the early 1980’s. But, in the two decades between, profits were much lower, sometimes only reaching 20% of the profits during the boom years. The boom years need to cover the bust years in order to keep the industry going.

Source: Bureau of Economic Analysis, U.S. Energy Information Administration

BTW, who do you think makes more money off of gasoline, — the oil companies or the government? If oil companies are evil for pulling in billions of dollars a year in profits from the oil they produce, the government must be evil incarnate, because the federal and state governments make a lot more money off of gasoline taxes each year than the total profits of all the oil companies combined. Over this 28 year period, the government made more than twice as much money off of gasoline as the oil companies did. (And that doesn’t even take into account the corporate taxes the oil companies paid!)

While many think of the oil industry as evil, we’d all be in a fix if it collapsed. So, it’s in our interest for them to make enough money to keep the oil flowing through boom and bust. If the government allowed them to drill for oil here at home, and build new oil refineries, perhaps the boom and bust periods would even out a little more. If there was more local supply to meet the demand, the price wouldn’t be as high. But, since taxes are based on a percentage of the price at the pump, it’s in the government’s interest to constrict the supply, which artificially elevates the price.

Now the Democrats are proposing an additional windfall tax for the “excessive” profits the oil companies are making. But guess where the money to pay those windfall taxes will come from? It will come right out of your pocket at the pump.

The next time you get pissed off at how much you pay for gasoline, bow your head and thank the government for that. Remember, for every penny of profit you’re giving the oil company, you’re giving the government two. And, while you’re at it, thank the government for subsidizing ethanol production and raising your food prices as well.

Ethanol is more expensive to produce and transport than gasoline, as well as being 20%-30% less efficient, so you’ll find your gas prices increasing even further, while your mileage decreases. We have to pay more for the food we eat so we can also pay more for less efficient fuel. You have the environmental lobby to thank for that bright idea, but don’t forget to thank your Uncle Sam and your state legislatures for making their dream (and our nightmare) come true.

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We’ve heard a lot about Hope and Change from Senator Obama, but his actual positions on the issues have so far struck me as vague. He almost seems to have become a modern cult figure, with hysterical fans fainting and squealing at his appearances, and all the frenetic excitement he’s generating among the young and ‘young at heart.’ So I decided to visit his Web site and see if I can figure out where he actually stands on some issues.

Naturally, the first issue that drew my attention was the Economy. According to Senator Obama, The Problem with the economy is twofold. The first part of the Problem is that “Wages are Stagnant as Prices Rise.”– As soon as I read that, I thought “Let me guess. He wants to raise the minimum wage.” Sure enough, further down the page, it says “Obama will also increase the minimum wage and index it to inflation to ensure it rises every year.”

Now, those of us who have taken Economics 101 know that’s like a puppy chasing its tail. As wages increase, they drive up the cost of goods and services, which, in turn drives up inflation. Wages being indexed to inflation, this drives up wages even higher, and the cycle perpetuates itself into a never-ending inflationary spiral. Sound like a good idea? Not to a fiscal conservative, perhaps, but the reaction of the average undereducated citizen is “Higher wages? Oh, boy, I’ll get a raise!” And, while Senator Obama may know better, himself, that’s exactly the reaction he’s counting on.

The second part of the Problem with the economy is apparently “Tax Cuts for Wealthy Instead of Middle Class: The Bush tax cuts give those who earn over $1 million dollars a tax cut nearly 160 times greater than that received by middle-income Americans.” Huh? When I read that, I couldn’t help but wonder where Senator Obama is getting his data. 

The Congressional Budget Office releases statistics on the Effective Federal Tax Rates for each year. (The latest figures are from 2005.) The effective tax rates are not the same as tax brackets, but represent the actual taxes paid as a percentage of total gross income from all sources before any deductions, exemptions, credits, etc.

Effective Individual Federal Income Tax Rates
Lowest Quintile -5.6 -6.5 -16.1%
Second Quintile 0.3 -1.0 -433.3%
Third Quintile 3.8 3.0 -21.1%
Fourth Quintile 7.2 6.0 -16.7%
Fifth Quintile 16.3 14.1 -13.5%

The data shows that the middle and lower-middle income distribution catagories have actually received larger effective tax cuts than the upper income categories. So it’s rather difficult to see what Senator Obama is talking about, especially since he didn’t reference any sources for his claim.

Even assuming he’s referring to actual dollar amounts, rather than percentages, it’s hard to imagine that the tax cuts received by those earning over $1 million a year amounted to 160 times (that’s 16,000 percent!) of the tax cuts received by the middle class. It’s true that the top five percent of earners did pay 60.7% of all taxes in 2005 but, in 2001, the top five percent of earners only paid 55.5% of all taxes. That means the wealthiest taxpayers actually paid a higher percentage of all taxes collected in 2005 than in 2001. So how is it they got 160 times the tax cuts that the middle class got? I’m trying to do the math, but it just doesn’t work.

As I said, I can’t help but wonder where Senator Obama got his figures. Perhaps it was a misunderstanding. Perhaps a campaign aide mistranscribed the data, or he misremembered something he thought he had heard. Who knows? Is it important? That depends. Perhaps the actual statistics aren’t as important as the underlying message. But, if so, why quote statistics at all?

Regarding the underlying message, someone sent me a link recently to a very insightful (and entertaining) Modern Fable of Taxing the Rich, written by one of our neighbors to the North. I highly recommend it.

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Published in: on March 2, 2008 at 12:00 am  Comments (6)  
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The Most Generous Nation in the World

For some reason, Americans have a reputation for being greedy. Perhaps it’s because so many people have been conditioned to associate capitalism with greed. The truth is, the United States is the most generous nation in the world. This chart shows the top ten countries ranked by private charitable contributions.

Charitable Aid Foundation

Arthur C. Brooks, Director of the NonProfit Studies Program at Syracuse University, conducted a study on charitable giving a couple of years ago, and published the following findings.

70 percent of Americans give to charity each year, and do so at far higher levels than people in other developed nations: three times as much as the British, four times as much as the French, and seven times as much as the Germans. …

Why are Americans so much more generous than our European counterparts, many of whom look down on us as being mercenary and crass? Do we give more just because we have more to give? That may be part of it. But the graph above ranks countries by giving, as a percentage of GDP, showing that Americans don’t just give more overall; we give proportionately more, relative to our income, than people in other countries.

In the same study cited above, Professor Brooks also researched relationships between how much individuals give to charity and their socio-political perspectives. Based on the results, he proposed a possible explanation for why Americans are more generous in our private charitable contributions than Europeans are.

Those who believe that government should redistribute income are far less likely to give voluntarily to help others. This helps explain why, compared to the United States, European states … see low levels of private giving.

Perhaps those who feel it’s the government’s role to help the needy don’t contribute as much privately because they believe the government has it covered. Presumably, they figure they’re already contributing through taxes, so it isn’t necessary to donate privately as well. Yet, in this country, the people who believe the government spends too much on social welfare programs pay the same amount of taxes, but still feel impelled to give more of their own private resources to help those who are truly in need.

In 1996, the General Social Survey asked a large sample of Americans whether they agreed that, “The government has a responsibility to reduce income inequality.” Those who “disagreed strongly” with this statement gave an amazing twelve times more money to charity per year, on average, than those who “agreed strongly.”
Arthur C. Brooks

This raises the question of whether those who think it’s up to the government to take care of the poor would be inclined to contribute more to humanitarian causes if the government were not assuming that role. If they paid less in taxes, would they donate proportionately more to charities? If so, we might be able to do a better job of helping the truly needy by eliminating government welfare programs and reducing taxes.

Private charities tend to be more efficient than government programs. (See Feeding the Needy or Bolstering the Bureaucracy.) Given the same amount of money, it’s likely that private charities could address the problem more effectively than the government does. If the government were to get out of the charity business, perhaps the folks who think we’re not doing enough would contribute more of their own time and money, instead of always crusading for higher taxes.

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Published in: on February 27, 2008 at 11:57 pm  Comments (30)  
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Eating the Rich

The most recent report from the Congressional Budget Office on Effective Federal Tax Rates is based on statistics from 2005. I found the report very enlightening.

  • Of the total individual income taxes collected that year, 99.4% were paid by the highest earning 40% of American households. That means 60% of the population paid less than 1% of the total taxes.
  • The lower 40% of households, on average, got more money back (through tax credits, EIC, etc.) than they paid in. This segment included people earning up to $48,000 per year. 
  • The top 20% of earners paid 86.7% of the total taxes collected, with the top 10% shouldering 72.7% of the total tax burden for the entire country.

Given this objective historical data, would somebody please explain to me the theory that the rich are undertaxed?

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Published in: on February 21, 2008 at 11:37 pm  Comments (15)  
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Is “I Told You So” Worth the Price?

Romney has gracefully bowed out of the race, explaining that he doesn’t want to divide the party any longer and exhorting us all to unite behind McCain. I regret to see him go. Obviously, I would have preferred for him to be the nominee. (Once again, my record is intact. — Every time I settle on one of the remaining candidates, he’s the next one to drop out.) But it was already clear that McCain was going to win the nomination; so I think Romney did what he needed to do, and I think he did it well.

Nevertheless, a number of conservatives are still planning to vote for the Clintons or Obama. They say it’s because they anticipate the worst, and want the Democrats to take the blame. If you’re one of those people, I have to ask, what exactly is it you want them to take the blame for?

  • For raising taxes to redistribute more wealth from those who earn it to those who don’t?

    Great. They’ll get the blame. You’ll get the bill.
    Is it worth it?

  • For bringing the war back home and fighting the terrorists here instead of there?

    Maybe they’ll be blamed. Or maybe they won’t. They already maintain that the reason the terrorists hate us is because the darned Repbublicans insist on supporting our ally, Isreal, instead of letting the Islamic fanatics destroy it. So, when they bring the troops home, and the terrorists follow, they’ll still blame the Republicans. — Becaues it really is America’s fault that those poor misunderstood terrorists hate us, after all…

  • For universal healthcare?

    Some people will blame them, — like those of us who end up footing the bill for other people’s unhealthy habits, and those who will be compelled by law to buy something they don’t think they need. But others will think it’s great, — the ones who end up getting subsidized by the rest of us. (They vote too, you know.)

  • For more problems with illegal aliens?

    Obviously, the voters don’t really care, since all of the candidates left in the race support the same immigration legislation.

  • For packing the Supreme Court with liberal justices?

    Some people will like it; some people won’t.
    But we’ll all have to live with the consequences.
    Are you OK with that?

Even if the Demos do get the blame, the damage will be done and we’ll be paying the price for years, well beyond the next administration. Is it really worth the price? Conservatives sat out the last election, with the same justification, and all it got us was a Democrat-controlled Congress. What good will it do to turn over the Exectutive Branch as well?

Those who are planning to withhold their votes, or vote for a third party candidate, might as well be voting for the Clintons or Obama, because that’s exactly what the Democrats are counting on. The liberals/Democrats will all rally around whichever socialist wins their nomination. The conservatives/Republicans will be so fragmented that we won’t even present a challenge. That’s the real reason the Domocrats favor McCain. It’s not because they actually support him (he’s diametrically opposed to them on taxes and the war), but because he’s so hated by the conservatives that they know, if he wins the nomination, the Demos won’t have any opposition.

I can relate to the frustration of the people who just want to walk away from this election in disgust, and wash their hands of it. It’s hard to muster the will to fight for a candidate you don’t even believe in. But remember all the federal agencies and presidential appointments. It’s not just the president you’re voting for, it’s which party controls the whole executive branch. If you don’t vote for the Republican candidate, you’re playing right into the Demos’ agenda.

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Published in: on February 7, 2008 at 9:42 pm  Comments (6)  
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Redistribution of Health

Why do I keep picking on poor Mrs. Clinton? Hasn’t she suffered enough (after living with Bill all these years)? I pick on her because she’s a serious contender for the office of President of the United States. And, frankly, that makes me very nervous. It has nothing to do with the fact that she’s a woman. It has everything to do with her political agenda.

 Mrs. Clinton’s proposed healthcare plan “requires insurance companies to offer coverage to anyone who applies, and bars insurance companies from charging higher premiums to those with pre-existing conditions.”1

It sounds great, on the surface. But what isn’t stated is that, if insurance companies can’t deny coverage to anybody, even those who make lifestyle choices that put them at greater risk, and they can’t raise rates for those with greater risk factors, the only alternative left to them is to raise the rates for those who are generally healthy to cover the much higher costs of insuring those who are not. Making the healthy pay more for health insurance so those who use it more can pay less brings to mind a new twist on Marx’s old motto: From each according to their health, and to each according to their infirmity. — But she also promises to make health care affordable for everybody. And that’s where the redistribution of health melds into (surprise!) the redistribution of wealth.

Her plan “offers tax credits to limit health care premiums to a certain percentage of a family’s income. Cost estimated at $110 billion annually, to be paid for by eliminating the Bush tax cuts for those earning over $250,000.”1

I keep hearing this and, the way it’s always phrased, it sounds like Bush implemented special tax cuts for those earning over $250,000. Sounds kind of like he’s doing favors for his rich buddies, doesn’t it? And that’s exactly what it’s intended to sound like. But, just to be clear, the tax cuts in question apply to everybody, not just to those making over $250,000. What Mrs. Clinton is proposing is to make those who earn “too much” ineligible for them. (And the other Democrats are proposing the same thing.) That was exactly the reasoning behind the Alternative Minimum Tax when it was first implemented in 1969, and only affected 155 taxpayers. In 2000, one million households were affected by the AMT, and it’s projected to be 30 million by 2010. This year, 20% of all taxpayers will be affected by it, some earning as little as $50,000.2

It’s easy to win votes by saying we’ll just get the wealthy to pay for whatever we want. Since there are a lot more of us than there are of them, the Democrats figure it should be easy to garner support for a plan that sounds like soaking the rich to benefit the rest of us. But just remember, there are a lot of other tax cuts they want to eliminate too, and, chances are, some of them will affect you.

1 CNN Election Center
2 Washingon Post

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Published in: on January 23, 2008 at 10:56 pm  Comments (11)  
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Feeding the Needy or Bolstering the Bureaucracy

One reason why many private charities are both more efficient and more effective than government welfare programs is because charities in the private sector are accountable to the people who contribute to them. There’s a significant amount of variance in administrative and fund-raising overhead among different charitable organizations. For example, the American Red Cross spends 6 cents out of every dollar contributed for overhead, while the American Cancer Society spends 31 cents out of every dollar for overhead.* Private charitable organizations are required to make this information available to the public. As a private contributor, you can choose the charities to which you contribute, and make sure you get the best return on your investment for whatever causes you support.

The government, on the other hand, does not publish the percentage of money allocated for social welfare programs that goes to bureaucratic overhead. Given the usual proliferation of bureaucracy in government, I’d be willing to bet that the overhead is pretty high. But you have no way to find out. Nor do you have any choice in the matter, even if you knew.

Nevertheless, there are people who, even while acknowledging that government welfare programs are less efficient and less effective than private charities, still believe the government should appropriate their (and everybody else’s) money to pay for them. Why? They believe that the very fact that it’s involuntary is a good thing. There are two reasons people think involuntarism is good.

  1. They have very little faith in human nature. They believe that they themselves are good, but most other people are not. Consequently, they believe, if the government didn’t force people to support humanitarian causes against their will, they wouldn’t support them at all. What they don’t realize is that empathy is a fundamental aspect of human nature. Empathy is not only the root of conscience, but also of altruism. When we see someone in need, we have an instinctual impulse to help them. However, by delegating that role to the government, we absolve ourselves of the need to take personal responsibility for the welfare of our fellow man. From the perspective of social evolution, that’s not necessarily a good thing.
  2. They want to feel like humanitarians but, if it were left up to their own discretion, they’re not sure they would be as generous as the government is with their money. It isn’t that they have such great faith in the government, but that they’d rather hand over the responsibility to someone else than to accept that responsibility themselves. Then they can feel good about supporting social welfare without having to make the hard decisions themselves.

Unfortunately, the ultimate result of leaving it up to the government is that less of the money spent to aid those in need actually benefits the people who need it, and more of it gets absorbed into the ever-expanding bureaucracy. Private charities have to compete in the free market, where benefactors vote with their dollars.

* Charity Navigator provides comparative data on charitable organizations, incuding how much they spend on actual program services vs. overhead.

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Published in: on January 21, 2008 at 10:44 pm  Comments (22)  
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Giving Away Other People’s Money

People who favor social welfare programs seem to think that they’re acting out of altruistic impulses, and that those who don’t support these programs are uncharitable. There’s a fundamental difference between altruism and redistribution of wealth by the government. Altruism is characterized by an individual acting of his own free will in the interests of others. No matter how magnanimous your intentions, it isn’t altruistic to give away somebody else’s money. Especially when it’s counter-productive.

Philanthropy is intinsically rewarding because being able to help someone in a meaningful way makes people feel good about themselves. That’s human nature. And that positive reinforcement motivates people to increase their generosity. But having something taken from you is not the same as giving. If, instead of being freely given, the same money is appropriated by the government and allocated indiscriminately to people who may or may not be deserving, rather than making the donor feel good, it makes them feel resentful. That, too, is human nature.

Unlike government agencies, individuals exercise judgement in their philanthropy, whether the recipient is a person, a family, or a charitable organization. Even the most altruistic individual doesn’t head down to the nearest skid row and start handing out money to every junkie and bum on the street who’s “less fortunate” than they are. An individual always wants to see a return on their investment. — Not necessarily a return to themselves, but they want the sense of gratification that comes from knowing their “investment” has effected a positive change, rather than subsidizing the status quo.

When one keeps giving money to someone, and they just keep asking for more, eventually one feels like one is flushing money down the pipe, and stops the cash flow. That’s the right thing to do. People are remarkably resourceful, when they need to be. But, for some people, mitigating that need results in prolonging their dependency. Some people are viscerally motivated by the shame of having to accept charity, and feel compelled to prove they’re worthy by striving to better themselves. Others see it as a way to sustain their current level of subsistence without having to make the effort to change.

When charity rests in the hands of individuals, or private organizations that are not legally bound to treat every applicant the same, the way a recipient deals with the assistance they receive effects a kind of natural selection. People who use it to good advantage are apt to receive more. Those who don’t are not.

However, when the government extracts money from us and gives it to whoever signs up for it, as long as they can prove they aren’t gainfully employed, the principle of natural selection is turned on its head. Those who use it to sustain their status quo keep receiving more, while those who use it to pull themselves up and get ahead get less. The insidious aspect of this is the Pavlovian implication it has. — Government social welfare programs reward the very behavior that natural selection (even benevolent natural selection) would rule against.

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Published in: on January 19, 2008 at 11:44 pm  Comments (22)  
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