The Fuel of Fear

by Steve Stofka

January 12, 2020

The Constitution requires that a census be taken every ten years. The first census in 1790 counted almost four million people. The Census Bureau estimates the population at 330 million now, a hundred-fold increase (Census Bureau, 2019). The Constitution was a hard-fought bargain between representatives of regional interests. Politicians in the North and South distrusted each other. Southern states estimated that they would gain the most population growth in future decades because the growing season was longer in those states, and most people depended on agriculture for their existence. Until those population trends developed, the South worried that the more populous North would dominate Federal policy (Klarman, 2016). Our lives are impacted by the fear and distrust of our founders.

Minority and isolated rural communities are at risk of being undercounted because they distrust government. Minorities may have come from a country where there is good reason to distrust government. Indian tribes have several hundred years of reasons to distrust state and federal governments. Response rates to the census questionnaire vary dramatically. In some of the 3000 counties nationwide, responses are only 20%. In some, the response rate is 80-85% (C-Span, 2020). An advocacy group testifying before the House Oversight and Reform Committee hearing this week estimated that 400,000 Latino children aged 0-4 were not counted in the 2010 census (C-Span, 2020). Pre-school programs for at-risk Latino children receive less funding when the government doesn’t know those children exist.

During the Great Depression, President Franklin Roosevelt and a Congress ruled by the Democratic Party made an abrupt shift in the role of the Federal government. Until then, the policies of state governments had a more direct impact on the lives of most Americans. Today, the Federal government is involved in every aspect of our lives. Census counts determine the distribution of hundreds of billions of Federal tax dollars each year.  Political scammers rely on the fact that minority populations are fearful, and they spread disinformation about the census to fuel that fear and help reduce the population counts of those communities. Because so many federal programs are tied to the census, people who are fully counted in one state benefit if those in a neighboring state are under counted. The counting of people has become a political sport.

Politicians are afraid of losing the jobs they worked hard to get in the first place. Their interests become aligned with companies whose campaign contributions help protect a politician’s position. Some fault the private market for overpriced drugs and high housing costs but it is the failure of policy makers to respond to the interests of the constituents who voted them into office. Politicians respond instead to the wishes of pharmaceutical, energy and real estate companies. A dominant company in an industry does not want competition. They lobby politicians to craft policies that make the market less free to protect their market domination. It is not the role of private companies to respond to a broad constituency of voters. That is the role of politicians, who blame the private market instead of their own public policy. Then they call for more public policy failures to fix private industry. Private industry increases their lobbying and campaign contributions in response.

Humans have a proclivity for fear and are more alert for negative experiences. Psychologists calls it a negativity bias (Cherry, 2019). For good and bad, fear infected our Constitution at the outset and drove the founders to craft a Constitution of compromise. Smaller states feared the majority will of the larger states. The founders feared the power of the British Parliament and the king just as minority populations fear the government today. Driven by fear for their own political survival, politicians sought the support of the few at the expense of the people who voted them into office. Then and now, we fuel our public policies with fear of the other, whoever we think that is. Our country becomes ruled by fear.

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Notes:

Cherry, K. (2019, April 11). What is the Negativity Bias? VeryWellMind. [Web page]. Retrieved from https://www.verywellmind.com/negative-bias-4589618

C-Span. (2020, January 9). Hearing on 2020 Census: Response rates. [Video, Transcript]. Retrieved from https://www.c-span.org/video/?467977-1/hearing-2020-census&start=12401

C-Span. (2020, January 9). Hearing on 2020 Census: Latino children. [Video, Transcript]. Retrieved from https://www.c-span.org/video/?467977-1/hearing-2020-census&start=13069

Klarman, M.J. (2016). The Framers’ Coup: The Making of the United States Constitution. New York: Oxford University Press. Pg. 192.

Photo by Drew Graham on Unsplash

U.S. Census Bureau. (2019, July 1). Quick Facts. [Web page]. Retrieved from https://www.census.gov/quickfacts/fact/table/US/PST045219

The Shark in Washington

September 29, 2019

By Steve Stofka

Before I get into a historical perspective on this week’s goings on in Washington, let’s look at a troubling indicator in the latest consumer confidence survey. September’s survey from the Conference Board indicated a high negative gap between consumers’ expectations and their current conditions (Note #1). This gap is measured by subtracting consumer responses about their current conditions from their expectations of the near future. If I am doing well now but worried about my job in the next six months to a year, that loss of confidence in the future will show up as a negative gap between current conditions and expectations in the survey.

The level of negativity is higher than it was at the start of the recession in late-2007 or the latter part of 2001 when the tragedy of 9-11 occurred. Not only do poor expectations precede a recession, they help create that very recession in a self-fulfilling prophecy.

As the economy recovers from a recession, the gap reverses and turns positive; i.e. expectations are higher than current conditions. A person may be out of a job but some of their friends are finding work, so they expect to soon find work. The gap turned positive in 1990 after that recession, again in 2002 and in 2009.

Let’s turn to the events that dominated the news this week. An impeachment inquiry will certainly draw the attention of the White House from trade negotiations with China and may dampen any bullish sentiment in the stock market. What lessons can we learn from history?

A brief recap. In a July 25th, 2019 phone call with Ukrainian President Volodymyr Zelensky, President Trump asked him to investigate Joe Biden and his son in connection with a Ukrainian gas company. Joe Biden is a former Vice-President and potential Democratic presidential rival in the 2020 election. In an apparent cover-up, the record of the call was kept in a top-secret classified directory. A formal complaint filed by a whistleblower in early August was not acted on until a leak brought the whole affair to light. Is this an impeachable offense? You be the judge. Depends on which side of the political aisle you sit on.

There is an odd similarity between the presidency of Donald Trump and the first term of Bill Clinton’s presidency. Clinton’s first two years 1993-4 were punctuated with various financial and sexual scandals from his time as governor of Arkansas. The political arena is a shark tank, but the sharks don’t attack until they smell blood in the water.

Republicans attacked Clinton for his lack of character just as Democrats attack Trump now. Both men give good cause. If you’re a Democrat you’ll say, “Oh no, Clinton was nowhere as bad as Trump.” If you’re a Republican, you think the opposite. We can dispute the degree of shadiness, but both are shady dealers.

In 1994, after 40 years in the political desert, Republicans won control of the House in a sweeping change of voter sentiment. In 2018, Democrats did the same. In the 1996 election, Republicans put up Bob Dole against Clinton’s re-election campaign. Dole was a military veteran, a long-time member of the House and the majority leader in the Senate for a decade (Note #2). Character and experience can only take a candidate so far in the eyes of voters.

Until the candidacy of Donald Trump, Republicans touted the character of their presidential candidates. Trump flaunted his lack of character and his bloodthirsty negotiating skills. He bragged that if he got conservative judges appointed to the Supreme Court and the lower courts, he could shoot someone on 5th Avenue in NYC and Republicans would still vote for him. Oh, that Donald, partisans said. He sure is different. Trump was the big shark that could take on the corrupt Clintons. Republican voters understood that Trump was a NYC real estate boss who didn’t play by the rules. They were sick of Washington’s rules. They did not “send in the clowns,” the 16 candidates with much more experience and character than Trump. They voted for the shark.

Democrats still don’t get this. “Look at the big bad shark!” they shout as they point at Trump. Republican voters smile.

Trump said he would get judges appointed. He has. He said he would get tax cuts done. He has. Most of the cuts went to the top incomes. A $1 trillion annual subsidy to wealthy people. Republicans believe in trickle down economics. Farmers and others in rural America are waiting for that subsidy to trickle down.

Trump promised to bring jobs back to America. There are more jobs now but not in rural America where his constituency is strongest. Farmers and rural communities have been the chief losers in Trump’s fight against China.

In a recent Gallup Town Hall, Jeffrey Rosen pointed out that Donald Trump is part of an ongoing 4th Constitutional battle since the founding of our country (Note #3). Rosen is the president of the National Constitution Center, a non-partisan organization chartered by Congress to promote and educate the public about the Constitution.

Beginning in the 1980s, Republicans have tried to undo the radical changes to the meaning of the Constitution instituted by FDR. In 1936-37 he threatened to pack the court if they did not approve his New Deal programs. Key members of the court reversed their earlier opinions and found greater powers for the Federal government in the Commerce and general welfare clauses of the Constitution.

In 1987, Democrats in the Senate blocked the appointment of Robert Bork to the Supreme Court. That appointment would have shifted the weight of opinion on the court toward those justices who preferred a more temperate role for the Federal government as understood by courts before the FDR administration and the Great Depression.

In the past eighty years, Congress has largely abdicated their lawmaking responsibilities to executive agencies whose career employees develop thousands of rules that citizens and companies are expected to follow. This type of rulemaking creates a gap in the checks and balances originally built into the Constitution.

Has Congress delegated too much administrative power to the President? Since President Trump was elected, Democrats have become aware of the dangers of a country run by executive order and rule making agencies. FDR’s cabinet was 6 people. Now it is 23 people under whom millions of people work for the executive branch (Note #5). Is it too big, too ungovernable? Many think so.

Financial regulators stumbled over themselves and failed to understand, report on or curtail the risks that the banks and investment companies were assuming before the financial crisis. The rollout of the health care exchanges under Obamacare was an embarrassment of mismanagement and poor execution. There are numerous other examples of poor agency management and overreach but that’s the subject for another time.

If you think the job of the federal government is to fix things, you will be disappointed over the course of the next year. Congress will accomplish little legislation. If you prefer a minimalist role for the federal government, you are probably thrilled with this prospect. Remember, though, that while you sleep, federal agencies are promulgating new rules and new penalties for non-compliance.  

Almost half of the voters in this country wanted Donald Trump to break things in Washington. He is doing a good job of that so far. If consumer expectations were dropping before this week’s events, they will only be dampened further as the controversies in Washington continue. Already on the decline, investment spending will contract as companies put plans on hold while politicians in Washington play the blame game.

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Notes:

1. The Conference Board. (2019, September 24). Consumer Confidence Survey. [Web page] Retrieved from https://www.conference-board.org/data/consumerconfidence.cfm

2. Wikipedia. (n.d.). Bob Dole. [Web page]. Retrieved from https://en.wikipedia.org/wiki/Bob_Dole

3. National Constitution Center. (2019, September 25). The Battle for the Constitution. [Web page, audiocast]. Retrieved from https://constitutioncenter.org/debate/past-programs/the-battle-for-the-constitution. An overview of the four constitutional battles is from approximately 30:00 to 45:00 in the podcast.

4. Wikipedia. (n.d.). Robert Bork. [Web page]. Retrieved from https://en.wikipedia.org/wiki/Robert_Bork

5. Wikipedia. (n.d.). Cabinet of the United States. [Web page]. Retrieved from https://en.wikipedia.org/wiki/Cabinet_of_the_United_States

It’s Only Money

September 24, 2017

Republicans in Congress hope that they can enact comprehensive tax reform that will lower taxes for individuals and corporations. The Congressional Budget Office estimates  that, under current law and before any tax reform, the current $20 trillion deficit will grow to $30 trillion by 2026. They recommend a combination of decreased spending and increased revenue that would amount to $620 billion (in current dollars) annually, about 15% of current Federal spending of $4.2 trillion. CBO’s goal is to achieve a level of public debt to GDP that is about 40%, the 50-year average.

Lawmakers struggle to cut even 5% of spending but let’s assume that they could accomplish that and reduce spending by $210 billion. That might be the easier task. The Federal government is currently collecting 18.5% of GDP in taxes, a few tenths more than the 18.2% collected during the Reagan years. The CBO says that the dollars collected is not adequate to meet the Federal government’s current level of spending and obligations and they project that annual deficits will increase over the next decade. The 70-year average of federal revenues is 17.5% of GDP.

FedRevPctGDP

Raising an additional $410 billion, or 10% extra in revenue, will require raising taxes or increasing GDP. Republican lawmakers and some economists hold fast to a theory that reducing tax rates will increase economic growth. To raise an additional $410 billion for a total of $4 trillion dollars, and collect the 50-year average of 17.9% of GDP in tax revenue, GDP next year would need to be almost $23 trillion, a whopping 20% increase from the 2016 level of $19 trillion. No amount of tax decrease will spur that much growth. A Republican Congress will not pass a tax increase.

In a recent Senate budget committee hearing, I was surprised to learn that half of the cost of corporate taxes is borne by the workers, as estimated by the Tax Foundation. The OECD finds that corporate income taxes are most injurious to people’s incomes and is why most developed countries have lower corporate tax rates than the U.S. These countries augment their revenues with a consumption tax, most often a VAT, or value added tax. Another surprise: consumption taxes are less of a burden to a worker than higher corporate taxes.

The founding of this country was instigated by a protest over a tea tax. In the Framer’s Coup, Michael Klarman relates the bitter debates over slavery and taxes at the 1787 Constitutional Convention. 230 years later, the debate over slavery may have ended but the debates over taxes are just as ferocious.

Since last November, the stock market has priced in the probable passage of tax reform by the end of this year or early next year. Republican lawmakers have been unable to repeal Obamacare and I think they will have an equal amount of difficulty passing tax reform.

CBO budget projections restrain the freedom of lawmakers to enact their favorite theories. Lawmakers are highly motivated to answer the whoops and hollers of their voters, many of whom may not be interested in the achingly dull but necessary procedures of budget craft. The parliaments of European governments can enact sweeping legislative changes that are difficult under our federalist system. The U.S. chose a different path of checks and balances embedded in a Constitution hammered out by compromise and a suspicion of human beings given legislative power. Time and time again we are reminded that those suspicions were well founded. Voters and lawmakers may become frustrated with the procedural obstacles of crafting legislation but the U.S. Constitution is the longest living Constitution because of those obstacles.

History lesson done. Stock investing lesson: don’t count your tax reform before it hatches.

Income Tax and the Constitution

The Constitution of the United States was designed to protect the individual states who feared the power of a large central government.  In keeping with that design, the Constitution enumerates the various powers of the Federal Government. This past week a majority of the Supreme Court decided that the health care law known as Obamacare was constitutional, basing its decision on the taxing power granted by the Constitution and the 16th Amendment.

A fundamental presumption of writing the Constitution is the self-preservation of the new nation as such.  Various powers of defense, the ability to make war and treaties with foreign countries are some of the enumerated powers granted to the Federal Government to ensure the country’s continued existence.  What is not enumerated but assumed is the right, the duty of the Federal Government to protect the country as a whole.  At a time of armed conflict within a fractured nation, President Lincoln understood this point more clearly than most – that the utmost responsibility of a President is not spelled out in the Constitution that he had sworn to uphold.

There are two common faults that have caused the downfall of all nations, particularly nation empires: 1) the internal struggle for power by factions; and 2) the inexorable concentration of wealth and property.  The second leads to the first.

In the Federalist Paper No. 9, Alexander Hamilton wrote “It is impossible to read the history of the petty Republics of Greece and Italy, without feeling sensations of horror and disgust at the distractions with which they were continually agitated, and at the rapid succession of revolutions, by which they were kept in a state of perpetual vibration, between the extremes of tyranny and anarchy.”  Periods of calm within those empires were short-lived, “soon to be overwhelmed by the tempestuous waves of sedition and party-rage.”  As we look at and listen to the debates regarding health care, what do we see?  Party-rage.  Day after day, proponents on both sides of the issue make claims that are either blatantly untrue or a tortured stretching of fact.  There are so many dubious claims that reporters at Politifact.org  can only examine the more widely spread claims.

In Federalist Paper No. 10, James Madison, the chief constructor of the Constitution, wrote: “Among the numerous advantages promised by a well constructed Union, none deserves to be more accurately developed than its tendency to break and control the violence of faction.”  Further, he writes “Complaints are every where heard … that the public good is disregarded in the conflicts of rival parties.”  He explained what he meant by the word faction: “By a faction, I understand a number of citizens, whether amounting to a majority or minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adverse to the rights of other citizens, or to the permanent and aggregate interests of the community.” 

What is to be done?  Madison wrote “There are two methods of curing the mischiefs of faction: the one, by removing its causes; the other, by controling [sic] its effects.  There are again two methods of removing the causes of faction:  the one by destroying the liberty which is essential to its existence; the other, by giving to every citizen the same opinions, the same passions, and the same interests.”  The first of these methods is undesireable; the second is impractical. Madison concluded “The latent causes of faction are thus sown in the nature of man.”  He does not condemn people for this tendency to form factions; a well constructed government must deal with this part of man’s nature.

Madison saw “A zeal for different opinions concerning religion, concerning Government, …an attachment to different leaders ambitiously contending for pre-eminence and power [who] have in turn divided mankind into parties, inflamed them with mutual animosity, and rendered them much more disposed to vex and oppress each other, than to co-operate for their common good.  So strong is this propensity of mankind to fall into mutual animosities, that where no substantial occasion presents itself, the most frivolous and fanciful distinctions have been sufficient to kindle their unfriendly passions, and excite their most violent conflicts.  But the most common and durable source of factions, has been the various and unequal distribution of property.  Those who hold and those who are without property, have ever formed distinct interests in society. [Many different interests] grow up of necessity in civilized nations, and divide them into different classes, actuated by different sentiments and views.  The regulation of these various and interfering interests forms the principal task of modern Legislation, and involves the spirit of party and faction in the necessary and ordinary operations of Government.” [emphasis added]  These astute observations by Madison are true today just as they were two hundred years ago.

In its own self-preservation, a government must ameliorate the “unequal distribution of property” which Madison considers to be the chief cause of factions.  How is a government to do that and preserve the respect for property rights that Madison and the framers deemed essential to a free people?  Madison wrote “From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results: and from the influence of these on the sentiments and views of the respective proprietors, ensues a division of the society into different interests and parties.”  As with factions, this contradiction is an essential process of being a free people.  To use the same sentence construction as Madison: there are two methods for removing the causes of the concentration of wealth and property:  the one, by abolishing individual property rights which are essential to a nation of free people; the other, by giving every citizen the same amount of property.  The first is undesireable; the second invalidates the first principle and impractical, as Communist societies discovered.

A well constructed government uses its taxing authority to fund its operation and control the inevitable concentration of wealth and property. Many conservatives of today argue on principle that government’s role is not to transfer wealth from one person to the next.  They ignore the history of the decline of many nations whose wealth concentration reached a critical mass that ignited revolution.  They forget that the first principle of a nation is its own preservation; that a nation MUST transfer enough wealth to slow its concentration among a small portion of its citizens.  By its very nature, a property or income tax takes, by threat of force, the property of a person.  The principle of respect for individual private property rights can not be sustained in the ideal if a nation is to survive.

The income tax, or 16th, amendment was “sold” to the state legislatures as a way to tax corporations and very wealthy individuals.  For corporations, the income tax was to be an excise tax or a fee for the exemption from liability that a corporate structure afforded its stockholders.  Today many conservatives advocate a flat tax or a less progressive tax rate structure, citing the uneven distribution of the tax burden on the rich.  When the legislatures voted on this amendment, they did so on the premise that almost all people would not be subject to the income tax.   Corporations and those with extremely large incomes were to shoulder the entire burden of the income tax.  Those state house members who voted for ratification would be shocked that the top 1% of income earners paid only 38% of the personal income tax collected in 2008 (National Taxpayers Union).  They would be indignant that corporations paid only 22.1% of the combined total of personal and corporate income taxes collected in 2008 (IRS Statistics  Table 1).  When the 16th Amendment was sold to the American people in 1910 through 1913, these two groups combined were to shoulder most, if not the entire, burden of the income tax.  In 2008, they paid a little less than 52%.

In the coming months billions of dollars will be spent to sway or negate our vote.  The people and corporations who spend these vast amounts of money will try to convince us that we should vote a certain way on principle, out of loyalty to a particular ideal, party or policy.  Those who spend this money are not evil – they are simply promoting their own interests, hoping that they will convince each of us that we share an interest with theirs.  Given a choice of two competing parties, some voters will be undecided, feeling lukewarm or conflicted about the interests of either faction.  We may wish for some alternative to these dominant factions, or a menu where we could pick and choose the narrow interests that most closely align with ours.  It is the nature of mankind that we can not either live or vote in the ideal; that we must make compromises and choose the faction which most closely aligns with our interests.

From the beginnings of this nation, parties have arisen, trying to wrest control of the government, hoping to grab control of its power for their own self-interest.  For its own self-preservation, a well constructed government MUST constantly strive to distribute competing interests and power; since money and property form the core of power, a government must spread just enough money from the richest of its citizens and corporations to the rest of its citizens.   How well a government can do so determines whether the nation survives.

Income Disparity

Beth referred me to a Slate article by

This article has a decided “liberal” slant.  The graph showing disparities in income leaves out “transfers of income”.  In July 2010, the BEA reported that transfer payments were 1/6 of total personal income, or about 30% of what people got paid in wages and salaries.  Transfer payments include Social Security, unemployment insurance, back to work welfare programs, pell grants, etc, etc.  There is disparity of income but Paul Krugman and others who have a strong political agenda pick out the data that most strongly shows their case.  Income is income.  In the early part of the 20th century there were no social safety net programs and few transfer payments.  Now, they comprise a significant part of income for a growing part of the population and should be included for comparison.

A final note:  There will always be disparities in income, disparities in circumstance, disparities in ability.  James Madison, the primary architect of the Constitution, was well aware of this and wrote in Federalist #10:
 

The diversity in the faculties of men, from which the rights of property originate, is not less an insuperable obstacle to a uniformity of interests. The protection of these faculties is the first object of government. From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results; and from the influence of these on the sentiments and views of the respective proprietors, ensues a division of the society into different interests and parties.

Those who hold and those who are without property have ever formed distinct interests in society. Those who are creditors, and those who are debtors, fall under a like discrimination. A landed interest, a manufacturing interest, a mercantile interest, a moneyed interest, with many lesser interests, grow up of necessity in civilized nations, and divide them into different classes, actuated by different sentiments and views. The regulation of these various and interfering interests forms the principal task of modern legislation, and involves the spirit of party and faction in the necessary and ordinary operations of the government.

The violence of factions had brought down previous republics like Greece and Rome.  What can remedy this natural tendency of people to form factions?

There are two methods of curing the mischiefs of faction: the one, by removing its causes; the other, by controlling its effects.
There are again two methods of removing the causes of faction: the one, by destroying the liberty which is essential to its existence; the other, by giving to every citizen the same opinions, the same passions, and the same interests.

Realizing that the cures for faction are worse than the disease of faction, Madison constructed a Constitution by which the different factions in this country would push and pull for power.  Unlike utopians who dream of a better world if only people weren’t so self-interested, Madison understood that self-interest was natural to people and developed a legislative structure that could hopefully balance those competing interests.
Today we have become a country of factions fighting for federal largesse:  farmers who want price supports, the unemployed who want benefit extensions, students wanting more generous student loan programs and grants, industrial towns wanting government support to bring businesses to their area, banks and car companies wanting bailouts, consumers wanting ever more protections, seniors wanting generous cost of living adjustments to their pensions, people wanting more regulations, people wanting less regulations, etc, etc.  We are turning into a country of supplicants raising our voices in a cacophony of “Gimme” and “It’s mine.” 
And we call ourselves a great nation.

Health Care Conundrum

In an op-ed in WSJ 10/17/09, Vernon Smith, a Nobel Laureate in economics, explained the problem with health insurance in simple terms that any layperson can understand. Health care provider A recommends to patient B the services that B should buy from A. C, either the government or an insurance company, pays A. “This structure defines an incentive nightmare,” Mr. Smith writes and presents a seemingly unsolvable problem.

The Senate recently passed its version of health care reform. House and Senate committees will meet in January to start reconciling differences in House and Senate versions. During the health care debate this year, and for the past century – Theodore Roosevelt tried to institute a public health care system – the focus has been on solutions to a number of problems: the number of uninsured, ballooning costs, the alarming number of bankruptcies because of medical bills, insured patients who are cut off because their benefits exceeded a lifetime maximum, those people denied affordable coverage because of pre-existing conditions.

Various players in the medical care provider market have voiced objections to proposed solutions when the impact of a solution would be negative on them. Perhaps we should all admit that we will never fix this intractable problem. Like many cancer therapies, the “solution” may be to manage the problem, not solve it. Only when all parties give up the notion of finding a solution will we be able to sit down at the table and come up with a framework for managing this problem.

This idea was first conceived by James Madison, the chief architect of the U.S. Constitution. Unable to resolve the decade old dispute between advocates for a strong federal government and those who championed individual and states’ rights, Madison had the genius to incorporate the struggle between these two ideologies directly into the Constitution, thereby providing a structured debating platform for this continuing argument and struggle for power.