Tax and Expenditure Limits: The Challenge of Turning Mitchell’s Golden Rule from Theory into Reality
Daniel J. Mitchell
The main goal of fiscal policy should be to shrink the burden of government spending as a share of economic output. Fortunately, it shouldn’t be too difficult to achieve this modest goal. All that’s required is to make sure the private sector grows faster than the government.
But it’s very easy for me to bluster about “all that’s required” to satisfy this Golden Rule. It’s much harder to convince politicians to be frugal. Yes, it happened during the Reagan and Clinton years, and there also have been multi-year periods of spending discipline in nations such as Estonia, New Zealand and Canada.
But these examples of good fiscal policy are infrequent. And even when they do happen, the progress often is reversed when a new crop of politicians take power. Federal spending has jumped to about 23 percent of GDP under Bush and Obama, for instance, after falling to 18.2 percent of economic output at the end of the Clinton years.
This is why many advocates of limited government argue that some sort of external force is needed to somehow limit the tendency of politicians to over-tax and over-spend.
I’ve argued on many occasions that tax competition is an important mechanism for restraining the greed of the political class. But even in my most optimistic moments, I realize that it’s a necessary but not sufficient condition.
Another option is budget process reform. If you can somehow convince politicians to tie their own hands (in the same way that alcoholics can sometimes be convinced to throw out all their booze), then perhaps rules can be imposed that improve fiscal policy.
But what sort of rules? Europe has “Maastricht” requirements that theoretically limit deficits and debt, and 49 states have some sort of balanced budget requirement, but these policies have been very unsuccessful – perhaps because they mistakenly focus on the symptom of red ink rather than the underlying disease of government spending.
Are there any budget process reforms that do work? Well, I’ve written about Switzerland’s “debt brake,” which has generated some good results over the past 10 years because it actually imposes an annual spending cap.
Some American states also impose expenditure limits. Have they been successful?
Unfortunately, they usually don’t seem to do a good job of controlling spending. Here are some key passages from a new study by Benjamin Zycher from the American Enterprise Institute.
…tax and expenditure limits (TELs) vary substantially in terms of their details, definitions, and underlying structures, but the empirical finding reported here is simple and powerful: TELs are not effective. …The ineffectiveness of TELs is unambiguous in terms of summary statistics, case-study examination of the records of several individual states, and estimation of an econometric model. This model was estimated for both state and local spending combined and state outlays considered alone.
The author finds some positive impact, but it’s unclear whether the results are meaningful…or durable.
In terms of the growth rates of per capita outlays, 20 of the 30 states display a decline in that growth rate during the periods when the respective TELs were effective, but none of those differences is statistically significant. …to the (highly limited) extent that spending limits prove effective, they are likely to be subject to erosion driven by the same political factors that yield the fiscal pressures.
Though three states seem to have generated genuine budgetary savings.
Among the 30 states with TELs in effect during 1970–2010, the econometric analysis finds that only three of those limits had the effect of reducing total outlays, by approximately 4–6.5 percent. This evidence does not provide grounds for optimism that an emphasis on spending limits would prove useful in terms of reducing long-term fiscal pressures.
Looking at all the evidence, Zycher is not very optimistic about expenditure limits, though he does recognize the valuable role of tax competition.
…a TEL is unlikely by itself to reverse the underlying conditions that yield expanding government. In particular, the incentives of interest groups to circumvent and neutralize the effects of TELs are unsurprising; that may be one central lesson from the California and Washington experiences. Future efforts to restrain the growth in government spending may find greater success if they are directed at increasing competition… One obvious way to achieve this is to strengthen the institutions of federalism, thus forcing states and localities to compete with each other.
Other researchers also have looked at tax and expenditure limits, so let’s see whether they have different perspectives.
Matt Mitchell (no relation) has a slightly more optimistic assessment. Here’s some of what he wrote in a study for the Mercatus Center.
…some varieties of TELs can decrease state spending as a share of state income, but the effect is small—in the range of about 2 to 3 percent. …Certain characteristics can make TELs more effective. These include constitutional (as opposed to statutory) codification, a focus on spending rather than on revenue, a provision that automatically and immediately refunds surpluses, and—of particular importance—a provision that requires either a supermajority vote or a public vote for override.
Here are some of his specific findings.
Weak TELs…tend not to impact state spending very much in either low or high-income states. At best, they decrease spending by about 1/10 of one percentage point in low-income states. At worst, they increase spending by less than 1/100 of one percentage point in high-income states. The most-stringent TELs, on the other hand, do have an appreciable impact on state spending. …Those TELs that limit budgets to inflation plus population growth seem to limit combined state and local spending. In states with this variety of TEL, state and local spending as a share of state income is about 6/10 of a percentage point less than in other states (this is a 3-percent difference relative to the average state and local spending share). …This variety of TEL is often favored by advocates of limited government because it is particularly restrictive (the sum of inflation and population growth is typically less than income growth).
Michael New of the University of Michigan-Dearborn also found that the design of a TEL makes a big difference. Here are some excerpts from his study, which was published in the State Politics and Policy Quarterly.
…most TELs have been enacted by state legislatures, and it is not clear that legislators have the incentive to reduce their autonomy by placing meaningful constraints on their own behavior. …Conversely, TELs enacted through citizen initiatives are likely to be drafted by interest groups that actually possess an interest in limiting state spending, giving them considerably greater potential for effectiveness.
Here are some of his results.
Why has Colorado’s TABOR been more effective than other fiscal limits? …the results of Models 2 and 4, which categorize TELs based on how they were adopted, lend considerable support to my hypothesis. These models indicate that TELs enacted by citizen initiative are the most effective at limiting the size of government. Model 2 predicts that after a TEL is passed by a citizen initiative, annual growth in per capita state and local expenditures will be reduced by $35.70. Similarly, Model 4 predicts that the annual growth in per capita state and local revenues will be reduced by $35.64. Both findings are statistically significant.
Professor New’s research shows that it is very important to limit spending so it grows at inflation plus population rather than letting it climb as fast as personal income.
…holding increases in expenditures to increases in personal income is a relatively easy threshold for a state to maintain. …During the early 1990s, however, two states enacted TELs with a lower limit. Both Colorado’s Taxpayer’s Bill of Rights (TABOR) and Washington state’s Initiative 601 (I-601) established a limit of inflation plus population growth. …Table 4 provides further evidence that strong TELs have been able to restrict government growth. Holding other factors constant, strong TELs annually reduce growth in both state expenditures and state revenues by over $100 per capita. …Both the coefficient for TABOR and the coefficient for I-601 are negative in all four regressions and statistically significant in three of the four. …My analysis provided solid evidence that these two TELs were even more effective at restraining expenditures and revenues as demonstrated by both statistical analysis and case studies.
Some people would conclude from the research of Zycher, Mitchell, and New that spending limits are not very effective. But that’s a hasty conclusion. The real lesson is that spending limits work, but only if they actually limit spending so that it grows slower than personal income, just as suggested by my Golden Rule.
In other words, spending limits are like speed limits in school zones. They are only effective if they’re set low enough to actually protect taxpayers and children.
This debate reminds me of the intellectual fight over the starve-the-beast hypothesis. Some have argued that tax cuts are not an effective way of limiting spending. But the research actually shows that tax cuts are an effective way of “starving the beast” if lawmakers don’t subsequently raise taxes.
The bottom line is that expenditure limits – if properly designed and enforced – are an effective way of controlling government spending. That doesn’t mean that politicians won’t figure out ways to over-spend, just like locks on doors don’t always stop burglars. But both are better than the alternative of no limits or no locks.
In prior posts, I’ve shared research showing that the United States today would be very close to a balanced budget if we had implemented something akin to the Swiss Debt Brake.
So far as I know, there’s no legislation to impose a spending cap specifically modeled on the Swiss system, but I’ve previously noted that Senator Corker’s CAP Act and Congressman Brady’s MAP Act both have sequester-enforced spending limits.
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Stonehenge archaeologists reveal new theory of why monument was built
Stonehenge may have been built on a site occupied by hunters for roughly 5,000 prior to its
A site near Stonehenge has revealed archaeological evidence that hunters lived just a mile from Stonehenge roughly 5,000 years prior to the construction of the first stones, new research suggests.
What’s more, the site, which was occupied continuously for 3,000 years, had evidence of burning, thousands of flint tool fragments and bones of wild aurochs , a type of extinct giant cow. That suggests the area near Stonehenge may have been an auroch migration route that became an ancient feasting site, drawing people together from across different cultures in the region, wrote lead researcher David Jacques of the Open University in the United Kingdeom, in an email.
"We may have found the cradle of Stonehenge, the reason why it is where it is," Jacques wrote. [In Photos: A Walk Through Stonehenge]
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The new discovery may also identify the people who first erected structures at Stonehenge. A few gigantic pine posts, possibly totem poles, were raised at Stonehenge between 8,500 and 10,000 years ago, but until now there was scant evidence of occupation in the area that long ago. The new research suggests those ancient structures may perhaps have been raised to honor a sacred hunting ground.
For decades, people have wondered at the enigmatic stone structures erected roughly 5,000 years ago in the plains of Wiltshire, England. No one knows why ancient people built the structure: some believe it was a place of ancient worship or a sun calendar, whereas still others think it was a symbol of unity or even that Stonehenge was inspired by a sound illusion.
The large megaliths, known as sarsens, are up to 30 feet tall and weigh up to 25 tons, while the smaller bluestones weigh up to 4 tons. Researchers think the giant boulders came from a quarry near Marlborough Downs, just 20 miles (32 kilometers) from the iconic site, while the bluestones likely came from Preseli Hills in Wales, nearly 156 miles (250 km) away from Stonehenge.
Jacques was looking through archival photographs of the region surrounding Stonehenge when he spotted a site known as Vespasian’s Camp, just a mile from Stonehenge in nearby Amesbury.
Realizing that it hadn’t been fully surveyed, Jacques began to investigate the area, which harbored a freshwater spring.
Because animals like to stop and drink at such watering holes, Jacques wondered whether ancient man may have settled nearby as well.
The team uncovered roughly 350 animal bones and 12,500 flint tools or fragments, as well as lots of evidence of burning. Carbon dating suggested the area was occupied by humans from 7500 B.C. to 4700 B.C. — roughly 5,000 years prior to the erection of the first stones at Stonehenge. [See Photos of the Stonehenge Hunting Ground ]
"The spring may have originally attracted large animals to it, which would have aided hunting and may have led to associations that the area was a sacred hunting ground," Jacques wrote.
In addition, the researchers found tools made from stone from one region of England, but fashioned in the style of another region (for instance, a stone tool made from Welsh or Cornwall slate, but made in a style typical of Sussex). That suggests the people from different regions were coming together at the site, Jacques wrote.
The findings could help researchers pinpoint why the ancient builders of Stonehenge chose the place they did, Jacques said.
"We have found a bridge from which transmission of cultural memory about the ‘specialness’ of the place where the stones were later being put up was possible," Jacques wrote. "We are getting closer to understanding their reasons for putting it up — it is all to do with ancestors, but those ancestors go much further back than has previously been realised."
The findings show "there was a substantial interest in the Stonehenge landscape well before the stones were hauled there and erected," said Timothy Darvill, an archaeologist at Bournemouth University in the U.K., who was not involved in the study.
Excavations dating to 2008 at Stonehenge also confirm earlier use at the megalithic site, Darvill wrote. However, what makes the Amesbury discovery special is the large trove of auroch bones found in the area, which suggests the spring was on a natural migration route for the wild aurochs, he said.
A program about the Amesbury site will air on BBC 4 on April 29.
Follow Tia Ghose on Twitter @tiaghose. Follow LiveScience @livescience, Facebook & Google+. Original article on LiveScience.com.
5 Strange Theories About Stonehenge
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Are you scientifically literate? Take our quiz
New Stonehenge theory: Stonehenge was built over a graveyard
Stonehenge built as a symbol of peace and unity, British researchers suggest
Statistics: Posted by DIGGER DAN — Thu Apr 25, 2013 3:01 pm
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By Jason Kuznicki
This month’s Cato Unbound looks at the Austrian school of economics. Specifically, how do Austrian insights apply to the “real” world—not just theory, but economic history and policy?
In his lead essay, Professor Steven Horwitz argues that Austrian economists are making important and under-appreciated empirical contributions. The Austrian school even stands to teach mainstream economics a good deal about how to conduct empirical work and interpret it properly.
To discuss with Horwitz, we have invited three other distinguished economists, each of whom has been influenced by the Austrian school—while ultimately settling elsewhere methodologically: Bryan Caplan, George A. Selgin, and Antony Davies.
As always, Cato Unbound readers are encouraged to take up our themes, and enter into the conversation on their own websites and blogs, or on other venues. We also welcome your letters. Send them to jkuznicki at cato dot org. Selections may be published at the editors’ option.
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David Kelley is a political philosopher, writer, and the executive director of the Atlas Society. Kelley is a strong proponent of objectivism and has published a wide range of literature including A Life of One’s Own (1998) and The Contested Legacy of Ayn Rand (2000).
In this video from a seminar in Aix-en-Provence, France in 1991, Kelley delivers a lecture about two types of social justice systems: egalitarianism and welfare rights. He claims that “the welfare state is subject to all the same problems that have made socialism unworkable. It creates perverse incentives among the people it tries to serve; it is run by a vast bureaucracy that is more interested in preserving its own power than in achieving results.”
Kelley then outlines the basic structure of a system of individualist ethics created by the American novelist and philosopher Ayn Rand. This system, Objectivism, attempts to provide a moral justification in addition to a political justification for the ethical implications of individualism.
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By Whiskey Contributor Apr 10th, 2012
Time and again I read Austrian School economists dissing Peak Oil Theory. They likely do this because they have not taken the time to fully understand the theory behind peak oil. Instead, they get caught up in the doom and gloom predictions made by many proponents of Peak Oil Theory and the erroneous calls for some sort of government intervention to alleviate the matter. The problem with this dismissive attitude, however, is that by not acknowledging the validity of Peak Oil Theory, the Austrians lose legitimacy in the eyes of a large percentage of the population, namely the environmental left.
In my younger days I, too, dismissed environmental concerns such as air pollution and overfishing, because in the back of my mind any acknowledgment of such would seemingly destroy the validity of the free-market. Only after having missed many opportunities with environmentalists did I finally discover a way to reconcile free-market economics with the environment. The same can be said for many Austrian economists who fail to acknowledge the validity of Peak Oil Theory.
One recent example of Peak Oil Theory denial is a piece written by David Deming and published by LewRockwell.com. To be sure, I am not familiar with David Deming or his economic background. My apologies to Austrians if David is not a student of our school. This attack on Peak Oil Theory, among other articles, having been published by LRC and Mises.org does demand a response from at least one student of the Austrian School and proponent of Peak Oil Theory. I will now go line by line of David’s article and pick apart his faulty logic.
Peak Oil is the theory that the production history of petroleum follows a symmetrical bell-shaped curve. Once the curve peaks, decline is inevitable.
True. For anyone who studies math, physics, or pretty much any other type of statistics or science, you’ll find that the nature of systems commonly take the form of a Gaussian(bell-curve). Although, it doesn’t have to necessarily be symmetrical.
The theory is commonly invoked to justify the development of alternative energy sources that are allegedly renewable and sustainable.
This is a loaded sentence. Whether or not the proponents of Peak Oil Theory advocate the use of renewable energy sources is moot. It has nothing to do with the validity of Peak Oil Theory. This is a smear attempt. Furthermore, he throws in the word “allegedly” as if solar, wind, and hydroelectric power are “allegedly” renewable. They are renewable. I don’t think there is any disputing that.
Peak Oil theory was originated by American geologist M. King Hubbert. In 1956 Hubbert predicted that US oil production would peak between 1965 and 1970. When production peaked in 1970, it was interpreted as proof that Hubbert’s model was correct and that US oil production had entered a period of inexorable and irreversible decline. Unanswered was the question of whether or not US production had declined simply because it had become cheaper to purchase imported oil.
Peak Oil is a theory based upon assumptions.
False. The theory does not rest on any assumptions about future demand. Regardless of whether demand skyrockets or plummets, the rate of production is destined to decline at some point. It is not a matter of if, but when.
Like other scientific theories, it is subject to empirical corroboration or falsification. Although Hubbert correctly predicted the timing of peak US oil production, several of his other predictions based on Peak Oil theory were wrong.
He is being extremely deceptive here. First, he writes about theories and empirical evidence, which is fine. But then he writes about false predictions. Predictions and theories are two totally separate beasts and he is trying to attack the theory of Peak Oil by way of false predictions. Example: Everyone on Earth will die(theory). Tomorrow, everyone will die (prediction). Two days from now when it is proven that not everyone is dead, will the theory then be proven false? The answer is no. Poor example, but you get the point.
Hubbert predicted that the maximum possible US oil production by 2011 would be one billion barrels. But actual production in 2011 was two billion barrels. Hubbert predicted that annual world oil production would peak in the year 2000 at 12.5 billion barrels. It didn’t. World oil production in 2011 was 26.5 billion barrels and continues to increase. Hubbert was grossly wrong about natural gas production. In 1956 he predicted that by 2010 US annual gas production would be 4 TCF. But in 2010, US wells produced more than 26 TCF of gas.
Mere false predictions that add nothing of value to his claim that Peak Oil Theory is false.
The flaw of Peak Oil theory is that it assumes the amount of a resource is a static number determined solely by geological factors.
Is oil a static resource or is it not? If anyone can prove that oil is regenerated at a rate of any significance for human consumption then I will admit that Peak Oil Theory is wrong. But that hasn’t happened. By all accounts the reserves (including undiscovered) of oil within planet Earth are understood to be finite. This fact alone shoots dead his entire argument.
But the size of a exploitable resource also depends upon price and technology. These factors are very difficult to predict.
How much oil can be exploited has nothing to do with the finite amount of oil that exists in Earth. The amount of oil that is exploitable in the future may change one’s predictions when Peak Oil hits, but it does nothing to disprove the Theory of Peak Oil.
The US oil industry began in 1859 when Colonel Edwin Drake hired blacksmith Billy Smith to drill a 69-foot-deep well. Subsequent technological advances have opened up resources beyond the limits of our ancestors’ imaginations. We can drill offshore in water up to eight-thousand feet deep. We have enhanced recovery techniques, horizontal drilling, and four-dimensional seismic imaging. Oklahoma oilman Harold Hamm is turning North Dakota into Saudi Arabia by utilizing hydraulic fracturing technology. US oil production has reversed its forty-year long decline. By the year 2020, it is anticipated that the US will be the world’s top oil producer.
A nice history lesson that has nothing to do with disproving the Theory of Peak Oil.
For at least a hundred years, people have repeatedly warned that the world is running out of oil. In 1920, the US Geological Survey estimated that the world contained only 60 billion barrels of recoverable oil. But to date we have produced more than 1000 billion barrels and currently have more than 1500 billion barrels in reserve.
Again, these were predictions about what would be recoverable. The predicted amount that is recoverable has nothing to do with the amount of oil in existence.
World petroleum reserves are at an all-time high.
This is likely bullsh!t. I write “likely” because few people know for sure. There are only a handful of entities that have a true stock of global reserves. For example, there are many who believe that Saudi Arabia(the most productive OPEC nation by far) falsifies the true amount of reserves that they have. There is speculation that they overstate their reserves so as to intentionally keep the price of oil low. While one might think that Saudi Arabia would benefit from higher prices one must realize that the Saudi puppet King is beholden to the U.S. And the U.S. Federal Government does not want skyrocketing oil prices.
There are also many other political considerations concerning the amount any OPEC nation may produce relative to others. In other words, politics are likely hiding the true quantity of global reserves. Even if petroleum reserves are at an all-time high it says nothing about the future of reserves. It is false logic. Example: Home prices are at an all-time high. We have nothing to worry about. Crash!
The world is awash in a glut of oil.
Bullsh!t. Even by official reports the amount of oil that has ever been discovered in Earth is equivalent to three Lake Tahoes. And half of that has already been consumed. I would not call that awash. Would you?
Conventional oil resources are currently estimated to be in the neighborhood of ten trillion barrels.
Deception. Notice he uses the word resources here. There is a huge difference between sweet crude oil and oil shale, for example. Sweet crude can be easily extracted and yields a very high EROEI. Oil shale on the other hand is extremely difficult to extract. The amount of energy required to extract and produce usable oil from shale is relatively low to other forms of oil.
The resource base is growing faster than production can deplete it.
The resource base has not been growing at all. Oil is finite for all intents and purposes.
In addition to conventional oil, the US has huge amounts of unconventional oil resources that remain untouched. The western US alone has 2000 billion barrels of oil in the form of oil shales.
And we’ll be lucky to net 200 billion of that.
At a current consumption rate of 7 billion barrels a year, that’s a 286-year supply.
If we are lucky to net 200 billion barrels of oil it would mean a thirty year supply for the United States. This is also assuming the current consumption rate remains stagnant. I will admit, however, that in this regard one could count this as increased oil production. But it does not take into account the amount of oil necessary to extract oil shale. The net aggregate of produced oil will, at some point, decline.
Nine years ago, I predicted that “the age of petroleum has only just begun.” I was right. The Peak Oil theorists, the malthusians, and the environmentalists were all wrong. They have been proven wrong, over and over again, for decades. A tabulation of every failed prediction of resource exhaustion would fill a library.
Notice how he throws the Malthusians in with Peak Oil theorists? It is clear to me that there is a very large difference between food production(renewable) and oil production(non-renewable).
Sustainability is a chimera. No energy source has been, or ever will be, sustainable. In the eleventh century, Europeans anticipated the industrial revolution by transforming their society from dependence on human and animal power to water power. In the eighteenth century, water power was superseded by steam engines fired by burning wood. Coal replaced wood, and oil and gas have now largely supplanted coal.
Sustainability is a chimera? And this gets a pass from the Austrian School economists? Krugman would be proud! Not only does this line of thinking promote high-time preference but I find it laughable that he could write that “no energy source has been, or ever will be, sustainable.” Unless he wishes to employ the strawman argument, I think it’s safe to say that solar energy is an inexhaustible resource.
In the far distant future we will probably utilize some type of nuclear power. But for at least the next hundred years, oil will remain our primary energy source because it is abundant, inexpensive, and reliable.
This is another prediction which has no bearing on the legitimacy of Peak Oil Theory. And as far as his prediction is concerned, if oil is our primary fuel for the next century it will not be because of its excellence as a resource, but because humanity is still burdened by the regressive beast called The State.
Petroleum is the lifeblood of our industrial economy. The US economy will remain stagnant and depressed until we begin to aggressively develop our native energy resources. As Harold Hamm has said, “we can do this.” What’s stopping us is not geology, but ignorance and bad public policy.
Finally, something I can agree with!
To conclude, Peak Oil Theory is real. Many libertarian types are guilty of attacking predictions made by proponents of Peak Oil Theory instead of the theory itself. While I’m all for attacking predictions made by Peak Oil Theorists and their naive(or sinister) calls for government intervention, the refusal to acknowledge the theory of Peak Oil automatically disqualifies libertarians from the discussion table. A strong case can be made that much of what governs United States foreign policy and global finance is a result of Peak Oil Theory. It behooves libertarians to study Peak Oil Theory in earnest and steer the conversation towards free-market problem solving instead of turning a blind eye to the theory altogether.
The Daily Anarchist
Statistics: Posted by yoda — Tue Apr 10, 2012 3:42 pm
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The Road to Roota Theory (with audio!)
I’m a writer. That’s how I express myself and that’s what I’m pretty good at. But the world is changing with all these new forms of media and many people are tired of reading. I hear it all the time…"Why use energy reading anything when I can just pull up a Youtube video?!"
Ok fine. As this techno-centric world leaves this "old school" writer in the dust I sometimes have to rely on "the kindness of strangers" to help me get up to speed on the Road to Roota. So one of my subscribers offered to put some of the Road to Roota articles on Youtube by reading them to all of you that are tired of reading. After I shook off my natural angry reaction that I tend to direct aimlessly towards ANYONE who would rather listen than read I told myself – "If it will help the cause let’s go for it."
I have posted the first of these audio recordings and I thought it appropriate to start with The Road to Roota Theory. You can find it here:
The Road to Roota Theory
UPDATE: Here’s a stunner… After I added the audio I find myself just wanting to listen to the audio rather then reading what I wrote!
May the Road you choose be the Right Road.
Statistics: Posted by DIGGER DAN — Thu Mar 01, 2012 11:15 am
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